June 7, 2012
Anti-corruption has become a major global initiative, as evidenced by efforts of entities such as the World Trade Organization, European Union, Organization of American States, Association of Southeast Asian Nations, Caribbean Community and African Union, among others, to require their members to address it. That all said, it is naive to expect that legislators, regulators, international trade organizations and other parties can eradicate customs and behaviors that have evolved over thousands of years.
U.S. Department of Justice investigations involving the alleged bribery of foreign officials by U.S. organizations are on the rise. At the same time, penalties and disgorgements associated with violations of the long-standing Foreign Corrupt Practices Act of 1977 (FCPA) have escalated dramatically. In 2010, the U.K. Parliament passed the country's first major overhaul of its anti-corruption laws in more than a century. In this environment of increased regulatory vigilance and enforcement, hotel and other hospitality companies should take notice as they rapidly expand their footprints into Asia, Brazil, and other foreign business and leisure destinations. It is important that these companies understand the requirements of the FCPA as well as similar laws in other countries in which they do business.
FCPA Prosecutions Are on the Upswing
Corruption can cost companies, and their shareholders, a lot of money. Under the FCPA anti- bribery provisions: Corporations and other business entities are subject to a fine of up to $2 million, and officers, directors, shareholders, employees and agents are subject to a fine of up to $100,000 and imprisonment for up to five years. There are also other potential penalties, e.g., the threat of disgorgement of profits from the business obtained through illicit payments and suspension of the firm’s right to do business with the U.S. government. Criminal enforcement under the FCPA has increased from just two enforcement actions in 2004 to 48 in 2011. It is estimated there are more than 100 open investigations at the present time and significant penalties have been assessed. While the nature and magnitude of enforcement actions vary, there is no materiality threshold for inappropriate payments that violate the FCPA.
Some believe that the U.S. Justice Department has gone too far in its interpretation and enforcement of the FCPA. For example, two years ago the U.S. Chamber Institute for Legal Reform proposed five amendments to the FCPA to ensure the law and its enforcement do not encumber U.S. competitiveness:1
- Adopt a “compliance defense” permitting companies to fight the imposition of criminal liability for FCPA violations if they have made good-faith efforts to comply with the law.
- Limit or eliminate successor criminal FCPA liability for an acquired company.
- Add a “willfulness requirement” for corporate criminal liability.
- Limit a parent company’s civil liability for the acts of a subsidiary.
- Clarify the definition of “foreign official” to remove the ambiguity around what it means.
Congressional hearings have been conducted over the last year to assess whether the FCPA should be updated for changes in business since the law was enacted nearly 35 years ago. The general themes of these hearings are whether (a) the FCPA is spawning unfair and unjust prosecutorial activity, and (b) there are any ambiguities in the law that are hamstringing business and/or hurting job creation, resulting in companies incurring excessive compliance costs because they would rather be “safe than sorry.” On the other hand, corporate governance advocates see proposals to change the FCPA as possibly undermining its effectiveness.
While our focus in this Flash Report is on the FCPA, it is important to recognize that there are other anti-bribery laws that hospitality companies should be concerned with. For example, the
U.K. Bribery Act (the Act) places companies operating in the United Kingdom under the most stringent anti-corruption regulation in the world, going even further than the requirements set down by the FCPA. The Act introduced a new offense that makes corporations operating in the United Kingdom automatically liable for bribes paid on their behalf. Corporations now could face criminal sanctions if management fails to demonstrate that adequate procedures designed to prevent bribery have been implemented and are taken seriously. In addition, the Act includes commercial bribery within its scope and is not limited to influence payments to government officials.
How Hospitality Companies Can Get Into Trouble – The Warning Signs
The current growth vehicle for the hospitality industry is international development in China, India, the Middle East and other areas. As hospitality companies expand their operations to other markets, there is a cycle in which they operate involving such activities as site selection, permitting, transacting with contractors and suppliers, underwriting, negotiations with joint venture partners and franchisees, and workforce assembly and organization. This cycle may drive interactions with many third parties, creating the risk of improprieties if not closely supervised and managed. The following are examples that illustrate this exposure:
- Location, location, location – Hotels are a “must have” no matter where one is in the world. They are in every underdeveloped, emerging and developing market, i.e., “corrupt hot spots.” Everyone knows that location is everything, and the identification, acquisition and/or lease of real estate can place hospitality companies in difficult situations.
