SEC Returns To “World Tour” Allegations In Administrative Action Against FLIR Systems
As highlighted in this prior post, in November 2014 the SEC brought an administrative FCPA enforcement action against Stephen Timms and Yasser Ramahi (individuals who worked in sales at FLIR Systems Inc., – an Oregon-based company that produces thermal imaging, night vision, and infrared cameras and sensor systems).
The conduct at issue was alleged expensive travel, entertainment, and personal items for Saudi foreign officials in order to influence the officials to obtain or retain business for FLIR with the Saudi Arabia Ministry of the Interior.
Based on the same conduct, the SEC yesterday announced this administrative action against FLIR Systems.
In summary fashion, the order states:
“This matter concerns violations of the anti-bribery, books and records and internal controls provisions of the FCPA by FLIR. In 2009, employees of FLIR provided unlawful travel, gifts and entertainment to foreign officials in the Kingdom of Saudi Arabia to obtain or retain business. The travel and gifts included personal travel and expensive watches provided by employees in FLIR’s Dubai office to government officials with the Saudi Arabia Ministry of Interior (the “MOI”). The extent and nature of the travel and the value of the gifts were concealed by certain FLIR employees and, as a result, were falsely recorded in FLIR’s books and records. FLIR lacked sufficient internal controls to detect and prevent the improper travel and gifts. Also, from 2008 through 2010, FLIR provided significant additional travel to the same MOI officials, which was booked as business expenses, but for which there is insufficient supporting documentation to confirm the business purpose. As a result of the unlawful conduct, FLIR earned over $7 million in profits from the sales to the MOI.”
Under the heading “FLIR’s Business with the Saudi Ministry of Interior” the order states:
“Stephen Timms (“Timms”) was the head of FLIR’s Middle East office in Dubai during the relevant time period, and was one of the company executives responsible for obtaining business for FLIR’s Government Systems division from the MOI. Yasser Ramahi (“Ramahi”) reported to Timms and worked in business development in Dubai.2 Both Timms and Ramahi were employees of FLIR.
In November 2008, FLIR entered into a contract with the MOI to sell binoculars using infrared technology for approximately $12.9 million. Ramahi and Timms were the primary sales employees responsible for the contract on behalf of FLIR. In the contract, FLIR agreed to conduct a “Factory Acceptance Test,” attended by MOI officials, prior to delivery of the binoculars to Saudi Arabia. The Factory Acceptance Test was a key condition to the fulfillment of the contract. FLIR anticipated that a successful delivery of the binoculars, along with the creation of a FLIR service center, would lead to an additional order in 2009 or 2010.”
Under the heading “World Tour,” the order states:
“In February 2009, Ramahi and Timms began preparing for the July 2009 Factory Acceptance Test. Ramahi and Timms then made arrangements to send MOI officials on what Timms later referred to as a “world tour” before and after the Factory Acceptance Test. Among the MOI officials for whom Ramahi and Timms provided the “world tour” were the head of the MOI’s technical committee and a senior engineer on the committee, who played a key role in the decision to award FLIR the business.”
The trip proceeded as planned, with stops in Casablanca, Paris, Dubai and Beirut. While in the Boston area, the MOI officials spent a single 5-hour day at FLIR’s Boston facility completing the equipment inspection. The agenda for their remaining seven days in Boston included just three other 1-2 hour visits to FLIR’s Boston facility, some additional meetings with FLIR personnel, at their hotel, and other leisure activities, all at FLIR’s expense. At the suggestion of Timms’ manager, a U.S.-based Vice President responsible for global sales to foreign governments, Ramahi also took the MOI on a weekend trip to New York while they were in Boston. In total, the MOI officials traveled for 20 nights on their “world tour,” with airfare and luxury hotel accommodations paid by FLIR. There was no business purpose for the stops outside of Boston.
Timms forwarded the air travel expenses for the MOI to his manager for approval, attaching a summary reflecting the full extended routing of the travel. The manager approved the travel, directing him to make the expenses appear smaller by “break[ing] it in 2 [submissions.]” Timms also forwarded the travel charges and an itinerary showing the Paris and Beirut stops, to FLIR’s finance department. FLIR’s finance department processed and paid the approved air expenses the next day. Neither Timms’ manager nor anyone in FLIR’s finance department questioned the itinerary or the travel expense, although the itinerary reflected travel to locations other than Boston.
After receiving questions from Timms’ manager, Ramahi and Timms later claimed that the MOI’s “world tour” had been a mistake. They told the FLIR finance department that the MOI had used FLIR’s travel agent in Dubai to book their own travel and that it had been mistakenly charged to FLIR. They then used FLIR’s third-party agent to give the appearance that the MOI paid for their travel. Timms also oversaw the preparation of false and misleading documentation of the MOI travel expenses that was submitted to FLIR finance as the “corrected” travel documentation. FLIR finance then made an additional payment to the Dubai travel agency for the remaining travel costs.
Following the equipment inspection in Boston, the MOI gave its permission for FLIR to ship the binoculars. The MOI later placed an order for additional binoculars for an approximate price of $1.2 million. In total, FLIR earned revenues of over $7 million in profits in connection with its sales of binoculars to the MOI.”
Under the heading “Additional Travel,” the order states:
“From 2008 through 2010, FLIR paid approximately $40,000 for additional travel by MOI officials. For example, Ramahi took the same MOI officials who went on the “world tour” to Dubai over the New Year holiday in December 2008 and again in 2009. FLIR paid for airfare, hotel, and expensive dinners and drinks. FLIR also paid for hotels, meals and first class flights for the MOI officials to travel within Saudi Arabia to help FLIR win business with other Saudi government agencies. Although the trips were booked as business expenses, the supporting documentation is incomplete and it is not possible to determine whether all the trips in fact had a business purpose.
Moreover, in June and July of 2011, a FLIR regional sales manager accompanied nine officials from the Egyptian Ministry of Defense on travel paid for by a FLIR partner. The travel centered on a legitimate Factory Acceptance Test at FLIR’s Stockholm factory. The travel, however, also included a non-essential visit to Paris, during which the officials spent only two days on demonstration and promotion activities relating to FLIR products. In total, the government officials traveled for 14 days and most of the officials only participated in legitimate business activities on four of those days. Three officials engaged in two additional days of training in Sweden. The total travel costs were approximately $43,000. FLIR subsequently reimbursed the partner for the majority of the travel costs, based upon cursory invoices which were submitted without supporting documentation.”
Under the heading “Expensive Watches,” the order states:
“At Timms’ and Ramahi’s instruction, in February 2009, FLIR’s third-party agent purchased five watches in Riyadh, paying approximately 26,000 Saudi Riyal (about U.S. $7,000). Ramahi and Timms gave the watches to MOI officials during a mid-March 2009 trip to Saudi Arabia to discuss several business opportunities with the MOI. The MOI officials who received the watches included two of the MOI officials who subsequently went on the “world tour” travel.
