The FCPA paparazzi has a standard list of anti-corruption risks: government interactions, third-party due diligence, gifts and entertainment, and mergers and acquisitions/joint ventures. Notice that charitable giving is not included on that list of greatest hits.
Gifts to charities can be a clever disguise of an improper payment to a government official or a relative of a government official. Like gifts and entertainment, a company needs to have a specific procedure for vetting the charitable donation to ensure that the recipient is legitimate. Like the due diligence process for third party agents, there needs to be a similar procedure for charitable donations which must include documentation of the review and approval process. Due diligence of the charitable organization needs to focus on the purpose of the organization, the members of the board and senior management. All of this needs to be documented.
A company has to investigate the circumstances surrounding the charitable donation. How did the company decide to make the donation? Was it at the suggestion of any foreign government official or third party agent?
In one particular enforcement action, a company paid a $500,000 fine for making “improper” payments to a legitimate charitable organization which was headed by a foreign official who had influence over the decision whether to award business to the company. The company was the largest contributor to the charity. While the matter was resolved with a civil settlement with the SEC, the enforcement action underscores the risks associated with charitable payments.
A related issue arises in some industries with what are termed “offsets,” a condition of a contract award may be to complete a local projects to benefit a country in which the company is doing business. As a condition of a government contract, companies may be required to purchase supplies from local businesses, or build schools, hospitals or other infrastructure projects which have no relation to the government contract.
The primary risk in these arrangements is the relationship between the company and the local committee or company involved in the offset project. To reduce the risk that such arrangements are a scheme to funnel improper payments, companies must create a rigorous due diligence process to review the entities involved and the specific terms of the relationship. Documentation of the process is essential. Contractual provisions to reduce the risk should be included.
It is also important to monitor the activities of the charitable organization to make sure it maintains its charitable purposes. If there is any change in its activities, a company should re-evaluate the relationship and exercise all legal options available to it to discontinue the relationship with the charitable organization.