Anne Richardson, Director of Member Services at TRACE, was in Kiev earlier this week. She heard repeatedly that companies operating in Ukraine are routinely asked by public officials for targeted corporate charitable donations. This appears to be particularly widespread with regard to locally-elected officials, such a mayors, who regularly instruct companies to make donations to particular charities or organizations in exchange for the official awarding a contract, granting a license, or completing some other action sought by the company. The officials reportedly do not have any personal connection to the charities they recommend. Rather, the official benefits by obtaining funding for community projects for which he did not receive sufficient state support, thereby increasing his goodwill in the community and enhancing his re-election prospects. The support requested is often as basic as funding for school infrastructure or teachers´ salaries. A company thus instructed will make a direct donation to the particular charity or organization and will then record the payment as charitable giving in its accounts, thus qualifying it as a deductible business expense.
It is interesting to compare this Ukrainian version of targeted corporate giving to the Schering-Plough case, the only FCPA enforcement action based entirely on charitable giving to date. In Schering-Plough, the director of the health fund which oversaw pharmaceutical funding was also the head of the Chudow Castle Foundation to which the company made approximately $76,000 in payments. While there was no indication that the company’s donations were redirected to the director or were otherwise not put toward their explicit charitable purpose (the restoration of historic castles in Poland), the SEC found that the donations were made to induce the director to influence the health fund’s purchase of Schering-Plough products. In the typical scenario in Ukraine, as described above, there will usually not be any personal connection between the official asking for the donation and the organization receiving the funds; however, there is a clear quid pro quo. While the donations seem to be made transparently and to legitimate, bona fide organizations, the fact that the official initiated the request for the donation and received a personal benefit (even if not a direct, monetary benefit) clearly warrants serious FCPA scrutiny. The fact that companies seek tax relief for the donations does provide some legitimacy to the transactions, but if they are at heart simply a new vehicle by which to camouflage bribery, the Ukrainian government’s tacit endorsement of the payments will not insulate the company from potential FCPA liability. If the payments are consistent with the company’s overall charitable giving program, this would be helpful to document, but again probably wouldn´t shield the company if there is evidence of an actual exchange of favors taking place.
President Viktor Yuschenko signed three new anti-corruption laws last month, covering both principles of bribery prevention and enforcement. On a first look, it does not appear that the legislation covers targeted corporate giving like that described above; however, we´ll be conducting further research into the new legal parameters. If demands by Ukrainian officials for targeted corporate giving are as widespread as we were told, focus and attention on the issue from within the government will be crucial to addressing this difficult compliance challenge for businesses operating in the country. Of course, given that Ukraine is deemed to have the highest level of corruption of any of the former Soviet states, the crackdown on corporate donations may simply encourage a shift of bribery demands into yet another new form.
