Bill Steinman: How to handle mandated per diems with foreign government customers
Wednesday, March 2, 2016 at 10:08AM
Bill Steinman in Affrmative Defense, China, Opinion Procedure Releases, Per Diem, Travel and Entertainment

Most FCPA Blog readers know that the FCPA contains an affirmative defense under which companies may incur expenses, such as meals or travel costs, on behalf of foreign government officials, so long as those expenses are reasonable and bona fide, and directly related to either showing off the company’s wares or executing or performing under a foreign government contract. 

The affirmative defense recognizes that a foreign government customer may want to visit a prospective supplier to kick its proverbial tires before buying. It also acknowledges that when foreign governments ultimately buy stuff, they might want to visit their supplier for legitimate things like training, milestone verification or acceptance testing. In either case the government customer will likely expect its supplier to pick up the tab, and the FCPA expressly appreciates this.

In my experience, the vast majority of FCPA compliance policies incorporate the affirmative defense. Indeed, most companies are quite comfortable incurring visiting foreign officials’ reasonable expenses for travel, meals and lodging, subject of course to appropriate review and oversight from compliance professionals.  For the most part, such matters are considered routine, and rightly so.

However, a new trend is pushing the boundaries of the affirmative defense. 

Over the last couple of years, a growing number of my clients are seeing foreign government contracts that require them not only to cover the costs for visiting officials, but also to provide those officials with cash per diems.  

There is, understandably, a visceral response to the thought of paying cash to a foreign official, and doing so raises a number of legitimate concerns under the FCPA.

Nevertheless, I believe that, in the right circumstances and subject to robust controls, companies do not need to shy away from these kinds of contractual requirements. 

In this series of posts, I’ll explain my rationale and examine some practical steps companies can take to mitigate the risks presented by per diem requirements.

Let’s start off by defining the factual boundaries within which a per diem is reasonable.

First and foremost, the parties’ contract must clearly and unambiguously require the supplier to furnish a per diem payment. This is not to suggest that the contract must employ the Latin phrase in a nifty italic font. Similar phraseology, such as a requirement to provide a stipend for incidental expenditures, is also sufficient.

Second, the supplier should have no discretion as to the amount of the per diem. In many situations, this will mean that the value is set forth in the sales contract, but this isn’t always the case. In China, for example, government contracts can require suppliers to furnish travel costs to visiting Chinese officials in accordance with Ministry of Finance Release 516 (available here in Chinese), which details permissible travel expenditures for Chinese government employees, broken down by city and country and including a daily allocation for miscellaneous expenditures. 

Release 516 is similar in many respects to the U.S. State Department’s published per diem rates. A contractual reference to Release 516 (or a similar, official published government document) is a reasonable substitute for calling out the amount of the per diem in the contract itself.

Third, the amount of the per diem must be objectively reasonable. I can offer no bright line that separates reasonable from excessive. For example, a $75 per diem strikes me as too much, but I’d likely be comfortable with $20.  To evoke the words of the late Justice Stewart, I know it when I see it.

Fourth, it's critical that the government customer, and not the supplier, is responsible for the presence of the per diem in the contract. For example, the government customer’s proposed terms and conditions might contain a per diem requirement before contract negotiations commence. Alternatively, the government customer may request the payment of per diems during contract negotiations. However, a per diem requirement that originated with the supplier looks like an effort to sweeten the deal and doesn’t qualify for the affirmative defense.

If present, these four factors help the supplier demonstrate that its payment of a per diem does not violate the FCPA’s anti-bribery provisions. Here’s why. 

A per diem requirement that is clearly reflected in the contract is completely transparent. It is difficult to argue that paying such a per diem serves a nefarious purpose when it is known to both the supplier and its government customer, and is set forth as a requirement in the supply contract. 

Moreover, the supplier has a contractual requirement to pay the per diem. Surely the FCPA should not be read to require a supplier to breach its contractual obligations just because a per diem is a distribution of cash.  

Beyond that, paying a per diem lacks an impermissible quid pro quo. As we all know, in order for a payment to violate the FCPA, it must be made for the purpose of inducing an official to do or refrain from doing something in the course of her or his official duties, to get her or him to influence government actions, or to secure an improper advantage. 

There is no such quid pro quo between a supplier and the recipient of per diem when the facts are I’ve described above.

Finally, a word of caution.

Every situation is unique. Every one. I’ve purposefully painted with a broad brush in describing circumstances in which I believe paying a contractually mandated per diem is reasonable. It is critical that companies examine each particular set of cards they’ve been dealt, and evaluate it carefully. 

This is tough stuff, and it is fraught with risk. If handled with an appropriate degree of scrutiny, companies can make informed decisions about whether a particular per diem is appropriate or problematic. There's a narrow set of circumstances in which companies can fulfill contractual obligations to pay per diems to foreign officials without wringing their hands, losing sleep or risking default.

On the other hand, if these issues are given cursory examination and treated as a “check-the-box” review, compliance problems are nearly guaranteed to ensue.

In subsequent posts, I’ll distinguish legitimate per diems from corrupt cash payments described in several recent FCPA settlements and examine several DOJ opinion procedure releases that lend support to my view.  (Yes, I know that OPRs do not have precedential value, but they do offer insight into the DOJ’s thinking on particular issues.)  I’ll conclude this series with an analysis of recommended risk mitigation steps that companies should take when fulfilling contractual per diem obligations.

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Bill Steinman is the senior partner at Steinman & Rodgers LLP, a boutique law firm in Washington, D.C. specializing in international anti-corruption compliance and investigations. He can be contacted here.

Article originally appeared on The FCPA Blog (http://www.fcpablog.com/).
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