2013 Enforcement Actions Archives

In Depth On The ADM Enforcement Action

By Mike Koehler on December 30, 2013 in 2013 Enforcement Actions, ADM, Agriculture Industry, Alfred Toepfer Int’l, DOJ Enforcement Action, Foreign Non-Issuer Company, Jurisdiction, Non-Prosecution Agreement, Permits / Licenses / Customs / Tax, SEC Enforcement Action, Tax Payments, Ukraine, Venezuela

On December 20th, the DOJ and SEC announced (here and here) that Archer Daniels Midland Company (“ADM”) agreed to resolve a Foreign Corrupt Practices Act based on the conduct of an indirect subsidiary in Ukraine and a joint venture partner in Venezuela. The enforcement action had been expected for some time (as noted in this prior post, in November the company disclosed that it had agreed in principle to the settlement).

[Although announced on December 20th, original source documents relevant to the enforcement action did not become publicly available until December 24th and the documents are still not on the DOJ’s FCPA website].

The enforcement action involved a DOJ criminal information against Alfred C. Toepfer International Ukraine Ltd. resolved via a plea agreement, a non-prosecution agreement involving ADM, and a SEC settled civil complaint against ADM.

ADM entities agreed to pay approximately $54 million to resolve alleged FCPA scrutiny ($17.7 million in criminal fines to resolve the DOJ enforcement action and $36.5 million to resolve the SEC enforcement action).

This post summarizes both the DOJ and SEC enforcement actions.

DOJ

Alfred C. Toepfer International Ukraine Ltd. (ACTI Ukraine)

The criminal information begins as follows.

“At certain times between in or around 2002 and in or around 2008, the Ukrainian government did not have the money to pay value-added tax (“VAT”) refunds that it owed to companies that sold Ukrainian goods outside of Ukraine.” (emphasis added).

Thereafter, the information alleges, in pertinent part, as follows.

“In order to obtain VAT refunds from the Ukrainian government, ACTI-Ukraine [an indirect 80%-owned subsidiary of ADM], with the help of its affiliate, Alfred C. Toepfer International GmbH (ACTI Hamburg) [an indirect 80%-owned subsidiary of ADM], paid third-party vendors to pass on nearly all of that money as bribes to government officials.”

“In order to disguise the bribes, ACTI Ukraine and ACTI Hamburg devised several schemes involving the use of Vendor 1 [a U.K. export company that used both truck and rail services for the export of goods from Ukraine] and Vendor 2 [a Ukrainian insurance company that provided insurance policies for commodities]. In some instances, ACTI Ukraine and ACTI Hamburg paid Vendor 1, a vendor that provided export-related services for ACTI Ukraine, to pass on nearly all the money they paid it as bribes to Ukrainian government officials in exchange for those officials’ assistance in obtaining VAT refunds for and on behalf of ACTI Ukraine. In addition, ACTI Ukraine purchased unnecessary insurance policies from Vendor 2 so that Vendor 2 could use nearly all of that money to pay bribes to Ukranian government officials in exchange for those officials’ assistance in obtaining VAT refunds for and on behalf of ACTI Ukraine.”

“In total, ACTI Ukraine, ACTI Hamburg, and their executives, employees, and agents paid roughly $22 million to Vendor 1 and Vendor 2 to pass on nearly all of that money to Ukrainian government officials to obtain over $100 million in VAT refunds. These VAT refunds gave ACTI Ukraine a business advantage resulting in a benefit to ACTI Ukraine and ACTI Hamburg of roughly $41 million.”

“In furtherance of the bribery scheme, employees from ACTI Ukraine and its co-conspirators, while in the territory of the United States, and specifically in the Central District of Illinois, communicated in-person, via telephone, and via electronic mail with employees of ACTI Ukraine’s and ACTI Hamburg’s parent company, Archer Daniels Midland Company (ADM), which owned an 80% share of the ACTI entities, about the accounting treatment of VAT refunds in Ukraine. During those communications, the ACTI employees mischaracterized the bribe payments as “charitable donations” and “depreciation.”

Based on the above allegations, the DOJ charged ACTI Ukraine with conspiracy to violate the FCPA’s anti-bribery provisions under 78dd-3. This prong of the FCPA has the following jurisdictional element.

“while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance” of a bribery scheme.

There is no allegation in the criminal information that anyone associated with ACTI Ukraine “while in the territory of the U.S.” made use of the mails or any means or instrumentality of interstate commerce.”

Rather, the information alleges, as to overt acts, as follows.

“[In July 2002 – 11 years prior to the enforcement action] executives from ACTI Hamburg [not the defendant ACTI Ukraine] traveled to ADM’s headquarters in Decatur, Illinois for business meetings. In one of those meetings, these ACTI executives met with executives from ADM’s tax department and discussed ACTI Ukraine’s ability to recover VAT refunds and the way in which ACTI Ukraine was accounting for the write-down of those refunds. During this discussion, the ACTI Hamburg executives stated that the way in which ACTI Ukraine was recovering its VAT refunds was by making charitable donations. ACTI Ukraine was not making such donations in conjunction with VAT recovery. In fact, ACTI Ukraine was writing down its VAT receivable based upon anticipated payments to Vendor 1.”

The other overt acts alleged in the information all concern e-mail traffic, none of which fits the jurisdictional element of “while in the territory of the U.S.”

The above charge against ACTI Ukraine was resolved via a plea agreement in which the company admitted, agreed, and stipulated that the factual allegations in the information are true and correct and accurately reflects the company’s “criminal conduct.”

As set forth in the plea agreement, the advisory Sentencing Guidelines calculation for the conduct at issue was between $27.3 million and $54.6 million and ACTI Ukraine agreed to a $17,711,613 criminal fine. The plea agreement states as follows.

“The parties have agreed that a fine of $17,771,613 reflects an approximately thirty-percent reduction off the bottom of the fine range as well as a deduction of $1,338,387 commensurate with the fine imposed by German authorities on ACTI Hamburg.”

The plea agreement further states that this fine amount is the “appropriate disposition based on the following factors”:

“(a) Defendant’s timely, voluntary, and thorough disclosure of the conduct; (b) the Defendant’s extensive cooperation with the Department; and (c) the Defendant’s early, extensive, and unsolicited remedial efforts already undertaken and those still to be undertaken.”

As is common in corporate FCPA enforcement actions, the plea agreement contains a “muzzle clause” prohibiting ACTI Ukraine or anyone on its behalf from making public statements “contradicting the acceptance of responsiblity” of ACTI Ukraine

ADM

The NPA between the DOJ and ADM concerns the above Ukraine conduct as well as alleged conduct in Venezuela. Only the Venezuela conduct is highlighted below.

The Statement of Facts attached to the NPA states as follows regarding “conduct relating to Venezuela.”

“From at least in or around 2004 to in or around 2009, when customers in Venezuela purchased commodities through ADM Venezuela [a joint venture between ADM Latin America (ADM Latin – a wholly owned subsidiary of ADM) and several individuals in Venezuela], the customers paid for the commodities via payment to ADM Latin. During this time period, a number of customers overpaid ADM Latin for the commodities by including a brokerage commission in the cost of the commodities. At the instruction of ADM Venezuela, including Executive A [a high-level executive at ADM Venezuela] and ADM’s Latin’s customers, rather than repaying these excess amounts to the customer directly, ADM Latin made payments to third-party bank account outside of Venezuela, which, in many instances, were used to funnel payments to accounts owned by employees or principles of the customer. In addition, ADM Venezuela personnel prepared invoices to ADM Latin’s customers that violated Venezuelan laws and regulations regarding foreign currency exchanges.”

The NPA states that in approximately 1998, “ADM identified the customer “commission” practice as a business risk and recognized that customers may attempt to engage in such transactions with ADM Latin through the prospective joint venture, and instituted a policy that prohibited the repayment of excess funds to any account other than that originally used by the customer to make the payment. However, although this policy was made known to Executive A and some ADM Venezuela employees, it was initially not formalized and from in or around 1999 until in or around 2004 the same practices continued. The customers submitted excess payments to ADM Latin, claiming that the overpayment was attributable to deferred credit expenses (“DCE”).”

The NPA further states as follows.

“In or around 2004, ADM conducted an audit of ADM Venezuela due to an issue pertaining to Executive A and uncovered the payments to third-party bank accounts being made through DCE. Although ADM took some remedial measures, including terminating the employment of the credit employee who had signed off on the refunds, conducting limited training on compliance for its joint venture partners, and instituting a written policy prohibiting refund payments of DCE to bank account different than the accounts from which the money came, the policy was narrowly drawn only to cover DCE payments. ADM did not train ADM Latin employees and did not take adequate steps to monitor ADM Latin and ADM Venezuela to prevent such payments in forms other than DCE. From in or around 2004 to in or around 2009, various customers, with the help of ADM Venezuela, including Executive A, began classifying these additional expenses as “commissions” or “commissions K,” rather than DCE, which were processed by the accounting department at ADM Latin, rather than the credit department. Therefore, when the customers instructed that the excess “commissions” be paid to third-party entities at third-party bank accounts, ADM Latin authorized and made the payments.”

The NPA further states that “in or around 2008, Executive A, and others at ADM Venezuela negotiated the sale of soybean oil from ADM Latin to Industrias Diana [an oil company headquartered in Venezuela that was wholly owned by Petroleos de Venezuela, Venezuela’s state-owned and controlled national oil company].” According to the NPA, in connection with this sale, “Broker 1 [a third-party agent that purportedly performed brokerage services for customers of ADM Latin, including Industrias Diana, in connection with the purchase of commodities] submitted an invoice to ADM Latin for the $1,735,157 commission amount, which ADM Latin paid to Broker 1’s bank account. Broker 1 then transferred this amount, in large part, to an account in the name of an employee of Industrias Diana.”