Within weeks of his visit to Saudi Arabia, Timms submitted an expense report to FLIR for reimbursement of the watches. The expense report clearly identified the watches as “EXECUTIVE GIFTS: 5 WATCHES” costing $1,425 each. Shortly thereafter, Timms specified that the watches were given to MOI officials, and identified the specific officials who received the watches.
Despite these red flags, the reimbursement was approved by Timms’ manager and, based on that approval and the submitted invoices, FLIR’s finance department paid the reimbursement to Timms.
In July 2009, in connection with an unrelated review of expenses in the Dubai office, FLIR’s finance department flagged Timms’ reimbursement request for the watches. In response to their questions, Timms claimed that he had made a mistake and falsely stated that the expense report should have reflected a total of 7,000 Saudi Riyal (about $1,900) for the watches, rather than $7,000 as submitted. Ramahi also told FLIR investigators that the watches were each purchased for approximately 1,300-1,400 Saudi Riyal (approximately $377) by FLIR’s third-party agent. In September 2009, at Timms’ direction, FLIR’s agent maintained the false cover story in response to emailed questions from FLIR’s finance department. Timms and Ramahi also obtained a false invoice reflecting that the watches cost 7,000 Saudi Riyal, which Timms submitted to FLIR finance in August 2009. The false, revised invoice was processed by FLIR.”
Under the heading, “FLIR’s FCPA-Related Policies and Training and Internal Controls,” the order states:
“During the relevant time, FLIR had a code of conduct, as well as a specific anti-bribery policy, which prohibited FLIR employees from violating the FCPA. FLIR’s policies required employees to record information “accurately and honestly” in FLIR’s books and records, with “no materiality requirement or threshold for a violation.” FLIR employees, including Timms and Ramahi, received training on their obligations under the FCPA and FLIR’s policy, although the company did not ensure that all employees, including Ramahi, completed the required training.
FLIR had few internal controls over travel in its foreign sales offices at the time. Although FLIR had policies and procedures over travel for its domestic operations, there were no controls or policies in place governing the use of foreign travel agencies. Instead, FLIR foreign sales employees worked directly with FLIR’s foreign travel agencies to arrange travel for themselves and others. Sales managers, such as Timms, were solely responsible for expense approvals for their sales staff. Timms’ manager was responsible for approving travel-related expenses for all non-U.S.-based senior sales employees (such as Timms) and approving the payment of large invoices to the foreign travel agencies.
FLIR also had few controls over the giving of gifts to customers, including foreign government officials. Sales staff and managers were responsible for all expense approvals for gifts and accounts payable was not trained to flag expenses that were potentially problematic. To the contrary, the initial expense submission for the watches was labeled in large English print “EXECUTIVE GIFTS: 5 WATCHES” for a total of $7,123, and was accompanied by email confirmation that the watches were provided to 5 MOI “officers,” when it was approved by Timms’ manager and processed and paid by FLIR accounts payable department.”
Under the heading, “Remedial Efforts,” the order states:
“In November 2010, FLIR received a complaint letter from FLIR’s thirdparty agent, and began an investigation that lead to the discovery of the improper watches and travel. FLIR subsequently self-reported the conduct to the Commission and cooperated with the Commission’s investigation.
Subsequent to the conduct described herein, FLIR undertook significant remedial efforts including personnel and vendor terminations. FLIR broadened its relevant policies and trainings and implemented a gift policy. FLIR enhanced access by its employees to its anti-bribery policy by providing translations into languages spoken in all countries in which it has offices. FLIR is in the process of enhancing its travel approval system in its foreign offices, including requiring all non-employee travel to be booked through either one large, designated travel agency or a limited number of designated regional travel agencies after receiving advance written approval from senior business personnel and the legal department. All travel agencies will be vetted through FLIR’s full FCPA due diligence framework, be subject to all of FLIR’s current FCPA training obligations, and cannot be reimbursed for travel bookings for non-employees in the absence of appropriate approvals. FLIR added additional FCPA training and procedures for its finance staff, and enhanced its third-party diligence process and contracts. FLIR also engaged outside counsel and forensic accountants to conduct a compliance review of travel and entertainment expenses in its operations outside the U.S.”
Under the heading, “Legal Standards and FCPA Violations,” the order states, in pertinent part:
“FLIR violated [the anti-bribery provisions] by corruptly providing expensive gifts of travel, entertainment, and personal items to the MOI officials to retain and obtain business for FLIR. [FLIR] also violated [the internal control provisions], by failing to devise and maintain a sufficient system of internal accounting controls to prevent the provision and approval of the watches and the travel and the falsification of FLIR’s books and records to conceal the conduct. As a result of this same conduct, FLIR failed to make and keep accurate books and records in violation of [the books and records provisions].”
As noted in the SEC’s release:
“The SEC’s order finds that FLIR violated the anti-bribery provisions of [the FCPA] and the internal controls and books-and-records provisions of [the FCPA]. FLIR self-reported the misconduct to the SEC and cooperated with the SEC’s investigation. FLIR consented to the order without admitting or denying the findings and agreed to pay disgorgement of $7,534,000, prejudgment interest of $970,584 and a penalty of $1 million for a total of $9,504,584.”
In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:
“FLIR’s deficient financial controls failed to identify and stop the activities of employees who served as de facto travel agents for influential foreign officials to travel around the world on the company’s dime.”
As a condition of settlement, FLIR is required to report to the SEC “periodically, at no less than nine-month intervals during a two-year term, the status of its compliance review of its overseas operations and the status of its remediation and implementation of compliance measures.”
FLIR Systems issued this release stating:
“FLIR Systems … announced an agreement with the Securities and Exchange Commission (SEC) resolving previously disclosed violations of the Foreign Corrupt Practices Act (FCPA) committed by two former FLIR employees dating back to 2008.
FLIR discovered the FCPA violations related to approximately $40,000 in excessive travel related to factory acceptance tests and miscellaneous gifts valued at approximately $7,000. FLIR subsequently self-reported the actions to the SEC and the U.S. Department of Justice (DOJ) and then terminated the involved employees, who knowingly violated and actively circumvented the Company’s policies and financial controls. As part of its act of self-reporting, FLIR conducted a thorough investigation of its international business activities with the assistance of independent legal specialists. The settlement fully resolves all outstanding issues related to these investigations.
In announcing the settlement, the SEC recognized FLIR for self-reporting the violations.
“FLIR takes compliance very seriously and has policies and procedures in place to prevent such conduct,” said FLIR President and CEO,Andy Teich. “We self-reported the employees’ activities to the relevant authorities upon discovering them and cooperated with the government’s investigation. We have taken action to bolster our training, controls, and policies. The actions of the two former employees involved do not reflect the values of FLIR or the high standards to which we hold ourselves accountable. I am very pleased that we have fully resolved this matter and put it behind us.”
