On May 9, 2019, Telefônica Brasil agreed to pay a US$4.13 million civil fine to settle U.S. Securities and Exchange Commission charges for violations of the internal accounting controls and recordkeeping provisions of the Foreign Corrupt Practices Act of 1977 (the FCPA) related to sporting tickets and hospitality provided to foreign government officials in connection with two high-profile soccer tournaments. The case serves as an important reminder of the significant risks associated with providing gifts and entertainment to officials, even in situations in which particular officials may not be in a position to exercise direct influence over a pending government decision but might be in a position to do so, and the gifts are merely given to engender "goodwill" with local officials.
In March 2012, Telefônica Brasil, whose American Depositary Receipts (ADRs) are traded in the United States, purchased 1,860 tickets for the 2014 World Cup from a FIFA vendor at a cost of approximately $5.1 million. An internal memorandum stated the purchase was "for relationship-building activities with strategic audiences." However, it was understood within the company, including by senior managers who had approved the purchase, that government officials would be receiving some of the tickets. A total of 194 World Cup tickets and related hospitality were given to 93 government officials from several countries, at a total value of $621,576. While most of the tickets were given to government officials who were "significant to the company's business interests," the SEC Order also includes references to officials who may not have had direct influence over the company but were influential merely in "opening doors" for Telefônica Brasil. In 2013, Telefônica Brasil engaged in a similar practice, providing a total of 38 Confederations Cup tickets and related hospitality to 34 government officials at a total value of $117,230.
According to the SEC's Order, while Telefônica Brasil had a code of ethics that prohibited bribery, it "lacked internal accounting controls sufficient to implement or maintain these policies and prevent giving things of value, like World Cup tickets, to government officials where such gifts might influence or reward an official decision (emphasis added)." Among other things, the Order observed that the company's management focused on employees accepting gifts and hospitality rather than providing gifts and hospitality, and that the broader prohibition against bribery was "not followed due to the lack of internal accounting controls, a compliance breakdown, and a deficient internal audit function."
In addition, the SEC Order states that Telefônica Brasil's records failed to properly account for the purchase of the tickets, characterizing the purchase of the tickets and related hospitality as being for "general advertising and publicity purposes." As a result, the SEC concluded that the company's books and records did not "in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company's assets."
The Telefônica Brasil case is a powerful reminder of the significant risks of providing any gifts and hospitality to foreign government officials even in situations where the recipients are not presently in a position to directly benefit the company. The case should prove useful to compliance officers as part of their ongoing efforts to enhance training protocols and compliance alerts to include "real life" examples of FCPA risks that should resonate with a broad audience within most companies.
The full text of the SEC Order can be found here.
