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So Much For That Tone At The Top Thing As SEC Returns To Bring Enforcement Action Against SQM’s Former CEO

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Foreign Corrupt Practices Act enforcement often seems more robust than it actually is because, in the relatively rare instances in which there is an individual prosecution in connection with a corporate action, the individual action often (but not always) occurs long before or long after the corporate action. Many FCPA Inc. participants, who have a vested interest in portraying more not less FCPA enforcement, count these occurrences as multiple enforcement actions when in reality they are the same core enforcement action. (This article highlights this dynamic as well as other dubious and haphazard FCPA Inc. counting methods).

Reflective of the above dynamic, as highlighted in prior posts here and here in January 2017 the DOJ and SEC announced a $30.5 million enforcement action against Sociedad Quimica y Minera de Chile S.A. (SQM), a chemical and mining company based in Chile, in relation to its interactions with Chilean officials. The bulk of the enforcement action involved use of the CEO’s “discretionary fund to direct payments to Chilean politicians, political candidates, and individuals connected to them “many of which violated Chilean tax law and/or campaign finance limits” and falsely recording such payments in SQM’s books and records.

Yesterday,  the SEC announced – based on the same core conduct alleged in the corporate action from approximately 1.75 years ago – that SQM’s then CEO Patricio Contesse Gonazlez (pictured – a Chilean citizen and resident who was CEO from 1990 to March 2015) resolved an enforcement action. Without admitting or denying the SEC’s findings, Gonzalez agreed to pay a $125,000 civil penalty.

This administrative order states in summary fashion:

“This matter concerns Respondent’s role in causing his employer, Sociedad Química y Minera de Chile, S.A. (“SQM”), to violate the books and records and internal accounting control provisions of the Foreign Corrupt Practices Act (“FCPA”), and his circumvention of internal accounting controls, falsification of SQM’s books and records, and misleading of SQM’s accountants. While acting as SQM’s CEO, Respondent caused SQM to make approximately US $14.75 million in improper payments to Chilean politicians, political candidates, and individuals and entities connected to them (collectively, “politically exposed persons” or “PEPs”). These improper payments were made over the course of seven years, from 2008 to 2015. Respondent directed and authorized these improper payments to PEPs, based on contracts, invoices, and other false documents. Most of the improper payments involved falsified documents submitted to SQM on behalf of third-party vendors associated with PEPs who posed as legitimate vendors to SQM (“third-party vendors”). Those payments were not supported by documentation that services were actually provided to SQM.

Respondent caused SQM’s violations of the FCPA. Respondent personally caused fictitious contracts with the third-party vendors to be created, and approved the contracts, invoices and other documents, so that the improper payments would be inaccurately recorded as legitimate business expenses. His conduct caused SQM’s books and records to inaccurately record the improper PEP payments as legitimate business expenses. Respondent’s actions also caused SQM’s internal accounting controls violations. As CEO, Respondent was responsible for SQM’s internal accounting controls, including controls that related to an account through which the improper payments were made (the “CEO Account”). Those controls were deficient and contained material weaknesses. Respondent circumvented those deficient controls to cause SQM to make the improper payments to the Chilean PEPs.

By falsifying contracts and invoices and submitting documents Respondent knew to be false into SQM’s accounting system, and by failing to inform SQM’s accountants about those fictitious transactions, Respondent knowingly circumvented SQM’s internal accounting controls and violated rules that prohibit falsifying a public company’s books and records and omitting material facts to an accountant in connection with an audit.

Respondent signed certifications which were filed with SQM’s Forms 20-F during the relevant period. Respondent’s representations in those certifications were false.”

Under the heading “As CEO, Contesse Was Responsible for SQM’s Internal Accounting Controls And Circumvented Them To Make PEP Payments,” the order finds:

“Contesse was the CEO of SQM since before it became a public company in 1993 and was responsible for the development of SQM’s internal accounting controls at all relevant times. Contesse was also ultimately responsible for SQM’s anti-corruption policies and procedures. During SQM’s development of the anti-corruption policies and procedures, Contesse was regularly briefed and was personally trained on their implementation and use by SQM’s then head of Internal Audit.

In addition, Contesse served on SQM’s ethics committee and authored the cover letter to SQM’s Code of Ethics. The Code of Ethics specifically proscribed improper payments to government officials. As CEO of SQM and a member of its ethics committee, Contesse was responsible for ensuring that SQM’s internal accounting controls related to the proscription of improper PEP payments were effective.

As part of management’s preparations for SQM’s annual Form 20-F filings, the company’s senior and executive officers met on a regular basis throughout the year to assess the effectiveness of the internal accounting controls. As CEO, Contesse was involved in establishing and assessing these controls.

In connection with the improper payments, Contesse circumvented SQM’s internal accounting controls. Contesse used the CEO Account to effect the transactions.”

The order finds that Contesse caused SQM to violate the FCPA’s books and records and internal controls provisions, knowingly circumvented SQM’s internal controls, lied to the company’s auditor, and signed false certifications in SQM’s SEC filings.

In the SEC’s release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:

“Corporate culture starts at the top, and when misconduct is directed by the highest level of management it is critical that they are held accountable for their conduct.”

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