The DOJ declined to pursue any case against FLIR.”
Bruce Yannett (Debevoise & Plimpton) represented FLIR.
Yesterday, FLIR’s stock closed down approximately .9%.
Analyzing The SEC’s Recent FCPA Pharma Speech
In November 2009, then DOJ Assistant Attorney General Lanny Breuer delivered this Foreign Corrupt Practices Act speech at a pharmaceutical industry conference. In the speech, Breuer warned the audience as follows.
“[C]onsider the possible range of “foreign officials” who are covered by the FCPA: Some are obvious, like health ministry and customs officials of other countries. But some others may not be, such as the doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities. Indeed, it is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a “foreign official” within the meaning of the FCPA.”
In the speech, Breuer also talked about “the importance [of] rigorous FCPA compliance polic[ies] that are faithfully enforced” and reminded the audience as follows.
“[A]ny pharmaceutical company that discovers an FCPA violation should seriously consider voluntarily disclosing the violation and cooperating with the Department’s investigation. If you voluntarily disclose an FCPA violation, you will receive meaningful credit for that disclosure. And if you cooperate with the Department’s investigation, you will receive a meaningful benefit for that cooperation—without any request or requirement that you disclose privileged material. Finally, if you remediate the problem and take steps to ensure that it does not recur, you will benefit from that as well.”
Over five years and ten FCPA enforcement actions against pharma/healthcare companies later, Andrew Ceresney (Director of the SEC’s Enforcement Division) delivered a nearly identical speech earlier this week.
The below post excerpts Ceresney’s speech.
When reviewing the speech, you may want to keep the following in mind.
As highlighted in this prior post, the enforcement theory that physicians, lab personnel, etc. are “foreign officials” under the FCPA was first used in 2002 and has since been used in 17 corporate enforcement actions.
Even even though Ceresney’s speech contains several citations, it is telling that the following assertion lacks any citation “doctors, pharmacists, and administrators from public hospitals in foreign countries … are often are classified as foreign officials for purposes of the FCPA.”
There is no citation for this assertion because it is one of the most dubious enforcement theories of this new era of FCPA enforcement and an enforcement theory that finds no support in the FCPA’s extensive legislative history. (See here for “The Story of the Foreign Corrupt Practices Act“).
Of further note, despite extracting hundreds of millions of dollars from risk averse corporations based on this “foreign official” theory, the DOJ and SEC have never used this enforcement theory to charge any individual.
Another issue to consider.
As highlighted in this recent post, despite the continued foreign scrutiny of the pharma and healthcare industry, the corporate dollars continue to flow to U.S. physicians and other healthcare workers. It is one of the more glaring double standards when it comes to FCPA enforcement and enforcement of U.S. domestic bribery laws.
With that necessary information, to Ceresney began his speech as follows.
“Pursuing FCPA violations is a critical part of our enforcement efforts. International bribery has many nefarious impacts, including sapping investor confidence in the legitimacy of a company’s performance, undermining the accuracy of a company’s books and records and the fairness of the competitive marketplace. Our specialized FCPA unit as well as other parts of the Enforcement Division continue to do remarkable work in this space, bringing significant and impactful cases, often in partnership with our criminal partners.
Now, our FCPA focus obviously covers many industries. For example, we have conducted a recent sweep in the financial services industry that will yield a number of important cases. But the pharma industry is one on which we have been particularly focused in recent years. A few factors combine to make it a high-risk industry for FCPA violations. Pharmaceutical representatives have regular contact with doctors, pharmacists, and administrators from public hospitals in foreign countries. Those people often are classified as foreign officials for purposes of the FCPA, and they often decide what products public hospitals or pharmacies will purchase. This influence over the awarding of contracts is true for virtually every country around the globe.
There have been three types of misconduct that we have seen arise most often in our pharma FCPA cases. One is “Pay-to-Prescribe”; another is bribes to get drugs on the approved list or formulary; and the third is bribes disguised as charitable contributions. Let me discuss each of these in turn.
In “Pay-to-Prescribe” cases, we see public official doctors and public hospitals being paid bribes in exchange for prescribing certain medication, or other products such as medical devices. Some of our cases involve simple cash payments to doctors and other medical officials. But we have also seen some more innovative schemes created for the purposes of rewarding prescribing physicians. For example, in our 2012 action against Pfizer, subsidiaries in different countries found a variety of illicit ways to compensate doctors. In China, employees invited “high-prescribing doctors” in the Chinese government to club-like meetings that included extensive recreational and entertainment activities to reward doctors’ past product sales or prescriptions. Pfizer China also created various “point programs” under which government doctors could accumulate points based on the number of Pfizer prescriptions they wrote. The points were redeemed for gifts ranging from medical books to cell phones, tea sets, and reading glasses. In Croatia, Pfizer employees created a “bonus program” for Croatian doctors who were employed in senior positions in Croatian government health care institutions. Once a doctor agreed to use Pfizer products, a percentage of the value purchased by a doctor’s institution would be funneled back to the doctor in the form of cash, international travel, or free products. Each of these schemes violated the FCPA by routing money to foreign officials in exchange for business.
Let me turn to a second form of bribery, which is aimed at getting products on a formulary. Of course, getting your company’s drugs on formularies is important to success in this industry. But the FCPA requires that you do this without paying bribes, and we have taken action where companies have crossed that line. We brought a case against Eli Lilly that included such violations. There, the company’s subsidiary in Poland made payments totaling $39,000 to a small foundation started by the head of a regional government health authority. That official, in exchange, placed Lilly drugs on the government reimbursement list. That action involved a variety of other FCPA violations and Eli Lilly paid $29 million to settle the matter.
The Eli Lilly case brings me to my third point, which concerns bribes disguised as charitable contributions. As you might know, the FCPA prohibits giving “anything of value” to a foreign official to induce an official action to obtain or retain business, and we take an expansive view of the phrase “anything of value.” The phrase clearly captures more than just cash bribes, and Eli Lilly is not the only matter where we have brought an action arising out of charitable contributions.
For example, in Stryker, we charged a medical technology company after subsidiaries in five different countries paid bribes in order to obtain or retain business. Stryker’s subsidiary in Greece made a purported donation of nearly $200,000 to a public university to fund a laboratory that was the pet project of a public hospital doctor. In return, the doctor agreed to provide business to Stryker. Stryker agreed to pay $13.2 million to settle these and other charges.
Similarly, in Schering-Plough, we brought charges against the company arising out of $76,000 paid by its Polish subsidiary to a charitable foundation. The head of that foundation was also the director of a governmental body that funded the purchase of pharmaceutical products and that influenced the purchase of those products by other entities, such as hospitals. In settling our action, Schering-Plough consented to paying a $500,000 penalty.
