(Editor’s Note. In this era of increasing GAO and IG investigations of government contractor actions all individuals and companies interacting with government officials must become aware of the strict ethics rules of doing business with government agencies. New rules and cases in this area has made it timely to address this issue. The following article is based on the June 2014 Briefing Papers by Jessica Tillipman, Assistant Dean at the George Washington University Law School.)
FAR 31.101-1 articulates the overall policy of all government entities, whether federal, state and local or foreign – “Government business shall be conducted in a manner beyond reproach and except as authorized by statute or regulation, with complete impartiality, and with preferential treatment for none. Transactions relating to the expenditure of public funds require the highest degree of public trust and an impeccable standard of conduct.” To ensure individuals involved in government procurement adhere to this standard, government entities in nearly all jurisdictions have established codes of conduct, ethical restrictions and anti-corruption laws where nearly all have established prohibitions on gifts and hospitality that may be accepted by government officials. While gifts and hospitality play an important role in conducting business in the private sector in the public sector these common practices and courtesies may be interpreted as attempts to infl uence public offi cials. Ethics and anti-corruption laws vary widely by jurisdictions resulting in considerable confusion over what rules apply. The following article attempts to provide an overview of these rules.
Government Ethics Restrictions on Gifts and Hospitality
Most of the laws target the relationship between the government and contractor to ensure the transactions are free of corruption or even the appearance of impropriety. Contractors that work in a variety of jurisdictions – federal, state-and local and foreign – are faced with a bewildering assortment of rules.
US Federal Restrictions
The Office of Government Ethics (OGE) maintains a website that summarizes relevant laws as well as provides guidelines and training materials. In recent times, the complex rules have been complicated by the expanding use of government outsourced personnel where contractor-employees work side-byside with government officials where common office traditions of birthdays, retirement and holiday parties create ethical issues. Though the policies are straight forward, the rules are fairly complicated where they are riddled with exceptions and nuances. As a general rule government employees are prohibited from directly or indirectly soliciting or accepting “gifts” from a “prohibited source.” Companies that contract with or seek to contract with the federal government fall under the definition of “prohibitive source” while a gift is deemed to be given because of a federal government employee’s official position if a gift would not have been offered or given if the employee was not working for the government. The definition of “gift” includes hospitality as well as any other item of monetary value. Excluded from this definition are items of little intrinsic value such as modest refreshments (that are not a meal), plaques, discounts available to the public and honorary degrees. However, included in the broad definition of “gifts” are many items that are business courtesies in the private sector such as meals, entertainment and transportation. If an item is not explicitly excluded as a ‘gift” it is probably prohibited unless a limited exception applies. Unless a gift falls under one of the following exceptions, it is “the safest course” to assume the gift is prohibited.
1. The 20/50 Rule. A contractor may offer a noncash gift with an aggregate market value of $20 per occasion provided the cumulative value does not exceed $50 in a calendar year. The monetary value applies to an entire organization not to individuals. Contractors cannot offer or give gifts or hospitality that exceed the cap by allowing the government official to pay the difference between the fair market value of the item and the gift cap (e.g. cannot buy lunch valued at $40 even if the official pays the $20 difference).
2. Gifts based on a personal relationship. A gift can be provided if it is clear it is “motivated by a family relationship or personal friendship rather than the position of the employee.” To qualify for this exception several factors are relevant such as who paid for the gift, the origin of the friendship and history of gift giving between the parties. The OGE has expressed suspicion if the friendship has developed on the job or gifts have been purchased with company funds.
3. Gifts from the spouses’ employer. Similar to above, gifts or hospitality may be extended if it is based on a spousal relationship. For example, if a contractor employee is married to a government offi cial the contractor may provide meals, lodging, transportation and other benefits if offered because of the spousal relationship, not the government official’s position. So if a contractor hosts a holiday party for all employees and their spouses then the government employee may attend as long as the invitation is made to all spouses.
4. Gifts in connection with bona fide employment discussions. If a contractor wants to engage in bona fi de employment discussions with a government official it may provide meals, transportation and lodging in connection with the discussions as long as the government employee has complied with all the government requirements for such discussions.
