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It’s NOT True That The FCPA Enforcement Agencies Are Focusing More On Individuals

Not True

In recent public statements, DOJ and SEC officials have stated that they are focusing more on individual FCPA enforcement actions.

For instance, in this recent Financial Times article about DOJ FCPA enforcement, Assistant Attorney General Leslie Caldwell stated “we’re really focusing on individuals.” (Interestingly and as an aside, in the same article Caldwell stated:  “In more than half of all countries it’s very difficult to do business without being faced with the potential of a FCPA violation . . . we recognize it’s a significant problem.”).

Likewise, in this recent interview DOJ Fraud Section Chief Andrew Weissmann, in explaining some of the reasons for the slowdown in corporate FCPA enforcement actions in 2015 stated that “part of the answer is that we are prosecuting more individuals.”

Over at the SEC, Andrew Ceresney (Director of the SEC’s Enforcement Division) recently stated that the SEC’s general focus on individual prosecutions “also applies to FCPA cases.”

The notion that the FCPA enforcement agencies are focusing more on individual enforcement is certainly part of the current narrative and many in the FCPA’s echo chamber are falling for this narrative hook, line and sinker.

However, it’s NOT true that the FCPA enforcement agencies are focusing more on individual enforcement. Indeed, the following number demonstrate the opposite.

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Just When You Think You’ve Seen It All – Along Comes The Nordion (Canada) Inc. Enforcement Action

kidding me

There have been several Foreign Corrupt Practices Act enforcement actions in the past 30 days or so.

But, just when you think you’ve seen it all in FCPA enforcement-land, along comes the Nordion (Canada) Inc. enforcement action announced yesterday by the SEC.

The basic findings, as set forth in this administrative order, were as follows.

Approximately 16 years ago, Mikhail Gourevitch (a dual Canadian and Israeli citizen who was fired years ago by Nordion) represented to the company that “his purported childhood friend from Russia” could help the company’s business in Russia.

Gourevitch and this eventual agent “conspired to use a portion of the funds Nordion paid the Agent to bribe Russian government officials to obtain approval for TheraSphere” a liver cancer therapy.

Gourevitch also received kickbacks from the Agent and otherwise “hid the scheme from Nordion” through, among other things, misrepresentations to his employer. In the words of the SEC, through his conduct Gourevitch “secretly enrich[ed] himself” and received “at least $100,000 for his role in the arrangement which was not disclosed to Nordion.”

In August 2014, Nordion was acquired by Nordion (Canada) Inc., a privately held company. The SEC’s order finds that Nordion (not the actual Respondent in the action Nordion (Canada) Inc.) violated the FCPA’s books and records and internal controls provisions and Nordion (Canada) Inc. agreed, without admitting or denying the SEC’s findings, agreed to pay $375,000.

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PTC Inc. And Related Entities Pay $28 Million In Yet Another FCPA Enforcement Action Involving Travel And Entertainment Provided To Alleged “Foreign Officials”

World Tour

Approximately 5-10 years ago, foreign subsidiaries of PTC Inc. (a software company formerly known as Parametric Technology Corp.) arranged for alleged Chinese “foreign officials” to travel often to the U.S. to visit PTC’s facilities. The trips morphed to include non-business leisure travel to places such as New York, Las Vegas, Honolulu and included activities such as guided tours, golfing and other leisure activities. In addition, the foreign subsidiaries sometimes provided gifts (such as iPods, gift cards, wine and clothing) ranging from $50 to $600 to the alleged “foreign officials.”

The end result is that approximately $28 million is flowing into the U.S. treasury in the latest corporate FCPA enforcement action involving travel and entertainment of alleged “foreign officials”

The enforcement action, which has been expected for some time, involved:

  • a DOJ non-prosecution agreement against Parametric Technology (Shanghai) Software Co. Ltd. and Parametric Technology (Hong Kong) Limited (collectively the “Companies”), but not PTC Inc., in which the Companies agreed to a criminal penalty of $14,540,000;
  • an SEC administrative order against PTC Inc. which the company agreed to resolve through a payment of approximately $13.7 million ($11.9 million in disgorgement and $1.8 in prejudgment interest); and
  • an SEC DPA against Yu Kai Yuan (A Chinese citizen who resides in Shanghai and a former employee of the PTC China entities) in what the SEC called “its first DPA with an individual in an FCPA case.”

DOJ

The conduct focused on the following entities as described in the NPA.

“Parametric Technology (Shanghai) Software Company Ltd. and Parametric Technology (Hong Kong) Ltd. are wholly owned, separate subsidiaries ofPTC through which PTC’s Chinese operations, including sales to Chinese customers, are managed. While the two entities comprising PTC China are structured separately, during the relevant period they conducted business as a single unit.”

According to the NPA:

“Many of PTC China’s customers were Chinese state-owned entities (“SOEs”) that were controlled by the government of China and performed functions that the Chinese government treated as its own, and thus were instrumentalities of the Chinese government as that term is used in the Foreign Corrupt Practices Act (“FCPA”) […] PTC China employees were aware that many of its customers were Chinese SOEs whose employees were Chinese government officials.”