The lesson is that bribes come in many shapes and sizes, and those made under the guise of charitable giving are of particular risk in the pharmaceutical industry. So it is critical that we carefully scrutinize a wide range of unfair benefits to foreign officials when assessing compliance with the FCPA – whether it is cash, gifts, travel, entertainment, or charitable contributions. We will continue to pursue a broad interpretation of the FCPA that addresses bribery in all forms.”
Under the heading “Compliance Program,” Ceresney stated:
“The best way for a company to avoid some of the violations that I have just described is a robust FCPA compliance program. I can’t emphasize enough the importance of such programs. This is a message that I think has started to get through in the past 5 years.
The best companies have adopted strong FCPA compliance programs that include compliance personnel, extensive policies and procedures, training, vendor reviews, due diligence on third-party agents, expense controls, escalation of red flags, and internal audits to review compliance. I encourage you to look to our Resource Guide on the FCPA that we jointly published with the DOJ, to see what some of the hallmarks of an effective compliance program are. I’ll highlight just a couple.
First, companies should perform risk assessments that take into account a host of factors listed in the guide and then place controls in these risk areas. The pharmaceutical industry operates in virtually every country, including many high risk countries prone to corruption. The industry also comes into contact with customs officials and may need perishable medicines and other goods cleared through customs quickly. They may also come into contact with officials involved in licensing and inspections. These are just a few examples of risk factors that a risk assessment should be focused on in this particular sector.
A healthy compliance program should also include third-party agent due diligence. In addition to using third-party agents, many pharmaceutical companies use distributors. This creates the risk that the distributor will use their margin or spread to create a slush fund of cash that will be used to pay bribes to foreign officials. Because of this added layer of cash flow, companies frequently improperly account for bribes as legitimate expenses. To properly combat against these abuses, a compliance program must thoroughly vet its third-party agents to include an understanding of the business rationale for contracting with the agent. Appropriate expense controls must also be in place to ensure that payments to third-parties are legitimate business expenses and not being used to funnel bribes to foreign officials.”
Under the heading, “Self-Reporting and Cooperation,” Ceresney stated:
“The existence of FCPA compliance programs place companies in the best position to detect FCPA misconduct and allow the opportunity to self-report and cooperate. There has been a lot of discussion recently about the advisability of self-reporting FCPA misconduct to the SEC. Let me be clear about my views – I think any company that does the calculus will realize that self-reporting is always in the company’s best interest. Let me explain why.
Self-reporting from individuals and entities has long been an important part of our enforcement program. Self-reporting and cooperation allows us to detect and investigate misconduct more quickly than we otherwise could, as companies are often in a position to short circuit our investigations by quickly providing important factual information about misconduct resulting from their own internal investigations.
In addition to the benefits we get from cooperation, however, parties are positioned to also help themselves by aggressively policing their own conduct and reporting misconduct to us. We recognize that it is important to provide benefits for cooperation to incentivize companies to cooperate. And we have been focused on making sure that people understand there will be such benefits. We continue to find ways to enhance our cooperation program to encourage issuers, regulated entities, and individuals to promptly report suspected misconduct. The Division has a wide spectrum of tools to facilitate and reward meaningful cooperation, from reduced charges and penalties, to non-prosecution or deferred prosecution agreements in instances of outstanding cooperation. For example, we announced our first-ever non-prosecution agreement in an FCPA matter with a company that promptly reported violations and provided real-time, extensive cooperation in our investigation. And just six weeks ago, we entered into a deferred prosecution agreement with another company that self-reported misconduct.
More commonly, we have reflected the cooperation in reduced penalties. Companies that cooperate can receive smaller penalties than they otherwise would face, and in some cases of extraordinary cooperation, pay significantly less. One recent FCPA matter in this sector illustrates the considerable benefits that can flow from coming forward and cooperating. Our joint SEC-DOJ FCPA settlement with Bio-Rad Laboratories for $55 million reflected a substantial reduction in penalties due to the company’s considerable cooperation in our investigation. In addition to self-reporting potential violations, the company provided translations of numerous key documents, produced witnesses from foreign jurisdictions, and undertook extensive remedial actions. There, the DOJ imposed a criminal fine of only $14 million, which was equivalent to about 40% of the disgorgement amount – a large reduction from the typical ratio of 100% of the disgorgement amount.
In fact, we have recently announced FCPA matters featuring penalties in the range of 10 percent of the disgorgement amount, an even larger discount than the case I just mentioned. And in the Goodyear case we announced last week, we imposed no penalty. In those cases, the companies received credit for doing things like self-reporting; taking speedy remedial steps; voluntarily making foreign witnesses available for interviews; and sharing real-time investigative findings, timelines, internal summaries, English language translations, and full forensic images with our staff.
The bottom line is that the benefits from cooperation are significant and tangible. When I was a defense lawyer, I would explain to clients that by the time you become aware of the misconduct, there are only two things that you can do to improve your plight – remediate the misconduct and cooperate in the investigation. That obviously remains my view today. And I will add this – when we find the violations on our own, and the company chose not to self-report, the consequences are worse and the opportunity to earn significant credit for cooperation often is lost.
This risk of suffering adverse consequences from a failure to self-report is particularly acute in light of the continued success and expansion of our whistleblower program. The SEC’s whistleblower program has changed the calculus for companies considering whether to disclose misconduct to us, knowing that a whistleblower is likely to come forward. Companies that choose not to self-report are thus taking a huge gamble because if we learn of the misconduct through other means, including through a whistleblower, the result will be far worse.”
All About The Alstom Enforcement Action
As mentioned in this previous post, last week the DOJ announced a $772 million FCPA enforcement action against Alstom and related entities.
While the Alstom enforcement action is the largest DOJ FCPA enforcement action of all-time, it is the second largest overall FCPA enforcement action of all-time behind the 2008 Siemens enforcement action ($450 million DOJ component and a $350 million SEC component). To see the current FCPA top-ten settlement list, click here.
The Alstom resolution documents total approximately 400 pages and this post summarizes these documents.
At its core, the Alstom enforcement action involved alleged conduct in Indonesia, Saudi Arabia, Egypt, the Bahamas, and Taiwan. All of this conduct is alleged in the Alstom S.A. information as the basis for the company’s FCPA books and records and internal controls violations between 1998 and 2004. The charges were resolved through a plea agreement. (A future post will explore, among other issues, the irony of Alstom pleading guilty in 2014 to substantive legal provisions that last applied to the company in 2004 when it ceased to be an “issuer.”). From there the conduct was apportioned to the following Alstom-related entities in related enforcement actions.