- Licenses and permits – Hotels, casinos and other hospitality companies simply cannot build or operate without licenses and permits, thereby putting them at the mercy of local authorities and customs.
- Safety and security – Hospitality companies need to ensure that guests and properties are protected, bringing the local police or security force into play.
- Services – Water, trash, fire and other necessary services are similar to safety and security in that they typically involve local authorities.
- Logistics/transport – Operating supplies and equipment (OS&E) and furniture, fixtures and other equipment (FF&E) are a business necessity, and that means exposure to customs officials.
- Development and land/lease activities – As some properties are built on government- owned/government-leased property, construction projects require government approval in order to move forward.
- Gaming operations – In industries like gaming, government authorization at the outset is essential and regulatory oversight is ever present, presenting opportunities for company employees and agents to engage in potentially sensitive interactions with other parties that could present high corruption risk.
- Joint venture relationships in overseas locations – These relationships may be with local organizations that have close ties to the government, such as government-owned or -operated entities.
- Business partnerships – Certain partnerships may be with government-owned organizations, such as airlines.
- Franchisees – Contractual arrangements with franchisees are a sensitive and hot topic. Many companies take the position that the nature of their franchisee relationship protects them; therefore, they are not responsible for the behavior of their franchisees. However, they in fact obtain a financial benefit in exchange for the franchisee’s use of their brand, so this position could be subject to challenge in the courts. Non-financial due diligence continues to be a control gap and an area of weakness, as many organizations don’t really know with whom they are doing business. Many franchisees may in fact be owned by, or involve in some way, government officials and/or their family members.
- Vendors and suppliers – A general lack of due diligence, existence of conflicts of interest, engagement with related party transactions and exposure to kickbacks are increasingly common in high-risk countries due to maturity of infrastructure, customs, hierarchy and government involvement.
In summary, with the nature of their operations, the countries in which they operate, and the emphasis on business courtesies, gifts, meals and entertainment in those countries, global hotel, gaming and other hospitality companies may find themselves in the middle of the bribery and corruption risk danger zone. Hospitality companies may even face local established competitors that are paying accommodations to derail the efforts of new entrants. Facilitation payments also require attention, because they are not permissible under the U.K. Bribery Act. These and other activities present an opportunity for influence payments in high-corruption countries. Accordingly, hospitality companies face significant challenges in each local market, leading to a heightened sensitivity to corruption risk in markets in which such activities are customary.
Regardless of the size of the company, the nature of its business or the location of its operations, transforming an aspirational commitment to compliance to a concrete strategy starts with assessing the risks the company faces. This assessment process reveals the “who, what, where, when and how” of the various intersections in the international development cycle between the company’s operations and foreign and other officials. As illustrated above, these interactions span a wide range of activities, from the marketing of services directly to government entities or state-owned enterprises to more routine contacts such as customs and taxes. Global hospitality companies should assess their exposure to corruption risk using seven broad categories of illustrative questions to ask about their international business activities:
- Country risk profile:
- What is the cultural, political and regulatory environment of the countries in which the hospitality company conducts business? Is the organization operating in countries with a history of bribery and corruption? For example, consider that Brazil, Russia, India and China (the so-called BRIC countries) each have high-growth potential as well as a history of significant corruption risk. Recognizing that hospitality companies are expanding rapidly into these countries where there is a high risk of illegal payoffs, proactive compliance programs are a must for hospitality companies expanding into such countries.
- How much control does the hospitality company have over its foreign operations? The more disconnected the company is from its foreign representatives, the higher its risk of violating anti-bribery laws. To this point, many hospitality companies may use agents or franchisees in foreign locations. Some of these companies are of the view that this organizational structure insulates them from FCPA exposure. However, as previously stated, they may not be as insulated as they think they are.
