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Issues To Consider From Recent Enforcement Actions

Previous posts here [1] and here [2] highlighted the late December 2018 Foreign Corrupt Practices Act enforcement actions against Eletrobras and Polycom. This post continues the analysis by highlighting additional issues to consider.

Timelines

As highlighted in this previous post [3], in June 2015 it was reported that Eletrobras hired a law firm to investigate FCPA issues. Thus, the company’s FCPA scrutiny appears to have lasted approximately 3.5 years. Once again, if the SEC wants its FCPA enforcement program to be viewed as legitimate and credible, it must resolve instances of FCPA scrutiny much quicker.

This is particularly true given the following statement in the SEC’s order “Eletrobras’s cooperation included sharing facts developed during the course of an internal investigation by its board and voluntarily producing and translating documents.”

Based on the lack of information in the public domain, it is not possible to calculate the time period that Polycom (acquired by Plantronics in early 2018) was under FCPA scrutiny.

Just the Second

The September 2018 Petrobras enforcement action [4] is believed to be the first ever FCPA enforcement action against a foreign government. The Eletrobras enforcement actions appears to be just the second. In the order, the SEC stated:

“The Brazilian federal government currently owns a 51% stake in Eletrobras and appoints seven of Eletrobras’s eleven board members.”

Without explicitly stating, the SEC thus clearly viewed Eletrobras as an “instrumentality” of the Brazilian government.

[Note: some have suggested [5] that the 2006 Statoil enforcement action also involved a “company directly owned and controlled by a foreign government.” However, there is no reference of this in either the DOJ’s resolution document [6] or SEC’s. [7]]

Damned If You Do, Damned If You Don’t

Both the Eletrobras and Polcyom enforcement actions represent a “damned if you do, damned if you don’t” type of FCPA enforcement action relevant to the internal controls provisions.

For instance, according to the SEC Eletrobras had:

It is safe to assume that if Eletrobras had none of this, that the SEC would have found the company in violation of the internal controls provisions.

However, Eletrobras did have these policies and procedures in place, but according to the SEC, they “were ignored or circumvented.” Moreover, as is fairly typical in FCPA enforcement actions, the few culpable actors at Eletrobras personally enriched themselves in connection with the underlying conduct. Nevertheless, the SEC found that the company violated the internal controls provisions.

[8]

The Polycom enforcement action (as highlighted in the original post) is even more problematic and further demonstrates the SEC’s (incorrect) view that the FCPA’s books and records and internal controls provisions are strict liability.

In pertinent part, the conduct at issue concerned a Chinese subsidiary which created “a separate, parallel sales management system outside of Polycom’s company-approved systems, which was orchestrated by Polycom’s Vice President of China” and whose employees used “non-Polycom e-mail addresses when discussing deals with Polycom’s distributor.” According to the SEC, “Polycom personnel outside China were unaware of the existence of this parallel system.”

As stated by the SEC:

“According to Polycom’s policies and procedures, Polycom sales personnel worldwide were required to enter details concerning sales opportunities and deals into a single, centralized customer relations management (“CRM”) database. However, Polycom China’s senior managers directed Polycom China’s sales personnel to enter details concerning sales opportunities into a separate, parallel sales management system outside of Polycom’s company-approved systems, which was orchestrated by Polycom’s Vice President of China. Polycom personnel outside China were unaware of the existence of this parallel system. Polycom China’s senior managers also directed Polycom China’s sales personnel to use non-Polycom email addresses when discussing deals with Polycom’s distributors.

[…]

Senior managers at Polycom China recorded information about each deal in Polycom’s centralized CRM database. Entries in the centralized CRM database did not reflect that Polycom was providing discounts to its distributors in China in order to fund improper payments to Chinese government officials. Rather, the entries in the CRM database falsely attributed the discounts to purportedly legitimate purposes.

[…]

Product discounts up to a certain threshold could be approved unilaterally by Polycom China’s senior managers. However, discounts above this threshold had to be approved by Singapore-based personnel who worked for another wholly-owned Polycom subsidiary. When these Singapore-based personnel sought information regarding the reasons for particular discounts, Polycom China’s senior managers always cited legitimate concerns such as competition with other communications products providers or end-user budget constraints. Polycom China’s senior managers never told the Singapore-based personnel that certain discounts were being used to fund improper payments to government officials.”

It is safe to assume that if Polycom did not have a single centralized customer relations management database that employees were required to use, or that if Polycom did not have approval policies in place for product discounts above a certain threshold, that the SEC would have found the company in violation of the internal controls provisions.

Yet, Polycom did have these things, nevertheless a few culpable actors at a Chinese subsidiary knowingly and willfully circumvented these controls and otherwise lied. Nevertheless, the SEC found the company in violation of the internal controls provisions.

Statute of Limitation Issue

In the DOJ’s recently released annual report [9] there are several FCPA references including this mention of the Polycom matter.

“Polycom, Inc. Declination: In December 2018, the Fraud Section issued a declination letter to Polycom, Inc., a manufacturer of communications devices whose subsidiaries paid bribes to Chinese officials to secure contracts worth approximately $47 million in revenue and $31 million in profits. The company voluntarily self-disclosed the conduct, cooperated with the investigation, and remediated. The company disgorged to the SEC $10.7 million in profits and $1.8 million in prejudgment interest, paid the SEC a civil money penalty of $3.8 million, and disgorged $20.3 million in profits to the Department and the U.S. Postal Inspection Service because that amount was outside the statute of limitations in the SEC’s case. (emphasis added).”

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