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Former Cognizant Technology Solutions Executives Criminally And Civilly Charged In Connection With Indian Planning Permit – Company Resolves $25 Million SEC Enforcement Action

In this 2016 post [1] highlighting Cognizant Technology Solutions’s disclosure of Foreign Corrupt Practices Act scrutiny it was also noted that Gordon Coburn resigned from his position as President of Cognizant Technology Solutions. This follow-up post [2] noted that the two disclosures were likely related.

Sure enough as today the DOJ announced that Coburn and Steven Schwartz (Executive Vice President, Chief Legal and Corporate Affairs Officer) were criminally charged with FCPA violations. If the defendants choose to put the DOJ/SEC to its burden of proof, disputed issues will likely focus on corrupt intent, obtain or retain business and the facilitating payments exception.

As noted in the DOJ’s release:

“The Department of Justice and the U.S. Attorney’s Office for the District of New Jersey also announced today that they have declined prosecution of Cognizant after considering the factors set forth in the Department of Justice’s Principles of Prosecution of Business Organizations and the Corporate Enforcement Policy, including Cognizant’s prompt voluntary self-disclosure, cooperation and remediation, as well as Cognizant’s disgorgement to the Department and the U.S. Securities and Exchange Commission (SEC) of the cost savings that resulted from the bribery scheme.  In the related case with the SEC, Cognizant entered into a cease and desist order and agreed to pay the SEC a civil penalty, disgorgement and prejudgment interest totaling approximately $25 million.”

A future post will summarize the corporate enforcement action.

As alleged in the indictment, Coburn “oversaw Cognizant’s acquisition and development of property in India, where Cognizant had substantial operations” and Schwartz “was responsible for managing Cognizant’s global legal, government affairs, and security teams” and “also was responsible for overseeing and managing Cognizant’s compliance functions.”

Under the heading “Overview of the Bribery Scheme” the indictment alleges:

“Between in or about January 2014 and in or about January 2016, Coburn, Schwartz, and others engaged in a scheme to bribe one or more government officials in India to secure and obtain a planning permit (the “Planning Permit”) necessary for construction of an office campus in the state of Tamil Nadu that would support approximately 17,000 Cognizant employees and become one of Cognizant’s largest facilities in India (the “KITS Campus”). The Indian government officials were “foreign officials” within the meaning of the FCPA.

In or about April 2014, Coburn and Schwartz authorized an unlawful payment of approximately $2 million to one or more foreign government officials in India to secure and obtain the Planning Permit, which was discretionary and non-routine. To conceal Cognizant’s involvement in the scheme, Coburn, Schwartz [a co-conspirator who resided in India and was the Vice President of Administration at Cognizant and another co-conspirator who resided in India and was Cognizant’s Chief Operating Officer] and others agreed that the Construction Company [a large engineering and construction firm with an office in Chennai, India] would obtain the Planning Permit by making the illegal bribe payment and that Cognizant would reimburse the Construction Company through construction invoices at the end of the KITS campus project.

In or about late June 2014, after the co-conspirators had agreed that the Construction Company would make the bribe payment on behalf of Cognizant, the Construction Company secured the necessary government order (the “Government Order”) for Cognizant to obtain the Planning Permit, allowing Cognizant to complete the development of the KITS campus and avoid millions of dollars in costs.  Months later, the co-conspirators caused Cognizant to funnel over $2 million to the Construction Company, disguised as payment for cost overruns on the KITS Campus, when they knew that the actual purpose of the payment was to reimburse the Construction Company for the bribe payment. As Coburn, Schwartz and others had previously agreed, they hid the bribe reimbursement payment within a series of line items in a construction change order request to be paid to the Construction Company, thereby concealing the true nature and purpose of the reimbursement, falsifying Cognizant’s books and records, and circumventing its internal controls.”

[3]

According to the indictment:

“In or about November 2013, Cognizant retained the Construction Company to develop the KITS Campus. Cognizan’t contract with the Construction Company provided that the Construction Company would obtain all statutory approvals and permits. The Construction Company was permitted at the end of the project to seek from Cognizant reimbursement for unanticipated costs associated with the agreed-upon scope of work through “variation claims” or “change order requests.” Coburn was responsible for approving Cognizant’s payment of such claims in excess of $500,000. [A co-conspirator] oversaw development of the KITS Campus on behalf of Cognizant, served as one of Cognizant’s primary liaisons with the Construction Company, and provided regular updates to Coburn.

The Planning Permit was a statutory approval that was required prior to the commencement of construction of the KITS Campus. Despite that requirement, it was common practice in India to apply for pre-construction statutory approvals, such as the Planning Permit, after construction began.

On or about February 7, 2013, approximately fourteen months after beginning work on the KITS Campus, the Construction Company submitted an application and fee for the Planning Permit.

