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Monday
Feb292016

Charitable giving: Recognize the warning signs and mitigate the risks

Many individuals, non-profits, and corporations actively support charitable causes around the world. The need to support worthwhile charitable projects in many developing markets is particularly acute due to local needs, the lack of government funding, and the lack of an adequately developed infrastructure.

Anti-corruption issues may arise in connection with philanthropic contributions, in situations, for example, where foreign officials specify a charity for donations or may have a direct or indirect interest in a particular donation.

In our e-book on navigating corruption challenges in emerging markets, we devote a chapter to developing anti-corruption controls in connection with philanthropic activities.

In order to mitigate risks related to charitable donations, philanthropic giving must be undertaken under a well-structured and supervised set of policies and internal controls.

Warning signs include:

  • The non-U.S. charity refuses to provide adequate documentation or suggests that the donation may only be made anonymously
  • The donation is directed to a bank account in a third country (other than a country where a grantee is based or carrying out activities)
  • An officer, director, or employee of the charity has family or other ties to foreign government officials
  • A foreign government official designates the donation amount or intended recipient, or directly or indirectly requests the donation
  • The donation is made on the suggestion or understanding that it could influence government action or lead a foreign official to look more favorably on the donor
  • Gifts or travel, lodging, meals, or entertainment are provided to foreign government officials in connection with charitable activities, or
  • The donation will be used to hire third parties who have connections to government officials or who have been identified or suggested by government officials.

We also discuss the importance of establishing clear guidance on charitable giving. Risks can be mitigated if the proposed contribution is:

  • Reasonable in nature and appropriate to support the stated needs of the activity or project
  • Proper under the circumstances (i.e., in the specific situation, the contribution does not raise questions from a reputational risk perspective)
  • Lawful under all applicable laws, regulations, and rules
  • Given openly and transparently with no appearance of impropriety
  • Given without expectation of reciprocity, obligation, favor, or action in return, and
  • Accurately recorded in the company’s books and records.

We also recommend that donors put into place not only clear policies on charitable contributions but also controls that should be tailored to the local level of corruption risk, the nature of the company’s intended contribution, the nature of the company’s business, and the size and complexity of its business. We suggest a series of controls that in our experience mitigate risks.

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In the next post, we'll talk about ensuring appropriate compliance controls are in place and effective.

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Our e-book, Anti-Corruption Compliance in Emerging Markets: A Resource Guide, is available here (pdf).

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Keith Korenchuk is a partner in Arnold & Porter’s Washington, DC office. He counsels and advises global companies on regulatory and compliance matters worldwide, with a focus on compliance program effectiveness, compliance program implementation, operations and evaluation, and related regulatory counseling and advice.

Samuel Witten is counsel in Arnold & Porter’s Washington, DC office. He helps companies develop and implement FCPA compliance programs. He also represents clients in arbitrations at the International Center for Settlement of Investment Disputes. He joined Arnold & Porter in 2010 after serving for 22 years in legal and policy positions at the U.S. Department of State.

Arthur Luk is a partner in Arnold & Porter’s Washington, DC office. He represents corporations, directors, officers, and executives, and "Big 4" accounting firms and individual auditors in investigations conducted by the DOJ SEC, and Public Company Accounting Oversight Board, and in securities class actions and shareholder derivative suits.