PART III: BUSINESS ETHICS & SWISS LAW
(See PART II: LITIGATION from previous post, 2 weeks ago)
Bribery, corruption, and facilitation payments are the most commonly reported issues recorded by the Institute of Business Ethics’ media monitoring. These claims accounted for 13% of all stories on business ethics with the broadcast and media sector accounting for 33% of where these claims originated or occurred. While some argue that corruption is a victimless crime, this narrow view fails to take into account the ripple effects suffered by the respective consumer. For example in this context, instead of awarding the contract for host of World Cup to a country who has a deeply rooted passion and tradition of soccer amongst their citizens, the winning big becomes based on kickbacks, political alignments, and strategic promises. While most companies, both domestically and abroad, have basic anti-bribery and anti-corruption policies per their local laws, FIFA sat in what can be considered the perfect loophole: a non-profit incorporated in Switzerland and only answerable to Swiss law. In this final installment, I will attempt to accurately translate and synthesize Swiss tax and business law to find a correlation between the corporate status as a non-profit in Switzerland versus one in the United States. I will also touch on the importance of good business practices and how it can act as a first line of defense against corruption. NON-PROFIT ASSOCIATIONS & SWISS LAW So why does being a designated non-profit matter?
A few reasons: first, non-profits receive virtually no oversight by a governing or regulatory body; second, they receive favorable tax exemptions (subject of course to local laws); and finally, despite being classified as “humanity” work organizations, these organizations are some of the most powerful and affluent groups in the world.
Before digging into why FIFA’s non-profit designation was a catalyst for its corruption, it is important to understand (at least generally) the relevant applicable law. Due to FIFA’s headquarters being in Zurich, Swiss law controls and slightly differs from U.S. federal law. In the tax context, generally, under Swiss tax code, non-profit organizations are subject to the ordinary corporate income tax on the federal, cantonal, and community levels as well as ordinary capital tax. However, there are some exclusions. Specifically, under Article 56(h) of Switzerland’s Federal Income Tax Act (FITA) and Article 23(1)(f) of the Federal Tax Harmonization Act (FTHA), legal entities may request tax exemptions if they (1) pursue charitable or public purposes and (2) if their profits are exclusively and irrevocably dedicated to such purposes. The kicker is (to the extent of my interpretation and my novice understanding of Swiss tax law) there is virtually no legal concept of “charity” or what qualifies as “charity” under the applicable Swiss law. Thus, the term is seemingly completely ambiguous. Why is this so important? As we will see below, in a brief discussion of Swiss business and corporate laws, this exemption and the ambiguous nature of what it means to “pursue a charitable purpose” in conjunction with its organizational status and corporate structure place FIFA in the perfect position to arguably avoid any federal regulatory oversight by Swiss authorities. As mentioned above, FIFA’s organizational status and corporate structure under the applicable Swiss laws is imperative to understanding how this level of corruption can occur for a such a prolonged period of time. According to documentation (and Swiss Civil Code, Articles 60-79), FIFA is a registered as an association which means that FIFA operates as an autonomous separate legal entity and acquires such personality independent of their enrollment in the Swiss Register of Commerce. In other words, as soon as it becomes apparent in FIFA’s organizational documents that it wished to exist as an independent legal entity it was recognized as such and thus, enjoyed an exempt from Swiss VAT (value added tax) and corporate income tax. The choice of registration of ‘association’ is similarly significant and is where Swiss law radically departs from U.S. law. Under U.S. law, generally, officers of an association owe its members duties referred to as fiduciary duties to the organization including duty of care, loyalty, and obedience. In short, they are required to act reasonably, prudently, and in the best interests of the organization; to avoid negligence and fraud; and to avoid conflicts of interest. These duties are to apply to the association as a whole and an individual who breaches such duties can be held liable for any damage caused to the association. Here, an association formed under Swiss law has no fiduciary duty to act in the best interests of its members; none. It can vote its own decisions and influence its activities based on its own interests, separate from the interests of its members. Further, the purpose of an association can be changed arbitrarily by a general assembly of its members. This arguably leaves an open door for instability and decreased security overtime. In connecting the proverbial dots, it becomes increasingly easier to see how the level of corruption sustained in the FIFA scandal not only occurred, but endured for the number of years before it breaking in 2015. Further, couple that revelation with the fact that FIFA brings in billions of dollars from World Cup tournaments, licensing deals such as branding mascots, game balls, and merchandise, and other third party contracts and the 2015 indictment is more of an inevitable event, than an eyebrow raising one. IMPORTANCE OF GOOD BUSINESS PRACTICES When former FIFA president Sepp Blatter accepted bribes in exchange for World Cup bids, he indirectly sent a message to the rest of his team that such practices were acceptable. His continual practice of such may have also intentionally or unintentionally communicated to FIFA employees and other affiliated entities that compliance with good business practices and ethics take a back seat to profits. Coupled with the benefits under Swiss law mentioned above as well as FIFA’s lack of discipline in dealings with almost every major soccer governing body across multiple continents, the culture of corruption in FIFA and its affiliations is the common thread that weaves the indictments of 2015 together. FIFA did release a Code of Ethics in 2004, but it seems these might have been just for show, because after a brief skim of the policies and just how many potential violations were present during each of Blatter’s elections, it seems incredible that the Committee never stepped in. This lack of enforcement could have also, indirectly, created a culture of tolerance for skirting policies and later, the law. One important lesson that can be derived from this situation is that it is vital to exercise constant vigilance against the culture of corruption or seeds of corruption, that allow employees and executives to bend the rules to achieve business objectives. Clear, comprehensive policies and consistent enforcement of such policies are essential to combating the behavior exhibited by FIFA and its affiliates. Without this practice, it is all too easy for executives and employees to rationalize unethical actions. Lastly, in conjunction with clear, comprehensive ethic policies this scandal highlights the importance of handling early signs of corruption in-house. Sweeping ethical violations under the rug or leveling inadequate penalties not only may embolden employees to continue the behavior, but can have a chilling effect on reporting any suspicious behavior. For example, FIFA’s ethics committee’s decision to only publish Judge Eckert’s investigatory report during the probe in 2014 cleared executives, but squeezed out ‘whistleblower’ employees. By initially blocking Garcia’s report from publication, FIFA’s actions signaled to its employees and affiliate employees that it would not only not protect them from reporting ethical violations, but any reports of potential violations effectively cost them their job. In hindsight, if FIFA had published Garcia’s report, it may have found itself in a very different position today.
----------------------------- In Conclusion, FIFA is an extreme example of what an organization with corrupt top-level officials can look like. The indictment named several high-brow FIFA officials in it and many of their actions were the unfortunate result of a toxic, non-transparent culture. It would seem that while climbing the ranks of FIFA, employees picked up a sense that to be engaged in acts of fraud, bribery, and other criminal behavior was not just a way to do business, but the preferred way. Hopefully, the new board and president can acknowledge their missteps and learn from them to lead FIFA out from under the cloud of corruption and scandal.
"Thank You' note Readers: Any Thanks to all who have explored these (sometimes long) articles. It's been a great pleasure walking this line with you all!
Contributor Bio: Kathryn (Katie) Boyle is in her last semester of law school at New England Law | Boston. Ms. Boyle’s interest lies in the intersection of sports, law, and business ethics. Post-graduation she aspires to practice as an employment and/or labor attorney for player associations in professional sports. (Twitter: @kayteboyle).