Under the heading “Improper Payments,” the NPA states:

“PTC China routinely engaged the services of local “business partners,” Chinese companies that helped PTC China find prospective contracts, assisted PTC China in the sales process with Chinese SOEs, and provided additional services to PTC China’s customers that had been outsourced by PTC China, including information technology services. Business Partner 1 [described as a Chinese company that worked with PTC on contracts with Chinese SOEs, providing sales assistance and certain outsourcing services] and Business Partner 2 [described the same way as Business Partner 1] were the primary business partners used by PTC China. PTC China failed to conduct meaningful due diligence of its Chinese business partners, notably with respect to corruption risks or anti-corruption controls of these Chinese business partners.

PTC China’s senior sales staff had wide discretion in setting the fee arrangements with Chinese business partners. Generally, commissions to business partners were set as a percentage of the contract price if PTC China won the contract in question. These commissions were typically referred to as “influence fees” to help PTC China win contracts. If the business partner was to provide subcontracted services such as information technology services, those services might either be included in the total commission or itemized separately using a line item referred to as “COD,” for “completely outsourced deals.”

PTC had a corporate theatre at its headquarters in Massachusetts that is designed for demonstrations of its products, and PTC headquarters is also equipped to provide customer training on its products. According to PTC policy, PTC should not pay for customer travel to its headquarters for such training. However, during contract negotiations, Chinese SOE customers frequently requested that PTC China provide employees with travel to the United States, nominally for training at PTC headquarters in Massachusetts, but primarily for recreational travel to other parts of the United States. PTC China, its business partner, and the SOE would determine a travel budget, which was then added into the contract price. In some cases, the overseas travel costs were specifically itemized in the initial contract documents for approval by senior PTC China sales staff; however, the overseas travel costs line item was removed from the final contract documents that were signed by PTC and the SOEs. Instead, for a time, the money budgeted for overseas travel was disguised using the COD line item to make it appear as though the travel expenses were subcontracting payments to the business partner, or simply included in the business partner’s overall commission.

Following PTC’s discovery that the COD line item was being improperly used in certain instances, travel costs were included in the business partner commissions by PTC China to avoid detection by PTC. The business partners, often Business Partner 1 or Business Partner 2, then paid for the overseas trips using the funds received from PTC China. The business partners provided PTC China with false documents indicating that they had performed subcontracted services even though there were no such services contemplated or performed and even though the funds were in fact used for, in part, improper recreational travel for Chinese SOE employees. For some of the more expensive trips for important Chinese SOE customers, the payments to the business partners were spread among and hidden within several contracts.

Some of the overseas travel expenses paid for by the business partners were tracked by PTC China sales staff on spreadsheets that they maintained separately from PTC China’s electronic accounting records to help PTC China better understand the composition of, and negotiate, fees with the Chinese business partners.

Generally, the trips included one or two days of business activities at PTC headquarters in order to justify the trips, preceded or followed by several days of sightseeing that lacked any business purpose and that was in fact the primary reason for the trip.

For example, in April 2008, two PTC China sales employees accompanied six employees of a Chinese SOE, including its president, on a trip to the United States. In addition to a one-day stop at PTC headquarters in Massachusetts, the group went on sightseeing visits to New York, Las Vegas, Los Angeles, and Honolulu. Travel records, e-mails, and photographs confirm that the additional stops on the trip were recreational and included tours of landmarks in New York, including Rockefeller Center, the Statue of Liberty, the United Nations, and the Empire State Building, a tour of the Grand Canyon in Las Vegas, and golfing and a tour of Pearl Harbor in Honolulu. Documents indicate that the trip cost over $50,000, which was paid for by Business Partner 1 at PTC China’s direction, and for which PTC China paid Business Partner 1. Within a year of the trip, PTC booked several contracts with the SOE totaling over $1 million.

In May 2010, a PTC China employee accompanied two employees of a Chinese SOE, including its information technology vice director and information technology project supervisor, on a trip to the United States. The trip included one day at PTC headquarters in Massachusetts, but also included sightseeing stops in New York, Atlanta, Las Vegas, and Los Angeles. These additional stops included shopping at an outlet mall and other stores, a Grand Canyon tour in Las Vegas, and a Universal Studios tour in Los Angeles. Subsequently, in July 2010, another PTC China employee accompanied seven employees of the same Chinese SOE on a second visit to the United States. In addition to stopping at PTC’s headquarters in Massachusetts, the trip included sightseeing visits to New York, Washington, DC, Las Vegas, San Diego, and Los Angeles, with recreational trips to various museums, the Empire State Building in New York, and Universal Studios in Los Angeles. Both trips were paid for by Business Partner 2 at PTC China’s direction, and for which PTC China paid Business Partner 2. The SOE entered into over $9 million worth of contracts with PTC.

In September 2010, a PTC China employee accompanied nine employees of three Chinese SOEs on a trip to the United States. The group spent one day at PTC’s headquarters in Massachusetts. The two-week long trip also included sightseeing stops in New York, Los Angeles, Las Vegas, and Honolulu and included tours of the Empire State Building, Universal Studios, and Pearl Harbor. An internal e-mail from the time one of the Chinese SOE customers entered into a contract with PTC prior to the trip actually taking place stated that “the customer just want sightseeing instead of the overseas training.” The Chinese SOEs whose employees went on the trip collectively entered into more than $3.5 million in contracts with PTC.

