Note: This is a guest post by attorney and compliance expert Ramsey Kazem. In this final part of the five-part series, we take the lessons of Budweiser’s sponsorship of the 2014 World Cup and offer suggestions for mitigating FCPA third-party risk in future transactions.
Even if Budweiser dodges the FCPA bullet, the revelations of bribery and corruption within FIFA coupled with allegations of political corruption in Brazil should have been a major wake-up call for the organization. While the business case for sponsoring high-profile events is obvious, sponsors like Budweiser must also consider the potential legal exposure and reputational risk from associating with organizations like FIFA. Budweiser, and organizations like it, should take the lessons of the 2014 World Cup and apply them to future sponsorship negotiations. The following are some suggested strategies for managing FCPA third-party risk:
- Risk Assessment. In evaluating a proposed sponsorship agreement, an organization should treat the sponsored entity like any of its third-party vendors, suppliers or agents. That is, the organization should assess the degree of risk presented by the proposed contractual relationship with the sponsored entity. The assessment should rate the risk of both the sponsored entity (e.g., FIFA) and the location where the sponsored event will take place (e.g., Brazil).
- Internal Controls. After assessing the risk of a proposed sponsorship agreement, the organization should develop internal safe guards to mitigate risk and/or serve as an early detection system. The organization should also consider developing training programs targeted at specific employees to introduce or reinforce related policies, procedures and processes.
- Contractual Terms. An organization should negotiate contractual terms and conditions that promote transparency, protects the sponsor’s investment, and limits corruption risk. To those ends, an organization should consider including the following in the sponsorship agreement:
- A detailed description of the benefits to be granted to the sponsor and the sponsored entity’s obligations to the sponsor.
- Contractual representations and guarantees that sponsorship fees are only for the performance of agreed to activities and services reflected in the agreement.
- Contractual prohibition on making corrupt payments to foreign government officials. The agreement should also clearly define key terms like “corrupt payments” and “foreign governmental officials” consistent with the FCPA and similar anti-corruption legislation.
- Contractual representation and warranties that the sponsored entity and its employees and agents will comply with the FCPA, other applicable anti-bribery statutes and the local laws of the host country. The agreement should also require the sponsored entity to execute periodic certifications stating that it is fully aware of its responsibilities under the FCPA and other applicable anti-bribery laws and that it has not engaged in any conduct in violation of these laws.
- A contractual provision that authorizes the sponsor to terminate the agreement if the sponsored entity engages in conduct that may damage the reputation of the sponsor. This morals clause should be tailored to specific conduct that could reflect poorly on the sponsor. This provision should also specify the criteria for determining whether certain conduct violates the provision.
- In connection with the morals clause or any other provision authorizing the sponsor to terminate the relationship, the sponsorship agreement should include a suspension clause. As is suggested by its name, this clause allows the sponsor to suspend its obligations until it makes a final decision on whether to terminate the agreement.
- A contractual provision that requires the sponsored entity to indemnify the sponsor for any violations of anti-corruption laws triggered by the sponsored entity. The indemnification provision should be as broad as possible and include reimbursement for the costs of any internal investigations, legal fees, fines and penalties.
- A contractual provision that allows the sponsor to clawback payments when the sponsored entity breaches certain provisions of the agreement. The clawback provision can be tied to specific conduct (e.g., engaging in corrupt conduct) or to an unspecified breach of a material term of the agreement.
- A contractual provision authorizing the sponsor to audit the sponsored entity to ensure compliance with the terms of the sponsorship agreement. Depending on how the provision is drafted, these audit rights can trigger as a matter of right (i.e. sponsor has the right to audit sponsored entity’s books and records upon reasonable notice to the sponsored entity) or upon the occurrence of a specific event (i.e. sponsor has the right to audit sponsored entity’s books and records if it reasonably believes there is a material breach of the agreement).
While these and similar contract provisions are desirable for the sponsor, the sponsored entity may push back and request mutuality in the obligations, seek to significantly limit the scope of the provisions, or flat-out reject the provisions.However, even if the sponsored entity has greater leverage in the negotiation, proposing the above contract provisions can provide useful insight into whether the business values of the contracting entities are aligned.For example, the refusal of a sponsor’s request for a moral clause is revealing – and should cause the sponsor to pause and reconsider whether to move forward with the agreement.
- Create Leverage. Contract negotiations typically follow the “golden rule”: if you hold the gold, you make the rules. That is to say, the entity with greater leverage typically has more influence in deciding the terms of the agreement. An organization like FIFA takes full advantage of its negotiating power and generally dictates the terms of its sponsorships agreements. As such, it could be very challenging to obtain FIFA’s assent to any of the contractual provisions described above. An effective way to counteract this disparity in negotiating power is for all of the major sponsors to take collective action to ensure that an adequate level of transparency and anti-corruption standards are included as standard terms in all sponsorship agreements.
- Periodic Reassessment of Risk. It is important to remember that a risk assessment measurers an organization’s risk at a given moment in time. Accordingly, an organization – especially with its long-term business relationships and contracts – should periodically reassess its FCPA third-party risk (for each of its partners if feasible) to account for changing conditions and any new or emerging threats.
- Action Plans. Prior to any new engagement, a sponsor should develop an action plan to address high-risk scenarios that could trigger bribery and corruption issues. These plans should detail a step-by-step course of action for confronting these issues and neutralizing the risk. An organization should also develop training programs for key personnel so they are prepared to implement the action plans when the need arises.
Many organizations face significant FCPA risk through their third-party business relationships. Budweiser’s sponsorship of the 2014 World Cup presents an interesting case study of how changing conditions can transform a seemingly low-risk business opportunity into a high-risk venture with significant FCPA exposure. While Budweiser may successfully sidestep the FCPA landmine in this instance, the story of the 2014 World Cup provides important reminders and lessons. Namely, an organization confronted with this type of scenario must be vigilant in monitoring its third-party contract performance, identifying and confronting red flags and reassessing its risk as conditions change. Moreover, as the threat becomes apparent, it must take immediate action to “stop the bleeding”, investigate whether, and to what extent, it violated the law, and take proactive steps to mitigate its FCPA risk in future transactions.
Ramsey Kazem can be reached by phone at +1-404-872-5615 or by email at email@example.com.