The NPA states as follows.

“On a number of other occasions, ADM Latin made payments to Broker 1’s bank account in connection with the purchase of commodities by other customers. Broker 1 then transferred those amounts, in large part, to bank accounts outside of Venezuela in the name of the principals of those customers. In total, ADM Latin transferred roughly $5 million to Broker 1.”

According to the NPA, certain of Broker 1’s transfers were to “accounts owned and controlled by Executive A, as well as numerous transfers to a company in which Executive A had ownership interests.”

The NPA states that the DOJ will “not criminally prosecute ADM … for any crimes … related to violations of the internal controls provisions of the FCPA arising from or related to improper payments by the Company’s subsidiaries, affiliates or joint ventures in Ukraine and Venezuela … and any other conduct relating to internal controls, books and records, or improper payments disclosed by the Company to the Department prior to the date on which this Agreement is signed.”

The NPA has a term of three years and ADM “agreed to pay a monetary penalty of $9,450,000 provided, however, that any criminal penalties that might be imposed by the Court on ACTI Ukraine in connection with its guilty plea and plea agreement … will be deducted from the $9,450,000 penalty agreed to under this Agreement.”

Pursuant to the NPA, ADM agreed to “report to the Department periodically regarding remediation and implementation of the compliance program and internal controls, policies, and procedures, as described in Attachment C” to the NPA.

In the DOJ release, Acting Assistant Attorney General Mythili Raman stated:

“As today’s guilty plea shows, paying bribes to reap business benefits corrupts markets and undermines the rule of law. ADM’s subsidiaries sought to gain a tax benefit by bribing government officials, and then attempted to deliberately conceal their conduct by funneling payments through local vendors. ADM, in turn, failed to implement sufficient policies and procedures to prevent the bribe payments, although ultimately ADM disclosed the conduct, cooperated with the government, and instituted extensive remedial efforts. Today’s corporate guilty plea demonstrates that combating bribery is and will remain a mainstay of the Criminal Division’s mission. We are committed to working closely with our foreign and domestic law enforcement partners to fight global corruption.”

The release further states:

“The agreements acknowledge ADM’s timely, voluntary and thorough disclosure of the conduct; ADM’s extensive cooperation with the department, including conducting a world-wide risk assessment and corresponding global internal investigation, making numerous presentations to the department on the status and findings of the internal investigation, voluntarily making current and former employees available for interviews, and compiling relevant documents by category for the department; and ADM’s early and extensive remedial efforts.”

SEC

The SEC’s complaint (here) is based on the same Ukraine allegations set forth in the above DOJ action.

In summary fashion, the complaint alleges:

“This matter involves violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by ADM. At certain times between 2002 and 2008, Alfred C. Toepfer, International G.m.b.H. (“ACTI Hamburg”) and its affiliate, Alfred C. Toepfer, International (Ukraine) Ltd. (“ACTI Ukraine”) paid approximately $22 million to two third-party vendors so that they could pass on nearly all of that money as bribes to Ukrainian government officials to obtain over $100 million in accumulated value added tax (“VAT”) refunds. These payments were recorded by ACTI Hamburg and ACTI Ukraine in their books and records as insurance premiums and other business expenses. ADM indirectly owns a majority of ACTI Hamburg and ACTI Ukraine through its 80% interest in Alfred C. Toepfer International B.V. (“ACTI”), and in 2002, ADM began consolidating ACTI’s financial results into its financial statements.

In order to disguise the purpose of these improper payments, ACTI Hamburg and ACTI Ukraine made certain payments for export-related services and insurance premiums to third parties, but, in fact, nearly all of these payments were intended to be passed on through these third parties as bribes to Ukrainian government officials in exchange for obtaining VAT refunds for and on behalf of ACTI Ukraine.

ACTI’s conduct went unchecked by ADM, and ACTI continued to make these improper payments for several years. ADM’s anti-bribery compliance controls in existence at the time were insufficient in that they did not deter and detect these payments. ACTI Hamburg and ACTI Ukraine created inaccurately described reserves in their books and records, manipulated commodities contracts that were kept open for an extended period of time, structured payments to avoid detection, and created fictitious insurance contracts to hide from ADM and others the payments to third-parties to secure VAT refunds in Ukraine.

Due to the consolidation of ACTI’s financial results, which included these inaccurately characterized payments, into ADM’s books and records, ADM violated [the FCPA’s books and records provisions]. ADM violated [the FCPA’s internal controls provisions] by failing to maintain an adequate system of internal controls to detect and prevent the illicit payments.”

Under the heading “ADM’s Violations,” the complaint states:

“ACTI Hamburg and ACTI Ukraine characterized their improper payments to the Shipping Company and the Insurance Company as insurance premiums and other business expenses even though nearly all of those payments were intended to be used for payment to Ukrainian government officials. Due to the consolidation of ACTI’s financial results into ADM’s, ADM’s financial records also failed to reflect the true nature of the payments.

Between 2002 and 2008, ADM’s anti-corruption policies and procedures relating to ACTI were decentralized and did not prevent improper payments by ACTI to third-party vendors in the Ukraine or ensure that these transactions were properly recorded by ACTI. In this respect, ADM failed to implement sufficient anti-bribery compliance policies and procedures, including oversight of third-party vendor transactions, to prevent these payments at ACTI Hamburg and ACTI Ukraine.

Through its various schemes, ACTI Ukraine and ACTI Hamburg paid roughly $22 million in improper payments to obtain more than $100 million in VAT refunds earlier than they otherwise would have. Getting these VAT refunds earlier—before the Ukraine endured a brief period of hyperinflation—gave ACTI Ukraine a business advantage resulting in a benefit to ADM of roughly $33 million.”

Under the heading “ADM’s Discovery and Subsequent Remedial Measures,” the complaint states:

“In mid-2008, after becoming aware of these insurance expenses, ADM controllers questioned ACTI executives regarding these expenses, particularly the basis for the accounting treatment of these expenses. An ACTI Ukraine employee disclosed to its outside auditors that the insurance payments were, in fact, made to secure VAT refunds. After ADM controllers received this information, ADM’s legal and compliance departments took action, which led to an immediate investigation in which ADM ultimately uncovered ACTI’s various schemes to secure VAT refunds.

Following discovery of these payments, ADM immediately retained outside counsel to conduct an internal investigation. As a result of the investigation, using its authority as majority shareholder through the ACTI supervisory board, ADM terminated certain ACTI executives. ADM then voluntarily conducted a world-wide risk assessment and corresponding global internal investigation, made numerous presentations to the Department of Justice and Securities and Exchange Commission, made current and former employees available for interviews, produced documents without subpoena, and implemented early and extensive remedial measures.”

As noted in the SEC’s release, ADM agreed to pay approximately $36.5 million to resolve the action (disgorgement of $33,342,012 plus prejudgment interest of $3,125,354), consented to the entry of a final judgment permanently enjoining it from future violations of the FCPA books and records and internal control provisions, and to report on its FCPA compliance efforts for a three year period. The release states:

“The SEC took into account ADM’s cooperation and significant remedial measures, including self-reporting the matter, implementing a comprehensive new compliance program throughout its operations, and terminating employees involved in the misconduct.”

In the release, Gerald Hodgkins (Associated Director in the SEC’s enforcement division) stated:

“ADM’s lackluster anti-bribery controls enabled its subsidiaries to get preferential refund treatment by paying off foreign government officials. Companies with worldwide operations must ensure their compliance is vigilant across the globe and their transactions are recorded truthfully.”

William Bachman and Jon Fetterolf (Williams Connolly) represented ADM.

Robin Bergen (Clearly Gottlieb Steen & Hamilton) represented ATCI Ukraine.

In this press release, ADM’s Chairman and CEO stated:

“In 2008, soon after we became aware of some questionable transactions by a non-U.S. subsidiary, we engaged an outside law firm and an accounting firm to undertake a comprehensive internal investigation. In early 2009, we voluntarily disclosed the matter to appropriate U.S. and foreign government agencies and undertook a comprehensive anti-corruption global risk analysis and compliance assessment. We have also implemented internal-control enhancements, and taken disciplinary action, including termination, with a number of employees. The conduct that led to this settlement was regrettable, but I believe we handled our response in the right way, and that the steps we took, including self-reporting, underscore our commitment to conducting business ethically and responsibly.”

German Company Resolves FCPA Enforcement Action Based On Conduct From “The Distant Past”

By Mike Koehler on December 10, 2013 in 2013 Enforcement Actions, Bilfinger, Deferred Prosecution Agreements, DOJ Enforcement Action, Foreign Non-Issuer Company, Monitor, Nigeria, Oil and Gas Industry, Willbros Group

Approximately 8 years ago, a German company owned 80% of a German entity doing business in Nigeria. The German entity doing business in Nigeria entered into a joint venture consortium agreement with subsidiaries of a Panamanian company. The Panamanian company had principal places of business in the U.S. and had shares traded on the New York Stock Exchange. The joint venture consortium allegedly made bribe payments to Nigerian officials.

The end result?

Why of course, $32 million dollars to the U.S. Treasury.

Yesterday, the DOJ announced (here) that “Bilfinger SE, an international engineering and services company based in Mannheim, Germany, has agreed to pay a $32 million penalty to resolve charges that it violated the Foreign Corrupt Practices Act by bribing [Nigerian] government … to obtain and retain contracts related to the Eastern Gas Gathering System (EGGS) project, which was valued at approximately $387 million.”

