This post  earlier this week told you that there would likely be more Foreign Corrupt Practices Act enforcement this week as the SEC’s fiscal year draws to a close.
Sure enough as late yesterday the SEC announced  an approximate $10 million enforcement action against Wisconsin-based printing company Quad/Graphics for “engaging in multiple bribery schemes in Peru and China.”
In summary fashion, the SEC’s administrative order  finds:
“This matter concerns violations of the FCPA by Quad/Graphics, Inc., a marketing solutions and printing services provider headquartered in Sussex, Wisconsin. From at least 2011 to January 2016, Quad engaged in multiple bribery schemes to secure business by paying or promising over a million dollars in bribes through subsidiaries in Peru and China. In one bribery scheme, Quad/Graphics Peru S.A. (“Quad Peru”), paid or promised bribes to government officials in Peru to win sales contracts from the Peruvian National Institute of Statistics and Information (“INEI”) and other government municipalities, and to avoid penalties on existing contracts with the Ministry of Education (“MINEDU”). Quad Peru also participated in a judicial bribery scheme when it tried to influence the outcome of a tax dispute with the Superintendencia Nacional de Aduanas y de Administraciόn Tributaria (“SUNAT”), the Peruvian tax authority, which had imposed over $12,000,000 in Value-Added Tax (“VAT”), interest, penalties and fines. In 2012 and 2013, Quad Peru paid over $200,000 in bribes through a local counsel to judges involved in the litigation. In another scheme, from 2010 to 2015, Quad’s subsidiary, Quad/Tech Shanghai Trading Company (“Quad/Tech China”), paid or promised approximately $182,000 in improper payments to employees of private and government customers through sham sales agents to secure business. Quad employees utilized various means and instrumentalities of U.S. interstate commerce to facilitate the bribery schemes in Peru.
In addition to bribery, Quad Peru also violated U.S. sanctions and export control laws by engaging in commercial transactions with a state controlled Cuban telecommunications company, Empresa de Telecomunicaciones de Cuba S.A. (“ETECSA”), and violated the FCPA’s books and records provisions by creating false records to conceal the transactions. Generally, these sanctions and export control laws prohibit business transactions with sanctioned countries that involve U.S. persons, companies or goods. None of Quad’s improper payments in Peru or China were accurately reflected in its books and records and Quad failed to have sufficient internal accounting controls in place to detect or prevent the various misconduct. Quad was unjustly enriched by approximately $7 million as a result of these schemes.”
The order begins by highlighting the following background:
“Prior to 2010, Quad was a privately held printing company headquartered in Sussex, Wisconsin, with a focus on domestic sales. With the July 2010 acquisition of World Color Press, Inc. (“World Color”), a Canadian printing company, Quad quickly became a public company with a major international presence. Quad acquired over 16,000 World Color employees, several subsidiaries, and multiple plants throughout Latin America, and its common shares began trading on the NYSE. Despite becoming a publicly traded company with a large global workforce and operations in high risk areas, Quad’s compliance program was almost nonexistent in 2010. At the time, Quad failed to implement sufficient internal accounting controls or anti-corruption policies and procedures and failed to conduct meaningful due diligence on third parties. Likewise, internal audit had no visible role in anti-corruption testing and the company failed to conduct broad FCPA or ethics training until approximately 2012. It appointed its first Director of Compliance, an individual with no compliance experience or training and an information technology background, in 2011.
From at least 2011 to 2016, Quad’s failure to implement a robust compliance program and maintain sufficient internal accounting controls contributed to ongoing bribery schemes in Peru to obtain business and win favorable outcomes in tax litigation. The schemes were facilitated through third party vendors. Quad’s then Operations Executive for Latin America and a then Finance Executive for Latin America, both based in the U.S., either ignored significant red flags or participated in the misconduct. These failures also allowed Quad/Tech China’s bribery of customers to facilitate systems sales to continue from 2010 to 2015, and Quad Peru’s sanctions violations in connection with the sale of goods to Cuba in 2012. None of the improper payments were accurately reflected in Quad’s books and records and its internal accounting controls were not reasonably designed to detect or prevent them.”
