Let’s recap. In my first post, I examined a limited set of circumstances where I believe it is reasonable under the FCPA to pay per diems to foreign officials.
In my second post, I looked at the enforcement agencies’ take on per diems by analyzing the FCPA Resource Guide as well as the Opinion Procedure Releases where the DOJ found it appropriate to make cash payments to foreign officials. In case there are still some doubters out there, let’s spend a little time looking at some recent FCPA enforcement actions that involved the provision of excessive per diems and other cash payments.
In this post, I’ll distinguish the problematic conduct in those enforcement actions from the situations where I believe cash per diems are permissible.
Let’s start with IBM’s settlement with the SEC from 2011. I begin here because the SEC’s complaint actually uses the term “per diem.” According to the SEC’s complaint, IBM entered into numerous contracts with government-owned or controlled customers in China that often called for the company to provide off-site training.
Among other things, the SEC alleged that IBM sent Chinese officials on training trips at least 114 times over a five-year period. Not only did IBM cover the officials’ travel expenditures, the trips consisted of little business activity. In addition, the SEC faulted IBM because its “internal controls failed to detect … trips where per diem payments and gifts were provided to Chinese government officials.”
Several issues jump out at me, and they have nothing to do with the payment of per diems.
To begin with, the trips were supposed to be for training, but actually “had little or no business content.” Moreover, IBM personnel allegedly submitted fake receipts to create slush funds for the purpose of funding many of these trips. Finally, the SEC’s concern with the per diems was not that IBM paid them, but that the company did not have adequate controls to detect that this was the case. In other words, the company paid per diems without the requisite oversight and approval.
What we have, therefore, is not an indictment of per diems in and of themselves. Instead, the SEC alleged that IBM’s controls were insufficient to detect contractually mandated business trips that were really vacations, the fact that its personnel were engaging in corrupt conduct, and that there was no oversight of the payment of per diems or the giving of gifts.
Now let’s turn to UTStarcom’s FCPA settlement from 2009. While this settlement does not use the magic phrase “per diem,” it does reference its dreaded sibling — “cash allowance.”
The SEC alleged that between 2002 and 2004, UTStarcom covered the costs for Chinese officials to attend executive training programs at universities in the United States at least seven times. UTStarcom spent over $4 million on these programs, and covered “travel, tuition, room and board, field trips to nearby tourist destinations, and a cash allowance of between $800 and $3,000 per person.”
None of these trips was required by a written contract. Rather, UTStarcom conceived of these trips as “marketing expenses.” In other words, UTStarcom dispensed cash allowances not in response to a clear contractual mandate, but on a purely voluntary basis in an effort to get business.
I’m not suggesting that per diems in the context of marketing trips are by definition improper — indeed, in my prior post, I noted that the DOJ has approved of the practice in several opinion procedure releases. However, doing so falls outside the circumstances I examine in this series. Moreover, as I’ve previously written, it is critical that the amount of a per diem must be reasonable. A $3,000 cash allowance seems rather hard to stomach from a compliance perspective.
Let’s briefly look at two more settlements that mention the provision of cash to foreign officials in connection with travel and see how they shook out.
In 2010, Universal Corporation resolved an FCPA probe with the SEC. The SEC alleged that Universal, together with its sales representative, organized a trip by Thai officials to Brazil to sample the company’s tobacco products. Universal’s sales representative asked the company to provide each official with $1,000 in pocket money as part of the trip. Universal ultimately reimbursed the representative $3,000 for the pocket money, but recorded the expenditures as sales commissions.
Daimler had its own dalliance with pocket money. The company allegedly paid for Chinese officials to travel to Europe for factory inspections trips in 2004. However, internal emails indicated that the delegation planned to travel throughout Europe to tourist destinations, rather than conduct business. The delegation was also provided with “pocket money.” According to the DOJ, the trips were discussed by Daimler and its affiliates during contract negotiations with the Chinese officials.
In each of these cases, it was not the provision of cash to traveling officials in an otherwise legitimate trip that resulted in liability. Rather, it’s clear that the travel itself was problematic.
In some cases, the travel lacked any clear business purpose, and was in actuality a vacation. In other cases, the travel was not subject to proper oversight or was purposefully misreported in the company’s books and records. In most of these situations, the purpose of the trip was to corruptly influence the official to award business to the company in question. In all likelihood, these trips would have run afoul of the FCPA regardless of whether the officials had received cash payments. In short, these are plain vanilla violations of the FCPA, and stand in stark contrast to the circumstances I described in my earlier posts where I believe per diems to be sound.
I haven’t set out to provide a comprehensive survey of every FCPA enforcement action involving cash payments provided in conjunction with travel. But the foregoing illustrates that the type of cash payments that have gotten companies into trouble are easily distinguishable from the circumstances described in my first post. Hopefully the remaining naysayers are on board with my view, or at least are softening up a bit.
In the next (and probably final) installment of this series, I’ll highlight the nuts and bolts risk mitigation measures I recommend companies consider when paying out contractually mandated per diems.
Until next time, stay safe out there.
Bill Steinman is the senior partner at Steinman & Rodgers LLP, a boutique law firm in Washington, D.C. specializing in international anti-corruption compliance and investigations. He’ll be a speaker at the FCPA Blog NYC Conference 2016.
The author thanks Audrey Karman for her contributions to this post. She’s an associate at Steinman & Rodgers LLP, where she assists clients with FCPA compliance in the engagement of international intermediaries, the review of due diligence materials for potential risks of FCPA violations, and internal risk mitigation recommendations.