The surreal dilemmas sound like they could be drawn from a magazine advice column for paranoid lawyers: can I provide sacrificial goats for my customers in the Middle East? What if the client asks us to procure internal organs for his sick relative? Is it OK for me to donate cash at a Korean funeral?

These are not the made-up challenges of some legal agony aunt, but the real-life scenarios under discussion by senior executives responsible for setting policies for corporate hospitality and gifts in an increasingly strict US regulatory environment.

The conclusion of the executives, who recently gathered in New York for a summit on the problem, was that the fine grey line that separates acceptable generosity from the darker world of bribery and corruption has narrowed substantially.

What lies behind their nervousness is the growing impact of Sarbanes-Oxley corporate governance legislation on the already strict rules of the US Foreign Corrupt Practices Act. Combine this with increasingly active enforcement agencies and the rapid globalisation of US business and there is a recipe for multinational angst on a grand scale.

Where minor local transgressions might once have been swept under the carpet, they are now likely to emerge as so-called "material weaknesses" in internal control reports requiring sign-off from a chief executive and finance director worried about their own liability. What might be common practice in Seoul or Yemen may not look so wholesome in front of the Securities and Exchange Commission or a Manhattan jury.

Questions over how much can be spent on a bottle of wine at dinner or whether a client can charge his spouse's pedicure to the hotel bill during a conference are therefore now routine dilemmas for corporate lawyers called upon to police this minefield.

"Nothing in law school prepares you for the goats," says Alexandra Wrage, president of Trace International, a business ethics group based in Washington DC. "I never thought I would find myself feeling sorry for companies, but this is a pretty big stretch."

To some, the issue may look like another example of the new Puritanism sweeping corporate America. Chief executives, such as Harry Stonecipher at Boeing, are getting fired for something as simple as an office romance. Wal-Mart, the world's biggest supermarket chain, recently threw the book at its former head of security for alleged expense account wrongdoings.

Even Tom DeLay, the Republican majority leader in the House of Representatives, has been swept up in a scandal over who paid for foreign trips.

To others, this is just the sort of pressure needed to clean up big business. The junkets and freebies that used to make the corporate world go round are finally being recognised for what they are.

Either way, the problem that US companies complain of is not so much that the boundaries of acceptable behaviour are shifting, but that they are not shifting in the same way for many of their overseas competitors.

"The lack of a level playing field is an enormous competitive advantage for non-US companies," says Ms Wrage. "US companies feel like they are in the cross-hairs, which is a good thing for anti-bribery enforcement, but it is coming at a pretty high cost. At some point, it has a chilling effect."

To those tempted to see this as American smugness, she points, in contrast, to sharply lower prosecution rates across much of Europe for similar international bribery cases. The problem is particularly acute in industries or regions of the world where a degree of modest generosity has always been seen as a polite way of building long-term relationships.

Companies placed in this type of situation can take surprisingly different approaches. Valli Baldassano, vice-president of global compliance for Schering Plough, the US pharmaceuticals group, believes the answer is to educate employees about why its guidelines are in place and then let them exercise some common sense. "In order to do modern business, you have to acknowledge that sometimes it is OK to take a little risk," she says.

This may sound like brave talk from a company that recently settled a case with the SEC involving claims that charitable donations had been used to influence a medical customer in Poland in an improper way.

Nevertheless, the company believes it is possible to maintain clear distinctions in an industry where generosity with doctors can be endemic.

"The anti-bribery policy is simple: don't bribe people," says Ms Baldassano. "We will accept or give modest gifts designed to create goodwill, not designed to influence someone in the performance of their job."

Some rules are clear-cut. Schering Plough makes a rule not to pay for spouses to attend medical conferences, for example. Other policies can be difficult. Rule one is no cash - yet there are countries in Asia where token payments in envelopes are still expected at social situations such as funerals or Chinese New Year.

In contrast, Northrop Grumman, the US defence manufacturer, takes a more rule-bound approach - perhaps in keeping with the military background of many of its employees.

"We make people fill out requests for everything. It helps promote a day-to-day culture of compliance," says Jeffrey Cottle, senior staff counsel. He points out that the US Foreign Corrupt Practices Act can be more tolerant than local laws, making it vital always to err on the side of caution. This even stretches to using the street value of gifts such as Superbowl tickets rather than their face value.

"When tickets are being scalped for $750, that is real value," says Mr Cottle.

Trace International, which advises its member companies on differing international standards, recently conducted a survey of corporate lawyers that found a wide range of in-house policies. Thirteen per cent of companies had no policy for gifts and hospitality, 17 per cent left it to the discretion of local managers and 34 per cent simply required prior approval for any "reasonable" expenditure. Only 33 per cent demanded approval if the monetary value was above a pre-determined threshold, while three per cent applied a blanket ban on anything above their threshold.

This is likely to change quickly as companies realise the impact of the changing regulatory climate. Provisions to protect whistle-blowers and ensure full disclosure are also likely to increase the number of cases that come to the surface. "Reporting requirements under Sarbanes-Oxley tend to take the 'voluntary' out of 'voluntary disclosure'," says Ms Wrage.

The trend in fines is also going up. Last July, two divisions of ABB's oil, gas and petrochemicals business pleaded guilty to charges of bribing Nigerian government officials - including with cash and pedicures - and agreed with the Department of Justice to pay fines of $10.5m.

Separately, ABB, the Swiss-Swedish engineering group, resolved civil charges brought by the SEC and agreed to pay an additional $5.9m fine.

Although praised throughout for their co-operation with investigators, it is estimated the various companies involved also ended up with a bill for some 43,000 lawyer hours at fees of up to $400 an hour.

Even in less egregious cases, few companies are still prepared to tolerate undisclosed gifts. "The people who used to push through the expense as a payment for computer services - strangely it always seemed to get disguised as computer services for some reason - are no longer willing to sign off," says Ms Wrage. "No one wants to go out on a limb."


What would you do? (A hypothetical dilemma posed by Trace International).

You have a contract for a high-value project in a developing country and it states that payments will be made by the customer at certain milestones in the project. To determine if the milestones have been reached, the contract calls for periodic visits to the facility. The contract is silent on how the cost of these trips will be handled.

1) Your main contact at the customer asks your company to pay for the trips, including travel and lodging. What do you do?

2) Several committee members say they plan to bring their spouses.

3) The trip is unexpectedly prolonged for a second week for legitimate reasons and, as the weekend approaches, the committee members ask what you have planned for them for Saturday and Sunday. They make it clear that they have always dreamed of seeing Disney World.

4) Assume the contract includes a per diem allowance for these visits. When and to whom do you pay the per diem?

5) You want to host meals at the beginning and the end of their trip. Any concerns?

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