As noted in the DOJ’s release, the EGGS has been the focus, in whole or in part, in several prior enforcement actions against Willbros Group, Jim Brown, Jason Steph, James Tillery and Paul Novak.

The enforcement action involved a DOJ criminal information resolved via a deferred prosecution agreement.

Information

The information alleges that Bilfinger conspired with others “to obtain and retain contracts related to the EGGS project through the promise and payment of over $6 million in bribes to officials of [the Nigerian National Petroleum Corporation – NNPC], [National Petroleum Investment Management Services – a subsidiary of NNPC], the [dominant political party in Nigeria], an official in the executive branch of the Government of Nigeria, and others (collectively – the Nigerian Officials).”

According to the information, in 2003 Bilfinger “agreed to create a joint venture with [Willbros West Africa, Inc. (WWA) and Willbros Nigeria Ltd. (WNL) – both subsidiaries of Willbros International Inc., a Panamanian corporation with principal places of business in the U.S. and with shares traded on the New York Stock Exchange] to bid on the EGGS contract and its optional scopes of work.” In late 2003, [Bilfinger Berger Gas and Oil Services Nigeria Ltd. “BBGOS” – a German company based in Nigeria that was owned 80% by Bilfinger] and WWA/WNL executed a “Consortium Agreement” which formalized Bilfinger’s agreement to create a joint venture in connection with the EGGS project.”

According to the information, “Bilfinger and its coconspirators agreed that the EGGS Consortium would inflate the price of its bids for the EGGS project by 3% so it could cover the cost of paying bribes to Nigerian officials for their assistance in obtaining and retaining the EGGS project and its optional scopes of work.

The information alleges, among other things, that when other conspirators “encountered difficulty obtaining money to make [their] share of the promised bribe payments to Nigerian officials,” Bilfinger agreed to those loan the other conspirators $1 million “with the understanding that the $1 million would be used to pay some of the promised bribe payments to Nigerian officials …”.

The information contains the following relevant jurisdictional allegations.

“[In 2004] WWA opened a bank account in the U.S. on behalf of the EGGS Consortium, in which payments for work conducted by the EGGS Consortium would be deposited and out of which payments would be made to BBGOS or WWA when authorized by both BBGOS and WWA.”
“[In 2005], Bilfinger Employee 1 [a German citizen] telephoned Bilfinger Employee 3 [a German citizen], who was in the United States, and asked Bilfinger Employee 3 to meet with Tillery in Boston, MA, to find out what payments had been promised to officials and whether [a relevant contract] was at risk because those payments had not yet been made.”
[In 2005], Bilfinger Employee 3 flew from Houston, TX, to Boston, MA, to meet with Tillery and inquire about the outstanding corrupt payments and the [relevant contract].”

Based on the above allegations, the information charges conspiracy to violate the FCPA’s anti-bribery provisions and two substantive FCPA anti-bribery charges. The two substantive charges are based on (1) a 2005 “flight from Houston, TX to Boston, MA to discuss promised bribe payments,” and (2) a 2005 “wire transfer of $2,804,496 from Houston, TX to Frankfurt, Germany in connection with the EGGS contract.”

DPA

The charges against Bilfinger were resolved via a DPA in which the company admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees, and agents as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states:

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and the Company. Among the facts considered were the following: (a) the Company’s cooperation with the Department, albeit at a late date, including interviewing relevant employees and disclosing the facts learned during those interviews to the Department, facilitating the Department’s interviews of foreign employees; (b) the Company’s remediation efforts, including terminating the employment of certain employees responsible for the corrupt payments and disciplining others, and enhancing its compliance program and internal accounting controls; (c) the Company’s committment to continue to enhance its compliance program and internal accounting controls …; and (d) the Company’s agreement to continue to cooperate with the Department in any ongoing investigation of the conduct of the Company and its officers, directors, employees, agents, and consultants relating to violations of the FCPA …”.

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $28 million to $56 million. The DPA states that the monetary penalty of $32 million “is appropriate given the facts and circumstances of this case, including the Company’s cooperation and remediation in this matter.”

Pursuant to the DPA, Bilfinger agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA and other applicable anti-corruption laws. The specifics are detailed in Attachment C to the DPA. The DPA also requires Bilfinger to engage a corporate compliance monitor for ”a period of not less than 18 months from the date the monitor is selected.” The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA.

As is common in FCPA corporate enforcement actions, the DPA contains a “muzzle clause” prohibiting Bilfinger or anyone on its behalf from “contradicting the acceptance of responsibility by the company” as set forth in the DPA.

Sidley Austin attorneys Thomas Green and Jeffrey Green represented Bilfinger.

In this press release (which the company had to consult with the DOJ before releasing) Bilfinger CEO stated:

“We are pleased that we have now been able to put these events from the distant past behind us. In recent years, Bilfinger has consistently expanded its compliance instruments and today has a modern and efficient system.”

In Depth On The Weatherford Enforcement Action

By Mike Koehler on December 2, 2013 in 2013 Enforcement Actions, Albania, Algeria, Angola, Anything of Value, Congo, Deferred Prosecution Agreements, Demand for Bribes, Distributor Issues, DOJ Enforcement Action, FCPA Related Charges, Foreign Issuers, Foreign Non-Issuer Company, Internal Controls, Iraq Oil For Food, Joint Venture, Monitor, Oil and Gas Industry, Panalpina, SEC Enforcement Action, Travel and Entertainment, Weatherford International

Last week, the DOJ and SEC announced (here and here) that Switzerland-based oil and gas services company Weatherford International agreed to resolve a Foreign Corrupt Practices Act enforcement action based primarily on alleged conduct by its subsidiaries in Angola, the Middle East, and in connection with the Iraq Oil for Food program. The enforcement action has been expected for some time (as noted in this prior post, in November the company disclosed that it had agreed in principle to the settlement announced last week).

The enforcement action involved a DOJ criminal information against Weatherford Services Ltd. resolved via a plea agreement, a criminal information against Weatherford International Ltd. (“Weatherford”) resolved via a deferred prosecution agreement, and a SEC settled civil complaint against Weatherford. [Note, the SEC enforcement action also alleged violations of the books and records and internal controls provisions in regards to commercial transactions with various sanctioned countries in violation of U.S. sanction and export controls laws. The DOJ – or other government entities – also alleged such conduct, but in resolution documents separate and apart from the FCPA resolution documents highlighted below].

Weatherford agreed to pay approximately $153 million to resolve its alleged FCPA scrutiny ($87 million to resolve the DOJ enforcement action and $66 million to resolve the SEC enforcement action). The Weatherford action is the 8th largest FCPA settlement of all-time (see here for the top ten FCPA settlements).

DOJ

Weatherford Services Ltd.

Weatherford Services (“WSL”), incorporated in Bermuda, is identified as a wholly-owned subsidiary of Weatherford International that “managed most of Weatherford’s activities in Angola.”

The conduct at issue involved “two schemes to bribe Sonangol officials to obtain or retain business.”

Sonangol is alleged to be a “government-owned and controlled corporation” of the Angolan government. The information specifically states:

“Sonangol was the sole concessionaire for exploration of oil and gas in Angola, and was solely responsible for the exploration, production, manufacturing, transportation, and marketing of hydrocarbons in Angola. Sonangol was run by a board of directors established by governmental decree in 1999. Each member of the board was also appointed or renewed in their position by governmental decree. Because Sonangol was wholly owned, controlled, and managed by the Angolan government, it was an ‘agency’ and ‘instrumentality’ of a foreign government and its employees were ‘foreign officials'” under the FCPA.

According to the information, the first bribery scheme “centered around a joint venture which WSL and other Weatherford employees established with two local Angolan entities.” The information alleges that “Angolan Officials 1, 2, and 3 (described as “high-level, senior officials of Sonangol” with influence over contracts) controlled and represented one of the entities” and that a “relative of Angolan Official 4 (described as a “high-level, senior official of Angola’s Ministry of Petroleum” with influence over contracts entered into by the Angolan government) controlled and represented the other.”

The information alleges that the “joint venture began because WSL sought a way to increase its share of the well screens market in Angola” and states that “WSL learned that Sonangol was encouraging oil services companies to establish a well screens manufacturing operations in Angola with a local partner.” Thereafter, “a high-level Weatherford executive sent Angolan Official 1 a letter expressing Weatherford’s intent to form a well screens manufacturing operation in Angola with a local partner and requesting Sonangol’s participation in the process.”

The information next alleges that “Angolan Official 1 advised WSL that Sonangol had selected local partners for WSL and that Sonangol would support the joint venture.” According to the information:

“… the parties agreed that two local Angolan entities (“Angolan Company A” and Angolan Company B”) would be WSL’s joint venture partners. Angolan Officials 1, 2 and 3 conducted all business with WSL on behalf of Angolan Company A. Angolan Company B was owned in part by the daughter of Angolan Official 4.”

According to the information, “certain WSL and Weatherford employees knew from the outset of discussions regarding the joint venture that the members of Angolan Company A included a Sonangol employee and Angolan Official 3’s wife, while Angolan Company B’s members included Angolan Official 4’s daughter and son-in-law.”

According to the information, “prior to entering into the joint venture, neither Weatherford nor WSL conducted any meaningful due diligence of either joint venture partner.” The information specifically alleges that Weatherford Legal Counsel A (a citizen of the U.S. and a Senior Corporate Counsel at Weatherford from 2004 to 2008) reached out to a law firm “to discuss whether partnering with the Angolan companies raised issues under the FCPA,” but that Weatherford Legal Counsel A “did not follow the advice” that had been provided to him. In addition, the information alleges that Weatherford Legal Counsel A “falsely told [another] outside counsel that the joint venture had been vetted and approved by another outside counsel, when, in fact, no outside law firm ever conducted such vetting or gave such approval.”

