Telefônica Brasil S.A: The Guest List Said What the Accounts Left Out

In the Telefônica Brasil S.A FCPA case, the company agreed to pay a $4,125,000 civil penalty over alleged accounting failures involving World Cup and Confederations Cup hospitality for government officials. The guest-selection emails quoted by the Securities and Exchange Commission described help with legislation and customs clearance. The accounts described advertising. If you worked on the invitations, approvals or expense entries, that difference is the heart of this case.

The Commission’s May 9, 2019 order addressed recordkeeping and internal accounting controls under the Foreign Corrupt Practices Act. It described Telefônica Brasil as a São Paulo telecommunications company, a subsidiary of Spain’s Telefónica S.A., and the operator of mobile services under the Vivo brand. Its American Depositary Receipts were registered with the SEC and traded on the New York Stock Exchange.

World Cup and Confederations Cup Hospitality

The Commission alleged that Telefônica Brasil’s hospitality program placed valuable soccer tickets in the hands of officials who could influence its business. According to the order, the company bought tickets for the 2014 World Cup and the 2013 Confederations Cup, both held in Brazil. The Commission alleged that its Institutional Relations Department, which dealt with Brazilian and foreign governments, played the central role in distributing tickets to officials.

According to the order, the company agreed to spend approximately $5.1 million on World Cup tickets. We find the comparison telling: the company agreed to a penalty smaller than its ticket bill without admitting the alleged conduct.

The order described an executive expense committee made up of senior leaders that approved the purchase. The marketing director’s approval memorandum described relationship-building with strategic audiences. The paperwork omitted any mention of government recipients, although the Commission alleged that people inside the company knew some tickets would go to officials.

The Commission alleged that the company ultimately gave 194 World Cup tickets to 93 government officials, with tickets and related hospitality valued at $621,576. Some officials received extra tickets for friends or family. Recipients included federal legislators, senators, mayors and other officials, as well as a small number of foreign embassy personnel who were commercial customers.

According to the order, the earlier Confederations Cup program followed the same route through Institutional Relations. The Commission alleged that 38 tickets went to 34 government officials, with tickets and hospitality valued at $117,230. Those recipients included federal congressmen and government ministry officials important to the company’s business. The two tournaments put the same question before the company: whose public responsibilities made them worth entertaining?

The Guest List Named the Business Favor

The Commission alleged that managers chose World Cup guests with the company’s interests and the officials’ usefulness in mind. An Institutional Relations manager explained in an email that his proposed guest lists took:

Other emails described the help employees wanted next. According to the Commission, an employee requested a ticket for a federal legislator’s chief of staff who “has opened many doors for us” and explained that further legislation was moving through the House and his help would be needed. A free trade tax zone official responsible for customs clearances received a ticket and a request for “ongoing support” on clearance of a particular invoice. Another exchange proposed inviting two Brazilian mayors only if the invitation calls could also raise legislative amendments important to the company.

For this telecom company, the Commission’s examples connected hospitality to legislative help and a specific customs clearance. The commercial question was what the official could do for the business. For an insider, knowing what was waiting on that official’s desk can explain far more than the guest’s title alone.

A Gift Policy Looking in the Wrong Direction

The Commission’s internal-controls allegation was that Telefônica Brasil failed to put its own antibribery policy into practice. Its code of ethics prohibited gifts or hospitality that might reward or influence a business decision. Yet the order alleged that senior managers approved tickets and hospitality for officials who could affect regulatory matters, legislation and other company business.

The order identified a particularly revealing failure in the controls over gifts and hospitality. According to the order, management focused on employees accepting tickets and entertainment, while giving insufficient attention to the company offering those benefits to others. The Commission also described a compliance breakdown and a deficient internal audit function, even though some people had asked how the policy applied.

We see a basic absurdity in that account. The company had a rule against using hospitality to influence decisions, while its guest-selection emails discussed the decisions and favors that made officials attractive guests. A policy can say the right thing while the people approving the spending work toward something else entirely.

Advertising in the Ledger, Officials in the Emails

The Commission’s books-and-records allegation concerned how the company described the spending after approving it. The order said Telefônica Brasil used “Publicity Institutional Events” for its first two World Cup ticket installments and “Advertising & Publicity” for the third. The company also booked World Cup hospitality as advertising and publicity.

The order described the same categories for Confederations Cup tickets and hospitality. The Commission alleged that these general publicity descriptions failed to characterize the benefits provided to government officials accurately. The invitation and email could reveal an official relationship that the expense account left out.

That gives an accounting employee and a government-relations employee different views of the same transaction. One may know the ledger category and the approval behind it. The other may know why a particular official received the benefit and what help the business wanted. We connect those views when examining whether the accounting tells the same story as the people arranging the hospitality.

The BHP Parallel: Approval Forms Can Leave Out the Decision

BHP Billiton faced a separate SEC accounting case over hospitality at the Beijing Olympics. Its settled order described applications that omitted guests’ government roles and pending business dealings. One sentence captures how a form can make an official look like an ordinary customer:

The Commission also alleged that BHP began negotiating with a newly appointed mines minister over a nickel exploration permit, but employees did not update or reconsider his hospitality application. The minister and his wife then attended the Olympics as company guests. The controls did not require the invitation to be reviewed again after the negotiations began.

These allegations expose different gaps in the approval process. In Telefônica Brasil’s case, the Commission said the general purchase paperwork did not mention government recipients. In BHP’s case, applications omitted official roles or failed to catch up with changing business. The useful record is the one that connects the invitation to the business relationship at the time the benefit is offered.

What a Telecom Insider Can Explain

The most useful whistleblower evidence connects the benefit, the official’s decision and the company’s explanation for spending the money. In this case, that connection ran through purchase approvals, guest-selection emails, ticket allocations and accounting entries. Someone who understands the pending legislation or the invoice awaiting clearance can explain why an apparently ordinary entertainment expense mattered to the business.

Research gives a broader reason to take that inside knowledge seriously. The 2019 working paper Do Corporate Whistleblower Laws Deter Accounting Fraud?, from the University of Chicago Booth School of Business and Baruch College, examined state False Claims Acts and companies held by state pension funds. It found a 5% to 9% reduction in the measured likelihood of accounting fraud after companies became exposed to those whistleblower laws. In its smaller internal-audit sample, the study found little evidence that increased audit investment explained the effect.

In the hospitality setting, we see the value of that knowledge in a person who can explain why an official was selected. That person can supply the business context missing from an otherwise ordinary-looking expense entry.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Information about a Foreign Corrupt Practices Act case like this one points instead to SEC whistleblower awards, and we assess that with you. We work with you on how your knowledge of the guests, the approvals and the accounts can contribute to an enforcement action.

You Know Why the Guest Was Invited

If you know why an official received tickets, who approved them or how the spending reached the accounts, talk with our whistleblower experts about what you saw. We build the case with you, bring in FCPA whistleblower lawyers who understand hospitality and accounting evidence, and stay beside you through the pursuit of a whistleblower award.