The order contains separate sections concerning “Bribery to Secure Sales in Peru,” Judicial Bribery Scheme in Peru,” “Bribery to Secure Sales in China,” and “Quad Conceals its Sales Transactions in Cuba.”
As to the first section, the order finds:
“In 2011, Quad Peru’s [formerly known as World Color Peru and a wholly-owned subsidiary of Quad whose books and records were consolidated into the financial statements of Quad] former Head Sales Executive was approached by an individual with influence in the Peruvian government who requested that Quad Peru pay him a “commission” in exchange for a government contract with INEI [, one of Quad Peru’s largest customers. Quad Peru’s Head Sales Executive obtained verbal approval to pay the bribe from Quad Peru’s former General Manager. Thereafter, from 2011 to 2016, Head Sales Executive continued to make payments with the expectation that bribes would be paid to government officials to secure contracts, primarily with INEI, and also to other officials at government municipalities in Peru. The improper payments were made through four purported third party vendors, which were sham companies owned by the same individual (“Sham Vendors”).
The four Sham Vendors were all registered in Lima, Peru, three with the same address, and had no real business operations. The Sham Vendors were used to pay bribes to both government officials and private customers on behalf of Quad Peru. Quad failed to conduct any due diligence on the Sham Vendors.
Most of the invoices submitted by the Sham Vendors were purportedly for prepress, modulation and/or packaging services provided to Quad Peru in connection with INEI contracts. In truth, none of the Sham Vendors performed any such services for Quad Peru. Instead, pre-press, modulation and packaging services were performed on site by Quad Peru employees or by unrelated external third parties.
The bribes that Quad Peru paid to INEI officials were approximately 13% of each government contract work order and were paid through fake invoices for services submitted by the Sham Vendors that were routinely approved by the Quad Peru Head Sales Executive and the Quad Peru General Manager.
Quad Peru’s then Senior Finance Manager was aware of the improper commission payments. He ensured that the related invoices from the Sham Vendors were paid after the Head Sales Executive and General Manager approved them. As the volume of improper payments increased, the Senior Finance Manager became increasingly concerned about authorizing them. He expressed his concerns to the General Manager but was brushed aside.
In approximately 2013, the Senior Finance Manager, with another Manager present, contacted a Finance Executive for Latin America who was based in the United States to discuss the improper conduct. The Finance Executive advised the Peru Senior Finance Manager not to forward any invoices directly to him and stated he would look into the matter. Despite this reassurance, the Senior Finance Manager never heard back from the Finance Executive on the subject and no follow up occurred. The improper commissions continued to be paid by wire transfers to accounts held by the Sham Vendors at various Peruvian banks or by checks that were hand delivered to the Sham Vendor’s principal or the Sham Vendor’s accountant in Peru.
In addition to using the Sham Vendors to pay bribes to government officials to secure contracts, Quad Peru also used them to pay bribes to employees of private customers from at least 2013 to 2015 to secure business.
Quad Peru’s Senior Finance Manager eventually left the company in 2015. In late 2015, a new Senior Finance Manager was hired from outside Quad. Once the new Senior Finance Manager was in place, two concerned managers in Peru approached him about several suspicious invoices that had recently been submitted by two of the Sham Vendors. Several of the invoices contained red flags, including having the same date and dollar amounts, and consecutive invoice numbers. Upon review, the new Senior Finance Manager agreed the invoices were problematic and declined to approve them. In January 2016, the Quad Peru Senior Finance Manager reported the matter to the Finance Executive, the same individual who, years earlier, was notified of similar suspicious payments by Quad Peru’s former Senior Finance Manager. After hearing from the new Senior Finance Manager, the Finance Executive reported the suspicious payments to his supervisor and then to Quad’s U.S. Legal Department.
In all, from at least 2011 to January 2016, Quad Peru paid or promised over $1 million in bribes through the Sham Vendors to secure contracts by which Quad was unjustly enriched by over $4.4 million.