The information alleges that WSL signed the final joint venture agreement with Angolan Company A and Angolan Company B in 2005, but that “neither Angolan Company A nor Angolan Company B provided any personnel or expertise to the joint venture, nor did they make any capital contributions.”

According to the information:

“In 2008, Angolan Company A and Angolan Company B received joint venture dividends for 2005 and 2006, including on revenues received in 2005 [before the joint venture agreement was executed]. […] In total, the joint venture paid Angolan Company A $689,995 and paid Angolan Company B $136,901.”

The information alleges that “prior to the distribution of joint venture dividends, WSL executives knew that Angolan officials were directing the distribution of those dividends.”

According to the information, “WSL benefitted from the joint venture arrangement” in the following ways: “Sonangol began taking well screens business away from WSL’s competitors, even when a competitor was supplying non-governmental companies, and awarding it to WSL” and “WSL received awards of business for which its bids were, by its own admission, not price competitive.”

The second bribery scheme alleged in the information relates to the “Cabinda Region Contract Renewal” in which WSL allegedly “bribed Angolan Official 5 (described as “a Sonangol official with decision-making authority in Angola’s Cabinda region”) so that he would approve the renewal of a contract under which WSL provided oil services to a non-governmental oil company in the Cabinda region of Angola.” The information alleges that even though the contract was between WSL and a non-governmental company, Angolan law required “that it be approved by Sonangol before being finalized” and that “Angolan Official 5 was the Sonangol official responsible for approving or denying the renewal contract.”

The information alleges that Angolan Official 5 solicited the bribe and that “WSL executives agreed to pay the bribe Angolan Official 5 had demanded” even though a prior WSL Manager had refused to pay it. According to the information, WSL made the payments to Angolan Official 5 through the Freight Forwarding Agent (described as a Swiss Company who provided freight forwarding and logistics services in Angola) who had previously paid bribes on behalf of WSL.”

As to the Freight Forwarding Agent, the information alleges that WSL retained the agent via a consultancy agreement in which the agent rejected a specific FCPA clause, but that “WSL and Weatherford acquiesced by removing the FCPA clause and inserting a clause requiring the Freight Forwarding Agent to ‘comply with all applicable laws, rules, and regulations issued by any governmental entity in the countries of business involved.” According to the information, “WSL generated sham purchase orders for consulting services the Freight Forwarding Agent never performed, and the Freight Forwarding Agent, in turn, generated sham invoices for those non-existent services.” The information alleges that the Freight Forwarding Agent passed money on to Angolan Official 5.

Based on the above, the information charges WSL with one count of violating the FCPA’s anti-bribery provisions and specifically invokes the dd-3 prong of the statute applicable to “persons” other than issuers or domestic concerns.

Pursuant to the plea agreement, WSL agreed to pay a criminal fine in the amount of $420,000.

Weatherford International

The Weatherford information largely focuses on the company’s internal accounting controls and alleges as follows.

“Weatherford, which operated in an industry with a substantial corruption risk profile, grew its global footprint in large part by purchasing existing companies, often themselves in countries with high corruption risks. Despite these manifest corruption risks, Weatherford knowingly failed to establish effective corruption-related internal accounting controls designed to detect and prevent corruption-related violations, including FCPA violations, prior to 2008.

Prior to 2008, Weatherford failed to institute effective internal accounting controls, including corruption-related due diligence on appropriate third parties and business transactions, limits of authority, and documentation requirements. This failure was particularly acute when it came to third parties, including channel partners, distributors, consultants, and agents. Weatherford failed to establish effective corruption-related due diligence on third parties with interaction with government officials, such as appropriately understanding a given third party’s ownership and qualifications, evaluating the business justification for the third party’s retention in the first instance, and establishing and implementing adequate screening of third parties for derogatory information. Moreover, Weatherford failed to implement effective controls for the meaningful approval process of third parties. Weatherford also did not require, in practice, adequate documentation supporting retention and in support of payments to third parties, such as appropriate invoices and purchase orders.

Prior to 2008, Weatherford did not have adequate internal accounting controls and processes in place that effectively evaluated business transactions, including acquisitions and joint ventures, for corruption risks and to investigate those risks when detected. Moreover, following the establishment of joint ventures and certain other business transactions, Weatherford did not appropriately implement its policies and procedures to ensure an effective internal accounting control environment through proper integration.

Prior to 2008, Weatherford also did not have an effective internal accounting control system for gifts, travel, and entertainment. In practice, expenses were not typically adequately vetted to ensure that they were reasonable, bona fide, or properly documented.

These issues were exacerbated by the fact that, prior to 2009, a company as large and complex as Weatherford – with its substantial risk profile – did not have a dedicated compliance officer or compliance personnel. Although Weatherford promulgated an anti-corruption policy that it made available on its internal website, it did not translate that policy into any language other than English, and it did not conduct anti-corruption training.

Prior to 2008, Weatherford did not have an effective system for investigating employee reporting of ethics and compliance violations. If an employee’s ethics questionnaire response indicated an awareness of payments or offers of payments to foreign officials or of undisclosed or unallocated funds, Weatherford did not have a protocol in place to perform any further investigation into the alleged corruption. As a matter of practice, in fact, Weatherford did not conduct additional investigation of such allegations. Prior to 2004, Weatherford did not require any employee to complete any kind of ethics questionnaire.

Further, Weatherford lack effective mechanisms to control its many foreign subsidiaries’ activities to ensure that they maintained internal accounting controls adequate to detect, investigate, or deter corrupt payments made to government officials.”

Under the heading “corrupt conduct” the information alleges – in summary form – as follows:

“Due to Weatherford’s failure to implement such internal accounting controls, a permissive and uncontrolled environment existed within Weatherford in which employees of certain of its wholly owned subsidiaries in Africa and the Middle East were able to engage in various corrupt conduct over the course of many years, including both bribery of foreign officials and fraudulent misuse of the United Nations’ Oil for Food Program.”

Thereafter, the information contains nine paragraphs of allegations that track the Angola allegations in the WSL information.

In addition, the information contains allegations about another alleged “scheme, in the Middle East, from 2005 through 2011” in which “employees of another Weatherford subsidiary [Weatherford Oil Tool Middle East Limited (WOTME) – described as a British Virgin Islands corporation headquartered in Dubai that was a wholly-owned subsidiary of Weatherford and responsible for managing most of Weatherford’s activities in North Africa and the Middle East] awarded improper ‘volume discounts’ to a distributor who supplied Weatherford products to a government-owned national oil company, believing those discounts were being used to create a slush fund with which to make bribe payments to decision makers at the national oil company.”

According to the information, “officials at the national oil company had directed WOTME to sell goods to the company through this particular distributor” and the information alleges:

“Prior to entering into the contract with the distributor, neither WOTME nor Weatherford conducted any due diligence on the distributor, despite (a) the fact that the Distributor would be furnishing Weatherford goods directly to an instrumentality of a foreign government; (b) the fact that a foreign official had specifically directed WOTME to contract with that particular distributor, and (c) the fact that executives at WOTME knew that a member of the country’s royal family had an ownership interest in the distributor.”

According to the information, “between 2005 and 2011, WOTME paid approximately $15 million in volume discounts to the distributor” that were “recorded in WOTME’s general ledger under a heading titled “Volume Discount Account.”

The information next contains four paragraphs of allegations relevant to the Iraq Oil for Food program and how Weatherford’s “failure to implement effective internal accounting controls also permitted corrupt conduct relating” to the program.

In a summary allegation, under the heading “Profits from the Corrupt Conduct in Africa and the Middle East” the information states:

“Due to Weatherford’s failure to implement internal accounting controls, an environment existed within Weatherford in which employees of certain of its wholly owned subsidiaries in Africa and the Middle East were able to engage in various corrupt business transactions, which conduct earned profits of $54,486,410, which were included in the consolidated financial statements that Weatherford filed with the SEC.”

Based on the above conduct, the information charges Weatherford with violating the FCPA’s internal controls provisions – specifically – that Weatherford knowingly:

“(a) failed to implement, monitor, and impose internal accounting controls and to maintain their effectiveness; (b) failed adequately to train key personnel to implement internal accounting controls to detect and avoid illegal payments and to identify and deter violations of those controls; (c) failed to monitor and control the financial transactions of its subsidiaries, in a manner that provided reasonable assurances that its subsidiaries’ transactions were executed in accordance with management’s general and specific authorization; (d) failed to monitor and control the financial transactions of its subsidiaries, in a manner that provided reasonable assurances that its subsidiaries’ transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and any other criteria applicable to such statements; (e) failed to maintain a sufficient system for the selection and approval of, and performance of corruption-related due diligence on, third party business partners and joint venture partners, which, in turn, permitted corrupt conduct to occur at subsidiaries; (f) failed to investigate appropriately and respond to allegations of corrupt payments and discipline employees involved in making corrupt payments; (g) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed, including training employees, and performing monitoring to detect criminal conduct; (h) failed to maintain internal accounting controls sufficient to prevent a subsidiary from entering into a joint venture agreement to funnel improper benefits to, and receive preferential treatment from, foreign government officials; (i) failed to maintain internal accounting controls sufficient to prevent a subsidiary from making payments to a channel partner not authorized by contract knowing there was a substantial likelihood that those payments were used to make corrupt payments; and (j) failed to maintain internal accounting controls sufficient to prevent kickbacks paid to the government of Iraq by a subsidiary.”