Overall, PTC China, through its business partners, paid over $1.1 million to fund, directly or indirectly, 24 trips for over 100 Chinese SOE employees that included a recreational component. In addition to the recreational trips, between in or around 2009 and in or around 2011, PTC China employees also provided over $250,000 in improper gifts and entertainment directly to Chinese SOE employees, in contravention of PTC policies imposing monetary limits and approval requirements for gifts and entertainment for government officials. PTC China’s sales staff’s longstanding practice of providing gifts to Chinese government officials was done at least in part to obtain or retain SOE business for and on behalf of PTC.”

The three-year NPA states:

“The [DOJ] enters into this Non-Prosecution Agreement based on the individual facts and circumstances presented by this case and the Companies. Among the factors considered in deciding what credit the Companies should receive were the following: (a) the Companies did not receive voluntary disclosure credit because, although the Companies, through their parent corporation PTC Inc., reported to the Office in 2011 certain misconduct identified through a then-ongoing internal investigation, they did not voluntarily disclose relevant facts known to PTC Inc. at the time of the initial disclosure until the Office uncovered salient facts regarding the Companies’ responsibility for the improper travel and entertainment expenditures at issue independently and brought them to the Companies’ attention, after which the Companies disclosed information that they had learned as part of an earlier internal investigation; (b) the Companies received partial cooperation credit of 15% off the bottom of the Sentencing Guidelines fine range for their cooperation with the Office’s investigation, including collecting, analyzing, and organizing voluminous evidence and information for the Office, but did not receive full cooperation credit for the reasons described in (a) above; (c) by the conclusion of the investigation, the Companies had provided to the Office all relevant facts known to them, including information about individuals involved in the FCP A misconduct; (d) the Companies engaged in extensive remedial measures, including a review and enhancement of the Companies’ and PTC Inc.’s compliance program, the establishment of a dedicated compliance team at the corporate level and at PTC China and enhanced policies for business partners, the termination of the business partners involved in the misconduct described in the Statement of Facts attached hereto as Attachment A, and the implementation of new customer travel policies and additional controls around expense reimbursement; (e) the Companies have committed to continue to enhance their compliance program and internal controls, including ensuring that their compliance program satisfies the minimum elements set forth in Attachment B to this Agreement; (f) based on the Companies’ remediation and the state of their compliance program, and that of their parent company PTC Inc., and the Companies’ agreement to report to the Office as set forth in Attachment C to this Agreement, the Office determined that an independent compliance monitor was unnecessary; (g) the nature and seriousness of the offense; (h) the Companies have no prior criminal history; and (i) the Companies have agreed to continue to cooperate with the Office in any ongoing investigation of the conduct of the Companies and their officers, directors, employees, agents, business partners, and consultants relating to violations of the Foreign Corrupt Practices Act (“FCPA”).”

In the NPA, the Companies admitted, accepted and acknowledged responsibility for the above conduct and, as standard in corporate FCPA enforcement actions, agreed to a so-called “muzzle clause.”

Pursuant to the NPA, the Companies agreed to pay a monetary penalty of approximately $14.5 million. In the NPA, the Companies agreed to report to the DOJ periodically, at no less than 12 month intervals during the three year term of the NPA “regarding regarding remediation and implementation of the compliance program and internal controls, policies and procedures” described in Attachment B of the NPA.

SEC

This administrative order, finding that PTC violated the FCPA’s anti-bribery, books and records and internal control provisions, is based on the same core conduct described in the DOJ NPA.

In summary fashion, the order states:

“This matter concerns violations of the anti-bribery, books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by PTC. From at least 2006 into 2011, two wholly-owned PTC subsidiaries (collectively, “PTC-China”) provided improper payments totaling nearly $1.5 million to government officials (“Chinese government officials” or “officials”) who were employed by Chinese state owned entities (“SOEs”) that were PTC customers. These payments were made to obtain or retain business from the SOEs. Specifically, PTC-China provided non-business travel, primarily sightseeing and tourist activities, as well as improper gifts and entertainment, to the Chinese government officials. PTC earned approximately $11.85 million in profits from sales contracts with SOEs whose officials received the improper payments.

PTC-China made these improper payments in two primary ways: 1) by providing at least $1,179,912 to third party agents, disguised as commission payments or sub-contracting fees, which were then used to pay for non-business related foreign travel for Chinese government officials; and 2) by allowing its sales staff to provide Chinese government officials with gifts and excessive entertainment of over $274,313. The payments were recorded as legitimate commissions and business expenses in PTC-China’s books and records, when in fact they were improper payments designed to benefit the Chinese government officials. PTC-China’s books and records were consolidated into PTC’s books and records, thereby causing PTC’s books and records to be inaccurate. PTC failed to devise and maintain an adequate system of internal accounting controls sufficient to prevent and detect these improper payments that occurred over several years.”

