Note: This is a guest post by attorney and compliance expert Ramsey Kazem. It is the fourth in a five-part series that we will be sharing in the next weeks. In this part, we will use the circumstances surrounding Budweiser’s sponsorship of the 2014 World Cup to describe a two-phased strategy for directly confronting red flags and mitigating FCPA risk.
Mitigating FCPA Risk
While it is unknown what, if any, internal action Budweiser undertook, an organization confronted with the previously described warning signs should have developed a two-phased strategy to mitigate its exposure to potential FCPA violations. The first phase of the strategy is to “stop the bleeding”. An organization must take immediate, proactive steps to stop high-risk conduct from continuing. Second, the organization should conduct an internal investigation to assess whether, and to what extent, it may have violated the law. An effective internal investigation allows an organization to get out ahead of troubling issues, confront challenges head-on, and prepares it to answer the difficult questions when the authorities come knocking.
Using Budweiser and FIFA as our example, the following will describe some tactics within each phase of the strategy:
Phase 1: Stop the Bleeding.
As the FCPA warning signs began to crystalize, Budweiser should have taken immediate action to stop the continuation of high-risk conduct. For example, recognizing the relatively low threshold for what constitutes a corrupt payment (i.e. “anything of value” which includes a wide range of benefits – not just cash payments), Budweiser should have implemented new processes to quarantine and more closely scrutinize any unusual or extra contractual requests from FIFA in the run-up to the 2014 World Cup. Any requests for additional cash payments, political contributions, charitable donations, special access to the Budweiser hotel, VIP privileges to Budweiser events, employment opportunities for “friends of FIFA” or game tickets should have been fully vetted and approved only where there was a clear, non-corrupt business purpose for honoring the request. Importantly, Budweiser should have mandated clear documentation requirements as part of this new process so it can show that high-risk transactions were cleared only after undergoing a detailed vetting process. Likewise, Budweiser should have maintained documentation for any requests that did not clear the vetting process. Having a clear paper trail of the things it did “right” may prove helpful in a future investigation.
In addition, Budweiser should have performed an immediate analysis of its sponsorship agreements to identify what, if any, restrictions FIFA was subject to in spending Budweiser’s sponsorship fees. Budweiser then should have sent a letter to FIFA enumerating all restrictions and relevant contract provisions and confirmed its expectation that FIFA abide by these provisions. Budweiser should also have requested a written statement from FIFA certifying that is has complied with the referenced contract provisions. Similarly, all future payments to FIFA should include a cover letter confirming Budweiser’s understanding of how the payment will be used and reference any contractual restrictions on the use of the money.
Budweiser should also exercise any audit rights under the sponsorship agreement. Some agreements include the right to inspect the sponsored entity’s books, records, and documents in the event the sponsor believes there is a breach of the agreement (or as a matter of right). If there was no contractual right, Budweiser should have made a written request to audit FIFA’s records relevant to the sponsorship agreement. While it is likely that such request would have been denied, Budweiser, in making the request, will be able to demonstrate that it made an affirmative effort to exercise oversight over FIFA’s contract performance. Moreover, the denial could serve as persuasive evidence that FIFA was actively shielding improper conduct from Budweiser. If FIFA was unwilling to cooperate, Budweiser should have then performed a limited audit of FIFA’s contract performance using its internal records. Upon completion of the audit – whether as a matter of contractual right, by agreement, or through internal records – any issues of concern should have been documented and communicated directly to FIFA with suggested corrective actions.
Also, in early 2012, as FIFA was publicly increasing pressure to repeal the alcohol ban, Budweiser should have recognized that FIFA’s arrogant posturing was a precursor to potential improper conduct. As such, Budweiser should have taken action to bridge the gap between the FIFA and the host country. For example, instead of dismissing the legitimate concerns of alcohol induced violence, Budweiser should have directly confronted the issue and offered a series of strategies to mitigate the risk of excessive alcohol consumption. As a sponsor of many large sporting events, festivals, and concerts, Budweiser has tremendous expertise on this issue and may have been able to present a “third option” that allowed the sale of alcohol, but also effectively addressed the concerns of the Brazilian government. In addition, Budweiser could have proposed a public awareness campaign to promote responsible alcohol consumption, offered to provide additional security specifically trained to de-escalate alcohol related confrontations, and implemented an in-venue reporting system for potential incidents with rapid response teams placed at strategic locations throughout the arenas. Instead of relying on FIFA’s heavy-handed and, perhaps, corrupt tactics, Budweiser could have gained the goodwill of the host-country by delivering a win-win resolution to the issue. More importantly, Budweiser’s effort in finding a reasonable middle ground could have gone a long way in removing the taint of controversy and corruption from the decision to repeal the ban.
