Member Article

Entertaining a trading partner may be marketing, but if the gesture conveys to the guest an expectation of favourable treatment in awarding a contract, it may be regarded as a form of economic corruption.

The question posed in the title - on its surface unrelated to the law - has been raised with us on several occasions recently, by various clients and with respect to various situations. They were concerned whether inviting a current or potential customer to lunch or dinner, and covering the costs of the  meal, could subject them to an accusation of corruption (with the value of the meal treated as a benefit). The clients who raised this question typically came from Anglo-Saxon countries, where efforts to stamp out corruption take a somewhat different form than in Poland.

In the US or the UK, companies whose staff are involved in bribery face serious financial sanctions, apart from the criminal sanctions borne by the perpetrators themselves. And in both of these countries, there is particular emphasis on battling corruption involving public officials of foreign countries and affiliates of companies from the US or the UK. The goal of the US and UK regulations is transparency of operations when entering new markets and forming contacts with state institutions in new investment locations, as well as in dealings with all types of agents and intermediaries. An act of international law that reflects these goals is the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Thus the Anglo-Saxon businesspeople who raised this question were concerned not only about the legal consequences in Poland, but also - or even more so - the negative consequences in their home jurisdictions.

In Poland, meanwhile, the battle against corruption is primarily waged with the individual perpetrators. Practically speaking, companies are not held responsible, although formally the grounds for corporate liability do exist. The Act on Liability of Collective
Entities for Punishable Offences has been in force since 2003, but is very rarely used.

It should be pointed out that the Polish Penal Code contains provisions concerning corruption in the public sphere, involving public officials and persons performing public functions, as well as “private” and economic corruption in violation of principles of fair competition. Acts which unfairly favour some participants in trade at the cost of others are defined in Penal Code Art. 296a.

In order to provide a proper analysis of the seemingly innocuous issue of the permissibility of inviting a person to lunch, it is first necessary to analyse the connection between the event and the nature of the guest’s duties, and, in this sense, the purpose of the invitation. The amount spent on the guest is also material. One argument that requires this issue to be taken seriously is the evolving concept of a person performing a public function, as a potential perpetrator of “passive” corruption (i.e. receiving bribes, Penal Code Art. 228 §1). The predominant view until about the mid-1990s was that performance of a public function was tied to the nature of the activities performed by a given person (if the activities were authoritative, decisional or public in nature), but under the current case law from the Polish Supreme Court, performance of a public function is quite uniformly tied not only to the authoritative nature of decisions taken within the public sphere, but also with control over public assets. This approach led the Supreme Court to hold that a member of the management board of a company wholly owned by the State Treasury was a person performing a public function, and to hold that it could not be ruled out that the CEO of a bank in which the State Treasury held shares could be found to be a person performing a public function.

Thus if you invite the CEO of a company controlled by the State Treasury out to lunch, you must deal with the possibility that the person will be treated as someone performing a public function for purposes of the Penal Code. Then it should be checked whether the company has established a policy covering corporate entertainment. This can help determine what is acceptable and what falls over the line.

Expenses incurred in connection with occasional business related entertainment, such as taking a customer to lunch, may not exceed the standards customarily accepted within the given cultural circles. The costs must be properly described and documented, and must be appropriate to the circumstances of the event. The same applies to promotional gifts intended to implement the company’s marketing strategy.

The purpose of the meeting will always be of crucial importance when determining the nature of the meeting, however, as well as how the purpose is tied to the specific actions and duties of the guest, for example organising a tender or selecting contractors. A suspicion of corruption would arise only if there were a cause-and-effect relationship.

In our legal practice, we more and more often encounter examples of private corruption, i.e. concerning persons who do not perform any public functions. Perhaps this is related in some way to the pressure felt by businesspeople during the economic crisis.

The mechanisms for private corruption are fairly simple. The perpetrators may be, for example, personnel whose compensation is based on commissions. Certain sectors in which there is particularly brutal competition, and signing a contract may make or break the business, also tend to foster corruption. This problem is particularly apparent in relations between small enterprises and major customers on whom they are dependent. An example could be retail chains, where suppliers may be willing to overstep the legal bounds in order to secure preferential treatment for their goods. It is not just small gifts like a box of chocolates that are involved, but
foreign holidays and other expensive presents.

The greater the pressure to win the contract, the more the problem grows, particularly during a crisis. Meanwhile, with cost-cutting in non-revenue-generating areas, such as internal audit, it may be easier for abuses to go undetected.

The widespread occurrence of this phenomenon may partly be due to the fact that corruption in the non-public sphere is not strongly condemned in Poland. But corruption does not just violate honesty and morality. When a contractor who gave a bribe is selected over a competitor who made a better offer, the company employing the person who made the choice suffers a loss. Such losses can run into the millions of zloty, and in the final balance they are reflected in the market price of the end
product.

There is also the issue of liability for abuses. Awareness on the part of management is relevant, as is the existence of more or less effective internal procedures, which may help determine whether liability should be borne only by the immediate wrongdoer, or
the questionable practice is condoned by others—and if so, how far up the corporate ladder this awareness reaches.

It should be stressed that if there are no appropriate policies in place, the perpetrators’ supervisors as well as persons managing the entire company may be liable. Polish law includes mechanisms providing for extensive criminal liability of persons managing companies, through the traditional concept of unintentional fault (negligence).

Returning to the original example, a distinction must be drawn between actions designed to build a relationship and those seeking preferential treatment of a given supplier.

In summary, face-to-face meetings over a meal help maintain good contacts between business partners—including those who are responsible for spending public funds. Thus there is no need to panic about potential criminal liability. It should be sufficient to use common sense and good judgment.

A good rule of thumb is, “If you don’t know what to do, do the decent thing.”

 

Link to article