From 2011 through 2015, the Head Sales Executive and the General Manager of Quad Peru also used the Sham Vendors to pay over $117,000 in bribes to government officials at MINEDU to reduce penalties and extend the delivery dates on certain existing contracts in order to avoid defaulting on contracts with MINEDU. From June 2011 to May 2013, Quad Peru paid over $45,000 in additional bribes to MINEDU officials in order to avoid penalties for failure to meet the terms of existing contracts with MINEDU. These payments were made through a slush fund that was created with the assistance of seven other third party vendors. As a result of this misconduct, Quad was unjustly enriched by over $970,000.
The bribe payments were falsely recorded in Quad’s books and records, primarily as pre-press or related services. Quad lacked a system of internal accounting controls sufficient to detect or prevent the payments despite the presence of numerous red flags, including vendor invoices with rounded dollar amounts, large invoice amounts that were disproportionate to the services described, invoices that were consecutively numbered (sometimes with the same date) and invoices without purchase orders or other supporting documentation.
In addition, though Quad began providing some FCPA and anti-corruption training in Latin America in approximately 2012, it was not taken seriously by certain Quad Latin America employees. High level Latin America executives failed to support the effort, as illustrated by one management meeting in Peru where sales performance issues were discussed, and the Operations Executive for Latin America alluded to bribery when he joked that everything about Quad Peru’s operations could be changed except the Head Sales Executive, because he was the key to contracts with MINEDU, presumably due to his corrupt efforts to win those sales.”
Under the heading “Judicial Bribery Scheme in Peru,” the order finds:
“During 2012 and 2013, Quad Peru also engaged in a judicial bribery scheme in Peru. Starting in approximately 2000, SUNAT, the Peruvian tax authority, assessed what ultimately totaled over $12,000,000 in VAT, interest, penalties and fines against Quad Peru for failure to pay VAT on certain book sales to MINEDU. Quad Peru (formerly World Color Peru) filed a complaint against SUNAT to challenge the tax assessment, and engaged in litigation that lasted for years. As the amount in dispute grew over time, the potential loss of over $12,000,000 for unpaid VAT was a concern for Quad. It was essentially the equivalent of approximately two years of profit for Quad Peru.
In April 2010, Quad Peru retained a local Peruvian law firm to serve as outside counsel on the SUNAT litigation. Quad Peru paid the law firm a monthly fee of approximately $1,000 to $1,200 for routine services related to the litigation.
Sometime around 2011, after setbacks in the litigation and at the law firm’s suggestion, Quad Peru’s management agreed to use the law firm to facilitate the payment of bribes to Peruvian judges to try to influence their decisions on the SUNAT litigation. Quad Peru’s management obtained approval from the Operations Executive, based in the United States, to engage in the judicial bribery scheme.
The first bribe occurred in approximately 2011, when Quad Peru’s Senior Finance Manager arranged for payment of $20,000 to the law firm for purposes of bribing a judge. The Senior Finance Manager obtained the $20,000 by having approximately two or three third party vendors, which had previously provided legitimate services, submit fake invoices. Quad Peru paid the invoices and once the vendors received payment they returned some portion of the money to Quad Peru’s former Head Sales Executive and the Senior Finance Manager. The Senior Finance Manager then used the money to pay the law firm. The third party vendors took part in the scheme so that Quad Peru would continue to hire them to perform other legitimate services. The Senior Finance Manager personally delivered the $20,000 in cash to the law firm’s office in Lima, Peru, for onward payment to a judge.
Around the time that the bribe was paid, Quad had a significant victory in the SUNAT litigation. In October 2011, the Litigation Court in Lima ruled in Quad Peru’s favor on the VAT issue. The Court ruled that Quad Peru’s dispute of SUNAT’s tax assessment was founded. However, SUNAT appealed the ruling and also challenged a previous injunction barring it from seizing Quad Peru’s assets while the lawsuit was pending.
