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Cognizant Technology Solutions Resolves $25 Million SEC Enforcement Action In Connection With Various Licenses And Permits In India

This previous post [1] highlighted the DOJ and SEC’s individual enforcement action against Gordon Coburn and Steven Schwartz (former executives of Cognizant Technology Solutions) in connection with a planning permit in India.

This post highlights the SEC’s enforcement action (as well as the DOJ’s so-called declination letter) against the company based on the same core conduct in which the company, without admitting or denying the SEC’s findings, agreed to pay approximately $25 million in disgorgement and prejudgement interest.

This administrative order [2] finds, in summary fashion, as follows:

“These proceedings arise from violations of the antibribery, books and records, and internal accounting controls provisions of the FCPA. Cognizant is a global provider of information technology and business process services. Much of its business involves using technically skilled workers around the world, including in India, to provide such services to companies in the United States and Western Europe. Between 2014 and 2016 Cognizant, acting through executives in the United States and India, authorized contractors to pay on the company’s behalf and reimbursed them for a total of approximately $3.6 million in bribes to Indian government officials to obtain government construction-related permits and operating licenses in connection with the construction and operation of commercial office buildings.

In 2014 Cognizant authorized a contractor to pay a $2 million bribe to a senior government official for the issuance of a planning permit for a project in Chennai, India. The payment, along with a scheme to conceal a $2.5 million reimbursement to the contractor, was authorized by two senior executives at Cognizant’s U.S. headquarters. In 2013 and 2014, Cognizant’s Indian subsidiary authorized the same third party contractor to pay a bribe of approximately $770,000 to a government official for an environmental clearance for a project in Pune, India. In 2015, the Indian subsidiary retroactively authorized and reimbursed the same third party contractor for approximately $870,000 in bribes that it had paid to government officials for construction-related permits in Siruseri, India. Cognizant received ill-gotten gains of approximately $16,394,351 as a result of the conduct.

The unlawful payments were paid from Cognizant India’s bank accounts and were not accurately reflected in Cognizant’s consolidated books and records. During the relevant period Cognizant also failed to devise and maintain a sufficient system of internal accounting controls at its corporate headquarters and at Cognizant India. This conduct took place in an environment in which Cognizant failed to adequately enforce its corporate antibribery and anticorruption policies.

As a result of its conduct Cognizant violated [the FCPA’s anti-bribery, books and records, and internal controls provisions].”

[3]

In addition to alleged bribe payments in connection with the KITS campus in Chennai (the focus of the Coburn and Schwartz individual enforcement action) the SEC’s order also found as follows:

“Bribe Payment in Pune, Maharashtra

The bribe scheme in Pune also involved the construction of a commercial office facility with Contracting Firm-1 as Cognizant’s builder. Construction began in 2012, prior to the issuance of necessary permits. On this occasion, Cognizant India authorized Contracting Firm-1 to pay an Indian official $770,000 in return for issuing an environmental clearance. The payment was made in early 2013, and the environmental clearance was issued thereafter. In April of that year, Contracting Firm-1 sought reimbursement through a change order request with a line item for “Liasoning [sic] and consultations charge towards Environmental clearance.” Cognizant India rejected the change order, but later approved the payment after Contracting Firm-1 changed the rationale to “Change in the make of Workstation from Featherlite to Art matrix.” Cognizant India reimbursed Contracting Firm-1 for the bribe payment in January 2014.

Bribe Payment in Siruseri, Tamil Nadu

In Siruseri, Cognizant India authorized Contracting Firm-1 to pay bribes totaling $840,000 to government officials for the issuance of several construction-related permits, including a planning permit, a power permit from the local electricity board, and an environmental clearance. Contracting Firm-1 made the payments in or around 2012, and Cognizant subsequently received the permits in the second half of that year. The contractor submitted change order requests for several inflated or unjustified work items. Cognizant India rejected the initial requests, but later approved the change orders after the sham descriptions were revised. Cognizant India reimbursed Contracting Firm-1 for the bribe payments in installments between 2015 and 2016.

