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Are U.S. Nonprofits with Operations in Latin America Subject to FCPA?

Nonprofit 3I’ve been consulting for more nonprofits lately, and I’m finding that they tend to make the same basic mistakes when it comes to managing the business side of doing good.  Because of their very nature (usually a lot of their funding comes from well-meaning donations that are specifically restricted for programs, but not overhead), nonprofits typically keep administration, accounting and compliance expenses to an absolute minimum — not realizing until it’s too late that this could be a fatal mistake. As laudable as their program missions might be, nonprofits should not under-budget these often-neglected, non-programmatic departments.

Take the case of U.S. non-profit organizations (NPO’s) doing good in Latin America. Many of them have never even heard of the Foreign Corrupt Practices Act (FCPA), much less set up robust compliance departments to help them navigate the treacherous waters of operating down there.  Yet U.S. nonprofits are very much subject to this law, just like regular for-profit companies.

That’s why I’m sharing the following edited post from the FCPAméricas blog (www.fcpamericas.com) about what U.S. nonprofits operating in Latin America should at the very least understand about FCPA compliance:

“…Risk Assessment

As with for-profit entities, the first step in grappling with FCPA compliance is for a nonprofit to conduct a risk assessment…including whether they operate in high-risk jurisdictions and the degree to which their operations require contact with government officials. Nonprofits often work as contractors for government agencies, often competing with private companies for these contracts. These transactions present FCPA compliance risks…

Other key risk assessment points for nonprofits include:

  1. Local staff or agents. Many nonprofits hire individuals or organizations (often local nonprofits) to carry out their work and act as their agents. As with for-profit organizations, such local hires present heightened FCPA risk and should undergo due diligence. In addition, nonprofits should be alert to corrupt or fraudulent practices from local nonprofits, such as attempts to fund administrative costs by requiring kickbacks from contractors hired to do specific projects.
  2. Management/oversight structure. Many international nonprofits disperse their decision making widely to their people on the ground. At the same time, given the resource constraints facing nonprofits, many have minimal oversight/management resources. Such structures significantly increase FCPA risks while simultaneously limiting the tools available to address them, e.g., internal controls, training, auditing and reporting. Similarly, many nonprofits lack FCPA expertise or even general compliance expertise. This may blind nonprofits to the risks they are facing and inhibit internal reporting…

Reputational Risk

An important factor that may motivate nonprofits to address FCPA risk is reputational risk…[which is far] greater for nonprofits than they are for corporations, since a corruption scandal at an NGO can dry up funding and threaten its existence. Such scandals can arise from engaging in bribery. If a nonprofit is a repeat victim of corruption, this could also suggest mismanagement. Taking steps to reduce FCPA risk will reduce the potential for both types of corruption…

…Technical points

Nonprofits are treated the same as corporate entities under the FCPA. However, nonprofits should consider the following legal wrinkles:

  1. Accounting provisions. Because nonprofits are not “Issuers”, they are not subject to the accounting requirements of the FCPA. Nevertheless, they are well advised to have accounting controls similar to those required of Issuers under the FCPA. Internal controls significantly reduce the risk that an employee or agent of the nonprofit will violate the FCPA’s anti-bribery provisions. Perhaps more importantly, such controls also reduce the risk that nonprofits will be a victim of corruption or embezzlement.
  2. Business Purpose Test. The FCPA prohibits corrupt payments or promises made for a business purpose, which the daring might suggest exempts the activities of nonprofits. That argument is a non-starter, however. In Opinion Release10-02 (2010), the DOJ stated its interpretation that the business purpose requirement would cover nonprofit work. Similarly, as discussed here, the “business purpose” element of the bribery prohibitions included in the UNCAC and the OECD conventions also covers the business of nonprofits…” 

The opinions expressed in the shortened and edited post above from the FCPAméricas blog are those of the author Matthew Fowler in his individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author’s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers…FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws…

In conclusion, if you are a U.S.-based nonprofit with operations in Latin America, your senior management and Board of Directors should pay close attention to the organization’s FCPA compliance. As you can see, there are several important issues that an NPO must keep an eye on to avoid problems down the road.

If you’re wondering how you’re going to pay for a compliance department (or even just 1 compliance professional or outside consultant, given the preponderance of restricted donations), you should consider modifying your fundraising plan to seek specific support for compliance-related matters. The support could be in the form of grants, of course, but don’t overlook valuable pro-bono training and/or legal advice.

Who are possible donors, you might ask?  Consider calling on larger NPO’s with global operations, international foundations, multinational corporations with large FCPA departments and, especially, U.S.-based international law firms with FCPA experience.

Another possible group of potential donors are multinational firms that have run afoul of FCPA regulations that resulted in severe sanctions. There are many companies that fall under this category (Ralph Lauren Corp., BizJet International, Siemens, Ball Corp., SNC-Lavalin, Helmerich & Payne, Chiquita Brands, Stryker Corp. and Walmart just to name a few). As these firms re-structure to comply with the terms of their government settlements (which usually include MAJOR personnel & procedural changes), these sanctioned companies might be open to the idea of sponsoring the compliance department of a nonprofit like yours, in a contrite attempt to clean up their tarnished images. It would be good PR for them and a great source of funding for you!