In pertinent part, the order states as follows regarding the leisure travel:

“PTC-China employees and the business partners typically arranged the overseas sightseeing trips in conjunction with a visit to a PTC facility. Most often, PTC-China sales staff arranged for Chinese government officials to visit PTC’s corporate headquarters in Massachusetts, for PTC to market and demonstrate the company’s products and services. The trips typically consisted of one day of business activities at PTC’s facility, followed or preceded by additional days of sightseeing visits that lacked any business purpose, all of which were paid for by the business partners using funds from their grossed up success fees and subcontracting payments. Some PTC employees in the United States generally understood that SOE officials were spending additional days in the country, including for tourist activities. And certain PTC employees based in China were aware that PTC-China employees were accompanying Chinese government officials to tourist destinations.

Typical travel destinations in the United States included New York, Las Vegas, San Diego, Los Angeles, and Honolulu, and involved guided tours, golfing, and other leisure activities. PTC-China sales staff usually accompanied the Chinese government officials on these trips. The Chinese government officials who went on the trips in turn were often signatories on the purchase agreements with PTC.

[…]

Overall, from 2006 into 2011, PTC-China, through its business partners, paid at least $1,179,912 to fund at least 10 trips for Chinese government officials that included significant non-business travel. The costs of these trips were improperly recorded in PTC’s books and records as COD or business partner related commissions or subcontracting payments, without any indication that they were primarily for sightseeing and other non-business related activities. PTC improperly profited by at least $11,858,000 from contracts obtained from the SOEs whose government officials participated on these trips.”

In pertinent part, the order states as follows regarding the “gifts and excessive entertainment”:

“From 2009 through 2011, PTC-China sales staff corruptly provided at least $274,313 in improper gifts and entertainment directly to Chinese government officials. The value of the gifts and entertainment generally ranged from $50 to $600, and often included small electronics (e.g., cell phones, iPods, and GPS systems), gift cards, wine, and clothing. PTC-China sales staff’s long standing practice of providing the gifts to Chinese government officials was done at least in part to obtain or retain SOE business.

By providing these gifts, PTC-China violated PTC’s corporate governance and internal controls policies. These policies included: $50 monetary limits on the provision of gifts and business entertainment to government officials; requiring PTC-China sales staff to obtain preapprovals for business expenses over $500; and requiring that PTC-China sales staff document the date, place, attendees, and purpose of business entertainment and the recipient. These gifts were improperly recorded as legitimate business expenses.”

Under the heading “PTC Failed to Devise and Maintain a System of Internal Accounting Controls,” the order states:

“From at least 2006 through 2011, PTC failed to devise and maintain an adequate internal accounting controls system to address the potential FCPA problems posed by its ownership of, and control over, PTC-China. Notably, during 2006, 2008, and 2010, PTC investigated compliance issues at PTC-China, including possible corruption involving its business partners. However, PTC failed to identify and stop the ongoing and systemic illicit payments to Chinese government officials by PTC-China personnel as described above and did not undertake effective remedial actions.

Despite these compliance issues, PTC failed to undertake periodic comprehensive risk assessments for PTC-China and to ensure that its internal accounting controls procedures were suited to PTC-China’s particular circumstances (in particular, its ongoing dealings with Chinese government officials). PTC’s Code of Ethics and Anti-Bribery policies for the provision of business entertainment were vague (i.e., stating that employees should use “good taste” and consider the “customary business standards in the community” when providing business entertainment) and not risk-based to China. And PTC did not have independent compliance staff or an internal audit function that had authority to review and test its internal accounting controls processes or intervene into management decisions and, if appropriate, take remedial actions.

As a result, PTC failed to identify and correct corporate governance and compliance breakdowns at PTC-China. Notably, PTC failed to: properly vet PTC-China’s business partners, which played a significant role for PTC-China as described above; police for corrupt payments by its business partners; monitor and supervise PTC-China’s senior sales staff to ensure that they enforced anti-corruption policies and kept accurate records concerning gifts to Chinese government officials; properly scrutinize travel related expenses to prevent reimbursement for employees’ airfare, lodging, and other expenses that were either personal in nature or gifts for customers; limit the number or total value of gifts PTC-China’s sales staff could provide to any single individual or entity; and provide sufficient FCPA training for its employees.”

Based on the above findings, the order finds that PTC violated the FCPA’s anti-bribery provisions, books and records provisions and internal control provisions. As to the anti-bribery findings, the order states:

“PTC-China used third party business partners to pay bribes in the form of travel, gifts and entertainment to Chinese government officials to obtain and retain business. PTC exercised substantial control over PTC-China by, among other things, creating functional reporting lines, approving PTC-China’s key decisions, and setting PTC-China’s business and financial goals. PTC entered into contracts directly with the SOEs as a result of the bribes paid through PTCChina’s business partners, and earned significant income from these contracts. Under applicable agency principles, PTC-China and its employees acted as agents of PTC during the relevant time and were acting within the scope of their authority and for the benefit of PTC when participating in the bribery scheme.”

Under the heading “PTC’s Self-Disclosure and Remedial Efforts,” the order states:

“PTC only discovered the improper payments to or for the benefit of Chinese government officials in 2011, while investigating complaints concerning a senior PTC-China salesperson. Upon learning this information, PTC, with the oversight of the Audit Committee of the Board of Directors, engaged independent counsel and an independent forensic consulting firm to undertake an investigation. PTC voluntarily self-reported the results of its internal investigation to the Commission and responded to information requests from the Commission staff. PTC did not, however, uncover or disclose the full scope and extent of PTC-China’s FCPA issues until 2014.

