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The DOJ’s First FCPA DPA Involved Monsanto

DOJ2

[This post is part of a periodic series regarding “old” FCPA enforcement actions]

In early January 2005, the DOJ used a deferred prosecution agreement for the first time to resolve a Foreign Corrupt Practices Act enforcement action. The “guinea pig” was Monsanto.

This post highlights the DOJ and parallel SEC enforcement action against the company (aggregate settlement amount of $1.5 million) based on conduct in Indonesia.

DOJ

As alleged in this information, in approximately 2001 the Indonesian government “announced a rule requiring an environmental impact study, known as AMDAL, be performed for a variety of activities including the cultivation of genetically-modified crops” and that “after a change of governments and the appointment of new officials, Monsanto and Consultant Company (an Indonesian corporation hired by Monstanto to assist in obtaining various governmental approvals and licenses) sought to have the new government, in which Official A [described as a high-ranking official who was in a position to authorize various decrees and regulations that would have enabled the company to sell certain products in Indonesia] had a post, amend or repeal the requirement for the environmental impact statement.”

The information alleges:

“Despite months of such efforts by the Monsanto, through Employee A [described as an American citizen] and Consultant Company, the Monsanto had failed to obtain Official A’s agreement to amend or repeal the AMDAL requirement. At several meetings with Consultant Company, both in the United States and Indonesia, Official A explained that it was very difficult politically for him to sign a decree repealing the AMDAL requirement. Finally, at a meeting between Employee A and representatives of Consultant Company, Employee A directed Consultant Company to “incentivize” Official A by paying him $50,000 in cash. Employee A stated that Monsanto would reimburse Consultant Company through paying invoices that falsely sought “consultant fees” relating to trips by Indonesian officials to the United States in December 2001 and January 2002. Employee A also agreed that Monsanto would cover any income or value-added taxes Consultant Company would owe on the income from the “consultant fees.” During the planning of the payment to Official A, Employee A instructed Consultant Company not to discuss the payment with any other employee of Monsanto.

On December 20, 2001, Employee A directed Consultant Company to send Monsanto an invoice seeking a “flat fee” of $66,000 for “consultant services.” The next day Consultant Company did so, but Employee A sent an electronic mail message stating that he needed the fee justified by hours spent by Consultant Company’s employees. On December 31, 2001, Consultant Company sent two invoices, on the letterhead of an affiliated company, seeking reimbursement of $22,000 and $44,000 for two trips by Indonesian officials and stating that specific employees had spent a certain number of hours at a certain billing rate on these trips, even though one of these trips would not occur for several more weeks.

On February 1, 2002, Employee A authorized the payment of Consultant Company’s invoices. Upon questioning by other employees of Monsanto, he justified the invoices by stating that Consultant Company had provided additional consulting services related to the Indonesian official’s trips that were “outside the retainer.” In addition, he obtained from Consultant Company a third set of invoices, again for $22,000 and $44,000, attached to which were detailed breakdowns of the work purportedly performed by Consultant Company’s employees. Based upon these invoices, other employees of Monsanto approved the payment of the invoices.

On February 5, 2002, an employee of Consultant Company withdrew $50,000 from its affiliate’s bank account. The following day, the employee of Consultant Company delivered the $50,000 to Official A, explaining that Monsanto wanted to do something for him in exchange for repealing the AMDAL requirement. Official A promised that he would do so at an appropriate time.

In or about March 2002, Monsanto, through its Indonesian subsidiary, paid the invoices, thus reimbursing Consultant Company for the $50,000 bribe, as well as the tax it owed on that income.

Official A never authorized repealing the AMDAL requirement, and Monsanto did not receive any benefit related to the payment authorized by Employee A.”

Based on the above, the information charges an FCPA anti-bribery violation and a books and records violation.

The criminal charges against Monsanto were resolved via this three year deferred prosecution agreement.

As stated in the DPA:

“This Agreement reflects Monsanto’s previous actions in investigating misconduct in its Asia-Pacific operations, voluntarily reporting its findings, and cooperating in the government’s subsequent investigation; its adoption of the: remedial measures set forth herein; its commitment to maintain and independently review such measures; and its willingness to continue to cooperate with the Fraud Section in its investigation.”

As a condition of settlement, Monsanto was required to pay a $1 million criminal penalty and retain a compliance monitor for three years.

In this release, Assistant Attorney General Christopher Wray stated:

“Companies cannot bribe their way into favorable treatment by foreign officials. Today’s agreement, which requires Monsanto’s full cooperation, acceptance of responsibility, and significant compliance and monitoring steps, will help ensure that such dishonest and illegal activity does not occur in the future.”

SEC

This complaint is based on the same core allegations set forth in the DOJ’s DPA. In addition, the complaint alleges:

“[F]rom 1997 to 2002, Monsanto inaccurately recorded, or failed to record, in its books and records approximately $700,000 of illegal or questionable payments made to various Indonesian government officials. The approximate $700,000 was derived from a bogus product registration scheme undertaken by the Indonesian affiliates. In certain instances, entries were made in the books and records of the Indonesian affiliates that concealed the source, use and true nature of these payments, violating Monsanto’s accounting policies, controls, and procedures.”