In March 2012, the court cleared the way for SUNAT to seize Quad Peru’s assets, including its cash and accounts receivables. Quad Peru’s operational infrastructure and materials, including its operating plant and other real property, also became subject to seizure.
On July 24, 2012, Quad Peru signed a “success fee” contract with the law firm agreeing to pay the law firm a maximum of $208,000 if the law firm successfully defended Quad Peru in the ongoing SUNAT dispute.
From September 2012 to late December 2012, SUNAT seized approximately $4.49 million from Quad Peru’s bank accounts. In addition, SUNAT seized approximately $7 million in cash receivables.
On or about December 11, 2012, with approval from the Operations Executive in the U.S., Quad Peru agreed to pay the law firm an “extraordinary” fee so that the law firm could use the funds to bribe a judge and stop the seizure of Quad Peru’s bank accounts and assets. The bribe initially seemed successful, as two days later, on December 13, 2012, the Administrative court granted Quad Peru’s request for a preliminary injunction contingent on the provision of a bank guarantee by Quad Peru of the full amount owed. SUNAT appealed and the litigation continued.
On December 14, 2012, the law firm issued an invoice to Quad Peru for $50,504 describing its services as “advice during the coercive execution process and in obtaining a precautionary measure.” Quad Peru’s Senior Finance Manager signed off on the invoice and paid it the same day.
Quad’s documents and internal emails also referred to the bribe payments as “extraordinary fees.” This fee and later fees called “extraordinary” were in addition to the normal monthly payments made to the law firm.
In April 2013, the law firm issued an invoice for $407,100 to fund additional bribes to judges. Unwilling to take sole responsibility for the very large payment to the law firm, the Senior Finance Manager of Quad Peru forwarded the invoice by email to the Finance Executive, who was based in the U.S., for payment approval. The Finance Executive then forwarded the invoice to the Operations Executive who was also in the U.S. and who also had knowledge of the bribery scheme. After discussing the $407,100 invoice with the Operations Executive, the Finance Executive told the Senior Finance Manager to pay the invoice, despite the possibility the money would be used for bribery.
Days later, Quad Peru wired a portion of the invoice amount, $230,000, to the law firm. Payment was wired from Quad Peru’s Miami, Florida bank account, an account typically used to pay for supplies, not attorney’s fees. Quad’s Finance Executive told the Senior Finance Manager how to account for the payment in Quad Peru’s books and records due to his concern about it appearing in variance reports.
On or about June 7, 2013, the law firm refunded $173,181, roughly two thirds of the original $230,000 payment, to Quad Peru, keeping approximately $56,819. The law firm refunded the money because its attempt to bribe the appellate judges in charge of SUNAT’s appeal was unsuccessful. This became evident days later on or about June 10, 2013, when 2 of the 3 appellate judges considering Quad Peru’s appeal voted in favor of SUNAT.
Between 2012 and 2013, SUNAT seized approximately $11.89 million. In October 2013, Quad Peru made another payment of approximately $108,488 to the law firm. According to the invoice submitted by the law firm, the payment was a “contentious administrative procedure success fee related to SUNAT.” The payment did not relate to any “success” on the part of the law firm. Instead it related, at least in part, to the law firm’s assistance with the judicial bribery scheme. In all, Quad Peru made improper payments of approximately $209,752 to the law firm in connection with the failed judicial bribery scheme.
Ultimately, in the summer of 2014, SUNAT won its appeal of the lower court ruling in favor of Quad Peru. On or about November 3, 2014, Quad Peru filed an appeal of the decision with the Peruvian Supreme Court. The litigation finally concluded on or about March 20, 2018, when the Peruvian Supreme Court decided the case in favor of Quad Peru.”
Under the heading “Bribery to Secure Sales in China,” the order finds:
“In addition to the improper conduct in Peru, from 2010 to 2015, bribes were promised and paid by Quad’s China based subsidiary, Quad/Tech China, to employees of state owned entities and private customers through sham sales agents to win business.