As part of its internal review and investigation, PTC undertook significant remedial measures including terminating the senior staff at PTC-China implicated in the FCPA violations. PTC also revised its pre-existing compliance program, updated and enhanced its financial accounting controls and its compliance protocols and policies worldwide, and implemented additional specific enhancements in China. These steps included: (1) reviewing and enhancing its anti-bribery policy, code of ethics, and gifts and entertainment policies to correct previous deficiencies; (2) establishing a dedicated compliance team, including a chief compliance officer and a new compliance director in China; (3) expanding its other compliance resources in China, including hiring a new vice president of finance for Asia and adding additional legal staff in China; (4) hiring a new management team in China, including a new China President; (5) enhancing its FCPA training for employees; (6) severing its relationships with the business partners that were implicated in the FCPA violations and discontinuing the use of COD partners or business referral partners generally; (7) implementing a comprehensive due diligence program for all other business partners that includes a risk-scoring system operated by a third party vendor and that includes FCPA training as part of the onboarding process; (8) obtaining quarterly anti-corruption certifications from sales staff; and (9) undertaking periodic compliance audits.”

The order states, under the heading “Non-Imposition of a Civil Penalty” as follows:

“[PTC] acknowledges that the Commission is not imposing a civil penalty based upon its payment of a $14,540,000 criminal fine as part of [PTC’s] subsidiaries’ settlement with the United States Department of Justice.”

As noted in this SEC release, PTC agreed to pay $11.858 million in disgorgement and $1.764 million in prejudgment interest. In the release, (Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit) stated:

“PTC failed to stop illicit payments despite indications of potential corruption by agents working with its Chinese subsidiaries, and the misconduct continued unabated for several years.”

Yuan DPA

Based on the same core conduct alleged above, the DPA alleges that Yuan caused violations of the FCPA’s books and records and internal controls provisions. Without admitting or denying the SEC’s allegations, Yuan agreed to refrain from violating the securities laws and agreed to a so-called “muzzle clause.”

Roger Witten (Wilmer Cutler) represented the PTC entities.

Elizabeth Gray (Willkie Farr) represented Yuan.

In this release PTC stated that the enforcement action involved “expenditures by certain former employees and business partners in China between 2006 and 2011.” The company further stated:

“The company is pleased to have resolved this matter. In connection with the agreements, PTC and its China subsidiaries will pay $28.2 million in penalties and interest to these agencies. PTC has implemented extensive remedial measures related to these matters, including the termination of the responsible employees and business partners, the establishment of an entirely new leadership team in China, the establishment of a dedicated compliance function, and other enhancements to compliance programs.”

PTC’s stock closed yesterday up .1%

Current CEO Of LAN Airlines Resolves SEC FCPA Enforcement Action Based On A Payment He Authorized 10 Years Ago In Connection With A Labor Dispute

PlazaLast week was busy for SEC Foreign Corrupt Practices Act enforcement.

First, there was the $3.9 million enforcement action against SAP (see here).

Then, there was the $12.8 million enforcement action against SciClone Pharmaceuticals (see here).

And then, as highlighted in this post, there was an individual action against Ignacio Cueto Plaza, the current CEO of LAN Airlines (pictured at left).

The Cueto enforcement action was noteworthy in at least five respects.

  • First, it was a rare SEC individual FCPA enforcement action (the Cueto action represents only the fourth core individual action since April 2012).
  • Second, it was an FCPA enforcement action against a CEO (rarely do individual FCPA enforcement actions involve an executive officer).
  • Third, it was an FCPA enforcement action against an existing CEO (most individual FCPA enforcement involve former employees because the company, as part of its remedial measures, terminates the employee found to be in violation of the FCPA).
  • Fourth, even though most FCPA enforcement actions are based on “old” conduct, a 2016 enforcement action based on 2006 conduct stretches the credibility of the SEC’s enforcement program to a new level, coupled with the fact that a U.S. law enforcement agency brought an enforcement action against a Chilean citizen based on alleged improper conduct in Argentina.
  • Fifth, most FCPA enforcement actions, even those that “only” charge or find FCPA books and records and internal controls violations, are still based on the alleged “foreign officials.” In this regard, the Cueto enforcement action is vague whether the SEC viewed the Argentine “union officials” to be “foreign officials” under the FCPA. If the SEC did view the “union officials” as such, it stretches the definition of “foreign official” even further. If the SEC did not view the “union officials” as foreign officials, the Cueto action represents a rare enforcement action concerning improper booking and insufficient internal controls concerning an instance of commercial bribery.

In this administrative action, the SEC found as follows.

“In 2006 and 2007, Ignacio Cueto Plaza (“Cueto”), the CEO of LAN Airlines S.A. (“LAN”), authorized $1.15 million in improper payments to a third party consultant in Argentina in connection with LAN’s attempts to settle disputes on wages and other work conditions between LAN Argentina S.A. (“LAN Argentina”), a subsidiary of LAN, and its employees. At the time, Cueto understood that it was possible the consultant would pass some portion of the $1.15 million to union officials in Argentina. The payments were made pursuant to an unsigned consulting agreement that purported to provide services that Cueto understood would not occur. Cueto authorized subordinates to make the payments that were improperly booked in the Company’s books and records, which circumvented LAN’s internal accounting controls.”

