Raffles, Rolexes and Inadvertent Gifts Reply

After eight years, TRACE member companies continue to raise novel compliance challenges for discussion. Carolyn Lindsey of TRACE looked into best practices surrounding raffles recently, — how they can be used to give something of value to government officials and, more importantly, how that can be avoided.

“Giving gifts to government officials can be risky business if appropriate precautions aren’t taken. Most multinational companies agree that precautions should include checking restrictions under the law of the government official’s country, ensuring that the value of the gift is “reasonable” and eliminating even the appearance of a quid pro quo. Sometimes compliance officers receive requests for (or discover after the fact) “inadvertent gifts”. These generally take the form of raffles and giveaways at events sponsored by the company. They also arise during product launches, store openings and route launches in the case of airlines. The grand prize of two free plane tickets, a new high-end appliance or a Rolex watch is a nice treat at the end of a soiree, but if the high-ranking government official walks away with the grand prize it could leave the compliance staff with heartburn and everyone else in the room wondering whether the raffle was rigged. (Indeed, we’ve heard stories from Asia about raffles that always favored the highest ranking official present.)

How can companies mitigate the risk during these events? Below are a few suggestions for multinationals to consider:

Check the guest list to determine how many government officials have been invited. If the majority of participants have some government role it may be best to skip the big-ticket item and give gift baskets with more moderately priced goodies.
Review local law. If the country places restrictions or prohibitions on gifts to government officials, make sure that the prizes comply with those restrictions.
Make sure that each person (or in some cases family) has only one chance to win.
Determine the odds of winning. The greater the odds the less likely the appearance of a quid pro quo.
Reconsider lavish prizes. While these are often the main attraction, carefully weigh the benefits and risks. Placing a reasonable dollar limit on raffle items can still result in a nice bonus for the winner without going over the top.

Of course, raffles arguably lack the necessary intent required to violate the FCPA and other anti-bribery laws. These are games of chance designed to entertain attendees at an event, not lavish gifts given to win business in violation of anti-bribery laws. However, if your company name is on the event, the photo of the mayor or the minister in the paper the next morning standing with his shiny new sports car can raise eyebrows in the local community. With some creative thinking and careful planning, the company can host an enjoyable evening and everyone can walk away a winner.”

The FCPA: Available in Multiple Languages Reply

We’re all looking for tools to help us roll-out compliance programs, train colleagues in far-flung operations and, at times, educate foreign law firms on the subtleties of the FCPA. Kathryn Nickerson, Senior Counsel at the U.S. Department of Commerce, undertook a very useful project about which too few people are aware. She arranged to have the FCPA translated into Spanish, Russian, Chinese and Arabic and posted on their website. Although the translations are marked “unofficial” we’re told they’re accurate and that they read well. This is a great service to the compliance community. If Commerce is taking requests, we’d love to see the Lay-Person’s Guide to the FCPA translated next.

The Anonymous Court: When Due Diligence Services Get it Wrong Reply

FCPA articles often highlight the risk posed to companies by the company they keep: consultants, sales representatives, joint venture partners. But there’s another side to this story that is rarely told. These third parties can be destroyed by shoddy due diligence as readily as they can be exonerated by responsible background checks. At the heart of FCPA due diligence is an assessment of a third party’s reputation. Assessing reputation can be a difficult task. How much weight should be given to the opinions of competitors? To the comments of former employees? Or to others in the business community who have heard rumors from these sources? Anyone who has had to run a reputational concern to ground knows how difficult it is to prove a negative. It can be easier and less expensive to walk away from questionable due diligence results than to invest the time and expense in helping the intermediary to refute the negative information and restore their reputation.

TRACE members fall into two categories: member companies (the multinationals that use our compliance services) and member intermediaries (the entities we investigate and which become, if all goes well, members of TRACE upon completion of our thorough, collaborative due diligence review process.) We’re the only organization working to promote transparency in both communities and it is important, at times, to recognize that the expense, frustration and loss of business occasionally associated with anti-bribery compliance effects both groups. With that in mind, we invited one company that voluntarily submitted to a TRACE review to tell their story.

