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ABB Becomes The First Company To Resolve THREE FCPA Enforcement Actions

Trifecta

The first time ABB resolved a Foreign Corrupt Practices Act enforcement action was in 2004 concerning conduct in Nigeria, Angola and Kazakhstan.

The second time ABB resolved an FCPA enforcement action was in 2010 concerning conduct in Mexico as well as in connection with the Iraqi U.N. Oil for Food program.

Since 2017 (see here for the prior post), ABB has been under additional FCPA scrutiny and last Friday ABB became the first company to resolve an FCPA enforcement action for a third time. The latest enforcement action concerned conduct in South Africa and the net FCPA settlement amount was $147.5 million (a DOJ component of net $72.5 million and an SEC component of net $75 million).

DOJ

The enforcement action focused on ABB’s relationship with Eskom Holdings Limited which is described as a South African state-owned and state-controlled energy company that operated to generate and transmit electricity in South Africa. According to the DOJ, “the South African government was the sole owner of Eskom shares, Eskom was controlled by the government of South Africa and performed functions that South Africa treated as its own.”

According to the DOJ:

“In or about and between 2014 and 2017, ABB, through certain of its agents, knowingly and willfully conspired and agreed with others to corruptly provide payments and things of value, to and for the benefit of, a foreign official to influence acts and decisions of the foreign official in his or her official capacity, to induce the foreign official to improperly influence the decisions of Eskom, and to secure an improper advantage in order to obtain and retain business for ABB.

In furtherance of the scheme, ABB and its co-conspirators made bribe payments intended for the benefit of South African Official, funneled money to unqualified subcontractors that ABB understood to be providing benefits to South African Official [described as a high-ranking executive of Eskom], and inflated the cost of worked to be performed by ABB for Eskom. ABB and its co-conspirators also produced false and misleading accounting documents and engaged in sham negotiations to reach pre-agreed prices on transactions in order to generate and conceal the funds used to provide benefits to South African Official. In carrying out the scheme, ABB and its co-conspirators used the means and instrumentalities of interstate commerce.”

As stated by the DOJ, the South African government approved the construction of a large coal-fired power plant (the Kusile Project) and Eskom awarded the first engineering contracts for the Kusile Project in 2008. In 2013, ABB learned that Eskom was planning to cancel certain previously issued engineering contracts for control and instrumentation (C&I) work on the Kusile Project and to consider other contractors.

ABB was aware that, pursuant to South Africa’s Broad-Based Black Economic Empowerment Act of 2003 and the South African government policies implementing it, and other subsequently promulgated policies, including the Supplier Development & Localization Plan (collectively the BEE Program), ABB’s ability to obtain contracts with Eskom depended, in part, on the engagement of certain local South African subcontractors.

According to the DOJ, in 2014 South African Official introduced ABB Manager 2 (a German citizen who was an employee of ABB Germany and ABB South Africa) to Subcontractor 1 Executive (a South African citizen who was an executive of a South African company), describing him as a “friend” of the South African Official, and stating that Subcontractor 1 ran a company that would be “interesting” for ABB to work with in South Africa. In response, ABB Manager asked ABB Manager 3 (a German citizen who was an employee of ABB Germany and ABB South Africa) and another ABB employee to investigate Subcontractor 1 as a partner, including its “political network,” and to get Subcontractor 1’s bank account information to establish Subcontractor 1 as an ABB subcontractor.

According to the DOJ, “despite Subcontractor 1’s poor technical qualifications and lack of experience, ABB accepted a proposal from Subcontractor 1 to become an ABB subcontractor in or around June 2014” and in October 2014 Subcontractor 1 submitted a proposal for subcontracting work on the Kusile Project to ABB, which increased ABB’s costs on the Kusile Project by approximately 100 million South African rand, the equivalent of approximately $9 million at the time.

According to the DOJ, after submitting its bid for the contract and learning that it was higher than the closest competing bid, ABB Manager 3 told ABB Manager 1 (a German citizen and employee of ABB Germany) that Subcontractor 1 Executive should “prove he is worthwhile” to ABB. Thereafter, ABB Manager 1 received confidential, internal Eskom information from South African Official and Subcontractor 1 Executive regarding the process and schedule Eskom would follow in awarding the C&I contract.  In or around January 2015, while ABB was engaged in final negotiations with Eskom for award of the C&I contract, Subcontractor 1 Executive on multiple occasions provided ABB Manager 1 and ABB Manager 3 with confidential Eskom information to provide an improper advantage to ABB in obtaining the C&I contract.

