FCPAméricas Blog
“Every Dollar Has a Name”: Avoiding sham contracts in Latin America
5.17.2013
Personal finance guru and motivational speaker Dave Ramsey is known to say that “every dollar has a name” when advising audiences on how best to manage their money. This maxim holds true for companies seeking to comply with the FCPA as well. By implementing controls that help ensure that each company dollar is assigned a name, that its destination is recorded with a degree of specificity, companies reduce foreign bribery risks.
Take the problem of sham third party contracts for example. Like the problem of phantom vendors (discussed previously by FCPAméricas), sham contracts present perpetual FCPA risk for companies in Latin America. How do they work? Companies, or their employees, create phony written agreements with third parties, perhaps a consultant or outside vendor. The company makes payments to the third party for purported goods or services. In reality, the entity provides no legitimate services, or not at the level to justify the compensation. The rest of the money is used to bribe foreign officials on the company’s behalf to achieve some business advantage, thereby violating the FCPA. Schemes like these were seen in cases like Siemens Argentina, where the company’s consulting contract with the Argentine Consulting Group involved no legitimate services and lay at the root of the bribery scheme.
What kind of controls can companies implement to minimize the risk that their employees will set up sham contracts to facilitate bribery? We asked anti-corruption forensic accountant David Wolfe to provide his insights:
Set Up Systems. Pre-set processes, like vendor approval mechanisms, help reduce the possibility that a third party will be paid based on a sham contract. Vendor approvals require a second, and sometimes a third, set of eyes to review the agreement and assess its legitimacy before the relationship begins. By requiring computer databases to be populated with this information, companies ensure that various aspects of the arrangement have been vetted. Pre-approved vendor lists give businesses a degree of comfort that relationships are legitimate. Similarly, purchase order systems force companies to consider with whom they are dealing and what they are purchasing.
Moreover, when companies create budgets up-front that anticipate expenses, and when they pre-approve these expenses, they establish more control over dollars spent. Contracts that arise outside of the pre-approved plan can be scrutinized more closely.
Key to such controls is segregation of duties and transparency. When various actors are involved, and when contract formation is done openly, it is harder to execute illicit arrangements. The level of detail of controls will depend on the size of the company – it is often difficult for smaller companies to achieve the same standards as those of large multinationals. But the fundamental principles can be the same.
Verify. Companies should verify that third parties are doing what they say they are doing pursuant to their contracts. This means ensuring they provide backup documentation with their invoices, and reviewing the documentation. It means keeping an eye out for fraudulent documentation, such as fake invoices or bogus line items. These are the types of problems seen in cases like Ralph Lauren Corporation in Argentina and Willbros International in Bolivia.
Track and Monitor. Payments made pursuant to third party contracts must be closely archived in a company’s books and records with specific budget codes that signify the types of goods and services at issue. Records should be made and updated in real time, while the expenses are occurring. Accurate books and records position the company to monitor contracts for potential problems. They can review contracts based on amounts paid to vendors, the location of the vendors, and what they are doing. Testing might pay particular attention to contracts for periodic services, where it is sometimes easier for fraud to hide. They might look closely at contracts that deal with intangibles, as opposed to physical goods. Such contracts might be subject to fewer pre-existing controls, like inventory logs.
In all, the keys to addressing sham contracts are controls, transparency, and accountability.
The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.
The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.
@2013 Matteson Ellis Law, PLLC
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Beyond the FCPA: Commercial Bribery, the Travel Act, and Compliance
5.14.2013
Today’s guest post is from anti-corruption attorney Matthew Fowler who formerly worked as a compliance officer at a multinational defense company.
When I was an in-house compliance officer, the issues that kept me up at night were not the ones covered by our compliance program. They were the unknown unknowns – the issues I feared were lurking just off radar. Commercial bribery fits the profile of that kind of issue, since it is not prohibited by the FCPA. But it is an issue that belongs squarely on the radars of compliance officers.
Commercial bribery – bribes paid to people working in the private sector – is not addressed by the FCPA, which criminalizes promises or payments made to “foreign government officials.” Similarly, U.S. federal law does not prohibit bribery in private commercial activity. However, many states do prohibit commercial bribery, and the Travel Act “federalizes” such state law prohibitions. Failing to properly record commercial bribes could also result in violations of the books and records provisions of the FCPA.
The Travel Act
The Travel Act prohibits the use of means of interstate or foreign commerce if the underlying activity is prohibited by state law. It specifically makes bribery in violation of state law a federal offense.
The relationship between the FCPA and the Travel Act was evident in the prosecution of Control Components, Inc. In 2009, Control Components pleaded guilty to charges that it violated both the FCPA and the Travel Act. The FCPA violations related to corrupt payments to officials and employees of foreign state-owned companies, and the Travel Act related to similar payments to employees of foreign and domestic private companies. These charges were based on California law, which prohibits commercial bribery.
Foreign Commercial Bribery Prohibitions
Commercial bribery may also violate foreign laws. The UK Bribery Act specifically covers bribery in both the public and private sectors. The bribery offences established in the UK Bribery Act relate to payments made or accepted to bring about “improper performance” of a relevant function or activity. According to Guidance published by the UK Ministry of Justice, “improper performance” relates to any function “connected with a business, performed in the course of a person’s employment or performed on behalf of a company or another body of persons… [Bribery] in both the public and private sectors is covered.”
