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Defending The Defense

By Thomas Fox

I want to thank Kyle Sheahen for his recent post and paper arguing that the promotional expenses defense under the FCPA is illusory. His work has stimulated a useful debate.

From a perspective different than previous commenters (here), I’d like to state the case for the value of the defense.

Generally, enforcement actions that discuss promotional expenses — including those Kyle cited in his paper — involve expenses that were neither bona fide nor reasonable as required by the FCPA. The cases include:

Lucent Technologies – $10 million in trips, primarily to vacation destinations in the U.S., including $34,000 for five days of sightseeing, wrapped onto a three day trip of business activity.

Ingersoll Rand – holiday excursion to Florence after visiting the company’s facilities in Vigante, Italy. The excursion to Florence included payment of $1000 in “pocket money”.

Metcalf & Eddy – first-class travel to the U.S. for foreign officials and per diem cash payments equivalent to 150% of estimated daily expenses.

Syncor -the SEC said payments for promotional expenses came “mostly came in the form of sponsorships for the doctors’ attendance at educational seminars, including payments for registration fees, travel, lodging, and meals” but also included “gifts of computer equipment, software, office furniture, and medical supplies to doctors and their hospitals; sponsorships of social functions and fundraisers at the hospitals; funds provided to cover the cost of temporary employees at the hospitals; and payments made for outside testing when a particular hospital’s laboratory equipment was not functioning properly.”

Titan Corporation – there’s a reference to an authorization for a $20,000 payment for promotional travel expenses, with the notation that it was unclear if the payment was made. However this was in the context of at least $2 million paid in bribes to government officials. Even if the $20,000 was not paid, there were other  facts on which to base the enforcement action.

I would argue that none of the above enforcement actions involved promotional expenses which were either bona fide or reasonable. Based on the foregoing, I think companies subject to the FCPA have sufficient guidance on what constitutes a bona fide or reasonable promotional expense. I also believe the cases cited in the article can be used as solid teaching points on what is not bona fide or reasonable without having to try and ascertain the intent to corrupt.

Thomas Fox is an attorney in Houston, Texas, specializing in FCPA compliance, risk management and international transactions. His blog can be found here and he can be reached at [email protected].

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1 Comment

  1. On the issue of bona fide, you might be right. But only because that's usually an easier question. Illegitimate expenses are almost always policy violations also, at least for most companies nowadays. There are expenses which are obviously bad. A lot of companies have policies against first-class travel for government, for example. And people will always try to get around the rules. Because of this, the question of bona fide is usually an easier determination.

    But for a regulator who says all the time that cultural mores aren't an excuse, saying that expenses must be "reasonable" is an issue. In the extreme, "reasonable" is also easy to determine, I know. But it's always extreme in hindsight. Picture the Compliance Officer who's trying to make that determination. Paying for a hotel room for a government official at the Bellagio is bad. But what about giving cash at a wedding in Korea? That's traditional, or so I'm told. Or how about taking someone to dinner in China? If you have a "reasonable" limit for China, would that cover the cost of a meal at a western restaurant? And if so, that's a pretty high limit for China.

    And what if that hotel room at the Bellagio is paid for as part of a conference that the company is hosting to demonstrate its wares? And the company is paying for everyone's hotel room? Worse, what if the product is something designed to help government officials, and the entire conference is government? These kinds of expenses can creep up on you.

    How about when the president of the company goes to China and meets with the Deputy Finance Minister? What's appropriate?

    A lot of these questions are a lot easier in hindsight. Assuming, of course, that the business person engages Compliance beforehand. From other compliance officers I speak with, a really, really common question starts, "I did something a few weeks ago…."

    A Compliance Officer has to make these calls without the benefit of hindsight. And so the question is, does the Act give the CO sufficient guidance about what's allowable? Trust me on this, the answer is no.

    So when you say that there have been cases prosecuting companies for unreasonable and non-bona fide expenses, that's not proof, in my opinion, on the going-forward question of whether the Act provides sufficient guidance for companies looking to obey the law.

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