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“I have become an expert in a subject that never held any interest for me. Like you, I suspect, I took for granted that it was the fiduciary responsibility of major global financial institutions to perform background checks on business partners before they entered into important contracts with them. The practice has become a standard “check the box” due diligence procedure that investors expect of their fund managers, much like investors expect fund managers to complete appropriate financial, legal and other due diligence before entering into a transaction. There are a number of potential firms that will happily provide these background checks for a fee. Unlike financial audits that follow national or international guidelines and have their own professional certification procedures, due diligence companies have no such professional standards, nor are they regulated by any guild or authority. As a result they have no higher body to which they are accountable. Hence, they are free to report true, false or simply unsubstantiated information to their clients knowing that they will never have to justify what they have written. They have no incentive to make sure their reports are correct. Indeed, they have great incentive to throw in anything they come across, rather than have to make judgment calls about the value of the information. Let me share with you my story and what I have learned over the past three years. My goal is not to ask for you to judge if the background check companies got my story right, but rather to point out failings in the process.

Before I begin I should tell you that I am an American working in fairly challenging markets in Europe. I am an Eagle Scout, Fulbright Scholar, graduate of one of America’s leading business schools, and alumni of both McKinsey & Company and Goldman Sachs. For over a decade I have run my own consultancy in Central Europe. We work for major multinationals and private equity funds after they buy companies in the region; these are frequently former state owned companies. Our job is to manage and restructure these businesses with the goal of creating profitable and efficient companies, a process that takes about a year to complete. After successfully turning around some 15 enterprises it probably comes as no surprise that as part of executing operating costs reductions and renegotiating supply and sales agreements in companies that used to be run by state appointed “apparatchiks” I have curtailed the livelihood of a number of those “managers” and their friends. On the other hand I have made my Western clients very happy; my team generally doubles the profitability of the businesses we acquire in a short period of time.

About three years ago I decided with one of my partners that instead of working as a consultant to private equity funds, we should try to partner with a major private equity fund and become their local operating arm. Given our track record, we didn’t have any problem finding interested partners. The process that ensued generally included some four months of developing a common strategy and operating vision for the new fund. We then negotiated a term sheet for our cooperation. We consistently received enthusiastic preliminary approval of the new investment platform from our partners and then, moments before final contracts were to be signed, received disappointing calls saying things like “we decided to change our strategy,” or “we decided to put off investing in Central Europe for a while.” Each time, we were surprised and frustrated, but picked ourselves up and set off to find a new partner. We finally got lucky. Instead of silence, our third potential partner honestly told us that our background checks were “terrible” and they couldn’t work with us.

We were shocked. We eventually were able to get this third potential partner to explain what exactly the background checks reported. I was apparently accused of embezzling over $100 million, and of supposedly being in conflict with some of my best clients. None of the charges was remotely true. I presented documents and statements from former clients to prove the background report was completely wrong and libelous. The problem is that background check companies require their clients to sign confidentiality agreements that not only forbid their clients from revealing any of the contents of the reports they prepare, but also prohibit the client from disclosing the identity of the background check company that prepared the report.

So, to this day, I have no idea who wrote the report or reports that have kept three global private equity funds from working with me, nor do I have any way of correcting these reports to make sure that in the future they aren’t sent out to some other potential business partner I would like to work with.

It appears that many due diligence companies hire or work with former intelligence officers in the various countries they operate. In Central Europe the former intelligence professionals who are looking for work are likely to have worked for the previous regime. Due to the nature of the charges made against me it is easy for me to identify which former communist CEO is the source of many of the charges. He was fired as part of one of our turnaround projects. Apparently, the author of the background check was content to report all of the false and unsubstantiated charges made by this disgruntled former CEO against me. The lack of any verification or quality control process means that sheer fabrication was given the weight of “truth” by a background check company. As a result, three years of my hard work have been wasted, and three global funds (and perhaps more) that might have benefited from our support weren’t able to.

I find it terribly ironic that the background check process could be corrupted from the inside by former agents of the communist regime. In Central Europe these agents frequently have ulterior motives. It is also extremely troubling that these anonymous reports cannot be found, reviewed or corrected given the impenetrable and anonymous veil of secrecy that Western background check companies maintain. They are able to stand behind this veil and ruin companies by giving rumors the weight of truth and the companies that hire them don’t dare work with the tainted entity thereafter.”

The Latest FCPA Forecast From U.S. Regulators 2

FCPA enforcement is high, but there remains very little official guidance from the government. As a result, practitioners, corporate counsel, and others following the latest FCPA developments are invariably on the edge of their seats any time an oracle from the SEC or DOJ (the latter, in particular) speaks at one of the growing number of conferences on the topic. Anne Richardson of TRACE had a chance to read the DOJ tea leaves yesterday, when Mark Mendelsohn of the DOJ, Cheryl Scarboro of the SEC, and Edward Coopers of the FBI spoke at a conference in Washington, DC. After all of the usual disclaimers by each speaker, here is the most recent summary of trends and predictions in the FCPA enforcement arena.