Note that the UK Bribery Act also prohibits both the payment and the acceptance of bribes – including private sector bribes. This is significantly broader than the FCPA, which addresses only the payment of bribes, and then only when paid to foreign government officials. In fact, outside the U.S. there are signs of a trend toward broadening corruption prohibitions to include commercial bribery and acceptance of bribes. A 2003 EU Council decision required all states of the European Union to criminalize both the payment and acceptance of bribes in the private sector. Beyond Europe, the United Nations Convention Against Corruption requires States Parties to “consider” the criminalization of both the payment and acceptance of commercial bribes.
Signs of this trend can also be seen in the Americas. Revisions to the Brazilian criminal code are expected to include criminalization of the payment or acceptance of commercial bribes. The current draft of the revised criminal code would establish that it is a crime to “… demand, request, accept or receive improper advantage, as a representative of the company or private institution, to himself or to third parties, directly or indirectly, or accepts promise of improper advantage, to perform or nor perform an act inherent in their assignments.”
Effects on Compliance Programs
Addressing commercial bribery risk in compliance programs has significant implications for compliance officers, including the following:
1. Compliance officers need to be aware of state and foreign commercial bribery prohibitions. The Travel Act has the effect of “federalizing” state commercial bribery laws, and the DOJ has shown its willingness to prosecute such matters when the recipient is overseas. U.S. companies could also find themselves facing sanctions in foreign jurisdictions for such payments. Compliance officers should know whether the states and countries in which they do business have commercial bribery prohibitions, and they should address those risks in their compliance programs.
2. When conducting risk assessments, compliance officers should take a more expansive view of corruption risks. Corruption risk assessments are often focused on interactions with foreign government officials, but the risk of commercial bribery arises in purely commercial settings. Similarly, corruption risk is not limited to international operations, since the Travel Act applies to both foreign and domestic bribes.
3. Compliance officers should consider addressing the acceptance of commercial bribes in their compliance programs. Gift and hospitality rules may need to be expanded to scrutinize benefits received by company personnel as well as those that they provide.
4. Companies should properly record and report commercial hospitality and similar payments. Failure to report such payments, whether commercial bribes or not, could result in a violation of the FCPA’s books and records provisions.
Making such changes could mean significant changes for compliance officers, but it is better to have such issues on your radar than off. It might even help you sleep.
The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.
The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.
@2013 Matteson Ellis Law, PLLC
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Preaching to the Choir, and the Sinners: FCPA compliance training in Latin America
5.10.2013
On Mexican highways, there are official government signs that read, “Conduce con precaución. Tu familia te espera” (Drive carefully, your family is waiting for you), and “Después de un accidente, ya nada es igual” (After an accident, nothing is the same). On some routes, the government might leave wreckage from car accidents with signs that read, “In January 2013, six people died here.”
It seems that the Mexican government has identified various ways of convincing people to drive safely. Some drivers follow speed limit signs. Others respond only to speed traps and bumps in the road. As it appears, some are affected by emotional appeals.
How might these lessons be relevant to FCPA compliance training in Latin America?
TRACE President Alexandra Wrage has categorized the various audiences of FCPA compliance training into different groups. There are the “bottom-liners,” also known as “box-checkers.” They are interested in knowing the rules, and focus on adhering to them. They care less about good corporate citizenship and more about being on the right side of company policy and the law. There is the “ethical majority,” those who are driven by a desire to protect the company’s reputation. They respond to messages regarding how compliance can increase a corporation’s standing in the market as well as shareholder value. There are the “idealists.” Unlike the other groups, the idealists’ attitudes toward compliance are driven by the larger picture. They are concerned about the global implications of their company’s business strategies. They are moved to action by the “social, health, and security problems that bribery spawns.” And there are the “criminals.” These are people inclined to break the rules for their own ends.
Each group responds to different types of training strategies. The bottom-liners respond to rules-based compliance approaches. The ethical majority and idealists tend to respond best to values-based approaches. For the criminals, trainers need to stress controls and consequences for violations.
As the Mexico example highlights, some could be affected by appeals to emotion too. For example, a compliance officer of a multi-national commercial real estate development company recently told me that she always begins her trainings by discussing the group’s own country, what type of leadership her audience wishes to have, the pride they feel when their leaders do the right thing, and the shame that results when they do not. A compliance lawyer at an energy company similarly told me that he likes to talk about the participants’ families and children when rolling out compliance procedures. He asks the audience: “Is a corrupt business environment the type of place we really want to leave to our kids?”
Invoking emotion plays off of values, like family and pride. While some values-based approaches promote attitudes like “our company does things honestly” and “if you bribe, you harm markets and democracies and you aid criminals,” an emotional approach takes values a step further. It considers how people ultimately relate to one another. It motivates people at the core. This is often how the most fundamental change in corporate behavior occurs.
I agree with Mrs. Wrage that training strategies need to incorporate several different approaches to reach different audiences. All strategies working together can help generate a culture of compliance. Strategies based on rules and values are essential. But emotional appeals have an important place as well.
The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.
The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.
@2013 Matteson Ellis Law, PLLC
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