According to the DOJ, in February 2015 the Eskom board approved ABB’s selection for the C&I contract and in March 2015 Eskom announced that ABB had been awarded the C&I contract. As stated by the DOJ:

“The next day … Eskom announced that certain top Eskom officials, including South African Official, had been suspended from their positions at Eskom. ABB learned that, notwithstanding the suspension of South African Official, the prior arrangements would continue to be honored, including the award of the C&I contract to ABB and the use of Subcontractor 1 as ABB’s subcontractor, with the understanding that South African Official would receive a portion of the money paid by ABB to Subcontractor 1.”

According to the DOJ, ABB Manager 3 ensured that an advance payment in the amount of approximately $800,000 was made to Subcontractor 1, while knowing that the funds were intended, at least in part, as a bribe for South African Official. The DOJ further stated:

“ABB South Africa falsely recorded the payment in its books and records as an ‘advanced payment’ for services to be performed by Subcontractor 1 under the subcontract when, in reality, a portion of the payment was intended to be used as a bribe for South African Official.”

The DOJ further states:

“Following ABB’s advance payment to Subcontractor 1, ABB learned of a dispute between Subcontractor 1 and South African Official, suggesting that the advance payment had not been delivered to South African Official, as ABB intended. In or around May 2015, ABB Manager 1 unsuccessful attempted to mediate the dispute at a meeting of Subcontractor 1 Executive, South African Official, and ABB Manager 1.

Soon after entering into the subcontract with Subcontractor 1, ABB began to experience problems with Subcontractor 1’s work, in part due to the inexperience of the personnel Subcontractor 1 provided for work on the Kusile project.”

Next, according to the DOJ, the South African Official returned from suspension in July 2015 and resumed a senior position at Eskom with authority and influence over the Kusile project and ABB Manager 1 instructed ABB Manager 3 to contact Subcontractor 2 (a South African company) so that ABB could establish Subcontractor 2 as an ABB subcontractor for the Kusile Project.

According to the DOJ, Subcontractor 2 “failed multiple aspects of ABB’s routine due diligence, raising questions among ABB personnel based in South Africa and the United States about Subcontractor 2’s qualifications and financial stability.

As stated by the DOJ:

“Despite concerns about Subcontractor 2’s qualifications, ABB subsequently granted the requested waiver [from ABB’s standard subcontractor qualification requirements] with respect to Subcontractor 2 premised on Subcontractor 2 working through other subcontractors who were qualified for the job.”

According to the DOJ, ABB Manager 1 and South African Official agreed to inflate the cost of ABB’s work on the Kusile Project via contract “variation orders” and that “payments to Subcontractor 2 were intended, at least in part, to ultimately benefit South African Official (including via South African Official’s close relative, who served as a director of Subcontractor 2 and also held an ownership interest in Subcontractor 2).”

According to the DOJ, ABB approved an approximate $754,000 payment to Subcontractor 2 while falsely recording the payment in its books and records as a payment for “work done” by Subcontractor 2 under the subcontract when, in reality, a portion of the payment was intended to be used as a bribe for the benefit of South African Official.”

According to the DOJ, ABB made filings with the SEC which incorporated the accounts of ABB and its subsidiaries which falsely included as a legitimate business expense the “advance payment” to Subcontractor 1 and the “corrupt variation order payments” to Subcontractor 2.

Based on the above core allegations, the DOJ charged ABB with conspiracy to violate the FCPA’s anti-bribery provisions, conspiracy to violate the FCPA books and records provisions, and substantive violations of the FCPA. In addition, ABB subsidiaries ABB Management Services Ltd. (Switzerland) and ABB South Africa (Pty) Ltd. (South Africa) each pleaded guilty to one count of conspiracy to violate the FCPA’s anti-bribery provisions.

The criminal charges against ABB were resolved through a three year deferred prosecution agreement.

The DPA sets forth the following relevant considerations.

