FCPA draws a fine line between corporate hospitality and bribery

As discussed in a previous blog post, the Foreign Corrupt Practices Act (FCPA) may classify normal business activities as bribes if they involve foreign officials in the global marketplace. This poses a compliance challenge for businesses with corporate hospitality initiatives, which may also considered bribery under FCPA.

In a recent FCPA enforcement, Telefônica Brasil, a Brazil-based telecommunications company with shares traded on a U.S. exchange, was fined $4.1 million for “fail[ing] to devise and maintain sufficient internal accounting controls over a hospitality program that the company hosted in connection with the 2014 World Cup and 2013 Confederations Cup.” In this post, we’ll cover when corporate hospitality is considered a bribe and what your organization can do to mitigate your FCPA risk.

When is corporate hospitality considered a bribe?

There’s nothing inherently wrong with corporate hospitality. In fact, businesses frequently treat customers and potential customers to sporting events or dinners. However, as the Telefônica Brasil enforcement action and similar cases demonstrate, if “foreign officials” are involved, the U.S. government might view corporate hospitality as a form of bribery.

How Telefônica Brasil violated FCPA

According to the government, Telefônica Brasil purchased 1860 World Cup tickets from a FIFA vendor for the sporting event taking place in its country and also intended to pay for related hospitality. The company allocated approximately 10% of the tickets to an internal department which interacted with the Brazilian government and foreign governments. The end result, according to the government, was that Telefônica Brasil “gave a total of 194 World Cup tickets to 93 government officials (in some cases, more than one ticket was given to an official so that he or she could invite friends or family members)” and “the total value of tickets and related hospitality given to these government officials amounted to $621,576.”

In addition, the government found that the company also purchased tickets and provided related hospitality to foreign officials in connection with the Confederations Cup, a soccer tournament that took place in Brazil one year prior to the World Cup. According to the government, Telefônica Brasil purchased 240 Confederations Cup tickets from a FIFA vendor and allocated approximately 15% of these tickets to the same internal department which interacted with government officials. The end result, according to the government, was that the company “gave a total of 38 Confederations Cup tickets to 34 government officials” and “the total value of tickets and related hospitality given to these government officials amounted to $117,230.”

Having a strong internal control environment is crucial for FCPA compliance

Likely because the conduct at issue did not involve a specific U.S. nexus, Telefônica Brasil was not found to be in violation of the FCPA’s anti-bribery provisions. However, the government found that the company nevertheless violated the FCPA’s internal controls provisions, stating:

“In implementing internal accounting controls over gifts, Telefônica Brasil management focused on company employees accepting tickets and hospitality, as opposed to the company offering tickets and hospitality to others, including government officials. Although the broad policy prohibition [explicitly prohibiting offering or accepting gifts, hospitality, or other types of incentives “which may reward or influence a business decision”] was clear, and certain individuals inquired about its applicability, it was not followed due to the lack of internal accounting controls, a compliance breakdown, and a deficient internal audit function.”

Books and records provisions are key for FCPA monitoring

The government also found that Telefônica Brasil violated the FCPA’s books and records provisions. Even though the company recorded the expenses as “publicity institutional events” and “advertising and publicity” the government stated:

“Telefônica Brasil failed to properly characterize the purchase of tickets and related hospitality that were given to government officials. It recorded the purchases and hospitality as being for general advertising and publicity purposes when in fact those tickets and related hospitality were given to government officials. As such, Telefônica Brasil’s books and records did not, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company’s assets.”

In short, the Telefônica Brasil enforcement action once again demonstrates the FCPA enforcement agencies’ expectations that business organizations actively monitor corporate hospitality expenses and the associated recording of such expenses.