In our previous post, we discussed the ongoing corruption case against Princess Cristina of Spain and her husband, Duke Iñaki Urdungarin. Urdangarin, a former Olympian, is accused of using his position to skim money from government contracts. Princess Cristina, for her part, has been charged with tax fraud and money laundering.
Look past the headlines and you will see a risky scenario faced by many companies doing business abroad: contributing to foreign charities. The organization at the center of the Spanish case, Instituto Nóos, is a not-for-profit organization with extensive ties to public officials – including Spain’s Royal Family. Allegedly, Urdungarin channeled funds from corporations bidding on government contracts through the non-profit. Charities and not-for-profits with connections to public officials raise significant concerns under the U.S. Foreign Corrupt Practices Act (FCPA), as donations to these organizations can be used to buy influence – for example, by funneling funds or donating to an officials’ favorite charity or cause.
The cases of Schering-Plough and Eli Lilly show that the risk of a FCPA violation is not limited to charities that funnel money to public officials, but extends to bona fide, legitimate charities as well. Both companies, while negotiating product sales with Polish government officials, made donations to the Chudow Castle Foundation, allegedly at the request of the foundation’s founder and president, who was also the Director of the Silesian Health Fund and in a position to influence the negotiations. The SEC alleged that the donations had been made to influence the public official and win contracts.
As detailed in the SEC’s complaint, Schering-Plough donated approximately USD 76,000 and notably lacked a policy requiring due diligence of charitable entities. In 2004, in an agreement with the SEC, Schering-Plough agreed to increase their due diligence efforts and pay a USD 500,000 civil penalty for their actions. According to the SEC Complaint regarding Eli Lilly, the company donated USD 39,000 and failed to properly oversee and investigate the relationship between the foundation, the negotiations, and the contributions. It’s notable, however, that in both cases it was not alleged that any money was transferred to the public official, or that the non-profit was illegitimate. Rather, the donations allegedly violated the FCPA because they were made to influence an official by donating to a cause the official was associated with and apparently cared about.
How Companies Can Protect Themselves
There are several practices companies can employ to protect themselves from the risk of violating the FCPA while making charitable donations. As outlined in “Biting the Hands That Feed: Corporate Charity and the U.S. Foreign Corrupt Practices Act” by Reagan Demas, a partner at Baker & McKenzie, the Department of Justice Advisory Opinions and settlements reveal four “pillars” of a sound corporate social responsibility program that will protect against FCPA violations: due diligence, pre-approved advance giving plans, no quid pro quo, and careful documentation and monitoring.[i]
1) Due Diligence: Companies should conduct due diligence on all donation recipients, both to ensure they are legitimate entities and to assess the non-profits associations with public officials. As noted above, this was a significant issue in the Schering-Plough and Eli Lilly cases. In a 2010 Advisory Opinion, the Department of Justice assessed one situation in which a company received a request from a foreign government asking them to make a donation to a microfinance institution. The company’s subsidiary employed a three-stage due diligence program and extensive controls on the donations, and the DOJ explained that, largely due to the extensive due diligence program, no action would be taken. As relayed in the DOJ FCPA Guide, some attributes of a successful due diligence program include: certifications of FCPA compliance, an assessment of affiliations, a review of audited financial statements, agreements restricting the use of funds, proof of proper use of funds, and ongoing monitoring.In conducting due diligence, companies should watch for “special connections” between officials and the charity, including the members of the board, and also be aware when an official has a “special interest” in a specific charity. In the case of Princess Cristina, there are disputes as to the Royal Family’s official role in Mr. Urdungarin’s business and non-profit acquisitions, but one of the key allegations against Mr. Urdungarin is that he leveraged royal ties to win contracts.
2) Pre-approved advance giving plan: Companies can protect themselves from the appearance of “corrupt” donations by prescribing, in advance, the annual amount of donations and, if possible, potential recipients. As Demas states, “[s]etting contribution plans (including recipients and amounts) in annuals plans well in advance helps ensure donations are not viewed as reactive or designed to induce specific governmental actions.”[ii]
3) No quid pro quo: If a gift is ever given with the expectation that there will be a return benefit by a public official, there is a significant risk of a FCPA violation. The FCPA Resource Guide makes this clear, and encourages companies to always ask if “the payment [is] conditioned upon receiving business or other benefits[.]”[iii] Further, companies should always be suspicious when a donation is made “at the request” of an official. More…