If unsuccessful in developing a viable “third option”, Budweiser would have been confronted with a difficult decision. On the one hand, it could have deferred to FIFA to resolve the impasse and hope it operates within the law. On the other hand, and as a last resort, Budweiser could have abandoned the pursuit of in-stadium beer sales. While there are insufficient facts to comment on whether the latter option was appropriate, necessary or wise, such action can produce a number of benefits that must be considered in the overall analysis. First, walking away from the opportunity sends a clear message to the entire organization that Budweiser’s code of conduct and anti-bribery/corruption policies are not just words on paper, but guiding principles for doing business the “right” way. By this example, employees at all levels of the organization will be empowered to make the hard choices for the right reasons. Second, taking such a principled stand could have significant public relations value as it signals Budweiser’s unblinking commitment to ethical business practices. Third, enforcement agencies may view this decision as a testament to the effectiveness of Budweiser’s anti-corruption program and overall commitment to ethical practices, which may result in reduced penalties for any existing violations. Finally, in an effort to comply with Brazilian law, Budweiser’s business team may develop new and innovative strategies for connecting with consumers. These innovations could produce long term value as Budweiser is likely to encounter similar restrictions in the future.
After effectively neutralizing the risk of new or continuing violations, an organization should move forward with Phase 2 of the strategy. That is, Budweiser should have completed a detailed internal investigation to determine whether the organization violated the FCPA.
Phase 2: Internal Investigation.
After taking appropriate measures to “stop the bleeding”, Budweiser should have commenced a full internal investigation to assess whether there are any existing FCPA violations. The investigation should have focused on Budweiser’s role in the effort to secure the repeal of the alcohol ban. More specifically, it must answer three critical questions: (1) What did Budweiser know? (2) When did it know it? (3) What, if anything, did it do about it? At minimum, the investigators should have:
- Interviewed all employees responsible for administering the sponsorship agreement;
- Interviewed all employees involved in negotiating the contract extension through the 2022 World Cup;
- Collected and reviewed all communications between FIFA and Budweiser including email, text messages, instant messages, etc.; and
- Reviewed all transaction information between Budweiser and FIFA including invoices, payment authorizations, extra-contractual requests for payment or items of value, related travel and entertainment expenses, unusual or suspicious payments or transfers, etc.
As part of the investigation, Budweiser should have re-evaluated the sponsorship fee and ensured that it can establish a business case for the fee amount, that the fee amount is reasonable for this type of agreement and that the payment structure does not include any unspecified premiums or fees for vaguely described benefits.
Of particular interest is an analysis of the fee amount negotiated in the 2011 agreement (extending the Budweiser’s sponsorship through 2022) as compared to 2006 agreement (extending Budweiser’s sponsorship through 2014). At the time of the 2006 agreement, the host city for the 2014 tournament was not yet selected and, thus, the controversy surrounding Brazil’s alcohol ban had not yet emerged as an issue. By 2011, however, not only was Budweiser aware of Brazil’s alcohol ban, but it was also known that the selected host countries for 2018 (Russia) and 2022 (Qatar) had similar restrictions on in-stadium alcohol sales.[1] Any increase in the sponsorship fee or change to the payment structure should have been carefully analyzed and justified by legitimate business purposes. An unexplained premium or increase in fee could be very problematic. Similarly, the 2011 agreement should be evaluated to determine if, and how, the alcohol bans were addressed.
As a final element of the investigation, Budweiser must carefully audit its books and records. The accounting provisions of the FCPA, which are separate from the anti-bribery provisions, require an organization to keep its financial books and records with sufficient detail so they accurately reflect the underlying transaction. Importantly, a violation of the accounting provisions does not require evidence of a corrupt transaction. Instead, the focus is on the manner in which a transaction is recorded. For example, a transaction that my otherwise be legal may still trigger a violation of the accounting provisions if the organization attempts to conceal the transaction or mischaracterizes its purpose. Budweiser, therefore, must scrutinize all of its payments to FIFA and ensure they are accurately recorded and supported with sufficient information to detail the transaction. Any off the books transactions, payments that are inconsistent with the terms of the sponsorship agreement or entries with vague descriptions (e.g. “miscellaneous fees”) should be red-flagged and further investigated.
By conducting a complete and thorough internal investigation, Budweiser will get out ahead of the story and have a detailed understanding of its potential FCPA exposure. Not only will it be able to begin the process of implementing necessary corrective actions, but it will be in a strong position to cooperate with enforcement agencies should it become a target of an investigation. Moreover, depending on the severity of the conduct discovered, Budweiser may elect to self-report any violation in the hopes that it will able to negotiate a deferred prosecution agreement, a non-prosecution agreement or some other reduction in penalties.
Ramsey Kazem can be reached by phone at +1-404-872-5615 or by email at info@thethreetwelvegroup.com.
[1] See Miami Herald article, “Brazil bends its rules on beer sales for World Cup”, June 21, 2014. Article can be found here.