- Alstom Network Schweiz AG (conspiracy to violate the FCPA’s anti-bribery provisions based on the Indonesia, Saudi Arabia, Egypt and Bahamas conduct and resolved through a plea agreement);
- Alstom Power Inc. (conspiracy to violate the FCPA’s anti-bribery provisions based on the Indonesia, Saudi Arabia and Egypt conduct and resolved through a DPA);
- Alstom Grid Inc. (conspiracy to violate the FCPA’s anti-bribery provisions based on the Egypt conduct and resolved through a DPA)
According to the information, during the relevant time period, Alstom employed approximately 110,000 employees in over 70 countries. The information contains specific allegations as to 9 individuals associated with Alstom and 9 consultants associated with Alstom. As highlighted below, at its core, the Alstom enforcement action involved inadequate controls concerning the engagement, monitoring and supervision of the consultants.
The information alleges that “Alstom had direct and indirect subsidiaries in various countries around the world through which it bid on projects to secure contracts to perform power-related, grid-related, and transportation-related services, including for state-owned entities.” According to the information, “Alstom’s subsidiaries worked exclusively on behalf of Alstom and for its benefit” and that Alstom “maintained a department called International Network that supported its subsidiaries’ efforts to secure contracts around the world.” In addition, the information alleges that “within Alstom’s power sector, the company also maintained a department called Global Power Sales (“GPS”), which performed functions similar to International Network, in that GPS assisted Alstom entities or businesses in their efforts to secure contracts.”
The information contains a section titled “Overview of the Unlawful Scheme” that has two substantive sections “False Books and Records” and “Internal Accounting Controls.”
Under the heading “False Books and Records,” the information states.
“Alstom, acting through executives, employees, and others, disguised on its books and records millions of dollars in payments and other things of value given to foreign officials in exchange for those officials’ assistance in securing projects, keeping projects, and otherwise gaining other improper advantages in various countries around the world for Alstom and its subsidiaries.
In a number of instances, Alstom hired consultants to conceal and disguise improper payments to foreign officials. Alstom paid the consultants purportedly for performing legitimate services in connection with bidding on and executing various projects. In reality, the Alstom personnel knew that the consultants were not performing legitimate services and that all or a portion of the payments were to be used to bribe foreign officials. Alstom executives and employees falsely recorded these payments in its books and records as “commissions” or “consultancy fees.”
Alstom also created, and caused to be created, false records to further conceal these improper payments. Alstom created consultancy agreements that provided for legitimate services to be rendered by the consultant, and included a provision prohibiting unlawful payments, even though the Alstom executives and employees involved knew that at times the consultants were using all or a portion of their consultancy fees to bribe foreign officials. Moreover certain Alstom employees instructed the consultants to submit false invoices and other back-up documentation reflecting purported legitimate services rendered that those employees knew were not actually performed, so that Alstom could justify the payments to the consultants.
In other instances, Alstom paid bribes directly to foreign officials by providing gifts and petty cash, by hiring their family members, and in one instance by paying over two million dollars to a charity associated with a foreign official, all in exchange for those officials’ assistance in obtaining or retaining business in connection with projects for Alstom and its subsidiaries. As with the consultant payments, Alstom knowingly and falsely recorded these payments in its books and records as consultant expenses, as “donations,” or other purportedly legitimate expenses.
Alstom employees, some of whom were located in Connecticut, knowingly falsified Alstom’s books and records in order to conceal the bribe payments that they knew were illegal and were contrary to Alstom’s written policy. Alstom also submitted false certifications to USAID and other regulatory entities, falsely asserting that Alstom was not using consultants on particular projects when, in fact, consultants were being used, and asserting that no unlawful payments were being made in connection with projects when, in fact, they were. Various other acts, including e-mail communications, passed through Connecticut.”
Under the heading “Internal Accounting Controls,” the information states:
“Although Alstom had policies in place prohibiting unlawful payments to foreign officials, including through consultants, Alstom knowingly failed to implement and maintain adequate controls to ensure compliance with those policies.
Alstom knowingly failed to implement and maintain adequate controls to ensure meaningful due diligence for the retention of third-party consultants. A number of consultants that Alstom hired raised a number of “red flags” under Alstom’s own internal policies. Certain consultants proposed for retention had no expertise or experience in the industry sector in which Alstom was attempting to secure or execute the project. Other consultants were located in a country different than the project country. At other times, the consultants asked to be paid in a currency or in a bank account located in a country different than where the consultant and the project were located. In multiple instances, more than one consultant was retained on the same project, ostensibly to perform the very same services. Despite, these “red flags,” the consultants were nevertheless retained without meaningful scrutiny. To the contrary, those submitting consultants for possible retention at times did not make explicit the true reason for the consultants’ retention, as well as other relevant facts. And certain executives who had the ability to ensure appropriate controls surrounding the due diligence process themselves know, or knowingly failed to take action that would have allowed them to discover, that the purpose of hiring the consultant was to conceal payments to foreign officials in connection with securing projects and other favorable treatment in various countries around the world for Alstom and its subsidiaries.
Alstom also knowingly failed to implement and maintain adequate controls for the approval of consultancy agreements. During the relevant time period, Alstom’s consultancy agreements provided that payments to the consultants would only be made on a pro rata basis tied to project milestones or as Alstom was paid by the customer. In certain instances, Alstom employees changed the amount and terms of payment for the consultants, in violation of the company’s own internal policies, so that Alstom could pay the consultants more money and make the payment sooner in order to generate cash available to bribe the foreign officials. The Alstom executives and employees responsible for approving consultancy agreements did not adequately scrutinize these changes, and in certain instances were copied on e-mails in which the true purpose for the change was discussed. During the relevant time period, Alstom also maintained an unwritten policy to discourage, where possible, consultancy agreements that would subject Alstom to the jurisdiction of the United States. To effectuate this policy, Alstom typically used consultants who were not based in the United States, and intentionally paid consultants in bank accounts outside of the United States and in currencies other than U.S. dollars. The Alstom executives and employees responsible for approving consultancy agreements attempted to enforce this unwritten policy even when it meant that the consultant had to open an offshore bank account solely for the purpose of receiving payments from Alstom.
Alstom also knowingly failed to implement and maintain adequate controls for payments to consultants. In multiple instances, Alstom paid the consultants without adequate, or timely, documentation of the services they purported to perform. At times, consultants sought help from Alstom to create false documentation necessary for payment approval. In other instances, the consultants created false “proofs of service” long after the purported services were rendered. In certain cases … a consultant sought assistance from an Alstom employee responsible for approving payment because, as the consultant explained to the Alstom employee, he did not want to include on his invoices the fact that his services included making unlawful payments. During the relevant time period, Alstom did not engage in auditing or testing of consultant invoices or payments. In many instances, requests for payments to consultants were approved without adequate review by Alstom knowing that the payments were being used, at least in part, to bribe foreign officials to obtain or retain business in connection with projects in various countries around the world for Alstom and its subsidiaries.”
Next, the information contains the following summary allegation.
“Alstom paid approximately $75 million in consultancy fees knowing that this money would be used, in whole or in part, to bribe or provide something of value to foreign officials to secure approximately $4 billion in projects in multiple countries, with a gain to Alstom of approximately $296 million.”