“a. the nature and seriousness of the offense conduct … including a multi-year scheme to pay bribes benefiting a high-level official of Eskom;

b. the Company did not receive voluntary disclosure credit … because it did not voluntarily and timely disclosed to the office the conduct …; although the Company did not receive voluntary disclosure credit, the Offices, in evaluating the appropriate disposition of this matter – including the appropriate form of the resolution – considered evidence that, within a very short time of learning of the misconduct, the Company contacted the Fraud Section and scheduled a meeting to discuss matters under investigation by the Fraud Section and the Company. The Company did not specifically identify the South Africa misconduct in that meeting request, but it disclosed the South Africa misconduct during the scheduled meeting, subsequently presented evidence to the Offices that it intended to disclose the misconduct related to South Africa during the scheduled meeting and did not know of any imminent media reports when the meeting was scheduled. However, before the scheduled meeting occurred and prior to making any such disclosure to the Fraud Section, a media report was published related the misconduct;

c. the Company received full credit for its extraordinary cooperation with the Offices’ investigation … because it cooperated with the Offices and demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct; the Company also received full credit for its cooperation … by, among other things: (i) promptly providing information obtained through its internal investigation, which allowed the Offices to preserve and obtain evidence as part of their own independent investigation; (ii) making regular and detailed factual presentations to the Offices; (iii) voluntarily making foreign-based employees available for interviews in the United States; (iv) producing relevant documents located outside the United States to the Offices in way that did not implicate foreign data privacy laws; and (v) collecting, analyzing, and organizing voluminous evidence and information that it provided to the Offices, including the translation of certain foreign language documents;

d. the Company engaged in extensive remedial measures, including hiring experienced compliance personnel and, following a root-cause analysis of the conduct … investigating significant additional resources in compliance testing and monitoring throughout the organization; implementing targeted training programs, as well as on-site supplementary case-study sessions; conducting continuing monitoring and testing to assess engagement with new training measures; restructuring of reporting by internal project teams to ensure compliance oversight; and promptly disciplining employees involved in the misconduct;

e. the Company has enhanced and has committed to continuing to enhance its compliance program and internal controls, including ensuring that is compliance program satisfies the minimum elements (set forth in an attachment to the DPA);

f. based on the Company’s remediation and the state of its compliance program, and the Company’s agreement to report to the Offices … the Offices determined that an independent compliance monitor is unnecessary;

g. the Company’s criminal history, including (i) the Company’s 2010 DPA, accompanied by guilty pleas by U.S. and Jordan-based subsidiaries, for FCPA violations, involving bribes and kickbacks to officials in Mexico and Iraq; (ii) guilty pleas in 2004 by U.S. and U.K. based subsidiaries for FCPA violations involving bribery of Nigerian officials; and (iii) a guilty plea in 2001 by an Italy-based subsidiary to big-rigging conspiracy involving a construction contract in Egypt; as well as the Company’s resolution of administrative actions with European and Brazilian competition authorities in 2013 and 2014;

h. the Company’s agreement to resolve concurrently a separate investigation by the SEC relating to the conduct … and its agreement to pay $75 million in civil monetary penalties; and the Company’s agreement to resolve additional separate investigations by authorities in South Africa and Switzerland, and its anticipated resolution with authorities in Germany, related to the conduct … which resolutions the Offices are crediting in connection with the criminal penalty …

i. the Company’s agreement to continue to cooperate with the Offices in any ongoing investigation of the conduct of the Company [and others];

j. accordingly, after considering (a) through (i) above, the Offices believe that the appropriate resolution in this case is a DPA with the Company; a criminal monetary penalty of $315 million, which reflects an aggregate discount of 25% off the mid-point between the middle and the high end of the otherwise-applicable U.S. Sentencing Guidelines fine range …”.

As stated in the DPA, ABB agreed to pay the U.S. $72.5 million and the remainder of the $315 million Total Criminal Penalty will be offset as follows: (i) $157.5 million to South African authorities; (ii) $11 million to Swiss authorities; (iii) $11 million to German authorities; (iv) $63 million to the SEC.

In this release, DOJ Assistant Attorney General Kenneth Polite stated:

“This is the department’s first coordinated resolution with authorities in South Africa, where much of ABB’s criminal scheme was carried out, reflecting our commitment to relationship-building and our ever-deepening partnerships in the global fight against corruption. ABB bribed a high-ranking official at South Africa’s state-owned energy company in order to corruptly obtain confidential information and win lucrative contracts. In addition, our partners in South Africa have brought corruption charges against that official.  This resolution demonstrates the Criminal Division’s thoughtful approach to appropriately balancing ABB’s extensive remediation, timely and full cooperation, and demonstrated intent to bring the misconduct to the department’s attention promptly upon discovering it, while also accounting for ABB’s historical misconduct.”

