[This post is part of a periodic series regarding “old” FCPA enforcement actions]
In 2002, the SEC announced  the filing of a settled civil complaint  against BellSouth Corporation charging the telecommunications company with violations of the FCPA’s books and records and internal controls provisions.
The conduct at issue focused on an indirect subsidiary in Venezuela (and BellSouth’s inability to “reconstruct the circumstances of purpose” of certain payments) and an indirect subsidiary in Nicaragua (which retained the wife of the chairman of a Nicaraguan legislative committee with oversight of telecommunications).
As frequently highlighted on these pages, the root cause of many FCPA enforcement actions are foreign trade barriers and restrictions and in this regard, as the complaint notes, Nicaraguan law prohibited foreign companies from acquiring a majority interest in Nicaraguan telecommunications companies.”
Another interesting aspect of the enforcement action is that the SEC invoked a standard that does not even exist in the FCPA by alleging that “BellSouth failed to devise and maintain a system of internal accounting controls at [the Nicaraguan subsidiary] sufficient to detect and prevent FCPA violations.” (emphasis added). The FCPA’s actual internal controls provisions state that issuers shall “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that” certain financial objectives are met.
The factual allegations of the SEC’s complaint state:
“In 1991, BellSouth acquired a minority interest in Telcel [described as Venezuelan corporation that became a indirectly majority-owned subsidiary of BellSouth]. BellSouth eventually increased its ownership percentage in Telcel, acquiring a majority interest in August 1997. Telcel has become Venezuela’s leading wireless provider, and contributes more revenue to BellSouth’s Latin American Group segment than any other Latin American BellSouth operation.
Between September 1997 and August 2000, former Telcel senior management authorized payments totaling approximately $10.8 million to six offshore companies (the “Companies”). Telcel recorded the disbursements in Telcel’s books and records based on fictitious invoices. The invoices indicated, without detail, that Telcel had received from the Companies professional, computer and contracting services. However, there were no service or vendor agreements supporting the alleged services, and in fact, no services were rendered. BellSouth has been unable to reconstruct the circumstances or purpose of the payments, or the identity of their ultimate recipients.
In 1997, BellSouth acquired a 49 percent ownership interest in Telefonia [described as a Nicaraguan corporation that became an indirectly majority-owned subsidiary of BellSouth], and an option granted by members of a Nicaraguan family (the “Nicaraguan co-owners”) to acquire an additional 40 percent. At the time of BellSouth’s acquisition of its minority interest in Telefonia, a Nicaraguan law, Article 29 of the General Law of Telecommunications and Postal Services (the “foreign ownership restriction”), prohibited foreign companies such as BellSouth from acquiring a majority interest in Nicaraguan telecommunications companies. BellSouth intended to exercise its 40 percent option, but could do so only in the event that the Nicaraguan legislature repealed the Article 29 foreign ownership restriction.
In connection with BellSouth’s acquisition ofTelefonia, BSI [described as an indirectly wholly-owned subsidiary of BellSouth located in Atlanta] and the Nicaraguan co-owners executed an agreement ceding to BSI operational control of Telefonia (“the Operating Agreement”). Under the Operating Agreement, BSI became responsible for Telefonia’s daily operations and for its long-term business planning. Additionally, after BellSouth’s investment in Telefonia, there was a restructuring of Telefonia’s board of directors, including the filling of four, of the six Telefonia board seats by BSI personnel.
In October 1998, Telefonia retained the wife of the chairman of the Nicaraguan legislative committee (“Committee”) with oversight of Nicaraguan telecommunications. Pursuant to their agreement, the wife was to be responsible for providing various regulatory and legislative services, including lobbying for repeal of the foreign ownership restriction. Although the wife (“lobbyist”) had prior financial and operations experience in the telecommunications area, she had no prior legislative experience. Telefonia and the lobbyist agreed that she would provide services to Telefonia over a three-month trial period for a monthly fee of $6,500, making her the second most highly paid individual compensated by Telefonia.
Ultimately, the lobbyist worked predominantly on the repeal of the foreign ownership restriction. Because the lobbyist’s husband chaired the legislative committee with jurisdiction over the foreign ownership restriction, BSI knew that its payments to the lobbyist could implicate the Foreign Corrupt Practices Act (“FCPA”). Although a former in-house BSI attorney approved the wife’s retention, BSI officials knew, or should have known, that the counsel lacked sufficient experience or training to enable him properly to opine on the matter.
