What to consider when making charitable donations in Asia

October 18, 2016 Stephen Mulrenan

Most companies understand the need for, and have developed, robust policies around the approval and tracking of corporate gifts, travel and entertainment. Such policies often: set limits on the expense of gifts to government and (sometimes) commercial third parties; set guidelines on what satisfies a gift, entertainment or travel benefit and give guidance on what will or will not be allowable; offer an approval mechanism for special consideration of requests that fall outside of stated dollar limits.

But while the rules around gift-giving are relatively clear, there continues to be some degree of confusion around approval processes for, and the tracking of, charitable donations.

Company use of gifts and inducements to win business in Asia is still happening more frequently than is reported, even among those companies with strict policies around charitable donations. This came to light recently, albeit in an indirect way, as a result of a Securities and Exchange Commission (SEC) FCPA enforcement action against Nu Skin Enterprises and its Chinese subsidiary.

According to allegations in the SEC Cease and Desist Order, the Chinese subsidiary of the Utah-headquartered cosmetic and nutritional products manufacturer made a US$154,000 donation to a charity in China to secure the intercession of a Chinese Communist Party official to stop an ongoing investigation into the company.

Nu Skin China had engaged in direct selling in China, in violation of Chinese domestic law, and was under investigation by the Administration of Industry and Commerce. According to Tom Fox, compliance ambassador at The Red Flag Group: “Nu Skin China decided, rather than comply with the law, it would seek to influence the investigation through corrupt means.”

Given the well-known corruption risks in China, Nu Skin Enterprises did not ensure adequate due diligence was conducted by Nu Skin China with respect to charitable donations – to identify links to government or political party officials and to prevent payments intended to improperly influence such persons in violation of the company’s anti-corruption policy and the FCPA.

And, according to Tom Fox, it is immaterial if the China subsidiary misrepresented to the United States parent what it was doing and then failed to follow specific instructions. “The reason there are levels of oversight in any best practices compliance programme is to prevent just this type of FCPA violation from occurring,” he says.

Professor Ding Xueliang from the Hong Kong University of Science and Technology recently estimated to the Financial Times that approximately 80 percent of Chinese government officials have engaged in some form of corruption at some point during their careers.

“That’s a very high ratio,” tweeted Juliet Lui, director of professional services for the APAC region at The Red Flag Group. “Here’s hoping you’re doing something about it.”

Deeper due diligence

What should companies consider when making charitable donations in Asia, and where is the confusion around approving and tracking such donations?

Unlike, say, karaoke, foot massages and other more sinister types of bribes that are hard to expense, charitable donations seem to fall under the protective guise of being a payment that has a positive impact on a community. As a result, securing internal approval is usually a fairly straightforward process.

However, in China, charities are frequently linked to government and government officials. Companies therefore need to draft more specific guidance for local senior managers so that they understand the risks of how corruption could play out – for example, what ‘quid pro quo’ in the context of corruption really means.

While it is true to say that many companies operating in Asia now have strict policies around charitable donations, all too often such donations are not properly scrutinised. Those that seek to justify this lack of oversight often point to cultural considerations. “It’s very common in my company to contribute charitable donations in our country,” is a particularly well-used line of defence. But just because everyone else in a country makes charitable donations doesn’t make it ok.

To be clear, The Red Flag Group is supportive of companies that want to contribute to local initiatives, but only if they have a deep understanding of how corruption works in practice. For example, it is important to remember that the expectation of receiving something in return for a charitable donation can be active – such as the winning of a government contract – or passive – such as the cessation of a government probe.

The Red Flag Group is able to assist its clients in Asia by drafting templates for local managers that incorporate safety protocols around donations to government officials. Utilising its country and industry knowledge, the Firm drafts realistic policy templates so that company management does not have to rely on blanket agreements.

The Nu Skin case demonstrated that every transaction matters. According to Tom Fox: “Ongoing due diligence, compliance terms and conditions in contracts, and monitoring the relationship after the contract is signed are mandatory for any high-risk transaction.”

With the FCPA including charitable donations in its broad definition of ‘anything of value’, the Nu Skin enforcement action also reinforced the need for robust management of FCPA high risk charitable donations.

When conducting business in mainland China, the majority of the companies that multinational corporations (MNCs) will likely encounter will be state owned enterprises. But are MNCs conducting the right level of due diligence on such partners? What about deeper due diligence, such as mapping out political conflicts of interest with third parties?

Once an MNC is aware that it could be exposed, what measures should they be taking to ensure that such an engagement does not result in corruption and reputational risk for the organisation? Internal audits are not sufficient. While they might well pick up cases of internal fraud, such as kickbacks, they are unlikely to identify external acts of bribery.

MNCs that are thinking about contributing to charitable causes should consider these important factors.

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