Heightened level of FCPA enforcement. Ten criminal prosecutions were brought in 2009, 17 in 2008, and 16 in 2007. There have been more prosecutions in the last five years than between 1977 (when the statute was passed) and 2005. These cases tend to involve grand corruption rather than petty corruption, Mark said, and criminal fines from the past five years have totaled over $1 billion. There are currently over 120 on-going DOJ criminal investigations.

Increased focus on individual prosecutions. Individual prosecutions have involved both senior executives as well as those in “gatekeeper” roles. A notable recent prosecution was that of Albert “Jack” Stanley, former chairman and CEO of KBR, and several CCI executives have been indicted and are awaiting trial. Mark noted that the increase in prosecutions of individuals, who have more to lose, has led to more FCPA trials. This year alone there have been three trials (Bourke, Jefferson, and Green). Mark commented that there would be no more trials in 2009. He welcomed the increased litigation as this would lead to more guidance from the judiciary in interpreting the FCPA (the Bourke decision, for example, commented on both the local law defense and the possibility of extortion as a defense).

Broad jurisdictional reach of the FCPA. On the civil side, foreign issuers fall under SEC jurisdiction; on the criminal side, the DOJ has jurisdiction where conduct takes place in the territory of the U.S. or a foreign company conspires with a U.S. company. Mark expects the trend of investigating and prosecuting foreign entities to continue.

Increase in multi-jurisdictional investigations. Mark said that this was “clearly the trend of the future,” as increasingly one or more foreign prosecutorial authorities are investigating the same set of conduct (as in the antitrust realm). This trend is being fuelled by other countries’ increasingly active enforcement of their own foreign bribery laws (which the DOJ has been encouraging), as well as by efforts by the U.S. authorities to develop deeper relationships with their foreign counterparts at both the prosecutor and police levels. Mark noted that other countries are also stepping up their enforcement of domestic corruption.

Increase in industry or sector-wide investigations. Mark stated that he could not emphasize enough “how important this is to [DOJ’s] enforcement strategy.” This strategy, he said, is critical to effectiveness and fairness of FCPA enforcement, as well as the efficient use of DOJ resources.

Due diligence in connection with transactional activity. Mark believes that the importance of due diligence in anti-bribery compliance programs has finally taken hold, at least among most large multinationals. He finds that practices in this area have become much more sophisticated and that many more companies are coming into the DOJ, in the M&A context, with due diligence at the top of their agenda (e.g., Opinion Procedure Release 08-02).

Other criminal violations alongside FCPA violations. Mark emphasized that the Fraud Section in the DOJ’s Criminal Division is fundamentally comprised of “fraud prosecutors,” and thus they will prosecute other instances of fraud that are uncovered in the course of FCPA investigations. Other violations include those in the areas of export control, antitrust, sanctions, commercial bribery (e.g., as in Schnitzer Steel and CCI), procurement fraud, and accounting fraud. “Process crimes,” such as obstruction of justice and false statements, will also be pursued.


The global economic crisis will increase opportunities for corruption and thus FCPA violations. Mark predicted greater competition for less business, leading to increased pressure to engage in bribery. At the same time, companies are probably spending fewer resources on their legal and compliance departments (he said he hopes companies are not cutting back, but expects that they are). Governments are injecting large amounts of money into their economies and are taking over failing firms, leading to difficult assessments of who qualifies as a “foreign official” under the FCPA (in response to a question from the audience, Mark recommended that, when in doubt about the “foreign official” status of the directors or employees in firms assisted by the government, companies should take the conservative approach and treat them as government officials). In addition, governments are directing an enormous amount of money – without a lot of corresponding controls – into infrastructure projects, which are traditionally at higher risk of corruption. Mark expressed concern about how business activity in 2009 would look from an FCPA enforcement perspective five years from now.

Enhanced resources and greater coordination among U.S. authorities. More resources in the DOJ are being devoted to white collar crime, including funds allocated to the Fraud Section generally and funds specifically designated for FCPA enforcement. The SEC is creating a specialized FCPA unit, discussed by Cheryl Scarboro in her remarks, and the DOJ hopes to benefit from even greater coordination with the SEC as a result. Mark said that they were always looking for additional FBI investigation resources as well.