Relationships with Governmental Officials: Understanding and Managing the Legal and Ethical Issues

August 10, 2016

L-378667_RTR23GK8While conducting business activities in an ethical manner is presumably a fundamental principle in building a reputable, successful and sustainable company there are also legitimate legal reasons for including ethics in a company’s overall governance and compliance framework.  U.S. companies are subject to a wide range of federal, state and local laws and regulations that are ethics-based and typically focus on identifying and controlling activities and relationships involving government officials that are likely to afford the company and/or its employees or agents an unfair advantage.  Areas that raise the greatest concerns, and which are likely to come up frequently in ordinary day-to-day business activities, include the following:

  • Anti-bribery laws prohibit the exchange of something for value with government officials as an incentive for the official to take (or refrain from taking) an action within the official scope of authority.
  • Providing government officials with gifts, gratuities, entertainment, meals, travel etc. may be construed as an attempt to influence the official and thus are often prohibited, restricted and/or subject to disclosure.
  • Providing support to political campaigns in the form of cash contributions or otherwise is often prohibited, restricted and/or subject to disclosure.
  • Lobbying and business development activities directed at government officials is generally accepted and allowed; however, such activities are often limited or restricted and/or subject to disclosure.
  • When company employees and agents forge personal, professional and/or business relationships with government officials or employees they run the risk of violating laws pertaining to conflicts of interest
  • Recruiting and hiring government officials who have previously been involved in the company’s business activities with the government or who will be representing the company in future dealings with government units for which they were previously employed must be handled carefully.
  • Companies interested in obtaining work under government contracts must understand and following public procurement laws that define how bids are solicited and contracts are awarded and administered.

The wide range of potential problem areas makes it challenging for companies to develop governance and compliance programs and administer them efficiently.  Certainly personnel involved in business development and sales activities that include contact with government officials must be carefully trained and monitored; however, many other people, from senior management to lower-level employees, may unknowingly and innocently run afoul of laws pertaining to gifts and entertainment, conflicts of interest and required disclosures of political contributions.  In addition, human resources personnel must be alerted to potential issues associated with hiring former government officials, a task that is complicated by the fact that senior management often takes the initiative in broaching the idea with the official before consulting with the human resources department.

Interesting and valuable information on “best practices” with respect to anti-corruption policies and measures came from a compendium compiled in 2009 by United Nations Office on Drugs and Crime and PricewaterhouseCoopers that surveyed what companies in the Fortune 500 Global Index (2008) were doing with respect to fighting the influence of corruption in their businesses.  As a general matter, the report, titled “Anti-corruption policies and measures of the Fortune Global 500”, admonished companies to set a minimum standard that complied with those set out in the United Nations Convention against Corruption. Specific findings from a thorough survey of the policies and procedures of the various companies included the following:

  • While most of the companies expressed a “zero-tolerance” policy with respect to the corruption, many failed to explicitly reference applicable laws and international treaties, provide assurances to managers that they will not suffer criticism or any other consequences for losing business due to their refusal to engage in corrupt practices and/or explicitly state the consequences that unethical and corrupt behaviors could have for the enterprise, its employees, customers and investors.
  • Communication of compliance policies to new employees and establishment of resource centers and training programs was common among the surveyed companies; however, companies varied with respect to the frequency and scope of training initiatives and whether or not participation by employees was mandatory.
  • Almost all of the surveyed companies addressed gifts and entertainment in their policies and provided employees with guidelines to consider when determining if an offered gift was unlawful or otherwise inappropriate. In general, however, there was a lot of variation in concrete rules in this area.  In some cases, companies established a maximum, threshold value and were more permissive with respect to gifts that did not exceed “social customs” or “socially expected” limits.
  • Reporting on internal wrongdoings witnessed in the performance of corporate duties (i.e., “whistleblowing”) was commonly covered in the policies of the surveyed companies and almost all of the companies maintained strong sanctions against retaliatory actions against whistleblowers.
  • While “facilitation payments”, which are payments made with the purpose of expediting or facilitating the performance by a public official for a routine action, are prohibited under the United Nations Convention against Corruption, policies of the surveyed companies pragmatically recognized that such payments were still a common means of conducting business in many countries. While some companies did not allow such payments, others “discouraged” them and required advance notice to senior management for approval.  Companies also recognized exceptions such as situations where the health or safety of an employee or of his/her family are at stake. Some companies discourage facilitation payments, but do not explicitly forbid them. In most cases, facilitation payments have to be reported as such to the management.
  • At the time of survey, in 2008, guidelines regarding corruption in the supply chain were relatively rare; however, since that time “best practices” in this area have evolved to include dealings with suppliers and many companies now explicitly require suppliers to sign on to codes of conduct.
  • Relatively few of the surveyed companies mentioned external audits in their compliance policies and procedures. In the same vein, policies generally did not include prohibitions on attempts to improperly influence the conduct of external audits.
  • Some of the surveyed companies established rules relating to policies activities of their employees and the most common approach among that those companies was to prohibit their employees from paying, promising, offering, or authorizing a payment of money or anything of value to a government official or political party for the purpose of obtaining or retaining business or securing an improper advantage. Managers and employees were typically not restricted from making contributions to political parties as long as the contributions were allowed by applicable law and were vetted by the company for appropriateness and recorded.
  • Some of the surveyed companies had committed themselves to involvement in collective action against corruption and has formed and/or joined anti-corruption organizations and established and maintained regular contact with relevant international organizations or initiatives.

For further information, see http://www.unodc.org/unodc/en/corruption/anti-corruption-policies-and-measures-of-the-fortune-global-500.html.

Gutterman WLEC bannerCompanies typically address bribery and corruption extensively in their policies and procedures relating to business activities in foreign countries in order to minimize the risk of potential liabilities under the US Foreign Corrupt Practices Act and a wide range of anti-bribery laws that have been adopted outside of the US.  However, domestic bribery and corruption should also be covered in a company’s governance and compliance program.  One approach is for the board of directors to adopt a short-form general statement of zero-tolerance policy regarding acts of bribery and corruption.  A general statement such as this should identify key risk areas, such as overseas collaborations, gifts and donations and public procurement, and should lay out specific steps that will be taken including implementation of an anti-bribery and corruption policy.  See Specialty Form at §221:245 of Gutterman, Business Transactions Solution available on Westlaw (“BTS”).  Other companies opt for a comprehensive form of anti-bribery and corruption policy which covers important issues such as the scope of policy coverage; how to obtain guidance on questions pertaining to the policy; what acts constitute “bribery” and thus will be subject to the policy; training; whistleblowing; audits; records and record keeping; and policies and procedures for specific areas such as gifts, hospitality and expenses, facilitation payments, agents, distributors, suppliers and joint venture partners, dealing with public officials, and political donations.  See Specialty Form at BTS §221:246.

Best practices call for providing readers with tools that they can use in real time to answer fundamental questions such as “what is bribery” and what type of due diligence should be conducted in assessing whether a prospective relationship with a third party raises unreasonable corruption risks.  Policies should be periodically reviewed and updated on a regular basis and should be administered by a senior management official who is given adequate resources to develop and maintain an effective compliance program.  Risk assessments should be conducted on a regular basis to measure the effectiveness of the policy and related procedures.  Other steps that should be taken include preparation and of standard clauses relating to bribery and corruption issues for inclusion in key contractual documentation.  For further discussion, see Corporate Governance (BTS §§221:1 et seq.).

Titles by Alan Gutterman