November 9, 2013 Posted by | New York | , , , , , , , | Leave a comment

Did Walmart CEO Know of Mexican Bribes?

Walmart de MexicoThis month marks the 1-year anniversary of the New York Times article by Pulitzer Prize winner David Barstow alleging a vast conspiracy of bribery and corruption in Mexico that dated back to 2002, when Walmart was aggressively expanding its footprint in that all-important emerging market. The Times claimed that it was only after learning of its investigation in November 2011 that Walmart “voluntarily” disclosed to the U.S. Justice Department that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act (FCPA), which outlaws the bribery of foreign officials by American executives.

All along, Walmart has claimed that none of their senior officers (including its current CEO Michael T. Duke) knew anything about any Mexican bribes.

Yet earlier this year, Democratic Congressmen Elijah Cummings and Henry Waxman, who are investigating certain aspects of the bribery allegations, released emails that indicate that several senior executives, including Mr. Duke (CEO since 2009 and previously the Vice Chairman responsible for Walmart International and its Mexican subsidiary), had specific knowledge that “Wal-Mart paid hundreds of thousands of dollars in bribes to secure approvals to build its store in Teotihuacan on the site of ancient ruins.”

The Cummings/Waxman letter (a copy of which can be read here: http://waxman.house.gov/reps-cummings-and-waxman-release-documents-showing-wal-mart%E2%80%99s-ceo-was-informed-mexican-bribery), focuses on only 1 particular store.

But the New York Times article from last year alleged a massive bribery scheme throughout the entire country.  You can read the stunning article here (http://www.nytimes.com/2012/04/22/business/at-wal-mart-in-mexico-a-bribe-inquiry-silenced.html?ref=davidbarstow).

Due to that New York Times report, Walmart is having to spend a lot of money on defending itself against multiple shareholder lawsuits and on the FCPA investigations.  In its most recent Annual Report, which the company filed just last week with the Securities and Exchange Commission, the company disclosed that it spent $157 million during the fiscal year that ended January 31, 2013, and that it expected to incur an additional $45 million during the first quarter alone.  Given the amount of money Walmart is spending on its legal defense, it’s hard to predict at this point whether any Walmart executive(s) will be going to jail.  The investigations are ongoing, and no criminal indictments have been handed down to date.

In addition to the alleged cover-up by Walmart executives in Arkansas, what troubles me is the sophistication of the supposed bribery scheme masterminded by the Mexican executives.  If proven to be true, the scheme should serve as a huge wakeup call to any foreigner wanting to invest, or already doing business, in Latin America.  You should assess your current operations there, and take concrete steps to protect yourself and your company from corruption risks in this region.

Consider, for example, that the main perpetrator of the alleged Walmart bribery scheme was a 10-year veteran in the company’s real estate department by the name of Sergio Cicero Zapata, who feeling under-appreciated when he was passed over for the job of general counsel of Walmart de Mexico, began to assemble a record of all the bribes he had helped to orchestrate.  He then contacted Walmart’s general counsel at the time (Ms. Maritza Munich) in Arkansas with “information about irregularities authorized at the highest levels of Walmart de Mexico.”

According to The Times, in the ensuing internal investigation ordered by Ms. Munich, Mr. Cicero spent hours explaining the mechanics of how he had helped funnel bribes through trusted facilitators, known in Mexico as “gestores” (pronounced hes-TOR-ehs).

Gestores are facilitators who help individuals and companies to get things done in Mexico, especially when dealing with slow-moving government agencies.  They grease the wheels of progress and are a daily reality of Mexican culture.  Although some are legitimate, many are not and it was Mr. Cicero’s job to recruit the latter.  Operating in the shadows, Mr. Cicero recounted how he worked closely with them, sharing strategies on whom to bribe and for how much. He described how they targeted mayors and city council members, urban planners, bureaucrats who issued construction permits, and anyone who might get in the way of Walmart’s relentless quest for growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of community leaders.  Furthermore, they got zoning maps changed; they made environmental objections vanish; and they expedited permits that typically took months to process.

According to The Times, Mr. Cicero further described how Walmart de Mexico perfected the art of fraudulent accounting.  The gestores submitted invoices with brief, vaguely worded descriptions of their services, with secret codes written on the invoices.  The invoices covered the bribe and the gestor’s fee, typically 6 percent of the bribe.  The codes identified the specific “irregular act” performed.  One code would indicate a bribe to speed up a permit; another would describe the elimination of a fine, etc.

According to Mr. Cicero, the invoices with the secret codes were carefully monitored by a handful of Walmart de Mexico executives in the know, which included the board chairman, the CEO, the general counsel and the chief auditor, among others.  Each month, they received a detailed schedule of all of the payments performed.  Walmart de Mexico then “purified” the bribes in accounting records as simple legal fees.  All told, over $8 million dollars were paid in bribes.