During the lobbyist’s retention, the legislator/husband drafted the text of the proposed repeal of the foreign ownership restriction and enlisted support for the proposed repeal from other Committee members. The husband scheduled and presided at a hearing in April 1999, during which his Committee heard arguments from BSI and others advocating repeal of the foreign ownership restriction.
In May 1999, Telefonia terminated the lobbyist. In June 1999, Telefonia made a severance payment to her. Telefonia recorded the total sum of $60,000 paid to the lobbyist as consulting services and as a severance payment. In September 1999, the Committee referred the proposed amendment for approval by the Nicaraguan National Assembly. In December 1999, the National Assembly voted to repeal the foreign ownership restriction. BellSouth exercised its 40 percent option and increased its ownership interest in Telefonia to 89 percent in June 2000.”
Based on the above allegations, the SEC charged BellSouth with violations of the FCPA’s books and records and internal controls provisions.
As to Telcel, the complaint alleges:
“Telcel created false books and records by improperly recording the falsely documented, unsubstantiated payments to the offshore companies as bona fide services. In addition, Telcel’s internal controls failed to detect the unsubstantiated payments for a period of at least two years. This control deficiency has further prevented BellSouth from being able to reconstruct the circumstances of the payments, or the identity of the ultimate recipients of the payments.”
As to Telefonia, the complaint alleges:
“Pursuant to Section 13(b)(6) ofthe Exchange Act, Section 12 issuers are required, with respect to entities of which they hold 50 percent or less of the voting power, to proceed in good faith to use their influence, to the extent reasonable under the circumstances, to cause the entity to comply with the FCPA’s “books and records” and “internal controls” provisions.
BellSouth, during the relevant period, held less than 50 percent of the voting power of Telefonia, but through its operational control, had the ability to cause Telefonia to comply with the FCPA’s books and records and internal controls provisions. Despite BellSouth’s ability to cause Telefonia’s compliance, Telefonia created false books and records by improperly recording payments to the wife of the Nicaraguan legislator as “consulting services.” BellSouth failed to devise and maintain a system of internal accounting controls at Telefonia sufficient to detect and prevent FCPA violations.”
As noted in the SEC’s release, without admitting or denying the SEC’s allegations, BellSouth agreed to pay a $150,000 civil penalty. As further noted in the SEC’s release, the SEC also brought a settled administrative action in which BellSouth consented to the entry of an order requiring BellSouth to cease and desist from future violations.
The SEC’s release further states:
“The Order notes that in determining to accept Bellsouth’s settlement offer, the Commission considered Bellsouth’s cooperation with the Commission staff after being advised of the staff’s investigation. The Order also notes that BellSouth undertook several remedial measures, including the disciplining and termination of various employees. Finally, the Order notes that BellSouth has taken steps designed to enhance its compliance program, which currently consists of a number of components, including corporate governance, policies and procedures, training, internal auditing, and corrective action and discipline.”
As to the origins of the enforcement action, this October 2000 SEC filing  by BellSouth stated:
“Because our Latin American companies must deal with government officials for licenses, concessions, permits and additional radio spectrum, they may be affected by the Act more than companies that are not so heavily regulated. We cannot assure you that the compliance program we have instituted and the other precautions we employ will protect us against injury for actions taken by employees, partners, agents and other intermediaries for whom we may have exposure.
The SEC is conducting an investigation that is focused on determining whether BellSouth and one of its Latin American subsidiaries violated the Act, as described in “Legal Proceedings.” We have also brought to the SEC’s attention a separate matter involving accounting entries made by another of our Latin American subsidiaries and as to which the SEC might expand its investigation. We cannot predict the duration, scope or outcome of any investigation, and we may be required to pay fines and penalties and may be subject to sanctions. These matters may also come to the attention of local authorities, media and others and may result in adverse local country impacts, including penalties and other serious injury to our local businesses.
The SEC is conducting an investigation that is focused on determining whether BellSouth and one of its Latin American subsidiaries violated the Foreign Corrupt Practices Act. We had previously engaged outside counsel to investigate this matter, and they concluded that those activities did not violate the Act. More recently and independent of these developments, our internal auditors, in the ordinary course of conducting compliance reviews, identified issues concerning accounting entries made by another of our Latin American businesses. Our internal investigation of this matter is continuing. We have informed the SEC as to this matter, and we expect the SEC to expand its investigation to encompass it. We are cooperating with the SEC in its investigation, but we cannot predict the duration or the outcome of the SEC’s investigation or whether the scope of the investigation will be expanded beyond the matters currently identified.”
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