During the relevant period, Quad/Tech China sold and serviced systems that attached to printing machinery. The systems were designed to improve the quality and efficiency of printing presses utilized by customers. Most of Quad/Tech China’s customers were Original Equipment Manufacturers (“OEMs”) and press end users. Quad/Tech China’s clients were in traditional (e.g. newspapers) and packaging printing and its focus was on the packaging side of the market.
Since there were only a handful of OEMs selling printing presses in China and an equally small number of press end users, Quad/Tech China’s potential customer base was small. Sotech Machinery Co. Ltd. (“Sotech”), an OEM specializing in packaging printing equipment, mostly for the cigarette industry, was one of Quad/Tech China’s largest customers. Another large OEM and customer was Shaanxi Beiren (“Shaanxi Beiren”) Printing Machinery Co. Ltd., a state owned entity and manufacturer of printing, decorating and packaging machinery.
From at least 2010 to July 2015, Quad/Tech China promised or paid commissions to sales agents who then passed some portion of the payments on to employees of OEMs and end users at private and public companies in China. The payments were made to induce customers to purchase Quad/Tech China’s systems. Illicit payments were made to Chinese officials at Shaanxi Beiren and to employees of Sotech to win sales.
The fake commissions that Quad/Tech China paid to sales agents to make illicit payments were generally 2% of sales order values and were typically described on invoices as “technical service fees.” The identities of the sham sales agents were kept secret from most Quad/Tech China employees. They did not provide any bona fide services and were not involved in any business operations at Quad/Tech China. They simply invoiced Quad/Tech China for a 2% commission and then transferred payment to customer employees in return for Quad/Tech obtaining a contract.
The improper payments were largely facilitated by a former Quad/Tech China Sales Executive in charge of the package printing business in China. Quad/Tech China’s then General Manager and its then Finance Manager were also aware of the payments to the sham sales agents. All three employees were based in China.
The total amount of improper commissions that Quad/Tech China paid or promised to sales agents in China was approximately $182,000.
Quad/Tech China did not do any due diligence on the sham sales agents and no proof of services performed were provided before their invoices were paid. Quad failed to provide adequate oversight and auditing of Quad/Tech China. In addition, Quad/Tech China employees were inadequately trained on the company’s anti-corruption policies. The improper payments were falsely recorded in Quad’s books and records as “commissions” and Quad failed to devise and maintain a system of internal accounting controls sufficient to detect or prevent the improper payments. Quad/Tech China was unjustly enriched by approximately $1,087,322 as a result of the improper payments in China.”
Under the heading “Quad Conceals its Sales Transactions in Cuba,” the order finds, in pertinent part:
“Before World Color, a Canadian company, was acquired by Quad in 2010, it regularly conducted business with Cuba. One of its largest clients was ETECSA, a state owned telecommunications company that purchased telephone directories from World Color Peru. Despite existing U.S. sanctions and export control laws, sales to Cuba continued after World Color’s acquisition by Quad.
Certain Quad employees, including members of management in Peru and the former Operations Executive based in the U.S., concealed transactions with Cuba in internal emails and correspondence discussing the contract negotiations, financing arrangements, shipping and printing. Additional books and records were falsified to conceal the transactions, including references to “broker” that were intended to conceal the efforts to use a third party as a pass through company. As a result of the conduct, Quad’s contracts, shipping documents, invoices, and journal entries were inaccurate.”
Based on the above findings relevant to Peru, the SEC found that Quad violated the FCPA’s anti-bribery provisions. Based on the overall findings, the SEC found that Quad violated the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, Quad agreed to pay approximately $10 million ($6.94 million in disgorgement, $960,000 in prejudgment interest, and a $2 million civil penalty).
As a condition of settlement, Quad agreed to report to the SEC “periodically during a one-year term, the status of its remediation and implementation of compliance measures, particularly as to anti-corruption risk assessments and integration of acquired entities, staffing and budgeting for compliance and internal audit, and due diligence and monitoring of payments to third-parties.”