In or about November 2013, approximately eight months after the Construction Company submitted Cognizant’s Planning Permit application, a local development authority (the “Development Authority”) conditionally approved and forwarded the application to a separate agency for consideration for the Government Order, a required step in obtaining the Planning Permit.

By in or about mid-January 2014, the government agency had not yet issued the Government Order. As a result, the Construction Company proposed that members of Cognizant’s senior management meet with certain high-level officials of the Tamil Nadu government to assist with securing and obtaining the Planning Permit. Cognizant declined to meet with Tamil Nadu officials concerning the Planning Permit application, maintaining instead that it was the Construction Company’s responsibility to secure the necessary approvals.

By in or about early March 2o14, Coburn became aware that the Construction Company had not obtained the Planning Permit due to delays with the Government Order.

“In or about late April 2014, Coburn and Schwartz authorized the payment of an approximately $2 million bribe to ensure that Cognizant would receive the Planning Permit for the KITS Campus.”

According to the indictment, “the Construction Company had received a bribe demand for approximately $2 million from one or more government officials in India in connection with the Planning Permit application for the KITS campus.”

According to the indictment, “by obtaining the Planning Permit, Cognizant was able to complete construction of the KITS campus, resulting in a significant business advantage that allowed the company to avoid costly delays and related expenses, including expenses associated with supporting thousands of India-based employees in different facilities.”

Based on the above allegations, the indictment charges Coburn and Schwartz with conspiracy to violate the FCPA’s anti-bribery, books and records and internal controls provisions, three substantive violations of the FCPA’s anti-bribery provisions, seven substantive violations of the FCPA’s books and records provisions and one substantive violation of the FCPA’s internal controls provisions.

According to the indictment:

“Coburn, Schwartz and others, in connection with the preparation of Cognizant’s SEC filings, made and caused to be made false, fraudulent, and misleading representations and omissions in Sarbanes-Oxley Quarterly Global 302 Certifications for the quarter ending June 30,2014 and the quarter ending March 31,2015, including, but not limited to, falsely certifying that Cognizant’s internal controls had been in force and effective, and that they had disclosed to Cognizant’s Chief Executive Officer and Chief Financial Officer all known deficiencies in the operation of the internal controls and any known fraud involving management or other employees who had a significant role in Cognizant’s internal controls.

Coburn, Schwartz and others in connection with the preparation of Cognizant’s filing of its annual report with the SEC, made and caused to be made false, fraudulent, and misleading representations and omissions in Annual Report on Form 10-K and Proxy Statement Disclosure Questionnaires for the year ended December 31 , 2014 and the year ended December 31 , 2015, including, but not limited to, providing false answers to questions relating to: bribes or kickbacks; disguised or intentionally misrecorded entries in Cognizant’s books and records; and transactions that may have violated Cognizant’s Code of Conduct.

To conceal Cognizant’s reimbursement for the bribe payment, Coburn, Schwartz, and others, circumvented and caused others to circumvent, and failed to implement, Cognizant’s system of internal accounting controls, including, but not limited to, controls relating to payments and approvals for accounts payable, and controls relating to Cognizant’s SEC filings, such as Sarbanes-Oxley Quarterly Global 302 Certifications and Annual Report on Form 10-K and Proxy Statement Disclosure Questionnaires.”

In the DOJ’s release, Assistant Attorney General Brian Benczkowski stated:

“The allegations in the indictment filed yesterday describe a sophisticated international bribery scheme authorized and concealed by C-suite executives of a publicly-traded multinational company. The indictment of Gordon Coburn and Steven Schwartz demonstrates the Department’s commitment to relentlessly pursuing corporate fraud and corruption wherever it is found.”

Based on the same core conduct alleged in the DOJ indictment, the SEC also filed this civil complaint [4] against Coburn and Schwartz charging them with violating the FCPA’s anti-bribery, books and records and internal controls provisions. As relevant to the facilitating payments exception, the SEC’s complaint alleges:

“The $2 million bribe payment to Government Official was not a payment to expedite or secure the performance of a routine governmental action because: (1) Cognizant and Contracting Firm had not followed the standard procedure to receive the required planning permit from the Chennai Metro Development Authority; (2) the bribe payment was demanded by and made to the Government Official [a senior government official in the Indian state of Tamil Nadu with influence over the issuance of planning and building permits], rather than the Chennai Metro Development Authority, the agency that issued the permit; (3) the Government Official exercised discretion in influencing the Chennai Metro Development Authority to issue the permit; and (4) the amount of the bribe demand and the bribe payment far exceeded any routine fee associated with an application for a planning or building permit issued by the Chennai Metro Development Authority.”

As highlighted here [5], Coburn is currently an Operating Executive with Carlyle Group.

According to this LinkedIn profile [6], Schwartz is currently general counsel at Consumer Reports.

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