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Bill Steinman: Getting comfortable with per diems by mitigating the risk

Per diems abound. Since my first post in this series six months ago, I’ve been asked to help our clients with at least fifteen foreign government tenders or contracts that require the payment of per diems during testing or training visits. While not a scientific survey, it underscores what I believe to be a growing demand by foreign governments for per diems. 

The reason for this is simple — per diems are convenient for traveling officials. It allows them to avoid going out of pocket for the simple things we all encounter on business trips — replacing a forgotten toothbrush, getting a boost from an overpriced latte. It also gives the travelling official a degree of flexibility and autonomy to deal with these needs, without having to present a receipt to their hosts. In short, per diem requirements make sense to foreign governments, and despite discomfort among suppliers with the practice, it’s not going away anytime soon.

Ultimately, companies need not wring their proverbial hands when faced with per diems, provided a certain set of conditions are met. As outlined in my first missive, I believe per diems to be reasonable when: (i) the requirement to pay the per diem is expressly set forth in the contract with a foreign government; (ii) the actual amount of the per diem is clearly established in the contract; (iii) the amount of the per diem is reasonable; and (iv) the foreign government, not the supplier, is responsible for inclusion of the per diem in the contract.

In today’s post, I outline a number of practical risk mitigation steps that companies should consider implementing before dispensing dollar one to visiting foreign officials. This is not an exhaustive list. As with any plan to address FCPA risks, the controls should be tailored to the situation at hand. However, these are some of the more common safeguards we believe companies should consider putting in place when dealing with daily stipends.

1. Get the Docs. The first step is to verify and thoroughly document the four factors outlined above. Hopefully, your compliance process requires the business personnel in question to furnish a copy of the contract (or at least its relevant provisions) as part of the review of the request to furnish the per diem. This is the easy part.  Simply verify that the contract does indeed mandate the payment of a per diem, the circumstances in which it is required and the amount. On occasion, you’ll discover internal inconsistencies.

I recently encountered a situation where a foreign government contract contained separate provisions calling for factory acceptance training and training at my client’s facilities. The provision governing the acceptance testing contained a requirement for a modest per diem. However, there was no mention of per diems in the training provision. Naturally, the customer expected that per diems would be furnished for both visits — a thorny situation to say the least.

If the contract was the result of a tender, review the published materials to determine whether they expressly contained the per diem requirement. If not, some sleuthing will be required. Review the company’s bid documents and see whether that’s the source of the per diem requirement. Engage with the relevant business folks and ask whether they proposed the per diem or whether the customer requested it. Do a little anecdotal benchmarking to determine whether your organizations’ prior contracts with the customer contained similar stipend requirements, or inquire with local counsel to weigh in on what they typically see in that customer’s agreements. Make sure to carefully document your inquiries.

2. Evaluate the Amount of the Per Diem. There are a number of ways that companies can evaluate whether the amount of the stated per diem is reasonable. Many companies provide their own employees with per diems during business travel, and that is a reasonable place to start. If internal company policies do not make allowances for per diems, companies can look to external sources, such as the U.S. State Department per diem rates for international travel or the GSA per diem rates for domestic locations.

3. Ensure Complete Transparenc. When it comes to per diems, I recommend a belt and suspenders approach to transparency. The requirement may be set forth in the parties’ agreement, but I also recommend sending the customer organization a transparency letter that clearly sets forth the details of the trip, including the payment of a contractually-mandated per diem and its amount. In addition to furthering your compliance goals, a detailed transparency letter also decreases the chances of any misunderstanding or potential discord with the foreign government customer over what exactly will be provided for the visiting officials during their sojourn. 

Finally, as a logistical matter, the transparency letter should be sent to a senior official at the relevant government agency who is not traveling with the delegation, via a verifiable delivery method. Providing a transparency letter to members of the delegation is, to evoke the analogy, engaging the fox to monitor the goings on in the hen house. Make sure to retain evidence of delivery of the transparency letter.

4. Implement Solid Controls. Make sure to build solid controls around the disbursement of the per diem. I recommend asking each official to sign a brief document acknowledging that she/he received the per diem. Think of this as a glorified receipt. This builds further transparency around the payments and also helps to build an audit trail.  Some of our clients take this a step further, and include a description in the receipt of the types of expenditures the per diem is intended to cover — think back to the toothpaste and latte referenced above.

Finally, the company should take steps to ensure that each official attends all contractually mandated meetings (barring, of course, unforeseen circumstances such as illness). This, of course, should be the case regardless of whether a per diem is provided, but when a per diem is involved, it is important to take the extra step to ensure that all visiting officials are present and accounted for. Therefore, the company should maintain a daily sign-in sheet.   

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As I mentioned above, this is not an exhaustive list of safeguards. However, with these, and other situation-specific controls in place, the risks associated with paying per diems can be appropriately controlled. Let’s be clear though. The payment of per diems remains risky business and requires substantial effort to both review the circumstances surrounding the per diem as well as implement an appropriate risk mitigation plan.  However, through my series of posts, I hope I have convinced some of the naysayers that per diems do not have to be strictly prohibited, and are, in certain situations with the right controls, appropriate.

My earlier posts about per diems are here, here, and here.

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Bill Steinman is a Contributing Editor of the FCPA Blog. He’s 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.

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