The information next contains specific allegations regarding Indonesia, Saudi Arabia, Egypt, the Bahamas, and Taiwan.
Indonesia
As to Indonesia, the information concerns various power projects in Indonesia through Indonesia’s state-owned and state-controlled electricity company, Perusahann Listrik Negara (“PLN”). One such project was the Tarahan Project, a project to provide power-related services to the citizens of Indonesia at approximately $118 million and another such project was the Muara Tawar Block 5 Project, a project to expand the existing Muara Tawar power plant and provide additional power-related services to the citizens of Indonesia at approximately $260 million. According to the information, Alstom subsidiaries bid on but were not awarded contracts related to other expansions of the Muara Tawar power plant. In summary fashion, the information alleges as follows.
“In connection with these projects, Alstom disguised on its books and records millions of dollars and other things of value provided to Indonesian officials in exchange for those officials’ assistance in securing the power projects for Alstom and its subsidiaries. Alstom also knowingly failed to implement and maintain adequate controls to ensure that no unlawful payments were being made through consultants to foreign officials in connection with these projects.”
The Indonesia allegations in the Alstom information are substantively similar to the allegations in the prior FCPA enforcement action against various individuals associated with Alstom Power. (See here for the prior post and summary).
Saudi Arabia
As to Saudi Arabia, the information concerns bids for power projects with Saudi Electric Company (“SEC”), Saudi Arabia’s state-owned and state-controlled electricity company, and its predecessor entities. According to the information, in connection with one project:
“Alstom disguised on its books and records tens of millions of dollars in payments and other things of value provided to Saudi officials to obtain or retain business in connection with the projects. Alstom knowingly failed to implement and maintain adequate controls to ensure that no unlawful payments were being made to these officials. The arrangements for these consulting agreements originated with [a separate international power company with which Alstom operated as a joint venture in 1999 and acquired in 2000]. Subsequently, Alstom honored, continued, and in certain instances renewed these consulting agreements without adequate diligence on what services were ostensibly being provided by these consultants, whether the consultants were capable of providing such services, whether the agreed upon consultancy fees were commensurate with such legitimate services, and despite the lack of documentation regarding what legitimate services were provided.”
In one instance, the information alleges that a consultant “was the brother of a high-level official at the SEC who had the ability to influence the award” of a project, “which certain Alstom employees knew.” According to the information, this consultant was paid “approximately $5 million, with no documentation of any legitimate services having been performed [by the Consultant] commensurate with a $5 million fee and with no documentation of any technical or other expertise to justify such a fee.” In another instance, the information alleges that another consultant “was a close relative of another high-level official at SEC who had the ability to influence the aware” of a project” which certain Alstom employees knew.” According to the information, this consultant was paid at least $4 million under similar circumstances to those referenced above.
The information states as follows.
“In addition to paying consultants as a means of bribing key decision makers at the SEC, Alstom and its subsidiaries paid $2.2 million to a U.S.-based Islamic education foundation associated with [an SEC official believed to have 70% of the decision-making responsibility for SEC matters]. The payments were made in three installments, and internal records at Alstom reflect that these payments were included as expenses related [to the projects] rather than as a separate and independent charitable contribution.”
Egypt
As to Egypt, the information concerns bidding on various projects with the Egyptian Electricity Holding Company (“EEHC”), the state-owned and state-controlled electricity company in Egypt. According to the information, “EEHC was not itself responsible for conducting the bidding [on projects], and instead relied on Power Generation Engineering & Services Co. (“PGESCo”), which was controlled by an acted on behalf of EEHC.” According to the information, in connection with various projects, “Alstom disguised on its books and records millions of dollars and other things of value provided to Egyptian officials to obtain or retain business in connection with power projects for Alstom and its subsidiaries. Alstom also knowingly failed to implement and maintain adequate controls to ensure that no unlawful payments were being made to these officials. According to the information, Alstom used a consultant whose primary purpose “was not to provide legitimate consulting services to Alstom and its subsidiaries but was instead to make payments to Egyptian officials, including Asem Elgawhary who oversaw the bidding process.” (See here for the prior post regarding the Elgawhary enforcement action).
The information also contains allegations concerning bidding on various grid projects with EEHC and the Egyptian Electricity Transmission Company (“EETC”), the state-owned and state-controlled electricity transmission company in Egypt. According to the information, certain of these projects were “funded, at least in part, by the United States Agency for International Development (“USAID”). According to the information:
“In connection with [these projects], Alstom disguised on its books and records payments and other things of value it provided to Egyptian officials in exchange for those officials’ assistance in securing and executing the transmission and distribution projects for Alstom and its subsidiaries. Alstom also knowingly failed to implement and maintain adequate controls to ensure that no unlawful payments were being made to these officials.”
According to the information, an Alstom entity “repeatedly submitted false certifications to USAID in connection with these projects, and did not disclose that consultants were being used, that commissions were being paid, or that unlawful payments were being made.”
According to the information, “in addition to falsifying records in connection with the retention of consultants and their commission payments,” Alstom employees also “paid for entertainment and travel for [a high-level official] and other key decision-makers at EETC and EEHC, and provided those officials with envelopes of cash and other gifts during such travel.”
Bahamas
As to the Bahamas, the information concerns power projects with the Bahamas Electricity Corporation (“BEC”), the state-owned and state-controlled power company. According to the information, “Alstom disguised in its books and records payments to Bahamian officials to obtain or retain business in connection with power projects for Alstom and its subsidiaries. Alstom also knowingly failed to implement and maintain adequate controls to ensure that no unlawful payments were being made to these officials.
According to the information, Alstom retained a consultant “who, as certain Alstom employees knew, was a close personal friend” of a board member of BEC and that the primary purpose of the consultant was not to provide legitimate consulting services but instead to pay bribes to the official who had the ability to influence the award of the power contracts. According to the information, Alstom did not perform any due diligence on the consultant even though the consultant had no knowledge about, or experience in, the power industry. Rather, the information alleges, the consultant “sold furniture and leather products, and exported chemical products and spare parts.”
Taiwan
As to Taiwan, the information alleges that between 2001 and 2008, Alstom and its subsidiaries “began bidding on transport-related projects with various entities responsible for the construction and operation of the metro-rail system in Taipei, Taiwan, including Taipei’s Department of Rapid Transit System, known as “DORTS.” According to the information, an Alstom entity formally retained a consultant on a DORTS project even thought the consultant did not have the requisite expertise in the transport sector. According to the information, the consultant’s expertise was as a “wholesaler of cigarettes, wines and pianos.”
According to the information, “Alstom’s system of internal controls was inadequate as they related to the Taiwan projects. Despite numerous red flags, Alstom personnel knowingly failed to conduct further diligence to ensure that payments to its consultants in Taiwan could not be used to make improper payments to Taiwanese officials after the projects were secured.”