The charge against Weatherford was resolved via a DPA in which the company admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees, and agents as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states:

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and the Company. Among the facts considered were the following: (a) the Company’s cooperation has been, on the whole, strong, including conducting an extensive worldwide internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department, including the production of more than 3.8 million pages of data; (b) the Company has engaged in extensive remediation, including terminating the employment of officers and employees responsible for the corrupt misconduct of its subsidiaries, establishing a Compliance Officer position that is a member of the Company’s executive board, as well as a compliance office of approximately 38 full-time compliance professionals, including attorneys and accountants, that the Compliance Officer oversees, conducting more than 30 anti-corruption compliance reviews in many of the countries in which it operates, enhancing its anti-corruption due diligence protocol for third-party agents and consultants, and retaining an ethics and compliance professional to conduct an assessment of the Company’s ethics and compliance policies and procedures designed to ensure compliance with the FCPA and other applicable anti-corruption laws; (c) the Company has committed to continue to enhancing its compliance program and internal accounting controls …; (d) the Company has already significantly enhanced, and is committed to continue to enhance, its compliance program and internal controls …; and (e) the Company has agreed to continue to cooperate with the Department in any ongoing investigation …”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $87.2 million to $174.4 million. The DPA states that the monetary penalty of $87.2 million “is appropriate given the facts and circumstances of this case, including the nature and extent of the Company’s criminal conduct, the Company’s extensive cooperation, and its extensive remediation in this matter.”

The DPA specifically states that “any criminal penalties that might be imposed by the Court on WSL in connection with WSL’s guilty plea to a one-count Criminal Information charging WSL with violations of the FCPA, and the plea agreement entered into simultaneously, will be deducted from the $87.2 million penalty agreed to under this Agreement.”

Pursuant to the DPA, Weatherford agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA and other applicable anti-corruption laws. The specifics are detailed in Attachment C to the DPA. The DPA also requires Weatherford to engage a corporate compliance monitor for ”a period of not less than 18 months from the date the monitor is selected.” The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA.

As is common in FCPA corporate enforcement actions, the DPA contains a “muzzle clause” prohibiting Weatherford or anyone on its behalf from “contradicting the acceptance of responsibility by the company” as set forth in the DPA.

In the DOJ’s release, Acting Assistant Attorney General Mythili Raman stated:

“Effective internal accounting controls are not only good policy, they are required by law for publicly traded companies – and for good reason. This case demonstrates how loose controls and an anemic compliance environment can foster foreign bribery and fraud by a company’s subsidiaries around the globe. Although Weatherford’s extensive remediation and its efforts to improve its compliance functions are positive signs, the corrupt conduct of Weatherford International’s subsidiaries allowed it to earn millions of dollars in illicit profits, for which it is now paying a significant price.”

Valerie Parlave, Assistant Director in Charge of the FBI’s Washington Field Office, stated:

“When business executives engage in bribery and pay-offs in order to obtain contracts, an uneven marketplace is created and honest competitor companies are put at a disadvantage. The FBI is committed to investigating corrupt backroom deals that influence contract procurement and threaten our global commerce.”

SEC

The SEC’s complaint (here) is largely based on the same core set of facts alleged in the above DOJ action.

In summary fashion, the complaint alleges:

“Between at least 2002 and July 2011, Weatherford and its subsidiaries authorized bribes and improper travel and entertainment intended for foreign officials in multiple countries to obtain or retain business or for other benefits. Weatherford and its subsidiaries also authorized illicit payments to obtain commercial business in Congo and authorized kickbacks in Iraq to obtain United Nations Oil for Food contracts. Weatherford realized over $59.3 million in profits from business obtained through the use of illicit payments.”

As to the additional Congo allegations, the complaint states:

“In addition to bribery schemes involving Angolan government officials, WSL made over $500,000 in commercial bribe payments through the Swiss Agent to employees of a commercial customer, a wholly-owned subsidiary of an Italian energy company, between March 2002 and December 2008.

[…]

WSL mischaracterized the bribe payments as legitimate expenses on its books and records. Bank account records and a U.S. brokerage account statement show that among the recipients were two employees of the commercial customer who were responsible for awarding contracts to WSL. Weatherford obtained profits of$1,304,912 from commercial business in Congo relating to payments made by Swiss Agent.”

The SEC complaint also contains allegations concerning conduct in Algeria and Albania.

Under the heading “Improper Travel and Entertainment in Algeria,” the complaint alleges:

Weatherford also provided improper travel and entertainment to officials of Sonatrach, an Algerian state-owned company, that were not justified by a legitimate business purpose. The improper travel and entertainment to Sonatrach officials include:

• June 2006 trip by two Sonatrach officials to the FIFA World Cup soccer tournament in Hanover, Germany;

• July 2006 honeymoon trip of the daughter of a Sonatrach official; and

• October 2005 trip by a Sonatrach employee and his family to Jeddah, Saudi Arabia, for religious reasons that were improperly booked as a donation

In addition, on at least two other occasions, Weatherford provided Sonatrach officials with cash sums while they were visiting Houston. For example, in May 2007, Weatherford paid for four Sonatrach officials, including a tender committee official, to attend a conference in Houston. Prior to the trip, a Weatherford finance executive sent an email to a Weatherford officer requesting $10,000 cash to be advanced to a WOTME employee without providing any explanation tor the cash advance. The request was approved and a portion of the funds was provided to the tender committee official. There is no evidence the cash was used for legitimate business or promotional expenses. In connection with a December 2007 trip by three Sonatrach officials traveling to Houston, a Weatherford finance employee questioned the propriety of a WOTME employee’s request for a $14,000 cash advance in connection with the trip. The finance employee’s concern was disregarded and the request was ultimately approved at high levels within Weatherford and a portion of the funds was provided to the officials. In total, Weatherford spent $35,260 on improper travel, entertainment and gifts for Algerian officials from May 2005 through November 2008 that were recorded in the company’s books and records as legitimate expenses.”

Under the heading “Improper Payments to Albanian Tax Authorites,” the complaint alleges:

“From 2001 to 2006, the general manager and financial manager at a Weatherford Italian subsidiary, WEMESP A, misappropriated over $200,000 of company funds, a portion of which was improperly paid to Albanian tax auditors. WEMESPA’s general manager and financial manager misappropriated the funds by taking advantage of Weatherford’s inadequate system of internal accounting controls. They misreported cash advances, diverted payments on previously paid invoices, misappropriated government rebate checks and received reimbursement of expenses that did not relate to business activities, such as golf equipment and perfume.

[…]

In addition to the cash payments, in 2005, after a regime shift in Albania, the Country Manager provided three laptop computers for the tax director and two members of Albania’s National Petroleum Agency, which the WEMESPA executives approved and misrecorded in the books and records.”

Under the heading “Misconduct During the Investigation and Subsequent Remediation Efforts,” the complaint states:

“Certain conduct by Weatherford and its employees during the course of the Commission staffs investigation compromised the investigation. These activities involved the failure to provide the staff with complete and accurate information, resulting in significant delay. In one instance, the staff sought information concerning the Iraq Country Manager who signed letters agreeing to pay bribes to Iraqi officials during the Oil for Food Program. The staff was informed that the Country Manager was missing or dead when, in fact, he remained employed by Weatherford. In at least two instances, email was deleted by employees prior to the imaging of their computers. On another occasion, Weatherford failed to secure important computers and documents and allowed potentially complicit employees to collect documents subpoenaed by the staff. Subsequent to the misconduct, Weatherford greatly improved its cooperation and engaged in remediation efforts, including disciplining employees responsible for the misconduct, establishing a high level Compliance Officer position, significantly increasing the size of its compliance department, and conducting numerous anti-corruption reviews in many of the countries in which it operates.”

Under the heading “Anti-Bribery Violations,” the complaint states in pertinent part:

“Weatherford’s conduct in the Middle East and Angola violated [the FCPA’s anti-bribery provisions]. From 2005 through 2011, Weatherford authorized $11.8 million in payments to national oil company officials through a distributor intended to wrongfully influence national oil company decision makers to obtain and retain business. Weatherford also violated [the anti-bribery provisions] when it retained the Swiss Agent to funnel bribes to a Sonangol official to obtain the Cabinda contract. Weatherford similarly violated [the anti-bribery provisions] by bribing other Sonangol officials via the joint venture in return for contracts and preferential treatment.”

Under the heading “Failure to Maintain Books and Records,” the complaint states in pertinent part:

“Weatherford, directly and through its subsidiaries, also violated [the books and records provisions] when it made numerous payments and engaged in many transactions that were incorrectly described in the companys books and records. In the Middle East, for example, the money given to a distributor to be used as bribes was reflected in Weatherford‘s books and records as legitimate volume discounts. In Angola and Congo, payments to foreign officials and others were described as legitimate consulting fees rather than bribe payments. Payments to Sonangol executives through the joint venture were misrecorded as legitimate dividend payments.”

Under the heading “Failure to Maintain Adequate Internal Controls,” the complaint states in pertinent part:

“Weatherford violated [the internal controls provisions] by failing to devise and maintain an adequate system of internal accounting controls. The violations were widespread and involved conduct at Weatherford’s headquarters as well as at numerous subsidiaries. Executives, managers and employees throughout the organization were aware of the conduct, which lasted a decade. Weatherford paid millions of dollars to consultants, agents and joint venture partners without adequate due diligence. Weatherford approved cash payments to Algerian officials traveling to Houston without any justification for the payments. Employees made payments to agents without regard to grants of authority and, on some occasions, without even receiving an invoice. In Italy, internal accounting controls were ineffective, allowing executives to embezzle and pay bribes for years.

