One area of potential FCPA risk that doesn’t get much attention, or as much as it should, is how companies meet their Corporate Social Responsibility (CSR) objectives on mega projects (oil, gas, mining, infrastructure, etc.). Without the proper systems in place, and properly trained staff, project directors and CSR managers may inadvertently violate the FCPA by providing something of value to a foreign official to alleviate delays caused by conflict in the community.
As pointed out by Rachel Davis and Daniel Franks in a report sponsored by the Harvard Kennedy School (pdf), the costs most frequently associated with community conflict were caused by temporary shutdowns and delay, which impacted productivity. Davis and Franks found that on projects with a capital expenditure of $3 billion to $5 billion, the cost of delays was about $20 million per week “in Net Present Value (NPV) terms, largely due to lost sales.”
With the incentive of ensuring that projects move forward, combined with the sizable budgets of CSR departments often reaching well above $10 million, the conditions are ripe for potential FCPA violations. But risk assessments and controls around potentially sensitive payments through a company’s community relations activity can help avoid potential violations and conflict.
The most important control element is a CSR strategy and a plan from the start that’s aligned with the business objectives (proactive vs. reactive). This plan should be implemented and communicated consistently by all members of the project team. It’s crucial that the plan be focused on the community as a whole, not on individuals. Beware of requests from a public official. All CSR project agreements should be completely transparent and include objectives, participants, KPIs, and financial management, to help avoid any perception of corrupt intent.
The importance of focusing a CSR initiative on the broader community rather than individuals can’t be overstated. In many emerging markets your community relations team will be dealing with indigenous tribal leaders. Markus Funk and Barak Cohen talked about their potential status as foreign officials for FCPA purposes in an earlier post on the FCPA Blog. A community relations team should ensure that they don’t receive anything of value, such as a business contract to meet local content requirements.
While placating a vocal tribal leader with the promise of future business might seem like the most expedient way of dealing with a community roadblock, it’s a short term fix that will actually encourage community conflict when other tribal members observe the inequality. And the promise of future business benefiting an individual will also expose the company to potential FCPA liability. Moreover, once the tribal leader recognizes that he has a winning formula, the roadblocks and business requests won’t stop.