Bribes for Operating Licenses

In addition to payments involving the above construction projects, Cognizant India also made approximately $27,000 in bribe payments to government officials for the purpose of obtaining certain operating licenses at six Indian facilities. The payments were made between 2013 and early 2016, mostly by lower to mid-level employees in Cognizant India’s corporate workplace services department, with the assistance of collusive third party vendors. The licenses were for kitchen operating facilities, air and water consents, fire protection, and other purposes related to operation of the buildings. The payments were disguised in Cognizant’s books and records by the use of false generic descriptions, such as “liaison,” “consulting,” and “miscellaneous” charges.”

The SEC found that Cognizant violated the anti-bribery provisions because:

“Cognizant paid bribes to an Indian government official to induce that official to direct that a permit be issued to facilitate the completion of a construction project. Cognizant made use of the means and instrumentalities of interstate commerce by hosting video conferences at which American executives participated in formulating the scheme and by exchanging email messages to and from the United States to approve the concealing of the payment. Two U.S. senior executives at Cognizant took active steps to advance the scheme, and Cognizant is liable for their conduct by respondeat superior.”

The SEC found that Cognizant violated the books and records provisions by:

“falsely characterizing illicit payments to government officials as legitimate business expenses in its books and records.”

The SEC found that Cognizant violated the internal controls provisions by:

“[F]ailing to devise and maintain a sufficient system of internal accounting controls at its corporate headquarters and at Cognizant India. Cognizant’s system for handling contractor change orders in India permitted managers to conceal bribe payments through the manipulation of bogus construction charges. The company’s procurement process did not include an effective review of the disbursement of funds for change orders. Nor did it include an effective review of the application or renewal of facility permits and licenses. Cognizant also did not adequately enforce its corporate policy against making improper payments to government officials. And it failed to provide reasonable assurances that its Indian subsidiary maintained accurate and complete records of transactions involving payments to government officials.”

Without admitting or denying the SEC’s findings, Cognizant agreed to pay approximately $25 million (disgorgement of $16,394,351, prejudgment interest of $2,773,017 and a civil monetary penalty of $6 million).

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

“In determining to accept the Offer, the Commission considered Respondent’s self-disclosure, cooperation, and remedial efforts. Cognizant voluntarily disclosed this misconduct to the Commission staff and timely shared the facts developed during the course of an internal investigation by the audit committee of its board. Cognizant also cooperated by voluntarily producing and translating documents, and making current or former employees, including those who needed to travel internationally, available for interviews by the Commission staff.

Cognizant’s remedial actions included: (i) terminating or imposing other discipline on officers and employees who participated in or were aware of the improper conduct; (ii) appointing new executive personnel, including a new president, general counsel, and heads of global real estate and procurement; (iii) enhancing its existing compliance function and headcount; (iv) consolidating its facility management operations and removing licensure responsibilities from third parties; (v) enhancing its internal accounting controls and compliance functions with respect to the construction of new facilities; (vi) enhancing its FCPA compliance policies relating to due diligence and contracting of vendors and suppliers; and (vii) conducting enhanced anticorruption training.”

In this release [4], Charles Cain (Chief of the SEC’s FCPA Unit) stated:

“Bribery to further corporate goals is an illusory path to long-term success.  While always the wrong choice, it is particularly egregious when senior executives chart that course for those they lead, as our complaint alleges here.  We are committed to holding them accountable for their actions.”

As part of the SEC settlement, Cognizant agreed to:

“Report to the Commission staff periodically during a two-year term, the status of its remediation and implementation of compliance measures, particularly as to the areas of due diligence on prospective and existing third-party consultants and vendors, FCPA training and the testing of relevant controls including the collection and analysis of compliance data.”