In the Middle East, the company failed on several occasions to perform due diligence on the distributor it used, despite the fact that the agent was imposed upon them by a national oil company official and would be selling to a government entity. The use of large volume discounts was not routinely reviewed. […] Weatherford also failed to provide FCPA … training. While Weatherford did require certain employees to complete a yearly ethics questionnaire seeking instances of alleged misconduct, Weatherford failed to investigate or even review the responses.”

As noted in the SEC’s release, Weatherford agreed to pay approximately $65.6 million to the SEC, including an approximate $1.9 million penalty assessed in part for lack of cooperation early in the investigation.

In the SEC’s release, Andrew Ceresney (Co-Director of the SEC’s enforcement division) stated:

“The nonexistence of internal controls at Weatherford fostered an environment where employees across the globe engaged in bribery and failed to maintain accurate books and records. They used code names like ‘Dubai across the water’ to conceal references to Iran in internal correspondence, placed key transaction documents in mislabeled binders, and created whatever bogus accounting and inventory records were necessary to hide illegal transactions.”

Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:

“Whether the money went to tax auditors in Albania or officials at the state-owned oil company in Angola, bribes and improper payments were an accustomed way for Weatherford to conduct business. While the profits may have seemed bountiful at the time, the costs far outweigh the benefits in the end as coordinated law enforcement efforts have unraveled the widespread schemes and heavily sanctioned the misconduct.”

Joseph Warin (Gibson Dunn) represented Weatherford.

In this statement, Bernard Duroc-Danner (Weatherford’s Chairman, President and CEO) stated:

“This matter is now behind us. We move forward fully committed to a sustainable culture of compliance. With the internal policies and controls currently in place, we maintain a best-in-class compliance program and uphold the highest of ethical standards as we provide the industry’s leading products and services to our customers worldwide.”

On the day of the enforcement action, Weatherford’s shares closed up approximately 1.2%.

Next Up – Stryker

By Mike Koehler on October 25, 2013 in 2013 Enforcement Actions, Argentina, Charitable Contributions, Foreign Legal Counsel, Greece, Healthcare Providers As Foreign Officials, Medical Device Industry, Mexico, Poland, Romania, SEC Enforcement Action, Stryker Corp., Travel and Entertainment

First it was Johnson & Johnson (see here – $70 million in combined fines and penalties in April 2011). Then it was Smith & Nephew (see here – $22 million in combined fines and penalties in February 2012). Then it was Biomet (see here – $22.8 million in combined fines and penalties in March 2012). Then it was Pfizer / Wyeth (see here – $60 million in combined fines and penalties in August 2012). Then it was Eli Lilly (see here – $29 million in combined fines and penalties in December 2012).

Next up, in the recent sweep of pharmaceutical / healthcare and medical device companies is Stryker Corporation.

Yesterday, the SEC announced that Stryker agreed to pay $13.2 million to resolve an SEC Foreign Corrupt Practices Act enforcement action via an administrative cease and desist order in which the company neither admitted or denied the SEC’s allegations.

The conduct at issue focused on various Stryker subsidiaries. There is no allegation in the SEC’s order concerning Stryker Corp. itself other than the following.

“The financial results of all of the Stryker subsidiaries discussed herein were consolidated into Stryker’s financial statements. Stryker’s foreign subsidiaries were organized in a decentralized, country-based structure, wherein a manager of a particular country’s operations had primary responsibility for all business within a given country. During the relevant period, each of Stryker’s foreign subsidiaries operated pursuant to individual policies and directives implemented by country or regional management. Stryker had corporate policies addressing anti-corruption, but these policies were inadequate and insufficiently implemented on the regional and country level. Accordingly, Stryker failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that the company maintained accountability for its assets and that transactions were executed in accordance with management’s authorization.”

In summary fashion, the SEC order states:

“From approximately August 2003 to February 2008 (the “relevant period”), Stryker made approximately $2.2 million in unlawful payments to various government employees including public health care professionals (collectively, the “foreign officials”) in Mexico, Poland, Romania, Argentina, and Greece. Stryker incorrectly described these expenses in the company’s books and records as legitimate consulting and service contracts, travel expenses, charitable donations, or commissions, when in fact the payments were improperly made by Stryker to obtain or retain business. Stryker earned approximately $7.5 million in illicit profits as a result of these payments. During the relevant period, Stryker incorrectly described unlawful payments to foreign officials in its accounting books and records in violation of [the FCPA’s books and records provisions] and failed to devise and maintain an adequate system of internal accounting controls in violation [of the FCPA’s internal controls provisions.]”

Under the heading “Unlawful Payments In Mexico,” the order states:

Between March 2004 and January 2007, Stryker’s wholly-owned subsidiary in Mexico (“Stryker Mexico) made three payments totaling more than $76,000 to foreign officials employed by a Mexican governmental agency (the “Mexican Agency”) responsible for providing social security for government employees. Stryker made these payments to win bids to sell its medical products to certain public hospitals in Mexico. Stryker Mexico earned more than $2.1 million in profits as a result of these illicit payments. These payments were made at the direction of Stryker Mexico employees, including country level management, and paid to the foreign officials through third party agents. For example, in January 2006, Stryker Mexico learned that the Mexican Agency was threatening to revoke a contract that Stryker Mexico had won to provide knee and hip products to certain public hospitals unless Stryker Mexico paid an employee of the Mexican Agency. As a result of the demand by the employee of the Mexican Agency, Stryker Mexico directed its outside counsel in Mexico (the “Mexican Law Firm”) to make payment to the employee, on Stryker Mexico’s behalf, in order for Stryker to keep the winning bid. At Stryker Mexico’s direction, the Mexican Law Firm paid the foreign official approximately $46,000 on behalf of Stryker Mexico and, as a result of this payment, the Mexican Agency did not revoke Stryker Mexico’s status as the winning bidder. The Mexican Law Firm then invoiced Stryker Mexico for $46,000 for purported legal services rendered, even though no such services were provided. Stryker Mexico recorded these improper payments as legitimate legal expenses in its books and records. Stryker Mexico earned over $1.1 million in illicit profits on this contract alone. Stryker Mexico made two additional payments through intermediaries during the relevant period in much the same fashion, with the purpose of retaining or obtaining business from public hospitals. The additional payments were in excess of $34,000 and earned Stryker illicit profits of nearly $1 million.”

Under the heading “Improper Payments in Poland,” the order states:

“Between August 2003 and November 2006, Stryker’s wholly-owned subsidiary in Poland (“Stryker Poland”) made 32 improper payments to foreign officials in Poland for the purpose of obtaining or retaining business at public hospitals. In total, Stryker Poland made approximately $460,000 in unlawful payments resulting in more than $2.4 million of illicit profits. These improper payments were recorded in Stryker’s books and records as legitimate expenses, including reimbursement for business travel, consulting and service contract payments, and charitable donations. For example, in May 2004, Stryker Poland paid for a foreign official then employed as the director of a public hospital in Poland, and her husband, to travel to New York City and Aruba. Although the official purpose of the trip was for the foreign official to attend a single-day tour of Stryker’s manufacturing and research facility in Mahwah, New Jersey, Stryker paid for the couple’s six-night stay at a hotel in New York City, attendance at two Broadway shows, and a five-day trip to Aruba before their return flight to Poland. According to Stryker Poland’s records, expenses for the trip, including airfare, accommodations, and entertainment, totaled approximately $7,000, all of which Stryker Poland recorded as legitimate travel expenses. Stryker Poland’s internal documents confirm a quid pro quo arrangement between Stryker Poland and the foreign official. For example, the form containing the schedule for the foreign official’s facility tour states that the purpose of the visit was to “strengthen [the public doctor’s] conviction that Stryker products are the best solution for her hospital,” and notes that “we won a big tender for [one product] (about $350,000) and in this year they are going to buy our products for $500,000.” Stryker Poland also made additional improper travel payments, payments under purported consulting agreements totaling approximately $47,000, and gifts and donations of nearly $400,000, each of which was made to a state-employed healthcare professional for the purpose of Stryker Poland’s obtaining or retaining the business of public hospitals.”

Under the heading “Improper Payments in Romania,” the order states:

“From at least 2003 through July 2007, Stryker’s wholly-owned subsidiary in Romania (“Stryker Romania”) made 192 improper payments to foreign officials totaling approximately $500,000 in order to obtain or retain business with affiliated public hospitals. Stryker Romania recorded these payments as legitimate sponsorships of foreign officials’ attendance, travel and lodging at conferences, and medical events, when in reality they were illicit payments made to obtain or retain business. As a result of these payments, Stryker Romania earned more than $1.7 million in illicit profits. For example, in April 2004, a Stryker Romania salesperson submitted a form to sponsor a foreign official’s lodging abroad to attend a conference. The form stated that a “business benefit[]” from the sponsorship was that, in return, Stryker Romania would receive a contract for the sale of a particular medical device. In addition, Stryker Romania internally discussed that the foreign official in question was “waiting to be confirmed as chief physician” at a public hospital, “thus becoming important” for an upcoming bid for a contract. Stryker Romania recorded the payment as a legitimate business travel expense even though its own internal documents demonstrated that the payment was made with the purpose of obtaining future business.”

Under the heading “Unlawful Payments in Argentina,” the order states:

“Between 2005 and 2008, Stryker’s wholly-owned subsidiary in Argentina (“Stryker Argentina”) made 392 commission payments, or “honoraria,” to physicians employed in the public healthcare system in order to obtain or retain business with affiliated public hospitals. Unlike traditional honorarium payments that are made in exchange for the provision of a service (such as making a speech), these honoraria were commissions that were calculated as a percentage of a total sale to a particular hospital and then paid to the public doctor associated with the sale. Stryker Argentina routinely made these payments by check to doctors at rates between 20% and 25% of the related sale. In total, Stryker Argentina made more than $966,500 in improper honoraria payments during the relevant period, causing Stryker Argentina to earn more than $1.04 million in profits from the public hospitals with which the doctors were associated. Stryker Argentina booked these payments as commission expenses in an account entitled “Honorarios Medicos,” when in fact they were unlawful payments made to compensate doctors for purchasing Stryker products.”

