CSR Programs and Charitable Donations: FCPA Compliance Challenges

Introduction

Companies in the mining and energy sectors often operate in remote locations and find themselves working with indigenous communities who have no official say in the company’s operations, and yet are often dependent on these businesses to provide critical public services. In some jurisdictions these services are part of the concession or a statutory requirement of being allowed to operate in the locality, while others have no formal structure. Often companies elect to augment statutory requirements by implementing Corporate Social Responsibility (CSR) programs[i] or by making charitable donations[ii]. Companies are also frequently subject to concerted campaigns by activist non-governmental organizations (NGOs) that utilize these communities for their own agendas. These issues, coupled with complex permitting and regulatory environments, increase a company’s vulnerability to potential violations of the FCPA and other anti-bribery and anti-corruption (AB/AC) legislation.

Anti-Bribery and Anti-Corruption Enforcement

The challenges of conducting business in a foreign jurisdiction are affected by a heightened level of regulatory scrutiny. Although the U.S. government leads the world in transnational bribery and corruption enforcement in terms of both the number of cases and the size of recoveries[iii], global cooperation and the growing role of non-U.S. enforcement will ensure that compliance functions within multinational entities will need to continue to increase their efforts to eliminate bribery and corruption within high-risk jurisdictions. Foreign regulators, having seen the success of the U.S. Department of Justice and the U.S. Securities and Exchange Commission (DOJ/SEC) enforcement actions, are increasingly incentivized to invest and participate[iv] in multinational AB/AC investigations to collect fines and penalties. Laws such as the UK Bribery Act (2010) and Brazil’s Clean Companies Act (2014), as well as active enforcement of existing local anti-bribery legislation, further increase the attention on an organization’s compliance function.

Available AB/AC Guidance

Because the FCPA has been in existence since 1977, there is a body of informative case law for companies examining their CSR and charitable giving programs. Additionally, the 2012 DOJ/SEC FCPA Resource Guide provides examples of compliance issues relating to charitable donations. Several recent FCPA enforcement actions, including the Schering-Plough Corporation (now Merck), Eli Lilly and Company and Stryker Corporation, have involved CSR programs, and in particular donations and contributions to local charitable organizations. Relevant observations, resulting from the settlements in these cases, include:

• There are no exemptions from performing risk-based, adequate due diligence on a charitable organization and its principals or directors.
  • Government affiliations and nexus issues should be examined and addressed.
  • Direct and indirect association with government officials, as well as involvement of governmental representatives (e.g., public/private partnerships), should be documented and reviewed.
  • Secondary providers of charitable services should be included in the initial due diligence.
  • Individual lobbying for donations, if not by a direct employee of the charitable organization, should be vetted.
• The purpose of the charitable gift should be obvious and consistent with the organization’s charitable mission or CSR program and have no direct business correlation unless legislatively or contractually mandated.
• Management should document the rationale behind the charitable contributions and ensure that the donation is consistent with the organization’s charitable objectives, policies and procedures inclusive of the level of management review and authorization for disbursements.
• Documentation such as FCPA certifications/acknowledgments and training (as needed) should be incorporated into the charitable relationship.
• The same ongoing monitoring required for a third-party vendor, consultant, distributor or agent should be applied to the charitable organization. The selection and application of risk-based, reasonable and cost-effective monitoring controls is critical.
  • Review of a charitable organization’s financial records, including bank accounts and disbursement activities.
  • Company donations may need to incorporate additional restrictions on the use of the funds.
• A charitable organization cannot be used as a substitute vehicle (e.g., third party) to facilitate an improper payment to a government official.

The aforementioned FCPA cases also provide insight into the common failures or pitfalls that correspond with charitable donations and CSR programs. These include:

• Oversight failure such as a “set and forget” approach, which overlooks the periodic review and ongoing monitoring requirements regarding the activities of the charitable organization (e.g., donated funds are not disbursed in support of the agreed-upon goals, management has changed, the original purpose has been altered, oversight function has been weakened or terminated).
• Company compliance departments lack the necessary information and/or interaction to fulfill their oversight responsibilities. The local charitable activities occur outside the control and review of the designated compliance resources within the organization.
• The charitable organization is co-opted and inappropriately used as a conduit for bribery (i.e., quid pro quo arrangement).
• Contributions to charities are inappropriately handled outside of the normal due diligence or compliance review processes or are considered exempt and managed as either a contractual obligation or guided/monitored as a budget constraint (e.g., a percentage of sales or revenue is budgeted for charitable giving).

Approaches to CSR/Charitable Contributions

As companies are challenged by local community and governmental groups to improve or substantially contribute to the development and growth of the communities in which they operate, and as community leaders are becoming more adept at demanding and holding organizations accountable for their CSR programs, companies have had to develop better strategies to proactively engage local communities within the bounds of both international and domestic AB/AC regulations. Incorporating one or more of the following strategies may improve both the quality of the compliance effort and the transparency of the CSR or charitable program.

1. Employ a Community Relationship Manager (CRM): An energy services company operating in multiple African nations developed a specialized role within the organization to manage and communicate with the tribal governments. The tribal governments, although not sanctioned or associated with the local government, often exerted more control over the local population than the local official governmental structure. The primary role of the CRM was to communicate what was permissible per company CSR policy and provide for a transparent dialog with the local population as to how best to invest the available resources for the betterment of the community.
2. Create a Charitable Organization: Partner with other international operators to create a charitable trust that can be controlled by the sponsoring entities but also include community leaders on the Board of Directors. The involvement of the community and the associated transparency related to the planned charitable giving can serve to limit the possibility of inappropriate diversion of the donated funds. Additionally, an independent audit or review of the trust can increase accountability.
3. Create a Local CSR Selection Board: In more developed areas, organizations have created a company/public “Board of Review” to communicate the application process for charitable awards or sponsorships while also participating in the selection and prioritization of the annual charitable spend.

The critical themes in the above strategies are the maintenance of adequate oversight of the CSR and charitable donation programs and an increase in communications and transparency within the communities that are directly impacted by the planned spend.

[i] A form of “self-regulation” whereby an entity will take into account the social, ethical and environmental impact of its activities on the community in which it operates. These programs are often involved in addressing the sustainable livelihoods of the local population and incorporate the charitable activities or programs of the entity.

[ii] Financial contribution provided by an organization to a nonprofit organization, charity or private foundation that furthers the contributor’s own objectives.

[iii] In 2014, the U.S. Securities and Exchange Commission and U.S. Department of Justice collected or obtained agreements to pay approximately $1.6 billion from FCPA cases.

[iv] Most notably, by sharing information or allowing access to information that was previously unavailable to foreign regulators due to local data protection and privacy laws.