5. Widely attended gatherings. Contractors may generally offer government officials free attendance at a widely attended conference as long as the event is legitimately widely attended and attendance is in the government’s interests. “Free attendance” is defi ned as a waiver of all or part of the fees associated with the conference including “food, refreshments, entertainment, instruction and materials furnished to all attendees.” It does not include expenses for transportation and lodging as well as entertainment that is “collateral to the event” or meals taken other than in a group setting. The exclusions should not be offered so frequently they represent “an improper purpose.”
6. Other areas. For example, transportation costs (including local travel) offered to a government official can be tricky. Generally it depends on the purpose of the transportation where if it is offered by the contractor in connection with the offi cial’s duties (e.g. travel between two official work sites) it is deemed a gift to the agency and hence permissible while if it is for the “personal benefit” of the official (e.g. shuttle bus as part of his daily commute) it is an impermissible gift unless one of the exceptions above apply (e.g. if the shuttle ride was valued at less than $20). Another example is that gifts that are provided indirectly such as (1) those given to a family member with the official’s knowledge or (2) a charity that evades funneling gifts directly. The rule of thumb here is if a gift may not be given directly to an official it may not be offered to or through another person or entity. Finally, contractors should be aware that they may face severe consequences if they violate gift restrictions to induce a government official including suspension or debarment actions or even worse consequences if they are given in an attempt to obtain a contract or favorable treatment to influence government offi cials.
State and Local Ethics Restriction
Though federal rules can be difficult they can nonetheless be identified on user friendly websites while tracking down the vast work of state and local ethics rules can be a huge task. Though no single article can summarize the gift and hospitality rules of all 50 states and thousands of local agencies, the article does provide a few useful examples that appear to be common in most locales. Some states maintain “zero tolerance” (“no cup of coffee” states) such as New Jersey where “no state officer or employee…shall accept any gift, favor, service or other thing of value” except something of trivial value or offered to the general public under the same terms and conditions. At the other end of the spectrum are states that place no monetary restriction of giving gifts or hospitality to government officials where in South Dakota the only restriction is to prohibit giving to improperly influence an official action, making gift giving virtually limitless. Some states have had similar permissive gift giving where they are now tightening rules such as Virginia where there is a recent executive order to cap gifts at $100 though there is still no cap on cumulative value. Assuming a contractor can locate relevant state gift restrictions it must also consider more stringent rules applicable to specific agencies or localities.
Foreign Ethics Restrictions
Contractors doing business with governments outside the US may have the most difficult task locating gift and hospitality prohibitions where they often must hire local help to wade through the requirements. Many restrictions in other countries are notably less stringent than those in the US where because the foreign laws are comparatively newer, they are not well developed or well enforced. A few examples follow.
US Foreign Corrupt Practices Act
Generally, the FCPA prohibits the bribery of foreign government officials and requires covered persons and entities to maintain accurate books and records and an adequate system of internal accounting controls. The anti-bribery and accounting provisions are intended to work in tandem where companies are to be prevented from hiding bribes or other improper transactions in off-book accounts or slush funds but also the government may prosecute companies for violating accounting provisions even in the absence of a separate anti-bribery violation. Key provisions include:
1. FCPA is famous for its broad jurisdiction where much to the dismay of non-US companies they have found themselves ensnared by its provisions. The FCPA applies to companies and individuals based either in the country where the improper activity occurred (territorial jurisdiction) or the origins of the companies that committed the act (nationality jurisdiction). Territorial jurisdiction covers persons or companies committing an act within the US “in furtherance” of a corrupt payment or offer of payment using US mails or other means of interstate commerce. Since 1998, the “in furtherance” has been expanded to apply to foreign companies or persons covering any act taken within the US that furthers improper payments. Nationality jurisdiction is applicable to domestic concerns and US issuers which may be triggered by an act that takes place entirely outside the US, regardless of use of US mails.
2. The anti-bribery prohibitions of the FCPA cover “offering to pay, paying, promising to pay or authorizing the payment of money or anything of value to a foreign official in order to influence any act or decision of the foreign official in their capacity” to secure improper advantage. The term “anything of value” is interpreted very broadly which depends on the subjective value attached by the foreign recipient where there is no minimal dollar threshold. Equally important, the requirement of a thing of value must be provided with “corrupt intent” – requiring the gift be made to secure an improper advantage. There must also be a “business purpose” to the payment where bribing a government official to obtain a contract has been broadened to cover such “business purposes” as avoiding customs duties, licensing, zoning approvals, avoiding inspections or reducing tax liabilities.