Under the heading “Unlawful Payments in Greece,” the order states:

“In 2007, Stryker’s wholly-owned subsidiary in Greece (“Stryker Greece”) made a sizeable and atypical donation of $197,055 to a public university (the “Greek University”) to fund a laboratory that was then being established by a foreign official who served as a prominent professor at the Greek University, and was the director of medical clinics at two public hospitals affiliated with the Greek University. As a result of this donation, Stryker Greece earned a total of $183,000 in illicit profits. The donation was made pursuant to a quid pro quo arrangement with the foreign official, pursuant to which Stryker Greece understood it would obtain and retain business from the public hospitals with which the foreign official was affiliated, in exchange for making the donation to the foreign official’s pet project. In an email from the country manager of Stryker Greece to the regional manager, the country manager emphasized that she believed the donation to the Greek University was necessary to secure future sales for Stryker Greece. The country manager wrote: “I think that anything below 30K will leave [the foreign official] disappointed. He did promise that he would direct his young assistants into using our trauma and sports medicine products. [The foreign official] is . . . difficult to get as a ‘friend’ and really tough to have as a disappointed customer.” The regional manager asked, “What do we get for the sponsorship – or is it just a gift?” The country manager confirmed the quid pro quo, stating, “For the sponsorship we get the Spine business and a promise for more products in his Department. . .” At a later date, another country manager stated, “I am willing to support what [the foreign official] is asking for in order to secure the sales he is bringing in.” The regional manager then approved the request. Soon thereafter, the country manager said of his meeting with the foreign official: “Things went well (how couldn’t they—I offered him the amount he is asking for . . .). . . . My impression is that we will sta rt business again.” Stryker Greece made the donation to the Greek University in three installments, each of which was improperly booked as a legitimate marketing expense in an account entitled “Donations and Grants.”

Based on the above allegations, the SEC found that Stryker violated the FCPA’s books and records and internal controls provisions.

In the SEC release, Andrew Calamari (Director of the SEC’s New York Regional Office) stated:

“Stryker’s misconduct involved hundreds of improper payments over a number of years during which the company’s internal controls were fatally flawed. Companies that allow corruption to occur by failing to implement robust compliance programs will not be allowed to profit from their misconduct.”

As noted in the SEC’s release, the administrative order “requires Stryker to pay disgorgement of $7,502,635, prejudgment interest of $2,280,888, and a penalty of $3.5 million. Without admitting or denying the allegations, Stryker agreed to cease and desist from committing or causing any violations and any future violations of the FCPA’s books and records and internal controls provisions.

The Stryker action is yet another example of the SEC obtaining a disgorgement remedy without finding or charging violations of the FCPA’s anti-bribery provisions. (See here for a prior post on no-charged bribery disgorgement).

The SEC order also contains a separate section titled “Stryker’s Remedial Efforts” and states:

“In response to the Commission’s investigation, Stryker retained outside counsel to assist Stryker in conducting an internal investigation into Stryker’s compliance with the FCPA in the jurisdictions that were the subject of the staff’s inquiry, as well as in jurisdictions where issues arose through Stryker’s audit and hotline processes. Stryker voluntarily produced reports and other materials to the Commission staff summarizing the findings of its internal investigation. In total, Stryker produced over 800,000 pages of documents at Stryker’s expense, including courtesy translations of numerous key documents. Since the time of the conduct detailed above, Stryker implemented a company wide anti-corruption compliance program, which includes: (a) enhanced corporate policies and standard operating procedures setting forth specific due diligence and documentation requirements for relationships with foreign officials, health care professionals, consultants, and distributors; (b) compliance monitoring and corporate auditing specifically tailored to anticorruption, including the hiring of a chief compliance officer and a sizeable full-time dedicated staff in both its internal audit and compliance functions to ensure FCPA compliance and the implementation of periodic self-assessments; (c) enhanced financial controls and governance; (d) expanded anti-corruption training to all Stryker employees; and (e) the maintenance of an Ethics Hotline which serves as a mechanism for employees to report any actual or suspected illegal or unethical behavior. In addition to its internal anti-corruption enhancements, from 2007 through the present, Stryker engaged a third-party consultant to perform FCPA compliance assessments and compile written reports for Stryker’s operations in dozens of foreign jurisdictions across the world at least annually. Stryker voluntarily produced documents that permitted the Commission staff to assess how Stryker’s internal audit and compliance functions used the results of each of the assessments to implement additional enhancements to its infrastructure, to target jurisdictions for future assessments, and to create management action plans in collaboration with local management. Based on the improvements described above, Stryker has demonstrated a commitment to designing and funding a meaningful compliance program in order to prevent and detect violations of the FCPA and other applicable anti-bribery laws.”

In this Wall Street Journal Risk and Compliance post, a Stryker spokesperson stated that the company “was advised that the Justice Department closed its investigation.”

Matthew Kipp (Skadden) represented Stryker.

Stryker’s November 2007 quarterly filing stated:

“In October 2007, the Company disclosed that the United States Securities and Exchange Commission has made an informal inquiry of the Company regarding possible violations of the Foreign Corrupt Practices Act in connection with the sale of medical devices in certain foreign countries.”

Thus, the time period from first instance of public disclosure of FCPA scrutiny to actual settlement was 6 years.

Yesterday Stryker’s stock was up approximately .07%.

*****

A few upcoming events that may be of interest to East Coast readers.

On Wednesday, October 30th, Brooklyn Law School will host a panel discussion of practitioners, in-house counsel, and professors titled “New Developments in FCPA Enforcement” (see here for more information).

On Saturday, Nov. 10th, I will be participating in a panel titled “Anti-Corruption Initiatives in the Arab World” as part of Harvard’s Arab Weekend. (To learn more about the event and the other panelists, see here).

Diebold Resolves $48 Million FCPA Enforcement Action Based Primarily On Excessive Travel And Entertainment Payments By Subsidiaries

By Mike Koehler on October 23, 2013 in 2013 Enforcement Actions, China, Diebold, Distributor Issues, DOJ Enforcement Action, Indonesia, Russia, SEC Enforcement Action, Security Industry, Travel and Entertainment

Yesterday, the DOJ and SEC announced (here and here) that Ohio-based Diebold, Inc. agreed to resolve a Foreign Corrupt Practices Act enforcement action concerning alleged business conduct by its subsidiaries in China, Indonesia and Russia. The enforcement action has been expected for some time (as noted in this prior post, in August the company disclosed that it had agreed in principle to the settlement announced yesterday).

The enforcement action involved a DOJ criminal information resolved via a deferred prosecution agreement and a SEC settled civil complaint. Diebold agreed to pay approximately $48.1 million to resolve its alleged FCPA scrutiny ($25.2 million to resolve the DOJ enforcement action and $22.9 million to resolve the SEC enforcement action).

DOJ

The DOJ enforcement action involved a criminal information against Diebold resolved through a deferred prosecution agreement. (See here for the original source documents).

Information

Under the heading “conduct in China and Indonesia” the information alleges:

“Diebold sold ATMs and provided ATM-related services to banks in China and Indonesia, including state-owned banks such as Bank 1 and Bank 2”

Both Bank 1 and Bank 2 are described as follows.

“[The Banks] were controlled and approximately 70% owned by the [Chinese government] … and were [two] of several state-owned banks in [China] that together maintained a monopoly over the banking system in [China] and provided core support for the government’s projects and economic goals. The government retained a controlling right in [the Banks], including appointing or nominating a majority of board of directors and top managers at the bank. [The Banks] were an ‘instrumentality’ of a foreign government [under the FCPA].”

The information then alleges:

“The contracts between Diebold and the banks in China provided that Diebold would train employees from the bank customers with respect to Diebold’s ATMs.”

“In order to secure and retain business with bank customers, including state-owned banks such as Bank 1 and Bank 2, Executive A, Executive B, Employee A, Employee B, and other Diebold employees repeatedly provided things of value, including payments, gifts, and non-business travel for employees of the banks, totaling approximately $1.75 million over a five year period.”

“Executive A, Executive B, Employee A, Employee B, and other Diebold employees attempted to disguise the payments and benefits through various means, including by making payments through third parties designated by the banks and by inaccurately recording leisure trips for banks employees as ‘training.'”

Executive A is described as a “senior executive at Diebold” who “held several positions, initially overseeing Diebold’s operations in the Asia Pacific region and later overseeing Diebold’s international operations.” [The SEC’s complaint refers to an Executive A as being a citizen of Taiwan and a resident of China].

Executive B is described as “a vice president of Diebold’s Asia Pacific division” with responsibilities “overseeing Diebold’s operations in the Asia Pacific region.” [The SEC’s complaint refers to an Executive A as being a citizen of Taiwan and a resident of China].

Employee A is described as “an employee in Diebold’s Asia Pacific division” who was “involved in sales and customer relations in the Asia Pacific region.”

Employee B is described as “an employee in Diebold’s Asia Pacific division” who was “in the Finance Department responsible for the Asia Pacific region.”