U.S. Attorney Jessica Aber (E.D. of Va) stated:

“Corruption and bribery are not victimless acts. They can create hazardous working conditions, hurt honest businesses, and erode trust and integrity in local and global governance. This resolution reflects the need for accountability, recompense, and rehabilitation in the wake of these kinds of violations. I extend my appreciation to the law enforcement authorities in South Africa, Switzerland, and Germany for their invaluable assistance.”

Assistant Director Luis Quesada of the FBI’s Criminal Investigative Division stated:

“As this resolution shows, international partnerships are central to the FBI’s efforts against global corruption. The FBI and our law enforcement partners conducted a thorough investigation to uncover the source of bribes to a senior official at South Africa’s state-owned energy company. No matter which country the crime occurs in, the FBI is steadfast in pursuing those who violate the Foreign Corrupt Practices Act.”

SEC

The SEC action was based on the same core conduct alleged in the DOJ action.

This administrative order states in summary fashion:

“This matter concerns violations of the anti-bribery, books and records, and internal accounting controls provisions of the FCPA …, as a result of bribes paid to a South African government official in connection with obtaining a contract worth approximately $160 million. The scheme occurred from March 2015 through December 2017, and involved ABB executives at its Swiss headquarters and German and South African subsidiaries who used complicit third-party service providers to funnel payments to the South African official who awarded ABB the contract.”

Based on the above findings, the order finds that ABB violated the FCPA’s anti-bribery, books and records, and internal controls provisions.

Regarding ABB’s books and records and internal controls, the order states:

“The various payments to [Third Party], much of which was intended as bribes for Eskom Official, were inaccurately reflected in ABB-South Africa’s books and records as legitimate engineering services and involved the use of false purchase orders and contracts. ABB-South Africa’s books and records were consolidated into ABB’s for purposes of Commission filings.

Despite known corruption risks in connection with its South African operations and having been previously the subject of two FCPA settlements with the Commission, ABB failed to devise and maintain sufficient internal financial accounting controls.”

Under the heading “Commission Consideration of ABB’s Cooperation and Remedial Efforts,” the order states:

“In determining to accept the Offer, the Commission considered ABB’s cooperation and remedial efforts. ABB’s cooperation included real-time sharing of facts learned during its own internal investigation, as well as the sharing of documents related to that investigation. ABB has made and continues to make enhancements to its internal accounting controls, global compliance organization and its policies and procedures regarding public tenders; misuse of confidential information; supplier due diligence, monitoring and payments; scrutiny of variation orders; risk review; management visibility and accountability; and reporting and training. Additionally, ABB terminated all employees involved in the misconduct.”

Under the heading “Criminal and Foreign Regulatory Dispositions,” the order states:

“Respondent has entered into a deferred prosecution agreement with the United States Department of Justice that acknowledges responsibility for criminal conduct relating to the findings in the Order.

In December 2020, Respondent entered into a civil settlement with the South Africa Special Investigating Unit and others relating to the findings in the Order and paid R1.56 billion ($107 million) which included reimbursement of the South African government for overpayments on the Kusile project and interest.”

Pursuant to the order, ABB agreed to cease and desist from committing future FCPA violations and to “pay disgorgement of $58,000,000 and prejudgment interest of $14,554,267 to the Securities and Exchange Commission, which is deemed satisfied by the payment previously made to the Government of South Africa pursuant to the Settlement Agreement of December 11, 2020.” In addition, ABB agreed to pay “a civil money penalty in the amount of $75,000,000 to the Securities and Exchange Commission.”

Thus, the net SEC settlement amount was $75 million.

As a condition of settlement, ABB agreed to report to the SEC during a three-year period on “the status of its remediation and implementation of compliance measures related to the effectiveness of its anticorruption policies, procedures, practices, internal accounting controls, recordkeeping, and financial reporting processes.”

The order further states that ABB shall:

“Certify, in writing, compliance with the undertakings […]. The certification shall identify the undertakings, provide written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The Commission staff may make reasonable requests for further evidence of compliance, and [ABB] agrees to provide such evidence.”

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

“Notwithstanding prior FCPA-related violations and known corruption risks throughout its operations, ABB lacked sufficient controls to detect or deter this egregious bribery scheme.”

In this release, ABB CEO Björn Rosengren stated:

“We take the Kusile matter very seriously. Since it was reported, ABB has cooperated fully with all authorities and spent considerable time and effort – including launching a new code of conduct, educating employees and implementing an enhanced control system – to prevent something similar from happening again. We have a clear zero tolerance approach to non-ethical behavior within our company.”

ABB was represented by Paul Hastings attorneys Robert Luskin and Jay Darden.

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