[This post is part of a periodic series regarding “old” FCPA enforcement actions]
If you think strict liability enforcement of the FCPA books and records and internal controls provisions is a recent invention, think again.
If you think off-the-rails FCPA enforcement (that is enforcement theories seemingly in conflict with actual legal authority) is a recent invention, think again.
A dubious FCPA enforcement action occurred in 2001 when the SEC announced  this administrative cease and desist order  finding that Chiquita Brands International Inc. violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act.
As highlighted below, the enforcement action was based entirely on the conduct of an indirect Colombian subsidiary that “indirectly reported” to Chiquita and notwithstanding SEC acknowledgments that the alleged conduct occurred “without the knowledge or consent of any Chiquita employee and in contravention of Chiquita’s policies.”
Moreover, the SEC’s order is concerning because it invokes a standard – “Chiquita … failed to maintain a system of internal accounting controls to ensure that [the subsidiary’s] books and records accurately and fairly reflected the disposition of [the subsidiary’s] assets” (emphasis added) that does not even exist in the FCPA.
Rather, the FCPA’s internal controls provisions state that an issuer like Chiquita shall devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that” certain specified financial objectives are met.
The Chiquita enforcement action is also interesting from the standpoint that it once again demonstrates – as frequently highlighted on these pages – that foreign trade barriers and distortions are often the root cause of FCPA scrutiny and enforcement. Indeed, in the Chiquita action the facts begin with the following: “Under Colombian law, companies are required to hire licensed customs brokers who interact with customs officials on behalf of the company.” From a risk standpoint, that is obviously a slippery situation.
Make sure to read this entire post because the origins of the Chiquita enforcement action are quite interesting.
The SEC’s order states:
“Chiquita’s Colombian operations consist of, among other things, a number of banana farms located throughout the country and an import/export port facility located in Turbo. The Turbo port facility is owned and operated by [C.I. Bananos de Exportacion S.A.] Banadex, an indirect wholly-owned subsidiary of Chiquita [that indirectly reports to Chiquita]. Beginning in 1993, the Colombian government licensed the Turbo facility as a location where goods could be stored pending inspection by customs officials.
In 1995, the Colombian government issued a decree requiring all current license holders to submit renewal applications. Banadex learned of the decree through CEA [described as a Colombian entity licensed by the Colombian government to act as an intermediary between corporations and Colombian customs officials], its intermediary with Colombian customs. Under Colombian law, companies are required to hire licensed customs brokers who interact with customs officials on behalf of the company.
In September 1995, the Banadex employee in charge of material and supplies advised Banadex management that renewal of the port facility’s customs license was in jeopardy because of two previous citations for failure to comply with Colombian customs regulations. The employee further advised management that replacing the Turbo facility would cost approximately $1 million. Without the knowledge or consent of any Chiquita employee and in contravention of Chiquita’s policies, Banadex’s chief administrative officer authorized Banadex’s CEA agent to make a payment to Colombian customs officials to obtain the license renewal. The chief administrative officer directed Banadex’s security officer and controller to make and process the payment.
Banadex’s CEA agent later advised the company that for the Colombian peso equivalent of approximately $30,000 the citations would be overlooked and the license renewal granted. Banadex agreed to pay two installments – approximately $18,000 in advance and the remainder after renewal. Both installments were made by Banadex’s security officer from a Banadex account used for discretionary expenses. The initial installment was incorrectly identified in the company’s books and records as a maritime donation (“Donacion Maritima”). The second installment was incorrectly identified as relating to a maritime agreement (“Acuerdo Maritima”). Banadex did not request permission from, or otherwise inform, any Chiquita employee within the United States regarding the transaction.
Chiquita’s policies and procedures contain strict guidelines regarding the use of a discretionary expenses account. Banadex did not comply with Chiquita’s procedure requiring that Banadex’s books and records accurately reflect the transaction. During 1996, Chiquita’s internal auditing staff made management aware of a number of instances in which Banadex had not provided documentation required by Chiquita’s internal accounting control procedures regarding discretionary expenses.
Chiquita had strict policies prohibiting payments of the kind made to the customs officials. To monitor and enforce those policies, Chiquita required quarterly identification and disclosure of all payments to government officials or employees, political candidates, or political parties. Contrary to Chiquita’s established procedure, Banadex employees failed to identify and disclose the payment to customs officials on the disclosure forms submitted for the relevant quarters.
In April 1997, Chiquita internal audit discovered the September 1996 payment during an audit review of Banadex. After conducting an internal investigation, Chiquita took corrective action, which included terminating the responsible Banadex employees and reinforcing its internal controls with respect to its Colombian operations.”
Based on the above, the order states:
“[T]he Commission concludes that Banadex employees made inaccurate entries in the documents recording the transaction and Banadex’s general ledger to conceal the payment to customs officials. These inaccurate entries by Banadex constitute a violation by Chiquita of [the FCPA’s books and records provisions] by failing to maintain books and records which accurately reflected Banadex’s transactions and dispositions of assets. The Commission further finds that Chiquita violated [the FCPA’s internal controls provisions] by failing to maintain a system of internal accounting controls to ensure that Banadex’s books and records accurately and fairly reflected the disposition of Banadex’s assets.”
Without admitting or denying the SEC’s findings, Chiquita agreed to cease and desist from committing or causing future violations of the FCPA’s books and records and internal controls provisions.
In 2010, as part of the Dodd-Frank Wall Street Reform Act, Congress granted the SEC broad authority to impose civil monetary penalties in administrative proceedings. Prior to this, the SEC needed to file a federal court action to seek civil monetary penalties.
Thus, the Chiquita enforcement action also included this settled civil complaint  based on the same allegations. Without admitting or denying the SEC’s allegations, Chiquita agreed to pay a $100,000 civil penalty.
According to original source media reports:
“Chiquita did not report the violation to the SEC. When asked where the SEC got the information, [Chiquita’s counsel] said, “I can’t speculate on that.”
Well, actually there was much speculation widely reported by major media sources as to the origins of the enforcement.
In short, and according to original source media reports, in May 1998 the Cincinnati Enquirer published a 18-page report alleging that Chiquita was “guilty of illegal and improper business practices.” However, shortly after the report was published, the paper admitted that “it was based partly on stolen Chiquita voice mail” and “in the wake of that revelation, and outcry from Chiquita” the publisher “quickly apologized publicly to Chiquita Brands and agreed to pay the company close to $15 million – without a lawsuit being filed.” The paper also fired the investigative reporter “accusing him of theft and deception in obtaining the internal Chiquita voice mail.” (See Newsday, July 20, 1998, “Unanswered Questions / Legal, Media Fallout of Paper’s Quick Settlement with Chiquita.”)
According to other reports, a month before the May 1998 report was published “an anonymous source in April  gave the SEC voice mail recordings that were allegedly stolen from Chiquita.” (See Dow Jones, July 18, 1998 “Anonymous Source Handed SEC Chiquita’s Voice Mail.”)
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