Business dinners, rounds of golf and holiday gift baskets are everyday business expenses for many U.S.-based professionals. These expenditures are often viewed as a necessity in building business relationships and showing appreciation to clients for their loyalty. Internationally, such practices are in many cases even more deeply ingrained in a country’s culture and tradition. Rather than a complement to daily business proceedings, entertainment and gift-giving are often viewed as highly essential in creating and maintaining customer relationships.
While gift-giving and entertaining can be valuable, they are also a source of tension between sales and operations personnel and a company’s compliance function. Sales and operations personnel need a level of flexibility to entertain clients and avoid committing cultural faux pas, but compliance departments have a constant concern that these expenses could violate anti-corruption regulations.
Although gifts and entertainment may not be the primary focus of the SEC and DOJ, the listing of SEC Enforcement Actions makes it a point to mention inappropriate gifts and entertainment in more than 60 percent of actions between 2013 and 2014. In addition, according to one expense management service provider, the volume of expenses related to entertaining is significant and accounted for approximately 5 percent of business travel and expense expenditures in 2012. As a result, compliance departments must remain vigilant in protecting the company from potential violations, but at the same time avoid an approach that causes unnecessary difficulties, delays and missed opportunities for sales and operations professionals.
How Compliance manages this area of risk can have a substantial impact on the everyday activities of operational professionals, either positive or negative. If managed successfully, Compliance can protect the company from violations as well as support operations which can result in operations’ willingness to include Compliance in more strategic areas such as establishing international channels to market, joint venture management and program negotiations.
Attention to transparency of expenditures prior to approval and recorded in the books and- records, as well as teaming with local operations personnel, can be instrumental in transforming a status quo “one-size-fits-all” gift and entertainment compliance policy into a dynamic and strategic program that will reap benefits for both Compliance and Operations.
Transparency can mitigate risks associated with foreign expenditures
Compliance departments are well attuned to the potential penalties and risks of inappropriate gift-giving and entertainment, and are knowledgeable of the countries where the perception of bribery and corruption is pervasive. However, implementing an inflexible compliance approach based only on this information does not allow for professional evaluation of reasonableness and intent, and can lead to overly conservative policies that may hinder the company’s competitiveness in the market. As an example, in Korea, a well-connected individual (a desirable trait for a sales employee) may attend many weddings each year, where cash is widely considered the only traditionally-acceptable gift. Failing to provide a cash gift is commonly viewed as rude and may adversely impact relationships, which in turn could limit future business sales and opportunities. Thus, implementing a “no cash” gift policy could present a substantial challenge for operational personnel in Korea who may resort to paying cash gifts out of their own pocket or finding ways to circumvent controls or misclassify expenses.
Another example is found in China, where many business professionals have ties to the Chinese government and may be viewed as “foreign government officials” under a broad interpretation of the Foreign Corrupt Practices Act of 1977 (FCPA). If a company’s policies restrict or prohibit gifts or entertainment for non-U.S. government officials, then that company’s personnel can be placed in difficult situations where they feel they have to choose between losing business and violating the company’s policies.
It is easy to see that a one-size-fits-all policy does not work in these scenarios and that a “just say no” approach is naïve. However, if Compliance approaches situations like these with the objective of evaluating intent through full transparency, then it can make more informed risk assessments and provide more reasonable guidance to the company’s employees. Plus, this approach often results in the added benefit of the company’s employees engaging more openly with compliance personnel on a variety of issues.
One example of this type of approach at work is described in a recent DOJ Opinion Procedure Release, which addressed a gift request from a U.S. law firm that represented a foreign country in various international arbitrations. One of the firm’s partners became friends with an official of the foreign country and wanted to pay for certain medical costs for the official’s daughter. The law firm proposed several safeguards and ensured full transparency to prevent the perception that the payment was made to influence any government decisions or gain an unfair business advantage. After review and consideration, the DOJ stated that it did not intend to take any legal action with respect to the proposed medical payments.
This is a prime example of the importance of transparency and teaming between Operations and Compliance. Many compliance departments would never consider allowing this type of expense under any circumstances. However, by taking a more engaged and transparent approach, the law firm was able to allow its partner to make the desired payments while limiting its own regulatory risk. With the help of operational personnel, compliance professionals should be able to compile the necessary details about proposed business gifts and expenses to evaluate their reasonableness in light of local customs, provide guidance, and incorporate any necessary controls and oversight, thus allowing operations and sales professionals to ethically conduct business.
Teaming yields culturally astute and effective compliance programs
Teaming between corporate compliance personnel and local employees with an understanding of customs and traditions can enhance the ability to distinguish between high-risk and low-risk gift and entertainment practices. For example, in Japan it is common for business discussions and negotiations to include formal business meals. These meals typically include fine food, wine and whisky and can be very expensive. However, many corporations have entertainment policy limits that do not provide sufficient consideration of these types of foreign customs. By creating a policy that allows for adjustments on limits by location and by providing an approval procedure for exceptions, the company can help its employees avoid the uncomfortable situation where a client recommends a restaurant that exceeds company policy limits.
One of the best ways to avoid these types of issues is for Compliance and local Operations to establish an open line of communication with regard to gifts and entertainment. Compliance staff remains the expert on policies, rules and laws, but operations staff knows what normal business practices are in the field and can help train Compliance in this area. To be effective and avoid being seen as a “roadblock,” Compliance needs to make an investment in understanding international business customs, traditions, laws and challenges. By teaming with Operations, the company can enjoy a compliance department that develops training and policies that protect the company from violations while also being in tune with local operational needs. Furthermore, operational personnel will become better prepared and informed regarding the company’s compliance requirements. The biggest shortfall of many compliance programs is that they focus only on issuing policies and providing training, but fall short of developing a program that is operationally focused, culturally aware, dynamic, inclusive, ever-evolving, and designed to bring a competitive yet compliant advantage to the company and its business.
In summary, gifts and entertainment is an area of opportunity where Compliance can re-brand itself from a back-office necessary evil to a strategic department that supports Operations in its international sales activities. By focusing on transparency and teaming with employees in the field, Compliance can take a more strategic role in the business. When compliance departments take a more engaged approach and view their role through an operational lens, they can meet their primary objective of protecting the company while also assisting the company to grow and succeed.
This article originally appeared in the October 2014 issue of Inside Counsel magazine.