- Extent of the due diligence performed on potential joint venture/business partners and franchisees:
- Have you investigated whether any payments are, in fact, being made to public officials who are employees, officers, agents, etc.?
- Does a foreign joint venture partner or franchisee refuse to provide a written certification that it will not take any action in furtherance of an unlawful offer, promise or payment to a foreign public official and not undertake any act that would cause the U.S. firm to be in violation of the FCPA?
- Is there an apparent lack of qualifications or resources on the part of a joint venture partner or franchisee to monitor the appropriateness of payments?
- Is the joint venture partner or franchisee related to, or recommended by, an official of the potential governmental customer?
- Does the hospitality company provide awareness training for joint venture/business partners, agents, franchisees and other representatives?
- Has the composition of principals, directors, officers and/or employees changed since the arrangement was made with the joint venture/business partner?
- Nature of payments and expenditures in foreign countries:
- What gifts, meals and entertainment are provided to those with whom the hospitality company does business in overseas markets?
- What charitable donations or political contributions are made “in-country” by the organization and its representatives?
- What types of leasing agreements has the hospitality company arranged in foreign countries?
- Are there unusual payment patterns, unusually high commission structures or special financial arrangements involving the hospitality company or its foreign subsidiaries and related third parties?
- Business model and relationships:
- How is business transacted in foreign countries? (Note: It is generally accepted that operating hotels and casinos in the United States is much lower in risk than, say, operating such properties overseas. While not without risk, operating in the United States may present less risk than alternative business models. Again, the greater the involvement with foreign governments or their agencies, the higher the risk.)
- What is the nature of business relationships with public international organizations, state-owned business enterprises, foreign governments, foreign municipalities, foreign legislative bodies, foreign political parties and/or royal families? For example, a hospitality company that enters into an arrangement with a foreign government to build a hotel and casino in the foreign country should pay close attention to how its relationships with government officials are managed.
- Does the hospitality company hire foreign officials and/or members of their families as employees or contractors?
- Control over cash accounts and books and records:
- How are the hospitality company’s bank accounts, petty cash funds and inventory monitored in non-U.S. locations? What controls are in place with respect to these assets?
- Is there a lack of transparency in expenses or accounting records within the company’s organization and its third-party intermediaries (e.g., joint venture partners, agents, consultants, franchisees, etc.)?
- Legal, regulatory and contractual matters:
- What business licenses, permits, certifications and inspections are required of the hospitality company in order to conduct business in overseas locations?
- Who has been granted power of attorney for your organization in non-U.S. jurisdictions?
- What terms and conditions do you include in written contracts with related third parties?
- How does the company monitor contract compliance?
- Policy and procedural matters:
- What policies and programs are currently in place to support compliance with the FCPA and other anti-bribery laws?
- What training initiatives are currently in place to create and sustain awareness of everyone’s responsibility to comply with the FCPA and other anti-bribery laws?
- What process has been established for employees or third-party intermediaries to obtain advice on questionable or sensitive matters involving foreign officials?
While the above questions are not intended to provide a complete diagnostic, answers to them may raise “red flags” requiring the immediate attention of the hospitality organization’s executive management and board of directors.
How Hospitality Companies Can Manage FCPA and Anti-Bribery Compliance
No matter what efforts are under way to reform the FCPA or the extent of pressure to drive reform, the law is still the law. Until it is changed, like all organizations, hospitality companies need the proper oversight and governance. Firms that paid bribes to foreign officials have been subjected to criminal and civil enforcement actions that have resulted in large fines and their employees and officers going to jail.2 It is not a pretty picture. To avoid such consequences, many firms have implemented detailed compliance programs intended to prevent, deter and detect improper payments by employees and agents. A robust FCPA and anti-bribery compliance program and corresponding controls typically include the following elements.
