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Bribery, Compliance, & Hospitality

Earlier this year, the CEO of a major hospitality company with more than 100 hotels worldwide was charged in Miami, along with his regional vice president, for unlawful compensation and conspiracy related to the renovations and remodeling of their newest hotel in South Beach.

The charges allege that the company would regularly offer heavy discounts or comped rooms for the city’s building department in Santo Domingo and other properties in exchange for assistance with permitting, licensing and, in some cases, to avoid paying fines.

The hospitality industry is constantly subject to inspection, permitting and licensing from local, state and federal governments. Whether it is a concession to operate on public federal beach property in Mexico, permits to build in protected or historic areas in Cusco, or a license to operate a new multiuse development in Manhattan, the hospitality industry is, somewhat inconspicuously, significantly regulated. Although some hotels operators act as if they do not, most have contact with government officials of every level almost daily.

Every hotel – and every hotel developer or management company – must obtain licenses and permits, must pass inspections and must manage government relations, from local officials to international dignitaries; it must deal with a local fire department inspection, as well as host national leaders. Throughout these interactions, the hotel staff must provide the best and most professional service while staying on the right side of the law.

Transnational Anticorruption Laws

Many of you may be familiar with the Foreign Corrupt Practices Act (FCPA), but some of you may not. The FCPA is a statute of the US that prohibits bribery in the operations and business practices of US individuals and entities in the international arena. The FCPA has two components: one prohibits international corruption and bribery directly, and the other indirectly, through accounting requirements. In general, the anti-bribery component prohibits giving anything of value to foreign government officials in exchange for an improper advantage. The accounting and record-keeping component applies only to “issuers,” or what are generally referred to as publicly held entities.

To US companies, the FCPA is the most relevant transnational anticorruption law. However, many countries have enacted similar legislation with an increasing number of enforcement actions. Under the umbrella of the OECD anticorruption convention, the UK, France, the Netherlands, Mexico, Chile and other OECD members all have laws that prohibit their national companies from bribing foreign government officials. Other non-OECD member countries, like Peru, Argentina and Brazil, have also enacted similar laws. These laws and other international treaties establish principles of cooperation between nations, which means that a violation in one country could lead to potential prosecution in many others. If you are familiar with recent scandals in Latin America, you may have noticed that cooperation between Brazil, Switzerland and the US led to significant penalties for companies and individuals.

Additionally, most countries in the world have domestic anticorruption laws that prohibit not only bribery, but also influence peddling, false government claims and improper inducement. Thus, companies may be subject to prosecution for improperly seeking government action (through bribes, influence or inducement) in both the place where property is located and the company’s headquarters.

This means that companies should ensure that their teams are trained and understand the risks associated with improper payments at any time, for any reason and at any level, and that the company has an adequate reporting mechanism and response protocol to address any allegations of misconduct. The alternative can subject individuals to criminal and civil liability and cost the company millions in penalties, fines and investigation costs.

Bribes and Other Improper Inducements

A bribe can be anything of value as long as it is given to a government official with an improper purpose (i.e., to get a benefit or advantage, or avoid a penalty). Value can be anything and in the hospitality industry, it includes comps, upgrades, loyalty points, discounts and many other benefits hotels regularly give to their guests. Government official is also defined broadly and includes building and health inspectors, police and military, but also ambassadors and, in some cases, even doctors and teachers.

When a guest who happens to be a government official complains, can they receive an upgrade? When the chief of police visits the restaurant, can they get a drink “on the house”? When an ambassador and their entourage arrive, can they get a room upgrade? Who should be making these decisions?

Compliance is simple in theory, but hard in practice. Stating in the code of conduct that employees should not bribe government officials to obtain a benefit or advantage is only the starting point. Requiring the finance director to have adequate controls in place to ensure that the hotel’s books and records are accurate is necessary, but does your company have the adequate policies and procedures in place to properly register a free meal or an upgrade?

Defining when a comp is a bribe, and when an upgrade is improper, is never easy. The decision – many argue – should not be made by the front desk or even at the property level. This is certainly true if property level employees do not receive adequate training nor have specific compliance policies and procedures that address these issues. The prohibition against bribery is the main thrust behind a company’s anticorruption compliance program, and adequate internal controls its primary objective.

Compliance Programs

There is no one-size-fits-all compliance program. Each company must conduct an independent risk assessment and determine what type of program is right to address its particular risks. That said, various government authorities, including the US Department of Justice (DOJ), have provided some guidance as to the minimum expected requirements to establish adequate internal controls. In addition, many recently enacted laws have leniency provisions for companies with robust compliance programs. Based on these guidelines, there are several basic elements of a compliance program:

  • A code of conduct and anticorruption policy
  • Periodic risk assessment and controls oversight
  • A dedicated compliance professional
  • Adequate whistleblower access and non-retaliation policy
  • Compliance training
  • Due diligence in employee and third-party hiring

Every company’s compliance program must have each of these elements to have an effective compliance program. These elements, however, must be fashioned in proportion to the company’s risk profile, size and revenues, government interactions, etc.

Consequences of Noncompliance

Let me share some useful statistics, courtesy of Stanford’s FCPA Clearinghouse on FCPA enforcement and how disruptive it can be
for companies:

  • China, Mexico, India, Brazil, Russia and Argentina are in the top 10 list of most FCPA bribes paid
  • US$10,712,420,673 in total monetary sanctions in all FCPA-related enforcement
  • 92.5% of defendants settle with the SEC and 76.41% settle with the DOJ (almost all who do not are individuals)
  • A total of 523 FCPA DOJ/SEC enforcement actions, of which more than 90% involved third-party intermediaries

Internal Investigations

Based on a sample, the cost of a company’s internal investigation can be more than 10 times the amount of profit obtained from bribes paid. If a company pays US$10,000 in bribes, it may pay hundreds of thousands of dollars in penalties/disgorgement and more than US$1 million to conduct its global internal investigation. Internal investigations into bribery are, generally, global in nature and expansive in scope. The mandate is twofold: on one hand, it must determine if the specific bribery allegations are true and, on the other, it must establish if this same fact pattern that caused a failure of internal controls is occurring in other locations or properties.

Conclusion

Many companies in the hospitality industry do not have a working compliance program either because they have not assessed the significance of the risk or because they believe such an undertaking would be costly in efficiency and resources. As we have discussed above, the risk is present from development to management, and the risk compounds without adequate training and controls. As for budgeting, an efficient and cost-effective compliance program is achievable provided the company’s tone at the top – and at the property level – puts compliance front and center.

Jose Martin

Jose Martin is Of Counsel for Squire Patton Boggs where he uses experience gained from more than 13 years as an in-house compliance and corporate counsel for major international corporations to advise clients in anticorruption and Foreign Corrupt Practices Act (FCPA) enforcement matters, compliance program design and implementation, internal investigations and training. He also represents clients in corporate and commercial, employment, and mergers and acquisitions law.

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