While clear policies on charitable contributions are important, the controls implementing these policies are equally critical to an effective compliance program.
Which type or types of controls are used in emerging markets is a function of the local level of corruption risk, the nature of the company’s intended contribution, the nature of the company’s business, and the size and complexity of its business.
As we discuss in our e-book on navigating corruption challenges in emerging markets, options for controls on charitable contributions cover a spectrum of levels and intensities.
Controls may include:
- A general policy, with reliance on the financial controls a company uses for authorizing a contribution and payments
- Preapproval of the contribution by the employee’s supervisor
- Preapproval of the contribution by local compliance personnel or counsel
- Preapproval of the contribution by regional compliance personnel or counsel, typically based on an expenditure threshold
- Preapproval of the contribution by regional management, typically based on an expenditure threshold and/or other indicators of high-risk (e.g., a contribution involving a government official or government interactions), and
- Preapproval of the contribution by global compliance personnel or counsel (up to and including the global compliance officer or general counsel), typically based on an expenditure threshold and/or other indicators of high risk (e.g., a contribution involving a government official or government interactions).
These control options may also be modified to require higher levels of review where it appears that governments or government officials are involved in the contribution, or are beneficiaries of the contribution. On the other hand, top-level review is not always necessary for small or routine contributions to established charities, because the attendant corruption risks are typically low.
When and how this elevated level of review is triggered is another consideration that may vary from company to company. One option is for local managers to determine whether there are corruption risks involved as the result of a government connection. Another option is to establish a committee to consider contributions and conduct adequate diligence to determine if there is a government connection. If a government connection is discovered, a heightened review with elevated approval requirements could then be required.
Once a government connection is discovered, a heightened review with elevated approval requirements could then be required.
Deciding how to structure controls in reviewing and approving charitable contributions is a function not only of the risks identified above, but also of several practical factors, such as the structure of a company’s compliance and legal organizations, the experience of local compliance and legal personnel handling these or similar matters, and the management philosophy on the relationship of local operating autonomy and regional/global oversight of business matters in general.
If there are small contributions given in high volumes, corruption risks generally will be relatively low; these contributions may only require a lower level of scrutiny, oversight, and approval. Furthermore, in companies that give a high volume of small contributions, the legal and compliance organizations may find themselves overwhelmed in reviewing donations, without adding a great deal of value from a risk mitigation perspective. On the other hand, high value contributions given less frequently and involving a more complex relationship with the recipient generally require more review at a higher level, including legal or compliance personnel.
Adequate documentation of contributions is also important. In that regard, some companies require an application or proposal from the organization seeking support, particularly for contributions that are above a certain monetary threshold. The application or request would describe, for example, the organization and its history, the nature of the request, the purposes to which the contribution would be put, and the organization’s willingness to provide reports or other further documentation.
A written agreement with the recipient organization is also often required, again typically when the contribution exceeds a certain level or the project involves more complexity in its implementation beyond a simple one-time payment. Many companies consider establishing phased payments based on value thresholds, anti-corruption compliance clauses, and audit rights. Another control approach is oversight of the recipient through reporting requirements and certification of use of funds, annual reporting, and audit rights.
While the use of these enhanced provisions on recipients may vary based upon the circumstances, it is important to design the oversight so it is tailored to the nature of the interaction. It is generally good practice to include audit rights in the agreement to ensure the option of more detailed oversight in any circumstance.
Determining the appropriate way to implement controls on charitable contributions is very fact specific to the company, the charities it supports, and its compliance structure. And for many companies, the most effective approach will evolve over time as controls are assessed and adjusted based on experience.
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In the next post, we’ll talk about U.S. enforcement in connection with charitable donations.
Our e-book, Anti-Corruption Compliance in Emerging Markets: A Resource Guide, is available here (pdf).
Keith Korenchuk is a partner in Arnold & Porter’s Washington, DC office. He counsels and advises global companies on regulatory and compliance matters worldwide, with a focus on compliance program effectiveness, compliance program implementation, operations and evaluation, and related regulatory counseling and advice.
Samuel Witten is counsel in Arnold & Porter’s Washington, DC office. He helps companies develop and implement FCPA compliance programs. He also represents clients in arbitrations at the International Center for Settlement of Investment Disputes. He joined Arnold & Porter in 2010 after serving for 22 years in legal and policy positions at the U.S. Department of State.
Arthur Luk is a partner in Arnold & Porter’s Washington, DC office. He represents corporations, directors, officers, and executives, and “Big 4” accounting firms and individual auditors in investigations conducted by the DOJ, SEC, and Public Company Accounting Oversight Board, and in securities class actions and shareholder derivative suits.