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The First FCPA Enforcement Action Of 2017 Is A $13 Million Joke

On Friday, the SEC announced the first Foreign Corrupt Practices Act enforcement action of 2017 against Mondelēz International, Inc.

The basic findings in this [1] short administrative action are the following: (i) in February 2010, Kraft Foods (which re-named itself Mondelez International in 2012) acquired Cadbury (a U.K.-based confectionary and snack beverage company that had securities registered with the SEC) and its subsidiaries, including Cadbury India; (ii) in early 2010 Cadbury India retained an agent to interact with Indian government officials to obtain licenses and approvals for a chocolate factory; (iii) Cadbury India failed to conduct appropriate due diligence on and monitor the activities of the agent which “created the risk” that funds paid to the agent (approximately $100,000) could be used for improper or unauthorized purposes and (iv) Cadbury’s India’s books and records did not accurately and fairly reflect the natures of the services rendered by the agent.

Without admitting or denying the SEC’s findings, Mondelez agreed to pay a $13 million civil penalty.

This enforcement action is a complete joke (as is the fact that the scrutiny began in February 2011).

In summary fashion, the order states:

“Mondelēz, formerly known as Kraft Foods Inc., is a U.S.-based food, beverage, and snack manufacturer with securities registered with the Commission. In February 2010, Mondelēz acquired Cadbury, a U.K.-based confectionary and snack beverage company that had securities registered with the Commission. In early 2010, Cadbury India Limited (“Cadbury India”), a subsidiary of Cadbury, retained an agent (“Agent No. 1”) [described as a local business person and tile and marble vendor] to interact with Indian government officials to obtain licenses and approvals for a chocolate factory in Baddi, Himachal Pradesh, India. Cadbury India’s failure to conduct appropriate due diligence on, and monitor the activities of, Agent No. 1 created the risk that funds paid to Agent No. 1 could be used for improper or unauthorized purposes. In addition, Cadbury India’s books and records, which were consolidated into the books and records of Cadbury, did not accurately and fairly reflect the nature of the services rendered by Agent No. 1. Cadbury did not devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurances that access to assets and transactions were executed in accordance with management’s authorization and specifically to detect and prevent payments that may be used for improper or unauthorized purposes.

As a result, Cadbury violated [the FCPA’s books and records and internal controls provisions]. As a result of Mondelēz’s subsequent acquisition of Cadbury’s stock, Mondelēz is also responsible for Cadbury’s violations.”

[2]

Under [3] the heading “Facts,” the order states in full:

“Cadbury India manufactures and sells chocolate products and other confectionaries in India. It operates six manufacturing plants in India and is headquartered in Mumbai. In 2005, Cadbury India built a major plant in Baddi, Himachal Pradesh, India. Cadbury India obtained licenses and approvals from the state government in Himachal Pradesh that were necessary to operate its new factory. Cadbury India’s employees at the Baddi plant drafted and submitted the applications for these licenses and approvals.

In 2008, Cadbury India decided to increase production capacity in Baddi. It called the additional facilities “Unit II.”

Cadbury India estimated that it may require more than 30 different licenses and approvals for Unit II. In or around November 2009, Cadbury India decided to obtain outside assistance in securing these various licenses and approvals. In January 2010, Cadbury India employees met with Agent No. 1 to discuss potentially retaining Agent No. 1 to obtain the licenses and approvals. As part of these discussions, Cadbury India employees at Baddi and Agent No. 1 negotiated the prices of Agent No. 1’s services. Agent No. 1 issued at least two quotations detailing the fees for each license and approval. Shortly after this meeting, in late January 2010, Cadbury India employees at Baddi recommended the retention of Agent No. 1, which management approved without further due diligence. Agent No. 1 began its work shortly thereafter and on February 23, 2010, Cadbury India executed a letter of authorization authorizing Agent No. 1 to represent Cadbury India before government bodies.

From February 2010 to July 2010, Agent No. 1 submitted five invoices totaling $110,446 to Cadbury India for “providing consultation, arrange statutory/government prescribed formats of applications to be filed for the various statutory clearances, documentation, preparation of files and the submission of the same with govt. authorities” for specific licenses. In contrast Cadbury India employees at Baddi, not Agent No. 1, prepared these license applications. Cadbury India paid Agent No. 1 a total of $90,666 after deducting withholding tax upon receipt of the invoices. After receiving each payment, Agent No. 1 withdrew from its bank account most or all of the funds in cash. During this time period Cadbury India obtained some of the licenses and approvals for Unit II. This included a de-amalgamation approval to designate the property on which Unit II was built as legally distinct from that of the existing manufacturing facility.

Besides the meetings described above, Cadbury India performed no further due diligence on Agent No. 1. Other than the invoices from Agent No. 1, which contained a description of the specific licenses or approvals obtained as support for that invoice, Cadbury India did not receive documentary support for Agent No. 1’s services and did not have any written contract with Agent No. 1 when it paid Agent No. 1.

Cadbury India’s books and records did not accurately and fairly reflect the nature of the services rendered by Agent No. 1. Cadbury did not implement adequate FCPA compliance controls at its Cadbury India subsidiary, which created the risk that funds paid to Agent No. 1 could be used for improper or unauthorized purposes.

On February 2, 2010, Mondelēz acquired Cadbury. Because of the nature of the acquisition, Mondelēz was unable to conduct complete pre-acquisition due diligence, including anticorruption due diligence.

Between April 2010 and December 2010, Mondelēz engaged in substantial, risk-based, post-acquisition compliance-related due diligence reviews of Cadbury’s business, which involved reviews in 24 countries, including India. This post-acquisition due diligence review did not identify the relationship between Agent No. 1 and Cadbury India.

In October 2010, upon commencement of an internal investigation related to Agent No. 1, Mondelēz required Cadbury India to end the relationship with Agent No. 1 and no further payments were made.

Mondelēz conducted an internal investigation, which included the retention of external counsel and forensic accountants and cooperated with the SEC’s investigation. Mondelēz also undertook extensive remedial actions with respect to Cadbury, including implementing Mondelēz’s global compliance program at Cadbury and conducting a comprehensive review of the use of third parties in Cadbury India’s business.”

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Elevate Your Research [4]

Under the heading “Legal Standards and Violations,” the order states:

“As described above, Cadbury India, a subsidiary of Cadbury, retained Agent No. 1 to interact with Indian government officials to obtain licenses and approvals for Unit II in Baddi, India. Cadbury India did not conduct appropriate due diligence on, and properly monitor the activities of, Agent No. 1, which created the risk that funds paid to Agent No. 1 could be used for improper or unauthorized purposes. In addition, Cadbury India’s books and records did not accurately and fairly reflect the nature of the services rendered by Agent No. 1. As a result of the conduct described above, Cadbury violated [the books and records provisions], by failing to keep accurate books, records and accounts, and [the internal controls provisions], by failing to devise and maintain internal accounting controls that were sufficient to provide reasonable assurances that access to assets and transactions were executed in accordance with management’s authorization and specifically to detect and prevent payments that may be used for improper or unauthorized purposes. As a result of Mondelēz’s acquisition of Cadbury stock, Mondelēz is also responsible for Cadbury’s violations.”

As noted in this SEC release [5], without admitting or denying the SEC’s findings, Cadbury and Mondelēz agreed to a cease-and-desist order and payment of a $13 million civil penalty.