Cueto is described as follows.

” [A] Chilean citizen and, since 2012, has been CEO of LAN. From 1995 to 1998, Cueto served as President of LAN Cargo, a LAN subsidiary located in Miami, Florida. He served on the Board of Directors of LAN from 1995 to 1997. From 1999 to 2005, Cueto was CEO of LAN’s passenger airline business. In 2005, Cueto became President and COO of LAN Airlines S.A. He remained in that position until June of 2012, when LAN merged with Brazilian Airline TAM, S.A. (“TAM”) and became LATAM Airlines Group S.A. (“LATAM”). Cueto remains CEO of LAN, which is now part of LATAM.”

The enforcement action focuses the “obstacles that LAN might face in trying to enter the Argentine airline market.” Under the heading “LAN Faces Major Issues Upon Entering the Argentine Market,” the order states:

“Upon entering the Argentine passenger airline market LAN immediately faced several major issues impacting its viability and began losing money. First, it needed to meet demands from labor unions representing the employees acquired from LAFSA and Southern Winds. Second, LAN needed majority ownership of its Argentine subsidiary, and therefore had to persuade the Argentine government to change its existing law on foreign ownership of domestic airlines and to increase caps on airfares. Third, LAN needed regulatory authorization to operate various flight routes, both domestically and internationally, in Argentina. Since the Argentine passenger airline market was heavily regulated by the government, particularly officials within the Department of Transportation who had close ties to the unions, LAN sought help from the government officials with each of these issues.

In early 2006, the consultant again contacted the Vice President of Business Development and offered to assist LAN in Argentina. By this time, the consultant was a government official in the Ministry of Federal Planning, Public Investment and Services, Department of Transportation. On January 31, 2005, the Secretary of Transportation appointed the consultant as a Cabinet Advisor “ad-honorem.”

LAN executives, including Cueto, knew that for LAN Argentina to become profitable it would need an infusion of cash. LAN asked Argentine government officials to liberalize the laws on foreign ownership so that LAN could own a majority share of LAN Argentina and sought government authorization to raise regulated airfares. On or about August 8, 2006, the President of Argentina signed a Decree that enabled LAN to become a majority owner of LAN Argentina and allowed LAN to raise airfares by 20%. LAN Argentina was also awarded critical additional flight routes by the Transportation Secretary.”

Under the heading “LAN Encounters Problems with the Unions in Argentina,” the order states:

“As part of the deal that LAN reached with the Argentine government in March 2005, LAN was required to hire between six and eight hundred employees from the defunct LAFSA and Southern Winds airlines. LAN was bound by the existing bargaining agreements between LAFSA, Southern Winds and the labor unions.

There were five unions representing airline employees in Argentina. They included the grounds crew union, the Asociación del Personal Aeronáutico (APA), the pilots’ union, the Asociación de Pilotos de Lineas Aereas (APLA), the mechanics’ union, Asociacion del Personal Técnico Aeronáutico (APTA), the flight attendants’ union, Asociación de Tripulantes de Cabina de Pasajeros de Empresas Aerocomerciales (ATCPEA), and the supervisors’ union, Unión del Personal Superior y Profesional de Empresas Aerocomerciales (UPSA).

All of the unions were powerful and unafraid to make demands on LAN. They sought wage increases and additional benefits, and used the terms of their respective Collective Bargaining Agreements (“CBAs”) as leverage. These labor agreements contained provisions that LAN believed were unfavorable, such as restrictions on the hours employees could work and their work locations.

The mechanics’ union, the flight attendants’ union and the supervisors’ union each had a single-function rule contained in their CBAs. The single-function rule was a provision that limited workers from performing more than one work function at a time for LAN. The single-function rule was loosely interpreted and for the most part not enforced by the unions. Had it been enforced, the single-function rule would have required LAN to double its work force and would have seriously imperiled LAN’s ability to continue its operations in Argentina.

Around 2006 the unions began campaigning for wage increases. The unions threatened to enforce the single-function rule unless LAN Argentina agreed to a substantial wage increase. LAN’s management, including Cueto, attempted to negotiate on the wage issues but made no progress and things worsened over time. Eventually there were work stoppages and slowdowns on the part of the workforce, including strikes involving the pilots’ and the mechanics’ unions.”

Under the heading “Cueto Approves Improper Payments,” the order states:

“Beginning in the summer of 2006, the consultant supplied LAN executives with information on how to deal with specific union members and the unions in general. Eventually, the consultant offered to negotiate directly with the unions on LAN’s behalf, making it clear that he would expect compensation for such negotiations, and that payments would be made to third parties who had influence over the unions. After his staff informed Cueto that the consultant was well connected with the unions and could effectively negotiate an agreement with union officials, Cueto approved the retention of the consultant.