But wait, there’s more!!  According to the New York Times, an internal probe by Bentonville investigators found that the corruption in Walmart’s largest foreign subsidiary might be far more extensive than even Mr. Cicero had described.  In going through Walmart de Mexico’s database of payments, investigators found large “contributions” and “donations” directly to state, municipal and local governments all over Mexico — nearly $16 million in all since 2003 — in return for the licenses, zoning approvals and construction permits needed to build their stores.

Then there’s the reaction by the American bosses in Arkansas, who when upon learning of the scheme, allegedly tried to cover it up…

You might be thinking that this sounds more like the script for a Hollywood fictional thriller about corporate corruption, and not the dealings of a respected Fortune 500 company listed on the New York Stock Exchange.  I thought so myself at first, until I started to wonder about the $200 million in legal fees that Walmart has shelled out to defend itself and its executives.  You just don’t spend that kind of money unless there is some truth to the allegations!

With over $100 Billion in worldwide sales per quarter, it would seem that Walmart can easily afford $200 million.  Now ask yourself, as a foreigner doing business in Latin America, could you survive an investigation on alleged corrupt practices?

April 2, 2013 Posted by | New York | , , , , , | 7 Comments

How Do You Protect Yourself and Your Company From Top Corruption Risks in Latin America?

Local police and customs agents are the top corruption risks in Latin America, according to 439 business executives who responded to a 2012 survey of companies doing business in 14 Latin American countries.  The survey was conducted by U.S. law firms Miller & Chevalier and Matteson Ellis Law, with extensive collaboration from 12 Latin American law firms.  (This post is being re-blogged with permission from the author — Mr. Matt Ellis of Matteson Ellis Law, PLLC.  Its original length was edited for brevity.  You can obtain a copy of the complete survey here):

“…two areas of government were seen to create consistent concern for executives in almost every country surveyed – customs and police. Almost two-thirds of respondents rated these government functions as having “significant corruption” in the countries in which they have experience.

The reasons for this finding are complicated. Although customs and police officials at higher levels can certainly create corruption risk (the Bizjet enforcement action appears to have involved payments to relatively high-level Mexican Federal Police), these risks are most often associated with lower-level officials – like traffic police and port officials. These officials often have lower levels of education. Their wages are low. They are often required to seek rent through other sources, like bribe requests, to bring in enough money to support their families and cover basic needs. These areas of government are often described as less formal and more unprofessional.

But these facts do not change the reality that petty corruption can be just as insidious to the development of a country as can grand corruption. It can also be just as disruptive to business. These facts also do affect the expectations of ethical practices placed on companies operating in the region. To comply with laws like the Foreign Corrupt Practices Act (FCPA), employees must always refuse bribe requests.

What are the implications of this finding for FCPA compliance programs? When working in Latin America, compliance practitioners would be wise to tailor their programs to be particularly robust in responding to customs and police risk. Here are just a few tips.

– Make sure you have written policies that include facilitating payments and duress and extortion, which are common to petty corruption.

– Know the local terminology for corruption. Knowing words like mordida in Mexico and propina in Brazil will help you track and identify issues when they occur and train your teams to avoid them.

– Design training role-plays to include examples of petty corruption. What do you do when the policeman pulls you over and refuses to let you go without a payment?

– Be particularly careful with the third parties (ie, customs agents) you use in these areas. Due diligence on dispachantes, gestores, and other support is essential. Do not stop there – ongoing monitoring and testing is just as important.

– Build customs delays into your business plans. In many countries, delays will happen. You can be sure of this. But the pressure for an employee to make a payment is much less when your business model expects a wait.

– Do not give police a reason to pull you over. For example, make sure your company cars are fully compliant – that your licenses and registration are updated, and that the tail lights are working. Periodically train your drivers on road safety.

– Have communications mechanisms in place so employees can seek compliance feedback in real-time when issues arise. Your local compliance officer surely has a cellphone and can be called in the middle of the night.

– Make sure your teams know who is and is not a foreign official for purposes of the FCPA. Are private companies used by a government to scan containers at a port?

– Spend extra time in your compliance audits on reviewing transactions related to police and customs. Petty cash disbursements are a good place to start.

– Use the FCPA as a shield. When a bribe request is made, tell the policeman or customs agent that you do not want to be rude, but you simply cannot make the payment. If you did, you would lose your job.

– Be ready to wait. Delays are often the corrupt official’s best friend. The policeman might make you wait at a checkpoint until he decides to finally let you go. Bring a book.

Of course, the mechanisms you devise to respond to risk will depend on your company’s specific risk profile. A risk assessment is a necessary first step to any compliance program. The above suggestions are only a few things that I have seen companies do successfully in the region. Moreover, do not forget that customs and police create only some of many corruption risks in the region, albeit critical ones.”

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication.  For more information, please contact Info@MattesonEllisLaw.com.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2012 Matteson Ellis Law, PLLC

Author: Matt Ellis

August 4, 2012 Posted by | New York | , , | 4 Comments


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