3. The FCPA’s knowledge standard is incredibly broad where it is designed to ensure companies do not hide behind agency or other third parties to avoid liability. Given this liability companies must be careful in their selection and oversight of agents or intermediaries hired to assist since the vast majority of FCPA cases have been a result of activities of third parties.
4. The FCPA does provide one limited exception to the anti-bribery prohibitions as well as an affi rmative defense. The exception applies when the payment is for the purpose to “expedite or to secure performance of a routine governmental action” where the payments are used to expedite “non-discretionary, ministerial activities performed by mid-or low level foreign functionaries.” However, this exception has become murky and is often not an exception when the foreign country does not exempt it. As for defenses, the FCPA does permit companies to pay a foreign official’s “reasonable and bona fide” expenses as long as they are directly related to the promotion or demonstration of a product or to the performance of a government contract. Also, under the books and records provisions of the FCPA all gifts must be properly and accurately accounted for.
5. Over the years the Department of Justice and SEC have issued guidance. First, companies are “not to sweat the small stuff.” For example, the guidance has made clear that modest meals and hospitality, reasonable cab fares and even company promotional items (usually with logos) are unlikely to improperly influence a foreign official and absent more items enforcement is unlikely.
6. Consequences of violating FCPA can be staggering resulting in hundreds of millions of dollars in fines and penalties as well as millions for internal investigations once violations are brought to light. In addition, suspensions and debarments, loss of licenses or clearances, inability to receive loans, loss of commercial business and severe reputational damages are also common consequences.
7. As a result of decades of long efforts by the US
to convince other countries to enact anti-bribery prohibitions similar to the FCPA, contractors conducting business outside the US are likely to find themselves within jurisdictional reach of criminal anti-bribery laws of other countries.
Compliance
The problems of complicated and diffi cult to find laws and rules both domestically and internationally is exacerbated for contractors by a multitude of different rules in a particular jurisdiction. They are faced with the question of how do they ensure compliance with the law when the same activity of giving gifts and hospitality is subject to dozens (maybe even hundreds) of different laws and standards with varying interpretations. A vigorous compliance program is needed. Though too detailed to summarize here, a few words might be helpful.
Written Guidance
Many jurisdictions have developed guidance. For example, the DOJ and SEC has “A Resource Guide to the US Foreign Corrupt Practices Act” that outlines the “Hallmarks of an Effective Compliance Program.” Many other jurisdictions also have written guidelines.
Policies and Procedures
Written policies and procedures are highly advised. The common format of Gift and Hospitality Policies and Procedures might include: (1) Defining the Purpose, Scope and Relevant Terminology (e.g. who is covered, limited to government officials versus all private parties) (2) General Policies and Procedures (e.g. a brief statement saying the company competes solely on the merits of its products and services) (3) Prohibited Gifts and Hospitality (e.g. cash, cash equivalents, per diem payments, loans, etc.) (4) monetary caps (e.g. determine if any dollar cap should be imposed, consistent with the 20/50 rule) (5) Government Offi cials vs Private Parties (e.g. separate policies may be desirable for each group (6) Spouses, Relatives and Friends (e.g. generally prohibited) (7) Personal Funds (e.g. can’t use personal funds of covered individuals (8) Travel and Hospitality Expenditures of Government Officials (e.g. detailed provisions) (9) Acceptance of Gifts (e.g. compliance with Anti-kickback Act, monetary thresholds)
Internal Controls
The level of controls will likely vary with the vulnerability of the company, size and desire of how dedicated corporate funds should be used to address the compliance functions. Examples of controls might include (1) Gift & Hospitality Request Form (e.g. as part of a detailed approval process) (2) Approval Authority (e.g. designating individuals or positions that must approve) (3) Procedures to Address Red Flags (4) Itemized Receipts Required and Information Needed) (5) Proper Recording in Books and Records (6) Gift and Hospitality Database (7) Routine Audits and (8) Training (e.g. annual anti-corruption and compliance training to covered individuals).
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