Based on the above allegations, Alstom was charged with one count of violating the FCPA’s books and records provisions from 1998 to 2004 and one count of violating the FCPA’s internal controls provisions from 1998 to 2004.
In the plea agreement, Alstom admitted that it was an “issuer” during the relevant time period and admitted, agreed, and stipulated that the factual allegations set forth in the information were true and correct.
In the plea agreement, the parties agreed that the gross pecuniary gain resulting from the offense was $296 million. The plea agreement sets forth an advisory sentencing guidelines range of $532.8 million to $1.065 billion.
Under the heading “failure to self-report,” the plea agreement states:
“The Defendant failed to voluntarily disclose the conduct even though it was aware of related misconduct at Alstom Power, Inc., a U.S. subsidiary, which entered into a resolution for corrupt conduct in connection with a power project in Italy several years prior to the Department reaching out to Alstom regarding its investigation.”
Under the heading “cooperation,” the plea agreement states:
“The Defendant initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoenas to the Defendant’s subsidiaries. Approximately one year into the investigation, the Defendant provided limited cooperation, but still did not fully cooperate with the Department’s investigation. The Defendant’s initial failure to cooperate impeded the Department’s investigation of individuals involved in the bribery scheme. At a later stage in the investigation, the Defendant began providing thorough cooperation, including assisting in the Department’s investigation and prosecution of individuals and other companies that had partnered with the Defendant on certain projects. The Defendant’s thorough cooperation did not occur until after the Department had publicly charged multiple Alstom executives and employees.”
Under the heading, “compliance and remediation,” the plea agreement states:
“The Defendant lacked an effective compliance and ethics program at the time of the offense. Since that time, the Defendant has undertaken substantial efforts to enhance its compliance program and to remediate the prior inadequacies, including complying with undertakings contained in resolutions with the World Bank (including an ongoing monitorship) and the government of Switzerland, substantially increasing its compliance staff, improving its alert procedures, increasing training and auditing/testing, and cease the use of external success fee-based consultants.”
In the plea agreement, Alstom agreed to a so-called “muzzle clause” in which it agreed not, directly or indirectly through others, to make any public statement contradicting the acceptance of responsibility set forth in the plea agreement.
Pursuant to the plea agreement, Alstom agreed to a corporate compliance program with elements typically part of other FCPA settlements.
Pursuant to the plea agreement, Alstom agreed to report to the DOJ, at no less than 12 month intervals, for a three-year term, regarding remediation and implementation of the compliance program and internal controls, policies, and procedures. The plea agreement references that Alstom is already subject to monitoring requirements pursuant to a February 2012 World Bank Resolution but states that “in the event that the Integrity Compliance Office [of the World Bank] does not certify that the Company has satisfied the monitoring requirements contained in the World Bank Resolution, the Company shall be required to retain an Independent Compliance Monitor.”
Alstom Network Schweiz AG Information
The information against Alstom Network Schweiz AG (formerly known as Alstom Prom AG), a subsidiary of Alstom headquartered in Switzerland and responsible for overseeing compliance as it related to Alstom’s consultancy agreements for many of Alstom’s power sector subsidiaries, is based upon the same Indonesia, Saudi Arabia, Egypt, and Bahamas conduct alleged in the Alstom information.
The Alstom entity is charged with conspiracy to violate the FCPA’s anti-bribery provisions under the dd-3 prong of the statute. According to the information, the “purpose of the conspiracy was to make corrupt payments to foreign officials in Indonesia, Saudi Arabia, Egypt, and the Bahamas in order to obtain and retain business related to power projects in those countries for and on behalf of Alstom and its subsidiaries.”
Alstom Network Schweiz AG Plea Agreement
In the plea agreement, the Alstom entity admitted, agreed, and stipulated that the factual allegations set forth in the information were true and correct.
Pursuant to the plea agreement, “the parties agree[d] that any monetary penalty in this case will be paid pursuant to the plea agreement between the DOJ and Alstom, S.A., the parent company of the Defendant, relating to the same conduct …”.
In the plea agreement, the Alstom entity agreed to a so-called “muzzle clause” in which it agreed not, directly or indirectly through others, to make any public statement contradicting the acceptance of responsibility set forth in the plea agreement.
The plea agreement contains the same corporate compliance program, reporting obligations, and monitor conditions as described in the Alstom plea agreement above.
The information against Alstom Power Inc., a subsidiary of Alstom headquartered in Connecticut in the business of providing power generation-related services around the world, is based upon the same Indonesia, Saudi Arabia, and Egypt conduct alleged in the Alstom information.
Alstom Power is charged with conspiracy to violate the FCPA’s anti-bribery provisions under the dd-2 prong of the statute. According to the information, the “purpose of the conspiracy was to make corrupt payments to foreign officials in Indonesia, Saudi Arabia, and Egypt in order to obtain and retain business related to power projects in those countries for and on behalf of Alstom Power and its subsidiaries.”
In the DPA, Alstom Power admitted, accepted, and acknowledged that it was responsible for the conduct charged in the information.
The DPA has a term of three years and under the heading “relevant considerations” states as follows.
“The [DOJ] enters into this Agreement based on the individual facts and circumstances presented by this case and the Company. Among the factors considered were the following: (a) the company failed to voluntarily disclosed the conduct even though it had previously entered into a resolution for corrupt conduct in connection with a power project in Italy several years prior to the [DOJ] reaching out to Alstom regarding their investigation; (b) the Company and its parent initially failed to cooperate with the Department’s investigation, responding only to the Department’s subpoena. Approximately one year into the investigation, the Company and its parent provided limited cooperation, but still did not fully cooperate with the Department’s investigation. The Company’s and its parent’s initial failure to cooperate impeded the Department’s investigation of individuals involved in the bribery scheme. At a later stage in the investigation, the Company and its parent began providing thorough cooperation, including assisting in the Department’s investigation and prosecution of individuals and other companies that had partnered with the Company and its parent on certain projects. The Company’s and its parent’s thorough cooperation did not occur until after the Department had publicly charged multiple current and former Alstom executives and employees; (c) the Company and its parent have undertaken substantial efforts to enhance its compliance program as part of the significant compliance and remediation improvements to Alstom S.A’s program, and has committed to continue to enhance their compliance program and internal controls, ensuring that its program satisfies the minimum elements set forth [in the DPA]; (d) General Electric Company, which intends to acquire the Company, has represented that it will implement its compliance program and internal controls at the Company within a reasonable time after the acquisition closes; and (e) the Company has agreed to continue to cooperate with the [DOJ] in any ongoing investigation …”.
In the DPA, the DOJ and the Company agreed that no monetary penalty will be paid by the Company because Alstom S.A., the parent company of the Company, has agreed to pay a fine of $772,290,000 related to the same underlying conduct.
In the DPA, Alstom Power agreed to a so-called “muzzle clause” in which it agreed not, directly or indirectly through others, to make any public statement contradicting the acceptance of responsibility set forth in the plea agreement.