Under the heading “Quad’s Self-Disclosure, Cooperation, and Remedial Efforts,” the order finds:
“In determining to accept the Offer, the Commission considered Respondent’s self-disclosure, cooperation and remedial efforts. Quad voluntarily disclosed the misconduct. The company’s cooperation included sharing facts developed during the course of its own internal investigation, producing documents and other materials (including documents from overseas), translating key documents, summarizing findings of internal investigations, providing summaries of witness interviews, and assisting in making current and former employees available for interviews.
Quad’s remedial actions included: (i) terminating employees involved in the improper conduct; (ii) enhancing the role and resources within the compliance department; (iii) hiring a new International Trade Compliance Manager; (iv) ongoing recruitment for, and training of, new compliance and internal audit personnel with anti-corruption expertise; (v) completing a root-cause analysis and implementing several internal controls enhancements; (vi) updating its code of conduct to further address FCPA issues; and (vii) updating policies and procedures designed to ensure appropriate risk assessments and integration plans are developed for newly acquired entities.”
In the SEC’s release, Tracy Price (Deputy Chief of the SEC’s FCPA Unit) stated:
“As a U.S.-listed company expanding abroad, Quad/Graphics failed to ensure that its internal accounting controls were sufficient to prevent the type of widespread bribery in Peru and China and the concealment of commercial sales in Cuba.”
Yesterday, the DOJ also released this letter  to Quad’s counsel. In pertinent part, the letter states:
“Consistent with the FCPA Corporate Enforcement Policy, the DOJ … has declined prosecution of … Quad/Graphics … for violations of the FCPA. We have reached this conclusion despite the bribery committed by employees of the Company’s subsidiaries in Peru and China.
The Department’s investigation found evidence that beginning in 2011 and continuing through January 2016, Quad’s Peruvian subsidiary, through its employees, paid or promised over $1 million to third-party intermediaries that were used, in part, to pay bribes to Peruvian government officials in order to secure printing contracts with government agencies , as well as to minimize penalty payments related to the delayed execution of contracts with government agencies, and tax payments owed in Peru. The Department also found evidence that between approximately 2010 and 2015 employees of Quad/Tech China, a subsidiary of Quad, paid bribes to employees of Chinese state-owned entities in order to obtain printing business in China.
The Department has decided to decline prosecution of this matter based on an assessment of the factors set forth in the Corporate Enforcement Policy and the Principles of Federal Prosecution of Business Organizations, including but not limited to: (1) Quad’s prompt, voluntary self-disclosure of the misconduct; (2) Quad’s thorough and comprehensive investigation; (3) Quad’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 investigation of any related prosecutions; (4) the nature and seriousness of the offense; (5) the Company’s lack of prior criminal history; (6) Quad’s full remediation, including the steps that Quad took to enhance its compliance program, terminating the employment of individuals involved in the misconduct, terminating the Company’s relationship with third parties in Latin America involved in the misconduct, and (7) the fact that the Company agrees to and will disgorge to the U.S. SEC the full amount of its ill-gotten gains.”
A Quad/Graphics statement notes:
“We are pleased to have reached resolution with the SEC and DOJ on previously disclosed Foreign Corrupt Practices Act (FCPA) and trade compliance matters arising from our operations managed from Peru, including transactions involving Cuba, and from China. The conduct at issue — which the Company initially identified through our own internal financial controls and voluntarily self-reported to the authorities — was inconsistent with Quad’s values and policies, took place several years ago, and was limited to a few employees who are no longer with the Company. Quad takes compliance very seriously, and we continuously enhance our policies and procedures in a manner that is consistent with the highest standards of ethics and integrity and our obligations under the law. The DOJ has declined to bring any action against the Company, citing our voluntary and prompt self-reporting, our thorough and comprehensive internal investigation, our full remediation, including enhancements to our compliance program, and our full and proactive cooperation with the government. The investigation has concluded without any material adverse effect on Quad’s business or financial condition.”
Quad was represented by Foley & Lardner attorneys David Simon, Jaime Guerrero and Rohan Virginkar.
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