During the summer of 2006, Cueto approved payments totaling $1,150,000 to the consultant in connection with LAN’s attempts to settle disputes on wages and other work conditions with the unions. At the time, Cueto understood that it was possible the consultant would pass some portion of the $1.15 million to union officials in Argentina. Cueto approved the payments to get the unions to abandon their threats to enforce the single-function rule and to get them to accept a wage increase lower than the amount asked for in negotiations. LAN and the consultant agreed that LAN would make the payment to a company controlled by the consultant in Argentina. In 2006, LAN did not have a policy requiring that due diligence be performed on consultants, and neither Cueto nor LAN conducted any due diligence on the consultant or any of his related entities.

Around August 2006, Cueto’s staff informed him that the consultant had reached an oral agreement to settle the wage dispute with the mechanics’ union on LAN’s behalf. Although the existing Collective Bargaining Agreement with the mechanics’ union would remain unchanged, Cueto understood that the union would orally agree not to seek enforcement of the single-function rule for a period of four years in exchange for a wage increase of approximately 6 15% of salary. The wage increase of approximately 15% was lower than the amount originally sought by the mechanics’ union.

Around August 2006, the flight attendants’ and supervisors’ unions both agreed to accept wage increases of approximately 15% and 10% respectively of salaries. The amounts were lower than the amounts originally sought by each union.”

Under the heading, “Cueto Authorized Improper Payments That Were Not Accurately and Fairly Feflected on LAN’s Books and Records,” the order states:

“Cueto directed subordinates to make the improper payments. The improper payments authorized by Cueto were improperly described in the books and records as “other debtors” costs in a LAN subsidiary that had no role in LAN’s argentine business.”

Under the heading, “Cueto Caused LAN’s Internal Accounting Control Failure,” the order states:

“As President and Chief Operating Officer of LAN, Cueto, along with others, was responsible for devising and maintaining compliance with internal accounting controls at LAN. Cueto did not follow the company’s existing internal accounting controls when he authorized the payment of $1,150,000 to the consultant’s company and failed to prevent the payment of $58,000 to another company owned by consultant’s son and wife. Cueto received and approved the sham contract for the consultant’s company to provide consulting services to LAN, knowing that such services would never be provided. Cueto also authorized payment of invoices from the consultant’s company that contained a description of services listed on the invoices that was false.”

Based on the above findings, the order finds that Cueto caused books and records and internal controls violations by LAN and that Cueto also knowingly circumvented or knowingly failed to implement a system of internal accounting controls or knowingly falsified book, record or account and that Cueto also violated falsified or cause to be falsified, a book, record, or account.

Under the heading “Remedial Actions and Undertakings,” the order states:

“As the CEO of LAN, which is now a division of LATAM, Cueto is subject to LATAM’s enhanced compliance structure and internal accounting controls. Cueto is required to certify compliance with LATAM’s new Code of Conduct that was adopted in 2013, as well as other internal corporate policies, including an Anti-Corruption Guide, a Gifts, Travel, Hospitality and Entertainment Policy, an Escalation Policy, and Procurement and Payment policies.

Cueto has attended the Corporate Governance Training provided by the LATAM Chief Compliance Officer and has provided a certification confirming acknowledgement of the Code of Conduct, the relevant applicable regulations, as well as the Company policies. Cueto has also executed an amendment to his employment agreement whereby Respondent acknowledges having been informed regarding the LATAM Manual for the Prevention of Corruption, among other matters, and his responsibilities to perform his duties with the highest ethical standards, in compliance with all Company Policies and Procedures.

[…]

Cueto also undertakes to attend all anti-corruption training sessions required for senior executives at LAN. These sessions will include, but are not limited to, both live and online anti-corruption trainings to be completed on at least an annual basis and according to LAN’s Compliance Department’s training schedule. These sessions will include, in addition to anticorruption laws and regulations, such as the FCPA, training on anti-trust laws, the Company’s Code of Conduct and all other applicable policies that each LAN employee must follow. After the conclusion of each session Cueto will sign the appropriate documentation that acknowledges his attendance and understanding of the topics presented. Should LAN modify the schedule of such  training sessions for any reason, Cueto will, so long as he is a senior executive of LAN, attend a comparable anti-corruption session on an annual basis and complete appropriate documentation attesting to his attendance and the session’s contents.”

Without admitting or denying the SEC’s findings, Cueto agreed to cease and desist from future legal violations and agreed to pay a $75,000 civil penalty.

Cueto was represented by Richard Grime (Gibson, Dunn & Crutcher –  a former Assistant Director of Enforcement at the SEC heavily involved in FCPA enforcement). Commenting generally on the SEC’s evolving and expansive FCPA enforcement theories, Grime recently stated:

“It’s not that you couldn’t intellectually [conceive of] the violation. It’s that the government is sort of probing every area where there is an interaction with government officials and then working backwards from there to see if there is a violation, as opposed to starting out with the statute … and what it prohibits.”

Like A Kid In The Candy Store

Kid in Candy Store

Like every year around this time, I feel like a kid in a candy store given the number of FCPA year in reviews hitting my inbox.  This post highlights various FCPA or related publications that caught my eye.

Reading the below publications is recommended and should find their way to your reading stack.

