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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

Venezuelan Democracy 9, Business 1

The Coat of arms of Venezuela

The Coat of arms of Venezuela (Photo credit: Wikipedia)

Just as I predicted 6 months ago (in my blog post of April 2012), Hugo Chavez won his fourth presidential election in Venezuela, marking this the 9th victory for democracy. The score is now Democracy 9, Business 1.

What? How dare I claim that Democracy has been such a clear winner in Venezuela? Well, yes, just look at the overwhelming numbers in the last 15 years. Chavez has won four presidential elections, most of them by landslide victories. Even in the most recent election last month (which by all accounts is the best performance scored by the opposition, after uniting under 1 single candidate), Chavez won 55% of the vote, taking all but 2 of the 24 Venezuelan provinces.  Turnout was a massive 80.6% of the electorate.

Furthermore, Chavez has won every single referendum (a total of six since his first presidency). The only exception was the 2007 referendum, which sought to amend a whopping 69 articles of the 1999 Constitution, including the abolishment of presidential term limits and the autonomy of the Central Bank. This referendum also sought to grant the President the power to declare an unlimited state of emergency. In other words, President Chavez was seeking to become the first elected Monarch of Latin America, with absolute power.

The people of Venezuela wisely rejected the referendum, but just barely (51% to 49%), and in my opinion, it’s the only victory scored by Venezuelan Business since Chavez came to power. However, this victory was partially reversed in the 2009 referendum, which was far more focused — on the abolishment of term limits for President, State Governors and City Mayors. With a huge turnout of 70.3% of the electorate, it passed 54.9% vs. 45.1% against.

I know what you’re thinking…that Chavez won by voting fraud. Well, this has been the claim since his very first election. However, it doesn’t really matter that most elections and referenda since Chavez’s rise to power were observed and ratified by the Organization of American States and the Carter Center, negating the allegations of voting fraud.

Far more important to you (the foreign investor seeking investment opportunities in Latin America) should be the realities of modern-day Latin American politics. The poor, the masses (Chavez’s political base) no longer need to rely on a military revolution Cuban-style to rise up against their perceived oppressors. They can now do it democratically, Chavez-style.

The impact to your investments could be disastrous. Just take a look at Venezuela, where nationalization and expropriations are quite common. In fact, the business climate has gotten so bad that Venezuela now ranks nearly in last place (#180 out of 185 nations) in the World Bank’s Ease of Doing Business rankings.  You stand a better chance at successfully managing a subsidiary in Iraq (#165), or even Afghanistan (#168).

Worse yet, Chavez is committed to exporting his revolution (think back to Bolivia, Ecuador, Nicaragua and Honduras during his previous terms) — and he will try to do so again during the next six years.

His political movement (“Chavismo”) is real and democratically legitimate, and it will be with us for many years to come. Your foreign direct investment will be at risk in any Latin American country where its elected government is not serious about social justice. Therefore, in addition to the usual business metrics that you use, your due diligence must also include a thorough analysis of the country’s political parties after they have come to power in recent history. Besides favorable business policies, did they also invest in affordable housing and in high-quality, low-cost health care & education for the masses? What policies did they actually implement towards alleviating income inequality? What was the level of corruption during their administrations? Etc., etc.

The answers to these public policy questions will tell you whether your investment will be safe short AND long-term, as government reigns change hands. Even if the current political party in power is good to foreign investors, you want to know whether the socio-economic conditions that they leave behind could give rise to a Chavez-type revolution in the near future…at the ballot box…in the very next presidential election.

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November 1, 2012 Posted by | New York | , , , , , , | 2 Comments


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