Under the heading “Other Payments Violative of the FCPA,” the complaint alleges:

“Monsanto first became aware of possible financial irregularities within its Indonesian affiliates in March of 2001. Monsanto began an internal investigation, which continued at the direction of the Board of Directors. As a result of the investigation, Monsanto notified the Commission of books and records and compliance irregularities involving Monsanto’s Indonesian affiliates. While Monsanto’s investigation uncovered numerous questionable payments, which Monsanto disclosed to the Commission, it did not uncover the payment to the Senior Environment Official described above.

The Indonesian affiliates established more than twenty nominee companies in Indonesia without the knowledge of Monsanto. Several of these nominees were purportedly established to hold pesticide product registrations on Monsanto’s behalf in exchange for a fee. During the review period, the Indonesian affiliates paid false product registration fees totaling approximately $787,202 to at least two nominee companies established by the Indonesian affiliates. The false registration fees, which were based on a percentage of sales of certain products, were paid to the two nominee companies despite the fact that other companies held the product registrations on Monsanto’s behalf. The legitimate holders of the product registrations did not charge Monsanto any such fees.

The Indonesian affiliates used the nominees to inflate sales of Monsanto’s pesticide products between the Indonesian affiliates and the nominees. This was done through a scheme of over-invoicing, in most cases, and by “ghost” sales, in other cases. The management team for Monsanto’s Indonesian affiliates then siphoned monies from these unauthorized and improperly documented sales to, in part, finance payments to Indonesian government officials.

From 1997 to 2002, Monsanto’s Indonesian affiliates made at least $700,000 of illicit payments to at least 140 current and former Indonesian government officials and their family members. The largest single set of payments was for the purchase of land and the design and construction of a house in the name of the wife of a senior Ministry of Agriculture official. The total amount of improper payments made in 1998 and 1999 for the house and land was the rupiah equivalent of $373,990. Other examples of improper payments include, among others, payments to a senior official of Budget Allocation at the National Planning and Development Board, totaling $86,690, and payments to other Ministry of Agriculture officials, totaling $8,100. Other payments for travel and gifts (such as cellular phones and golf memberships) were also made by the Indonesian affiliates on behalf of various Indonesian government officials.

In addition, questionable payments were made concerning a cotton gin in South Sulawesi, Indonesia. In connection with the Sulawesi project, one of Monsanto’s Indonesian affiliates, PTBS, entered into a ginning contract with an affiliate of the Consulting Firm. Under the ginning contract, PTBS paid the affiliate of the Consulting Firm to gin the cotton grown in South Sulawesi using cotton gins “rented” from the Indonesian Government. The Indonesian affiliates also paid fees of $129,500 to two different Indonesian consulting firms to gain control of the gin. At the same time, PTBS paid $1,000 per month to the Indonesian Plantation Agency, which owned the gin that milled the cotton. Lastly, PTBS had instituted a program wherein PTBS paid local South Sulawesi Department of Agriculture officials a certain percentage of each kilogram of cotton fruit produced. Payments of approximately $29,500 were made to various officials under this payment scheme.”

Based on the above, the SEC charged Monsanto with violating the FCPA’s anti-bribery provisions, books and records provisions and internal controls provisions.

Under the heading “Books and Records Violations,” the complaint alleges:

“Monsanto’s Indonesian affiliates failed to properly account for the illicit payments. Instead, members of the Indonesian management team used a complex scheme of bogus pesticide product registration fees and over-invoicing to finance off-book slush funds. These off-book accounts were the source for reimbursements to employees of the Indonesian affiliates for numerous improper payments made to Indonesian officials. These improper payments were inaccurately recorded by both the Indonesian affiliates and Monsanto as payments for bona fide services or bona fide product sales. The improper payments were then reflected in Monsanto’s consolidated financial statements as payments for bona fide services or bona fide product sales.”

Under the heading “Internal Controls Violations,” the complaint alleges:

“During the review period, Monsanto lacked internal controls sufficient to detect or prevent the illicit payment schemes operated by the Indonesian affiliates. In fact, from 1996 to 2001 Monsanto did not conduct any internal audits of its Indonesian affiliates, nor were statutory audits conducted, which were required of PTBS under Indonesian law. Instead, Monsanto assumed the financial statement information it received from its Indonesian affiliates was accurate. Despite the statements being unaudited, Monsanto management did not require the Indonesian affiliates to substantiate the information in the financial statements. The absence of effective internal controls enabled the Indonesian management team to conceal their illicit payment schemes.”

Without admitting or denying the SEC’s allegations, Monsanto agreed to pay a $500,000 civil penalty.

Homer Moyer represented Monsanto.

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