In this so-called declination letter [5] to Cognizant’s lawyers (Karl Buch and Grayson Stratton of DLA Piper and Kathryn Ruemmler and Douglas Greenburg of Latham & Watkins) the DOJ states:

“Consistent with the FCPA Corporate Enforcement Policy, the [DOJ] has declined prosecution of your client, Cognizant Technology Solutions Corporation for violations of the FCPA.

The Department’s investigation found that Cognizant, through its employees, authorized its agents to pay an approximately $2 million bribe to one or more government officials in India in exchange for securing and obtaining a statutorily required planning permit in connection with the development of an office park in Tamil Nadu, India known as the CKC/KITS facility in Chennai, as well as other improper payments in connection with other projects in India. Specifically, from in or about 2014 through in or about 2015, certain high-level employees of Cognizant, along with agents of the Company, took part in a scheme through which they authorized a third-party construction company to pay an approximately $2 million bribe to one or more government officials in India in exchange for assistance in securing and obtaining a planning permit relating to construction of the CKC/KITS facility. To conceal Cognizant’s involvement in the bribe payment, certain Cognizant employees and agents agreed that Cognizant would reimburse the third-party construction company for the bribe payment through construction invoices or “change orders” at the end of the development of the project. Additionally, certain Cognizant employees and officers also falsified and caused to be falsified certain internal books and records of the Company, including by failing to disclose the existence or nature of the payments in certain disclosure questionnaires, as well as “sub-certifications” signed as part of the Company’s Sarbanes-Oxley process.

Despite the fact that certain members of senior management participated in and directed the criminal conduct at issue, the Department has decided to decline prosecution of this matter based on an assessment of the factors set forth in the Corporate Enforcement Policy, Justice Manual and the Principles of Federal Prosecution of Business Organizations, including but not limited to: (1) Cognizant’s voluntary self-disclosure of the matters described above within two weeks of the Board learning of the criminal conduct; (2) Cognizant’s thorough and comprehensive investigation; (3) Cognizant’s full and proactive cooperation in this matter (including its provision of all known relevant facts about the misconduct) and its agreement to continue to cooperate in the Department’s ongoing investigations and any prosecutions that might result; (4) the nature and seriousness of the offense; (5) the Company’s lack of prior criminal history; (6) the existence and effectiveness of the Company’s pre-existing compliance program, as well as steps that the Company has taken to enhance its compliance program and internal accounting controls; (7) the Company’s full remediation, including but not limited to terminating the employment of, and disciplining, employees and contractors involved in misconduct; (8) the adequacy of remedies such as civil or regulatory enforcement actions, including the Company’s resolution with the U.S. Securities and Exchange Commission (SEC) and agreement to pay a civil penalty of $6 million and disgorgement; (9) Cognizant’s agreement to disgorge the full amount of its cost savings from the bribery; and (10) the fact that, as a result of the Company’s timely voluntary disclosure, the Department was able to conduct an independent investigation and identify individuals with culpability for the corporation’s malfeasance.

[…]

Cognizant further agrees to disgorge $19,370,561 which represents all profits fairly attributable to the bribery conduct, as determined through a cost avoidance calculation. The Department will credit the disgorgement amount (exclusive of any prejudgment interest) that Cognizant pays to the SEC.”

In this release [6], Cognizant states:

“We are pleased to reach these resolutions with the U.S. Department of Justice and the U.S. Securities and Exchange Commission. With today’s announcements, we’ve taken a major step forward in putting this behind us,” said Francisco D’Souza, Vice Chairman and CEO of Cognizant.  “Further, we are gratified that both the DOJ and SEC recognized that we voluntarily and promptly notified U.S. authorities of the potential issues in India more than two years ago, and cooperated extensively with their investigations.  We undertook a comprehensive internal investigation under the oversight of the Audit Committee of the Board of Directors, with the assistance of outside counsel. We have also made further enhancements to our compliance processes, procedures and resources.  It is important to note that this entire matter did not involve our work with clients or affect our ability to provide the quality services our clients expect from us.”

On the day of the enforcement action, Cognizant’s stock closed up .6%.

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