However, be warned.  The divergent enforcement statistics contained in them (a result of various creative counting methods) are likely to make you dizzy at times and as to certain issues. There will be more on this issue in the near future.

Shearman & Sterling

The firm’s Recent Trends and Patterns in FCPA Enforcement is among the best year-after-year.

Content that caught my eye:

“It is … noteworthy that the DOJ’s and SEC’s prioritization of individual prosecutions comes as enforcement agencies continue to struggle while pursuing FCPA charges against individual defendants. Setbacks in United States v. Sigelman and United States v. Firtash may cause the Department to rethink its strategy. Indeed, while the DOJ has had some success extracting plea agreements, when put to its burden of proof the DOJ (and the SEC for that matter) has experienced difficulty in securing convictions and judgments. Given these struggles, it is possible that future individual defendants may be emboldened to test their chances against the government in court, potentially requiring the DOJ to devote even more resources to trying these individuals. While the DOJ and SEC have made it a clear priority to prosecute individuals for violations of the FCPA, the risk-reward calculations that prosecutors must consider before bringing charges could be altered going forward.”

[For more on this general topic, see “What Percentage of DOJ FCPA Losses is Acceptable?“]

[…]

“[Regarding so-called declinations] we note however, in the cases of Eli Lilly, Goodyear, Mead Johnson Nutrition, Hyperdynamics, and Bristol-Myers, the DOJ’s declination decision might also be explained by a possible lack of jurisdiction. Specifically, in each of the cases above, where all of the illicit conduct was committed by subsidiaries of the parent company, the DOJ may have concluded it was too difficult to prove that the subsidiaries’ conduct should be imputed on the corporate parent—bearing in mind that the DOJ has a higher burden of proof to sustain criminal FCPA charges against a company.”

[…]

“The DOJ’s 2015 prosecution of Daren Condrey in United States v. Condrey raises some questions as to whether government prosecutors are remaining faithful to the government instrumentality test set out in the Eleventh Circuit’s 2014 decision in United States v. Esquenazi.”

[For more on this topic, see this prior post]

[…]

“[Regarding the 2015 BNY Mellon “internship” enforcement action] [T]he government’s approach is bad policy. For better or worse, some of the most educated and most qualified potential hires in many countries are the children of government officials—individuals who benefited from their parents’ privileges and had the opportunity to attend prestigious schools, learn foreign languages, etc. If the government infers an intent to apply corrupt influence from the potential hire’s relationship to government officials, it is likely to chill hiring of such individuals, resulting in a completely unnecessary disadvantage to U.S. and other companies covered by the FCPA.”

Debevoise & Plimpton

The firm’s FCPA Update is the best monthly read there is and the most recent edition states:

“Even adding in amounts agreed or ordered to be recovered from individuals in FCPA cases, last year was by any objective measure one of more muted FCPA enforcement. Various theories can be advanced to explain these figures.

One, and probably the most plausible, is that, in a system of FCPA enforcement against companies that almost never ends in a trial, corporate resolutions require companies’ consent. It was only a matter of time for there to be a dry spell of large corporate resolutions. Thus, there were no large settlements last year because of the mundane fact that none of the larger cases in the pipeline was ready to be settled. Because of potential negotiation delays of various kinds in cases in the pipeline, it is conceivable if not likely there will be large settlements in 2016, which may dampen urges to downplay enforcement risk.

Still, a theory warranting consideration is that more companies subject to the FCPA are “getting it,” the possibility being that after a decade of vigorous enforcement the number of big cases that could be brought is markedly decreased. That the number of FCPA-related investigations reported by public companies declined by about 20 percent, year over year, arguably supports this theory.

But negating this theory is the large number of new foreign corruption matters reported daily in the media, and the kinds of political upheaval and developments in technology, social media culture, whistle-blowing, and transparency movements that drive anti-bribery enforcement. Given the broad jurisdictional reach of the FCPA (particularly as construed by the DOJ and SEC), a large percentage of the new cases reported in the media could well subject companies and individuals alike to future FCPA enforcement risks. These risks are magnified by a growing level of cross-border cooperation among anti-bribery enforcement agencies.

And as the Obama Administration heads into its final year, with a new Attorney General and Assistant Attorney General for the Criminal Division now settled into their roles, the likelihood of increased enforcement seems relatively high.”

Gibson Dunn

The firm’s Year-End FCPA Update is also a quality read year after year.

Gibson Dunn also released (here) its always informative “Year-End Update on Corporate Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs).”

It begins as follows.

“2015 was a blockbuster year in corporate non-prosecution agreements (“NPA”) and deferred prosecution agreements (“DPA”), by sheer numbers alone.  Skyrocketing to 100 [87 NPAs and 13 DPAs], in 2015 the number of agreements more than doubled the numbers in every prior year since 2000 , when Gibson Dunn first began tracking NPA and DPA data.”

Davis Polk

The firm’s Trends in Anti-Corruption Enforcement is here. A visual FCPA Resolution Tracker is here.

Jenner Block

The firm’s Business Guide to Anti-Corruption Laws 2016 is here.

Hogan Lovells

The firm’s Global Bribery and Corruption Review is here.

Arnold & Porter

The firms Global Anti-Corruption Insights is here.

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