- Proactive understanding of potential corruption risks and oversight of anti-bribery or FCPA compliance program by the board
- Coordination and management of the FCPA and anti-bribery compliance program by a designated senior executive
- Documented “anti-bribery,” “anti-corruption” or “FCPA” policy and standards, along with related communication to employees and those who conduct business on behalf of the company
- Suitable policies to define the organization’s stance on gifts and hospitality, facilitation payments, offset arrangements, payments to outside advisers/agents, and political contributions
- An affirmation procedure requiring that critical employees, vendors and contractors provide written statements that they are in compliance with the requirements of the FCPA and other anti-bribery laws
- Effective mechanisms for individuals to report criminal conduct, concerns and other complaints involving potential legal and regulatory violations
- Risk identification process that includes explicit consideration of the risk of commercial bribery and corruption involving foreign officials and employees or agents who operate out of the home country, especially at locations known for unethical business practices
- Due diligence of employees, joint venture partners, third-party agents and franchisees
- Anti-bribery or anti-corruption compliance language and representations incorporated in all third-party contracts
- Periodic review of aged contracts to determine if any bribery or anti-corruption language needs to be updated
- Internal controls for books and records, as well as proper accounting emphasized in company policies and procedures
- Active monitoring of anti-corruption controls within financial and operational processes to identify and report potential red flags of illegal behavior
- Periodic audits of the FCPA or anti-bribery compliance program policies, procedures and controls to assess their effectiveness at ensuring compliance at all levels and across the entire organization
- Areas of noncompliance and recommended solutions to enhance the hospitality organization’s anti-bribery or anti- corruption compliance activities reported to senior management and the board
Note that these types of audit procedures should also be considered as part of all field audits (depending on the associated corruption risks) and ongoing control self-assessment programs.
- FCPA and anti-bribery awareness education and training out of the home country for employees, third-party agents and consultants conducting business on behalf of the organization to ensure that they are knowledgeable of the appropriate behavior and legal requirements
- Thorough and comprehensive investigation and remediation of reported potential violations involving bribery and corruption
- When an investigation is completed, determine – in consultation with outside counsel – whether any violations have occurred, and if so, weigh costs and benefits of voluntary disclosure to the government
- Disciplinary mechanisms that are consistently enforced for those who violate the company’s compliance policy
Large multinational hospitality companies cannot monitor every transaction of every dollar amount by every employee and joint venture, business partner and franchisee. However, these organizations do have a due-diligence obligation to 1) establish risk-based policies and procedures that provide reasonable assurance that the organization and its people and joint ventures, business partners and franchisees are adhering to the compliance requirements, and 2) implement adequate systems of internal controls. This includes establishing a compliance program that meets the standards of the Federal Sentencing Guidelines.
FCPA violations and noncompliance with other anti-bribery laws can be costly. Firms that paid bribes to foreign officials have been subjected to criminal and civil enforcement actions, resulting in large fines and jail time for officers and employees. Damage to reputation by negative headlines can devastate the bottom line and impair shareholder value.
Hospitality companies entering new, developing markets to seek growth should pay attention to the risks of bribery and corruption. To avoid the consequences of legal and regulatory violations, many companies have implemented detailed compliance programs intended to prevent and detect improper payments by employees and agents. It is critical for management to ensure that it has a robust FCPA and anti-bribery compliance program, including anti-corruption controls, in place. A robust program provides a critical road map for any organization conducting business in today’s global economy. FCPA and anti-bribery compliance and other corresponding internal control capabilities should be considered as part of a holistic strategy to address all issues that could arise from intentional illegal acts within the organization.
In this Flash Report, we have not attempted to cover everything related to compliance with the U.S. Foreign Corrupt Practices Act and other anti-bribery laws in the U.K. and other countries, nor have we attempted to address all of the nuances in complying with such laws and regulations that are relevant to the matters we have covered in this Flash Report. For these and other reasons, the information in this Flash Report is not intended to be legal analysis or advice, nor does it purport to address every issue that may impact companies or every possible government response or interpretation of these matters. Accordingly, organizations should seek the advice of legal counsel or other appropriate advisers on specific questions related to the U.S. Foreign Corrupt Practices Act and other anti-bribery laws in the U.K. and other countries as they relate to their unique circumstances.