Under the heading “conduct in Russia,” the information alleges that in connection with sales efforts to “privately-owned banks in Russia,” Diebold entered into a distributor agreement with Distributor 2. According to the information, Diebold, through its employees and agents, “created and entered into false contracts with Distributor 2 for services that Distributor 2 was not performing” and that “Distributor 2, in turn, used the money that Diebold paid to it, to pay bribes to employees of Diebold’s privately-owned bank customers in Russia in order to obtain and retain contracts with those customers.”

The information also alleges that “in connection with due diligence being conduct [by a Diebold employee] and other Diebold employees for a potential acquisition of Distributor 1 in Ukraine, [the employees] learned that Distributor 1 paid bribes to employees of bank customers to secure business.”

Based on the above allegations, the information charges (i) conspiracy to violate the FCPA’s anti-bribery provisions and books and records provisions; and (ii) substantive FCPA books and records violations.

DPA

The above charges against Diebold were resolved via a DPA in which Diebold admitted, accepted, and acknowledged that it was responsible for the acts of its officers, employees, agents as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states:

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and Diebold. Among the facts considered were the following: (a) following discovery of the FCPA violations during the course of acquisition-related due diligence, Diebhold initiated an internal investigation and voluntarily disclosed to the DOJ the misconduct …; (b) Diebold cooperated fully and conducted an extensive internal investigation; (c) Diebold has committed to continue to enhance its compliance program and internal controls …; and (d) Diebold has agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of the company and its officers, directors, employees, agents, and consultants.

The DPA specifically mentions a previous accounting fraud enforcement action by the SEC (see here for the prior post) and states: “the DOJ believes that the Company’s remediation is not sufficient to address and reduce the risk of recurrence of the company’s misconduct and warrants the retention of an independent corporate monitor …”.

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $36 million to $72 million. The DPA states that the monetary penalty of $25.2 million “is appropriate given the facts and circumstances of this case, including the nature and extent of the Company’s voluntary disclosure and cooperation.”

Pursuant to the DPA, Diebold agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA and other applicable anti-corruption laws. The specifics are detailed in Attachment C to the DPA. The DPA also requires Diebold to engage a corporate compliance monitor for “a period of not less than 18 months from the date the monitor is selected.” The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA. As is common in FCPA corporate enforcement actions, the DPA contains a “muzzle clause” prohibiting Diebold or anyone on its behalf “contradicting the acceptance of responsibility by the company” as set forth in the DPA.

In the DOJ’s release, Acting Assistant Attorney General Mythili Raman stated:

“In China, Indonesia and Russia, Diebold chose to pay bribes for business and falsify documents to cover its tracks. Through its corrupt business practices, Diebold undermined the sense of fair play that is critical for the rule of law to prevail. Today’s action – which holds Diebold accountable for its criminal conduct, while also recognizing its cooperation and voluntary disclosure to the government of its conduct – underscores that fighting global corruption is and will remain a mainstay of the Criminal Division’s mission.”

In the same release, Steven Dettelbach (U.S. Attorney for the N.D. of Ohio) stated:

“Companies that pay bribes to public officials, whether those officials are in Cleveland, in Ohio or overseas, violate the law. Corporate earnings cannot be placed above the rule of law, and today’s penalties – nearly $50 million in all – send the message again, loud and clear, that such conduct is unacceptable. We hope that Diebold will use this opportunity, including the internal controls and compliance monitor required by today’s agreement, to turn the page to a newer and more ethical corporate culture.”

SEC

The SEC’s complaint (here) is based on the same core set of facts alleged in the above DOJ action.

In summary fashion, the complaint alleges:

“This matter concerns violations of the anti-bribery, books and records, and internal control provisions of the FCPA by Diebold […] From 2005 through 2010, Diebold, through its agents and subsidiaries, lavished international leisure trips, entertainment, and other improper gifts on foreign officials to obtain and retain lucrative business with government owned banks in China and Indonesia. During that same period, Diebold, through its Russian subsidiary, paid bribes in connection with the sale of ATMs to private banks in Russia. In all, Diebold made approximately $3 million in illicit payments in China, Russia, and Indonesia.”

“From 2005 through 2010, through its subsidiary Diebold Financial Equipment Company (China), Ltd. (“Diebold China”), Diebold provided international leisure trips and entertainment to officials of government owned banks in China. This included trips to Europe, with stays in Paris, Amsterdam, Florence, Rome, and other European cities, and trips to the United States, with travel to the Grand Canyon, Napa Valley, Disneyland, Las Vegas, and other popular tourist destinations. Diebold spent approximately $1.6 million on leisure trips, entertainment, and other improper gifts for government bank officials in China. During this same time period, through its subsidiary P.T. Diebold Indonesia (“Diebold Indonesia”), Diebold spent over $147,000 on leisure trips and entertainment for officials of government owned banks in Indonesia. Diebold executives in charge of the company’s operations in Asia knew of these improper practices. The illicit payments were falsely recorded in Diebold’s books and records as training or other legitimate business expenses.”

“From 2005 through 2008, through its subsidiary Diebold Self-Service Ltd. (“Diebold Russia”), Diebold also paid bribes on the sale of ATMs to private banks in Russia. These bribes, which totaled approximately $1.2 million, were funneled through a Diebold distributor in Russia. Diebold Russia executed phony service contracts with its distributor to hide and falsely record the payments as legitimate business expenses.’

The SEC complaint alleges as follows concerning “international leisure trips that Diebold provided to government bank officials in China.”

“In 2005, Diebold paid for a fifteen-day leisure trip to the U.S. for two officials from Bank A, a bank owned and controlled by the government of China. This trip included travel to Universal Studios and Disneyland in Los Angeles, Las Vegas, the Grand Canyon, Washington, DC, New York City, San Francisco, and Hawaii.”

“In 2006, Diebold paid for a twelve-day trip to Europe for eight officials from Bank B, a bank owned and controlled by the government of China. This was a leisure and sightseeing trip to Rome, Italy, and Stockholm, Sweden.”

“Also in 2006, Diebold paid for a two-week leisure trip to Australia and New Zealand for five officials from Bank C, a bank owned and controlled by the government of China.”

“In 2007, Diebold paid for a two-week trip to France for thirteen Bank A employees. While purportedly for training at Diebold’s offices, the primary purpose of the trip was leisure.”

“In 2008, Diebold paid for a two-week leisure trip to Europe for eight officials of Bank D, a bank owned and controlled by the government of China. The trip included travel to Paris, Brussels, Amsterdam, Cologne, Frankfurt, Munich, Salzburg, Vienna, Klagenfurt, Venice, Florence, and Rome.”

“Also in 2008, Diebold paid for a two-week leisure trip to the U.S. for three officials from Bank E, a bank owned and controlled by the government of China.”

“Also in 2008, Diebold paid for a two-week leisure trip for ten employees of Bank F, a bank owned and controlled by the government of China. This trip included travel to Hong Kong, Singapore, Malaysia, and Bali.”

“In 2009, Diebold paid for a two-week trip to the U.S. for twenty-four Bank A employees that included travel to Chicago; to Las Vegas for sightseeing, a dance show, and tour of the Grand Canyon; to Los Angeles for a tour of Universal Studios; to San Diego and San Francisco, which included a tour of Napa Valley.”

The SEC further alleges that “many of the government bank employees who received these leisure trips and other improper gifts were senior officials who had the ability to influence purchasing decisions by the banks.”

As to internal controls, the complaint alleges that “Diebold lacked sufficient internal controls to detect and prevent these illicit payments, many of which were paid to third-parties in China” and that “all of the illicit payments were falsely recorded in the company’s books and records as training or other legitimate business expenses.”

As to Executive A and B, the SEC complaint states that “even after these Diebold executives received FCPA training administered by the company in 2007, they took no action to halt these improper practices. Instead, these executives took further steps to hide the leisure nature of these trips including, on at least one occasion, providing false information to the company’s auditors in China.”

The complaint further states:

“Other executives at Diebold were on notice of potential corruption issues at Diebold China. In 2007, a regional government agency in China, the Chengdu Administration of Industry & Commerce (“CDAIC”), opened an investigation involving, among other issues, leisure trips and gifts Diebold China had provided to bank officials. Company executives in China and the U.S. learned of the investigation after a Diebold field office in Chengdu was raided by authorities. Executives A and B took the lead in responding to the investigation. Diebold was able to settle the matter with no corruption charges filed, by paying CDAIC an administrative penalty of 600,000 RMB (approximately $80,000) for business registration violations. Despite being on notice of potential corruption issues at Diebold China, Diebold failed to effectively investigate and remediate these problems.”

Based on the above conduct, the SEC’s complaint charges violations of the FCPA’s anti-bribery provisions and books and records and internal controls provisions.

As noted in the SEC release, Diebold agreed to pay $22.9 million in disgorgement and prejudgment interest, appoint an independent compliance monitor, and consent to a final judgment permanently enjoining the company from violating the FCPA’s anti-bribery and books and records and internal controls provisions. In the release, Scott Friestad (Associate Director of Enforcement) stated:

“A bribe is a bribe, whether it’s a stack of cash or an all-expense paid trip to Europe. Public companies must be held accountable when they break the law to influence government officials with improper payments or gifts.”

Jonathan Leiken (Jones Day) represented Diebold.

This Law360 article states:

“Mike Jacobsen, a spokesman for […] Diebold, called the settlement ‘an important step for the company moving forward.’ ‘It’s imperative for Diebold to recognize these issues head on, acknowledge responsibility, put the FCPA investigation period behind it and get on with the business of managing the company,’ Jacobsen said in a statement. ‘Given the experience the company has gained and its continued focus on global ethics and compliance, Diebold is confident in its ability to manage ethics-related issues as they arise.'”

Yesterday Diebold’s stock was up approximately .7%.

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