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Compliance for Angels? FCPA Compliance and Nonprofits

NGOandFCPA [1]We don’t generally associate nonprofit organizations with bribery or corruption. We think of earnest people working to save the environment and improve lives. But nonprofits need to be concerned about FCPA compliance too. Nonprofit entities work in some of the most difficult places in the world, and their personnel are confronted with corruption and security challenges just like those of for-profit companies.

Compliance is often less likely to be a priority at nonprofits. Nonprofits generally rely on funding sources that require that donations be spent on specific projects rather than on management, oversight or compliance. In order to attract donor money, even large, well-funded nonprofits face pressure to reduce administrative expenses to a bare minimum. Given these resource constraints, what should nonprofits keep in mind regarding FCPA compliance?

Technical points

Nonprofits are treated the same as corporate entities under the FCPA. However, nonprofits should consider the following legal wrinkles:

  1. Accounting provisions. Because nonprofits are not “Issuers”, they are not subject to the accounting requirements of the FCPA. Nevertheless, they are well advised to have accounting controls similar to those required of Issuers under the FCPA. Internal controls significantly reduce the risk that an employee or agent of the nonprofit will violate the FCPA’s anti-bribery provisions. Perhaps more importantly, such controls also reduce the risk that nonprofits will be a victim of corruption or embezzlement.
  2. Business Purpose Test. The FCPA prohibits corrupt payments or promises made for a business purpose, which the daring might suggest exempts the activities of nonprofits. That argument is a non-starter, however. In Opinion Release10-02 (2010), the DOJ stated its interpretation that the business purpose requirement would cover nonprofit work. Similarly, as discussed here [2], the “business purpose” element of the bribery prohibitions included in the UNCAC and the OECD conventions also covers the business of nonprofits.

Risk Assessment

As with for-profit entities, the first step in grappling with FCPA compliance is for a nonprofit to conduct a risk assessment. In conducting a risk assessment, nonprofits should consider the usual risk factors, including whether they operate in high-risk jurisdictions and the degree to which their operations require contact with government officials. Nonprofits often work as contractors for government agencies, often competing with private companies for these contracts. These transactions present FCPA compliance risks that can be addressed through an FCPA compliance program.

Other key risk assessment points for nonprofits include:

  1. Local staff or agents. Many nonprofits hire individuals or organizations (often local nonprofits) to carry out their work and act as their agents. As with for-profit organizations, such local hires present heightened FCPA risk and should undergo due diligence. In addition, nonprofits should be alert to corrupt or fraudulent practices from local nonprofits, such as attempts to fund administrative costs by requiring kickbacks from contractors hired to do specific projects.
  2. Management/oversight structure. Many international nonprofits disperse their decision making widely to their people on the ground. At the same time, given the resource constraints facing nonprofits, many have minimal oversight/management resources. Such structures significantly increase FCPA risks while simultaneously limiting the tools available to address them, e.g., internal controls, training, auditing and reporting. Similarly, many nonprofits lack FCPA expertise or even general compliance expertise. This may blind nonprofits to the risks they are facing and inhibit internal reporting.

Nonprofits should be aware of the risks created by limited oversight and deficiencies in expertise, and seek ways to fill the gaps. One approach could be to seek “donations” of training or other support from for-profit or nonprofit partners that have robust FCPA compliance systems.

Reputational Risk

An important factor that may motivate nonprofits to address FCPA risk is reputational risk. Reputational risks are greater for nonprofits than they are for corporations, since a corruption scandal at an NGO can dry up funding and threaten its existence. Such scandals can arise from engaging in bribery. If a nonprofit is a repeat victim of corruption, this could also suggest mismanagement. Taking steps to reduce FCPA risk will reduce the potential for both types of corruption.

Ultimately, for nonprofits involved in development work, reducing corruption risks supports their development agenda. Reducing corruption supports development by reinforcing fair and transparent institutions.

The opinions expressed in this post are those of the author in his or her individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author`s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers and does not create an attorney-client relationship. It does not seek to describe or convey the quality of legal services. FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws or any other legal issue. FCPAméricas gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to FCPAméricas LLC.

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