The DPA contains the same corporate compliance program, reporting obligations, and monitor conditions as described in the Alstom plea agreement above.
The information against Alstom Grid, Inc. (formerly known as Alstom T&D, Inc.), a subsidiary of Alstom headquartered in New Jersey in the business of providing power grid-related services around the world, is based upon the same Egypt conduct alleged in the Alstom information.
Alstom Grid is charged with conspiracy to violate the FCPA’s anti-bribery provisions under the dd-2 prong of the statute. According to the information, the “purpose of the conspiracy was to make corrupt payments to foreign officials in Egypt in order to obtain and retain business related to power grid projects for and on behalf of Alstom Grid and Alstom and its subsidiaries.”
In the DPA, Alstom Grid admitted, accepted, and acknowledged that it was responsible for the conduct charged in the information.
The DPA has a term of three years and contains the same relevant considerations described in the Alstom Power DPA above.
In the DPA, the DOJ and the Company agreed that no monetary penalty will be paid by the Company because Alstom S.A., the parent company of the Company, has agreed to pay a fine of $772,290,000 related to the same underlying conduct.
In the DPA, Alstom Power agreed to a so-called “muzzle clause” in which it agreed not, directly or indirectly through others, to make any public statement contradicting the acceptance of responsibility set forth in the plea agreement.
The DPA contains the same corporate compliance program, reporting obligations, and monitor conditions as described in the Alstom plea agreement above.
In this DOJ release, Deputy Attorney General James Cole stated:
“Alstom’s corruption scheme was sustained over more than a decade and across several continents. It was astounding in its breadth, its brazenness and its worldwide consequences. And it is both my expectation – and my intention – that the comprehensive resolution we are announcing today will send an unmistakable message to other companies around the world: that this Department of Justice will be relentless in rooting out and punishing corruption to the fullest extent of the law, no matter how sweeping its scale or how daunting its prosecution.”
Assistant Attorney General Leslie Caldwell stated:
“This case is emblematic of how the Department of Justice will investigate and prosecute FCPA cases – and other corporate crimes. We encourage companies to maintain robust compliance programs, to voluntarily disclose and eradicate misconduct when it is detected, and to cooperate in the government’s investigation. But we will not wait for companies to act responsibly. With cooperation or without it, the department will identify criminal activity at corporations and investigate the conduct ourselves, using all of our resources, employing every law enforcement tool, and considering all possible actions, including charges against both corporations and individuals.”
First Assistant U.S. Attorney Michael Gustafson of the District of Connecticut stated:
“Today’s historic resolution is an important reminder that our moral and legal mandate to stamp out corruption does not stop at any border, whether city, state or national. A significant part of this illicit work was unfortunately carried out from Alstom Power’s offices in Windsor, Connecticut. I am hopeful that this resolution, and in particular the deferred prosecution agreement with Alstom Power, will provide the company an opportunity to reshape its culture and restore its place as a respected corporate citizen.”
FBI Executive Assistant Director Robert Anderson Jr. stated:
“This investigation spanned years and crossed continents, as agents from the FBI Washington and New Haven field offices conducted interviews and collected evidence in every corner of the globe. The record dollar amount of the fine is a clear deterrent to companies who would engage in foreign bribery, but an even better deterrent is that we are sending executives who commit these crimes to prison.”
As noted in the DOJ release:
“To date, the department has announced charges against five individuals, including four corporate executives of Alstom and its subsidiaries, for alleged corrupt conduct involving Alstom. Frederic Pierucci, Alstom’s former vice president of global boiler sales, pleaded guilty on July 29, 2013, to conspiring to violate the FCPA and a charge of violating the FCPA for his role in the Indonesia bribery scheme. David Rothschild, Alstom Power’s former vice president of regional sales, pleaded guilty on Nov. 2, 2012, to conspiracy to violate the FCPA. William Pomponi, Alstom Power’s former vice president of regional sales, pleaded guilty on July 17, 2014, to conspiracy to violate the FCPA. Lawrence Hoskins, Alstom’s former senior vice president for the Asia region, was charged in a second superseding indictment on July 30, 2013, and is pending trial in the District of Connecticut in June 2015. The charges against Hoskins are merely allegations, and he is presumed innocent unless and until proven guilty. The high-ranking member of Indonesian Parliament was also convicted in Indonesia of accepting bribes from Alstom, and is currently serving a three-year term of imprisonment.
In connection with a corrupt scheme in Egypt, Asem Elgawhary, the general manager of an entity working on behalf of the Egyptian Electricity Holding Company, a state-owned electricity company, pleaded guilty on Dec. 4, 2014, in federal court in the District of Maryland to mail fraud, conspiring to launder money, and tax fraud for accepting kickbacks from Alstom and other companies. In his plea agreement, Elgawhary agreed to serve 42 months in prison and forfeit approximately $5.2 million in proceeds.”
In addition to the above DOJ press release, the DOJ also held a press conference, a rare event in connection with an FCPA enforcement action. In this speech, Cole stated:
“We are here to announce a historic law enforcement action that marks the end of a decade-long transnational bribery scheme – a scheme that was both concocted and concealed by Alstom, a multinational French company, and its subsidiaries in Switzerland, Connecticut, and New Jersey.
Today, those companies admit that, from at least 2000 to 2011, they bribed government officials and falsified accounting records in connection with lucrative power and transportation projects for state-owned entities across the globe. They used bribes to secure contracts in Indonesia, Egypt, Saudi Arabia, and the Bahamas. Altogether, Alstom paid tens of millions of dollars in bribes to win $4 billion in projects – and to secure approximately $300 million in profit for themselves.
Such rampant and flagrant wrongdoing demands an appropriately strong law enforcement response. Today, I can announce that the Justice Department has filed a two-count criminal information in the U.S. District Court for the District of Connecticut, charging Alstom with violating the Foreign Corrupt Practices Act, or FCPA, by falsifying its books and records and failing to implement adequate internal controls. Alstom has agreed to plead guilty to these charges, to admit its criminal conduct, and to pay a criminal penalty of more than $772 million. If approved by the court next year, this will be the largest foreign bribery penalty in the history of the United States Department of Justice.
In addition, I can announce that Alstom’s Swiss subsidiary is pleading guilty to conspiring to violate the FCPA. And the company’s two American subsidiaries have entered into deferred prosecution agreements and admitted that they conspired to violate the FCPA.
Alstom’s corruption scheme was sustained over more than a decade and across several continents. It was breathtaking in its breadth, its brazenness, and its worldwide consequences. And it is both my expectation – and my intention – that the comprehensive resolution we are announcing today will send an unmistakable message to other companies around the world: that this Department of Justice will be relentless in rooting out and punishing corruption to the fullest extent of the law, no matter how sweeping its scale or how daunting its prosecution. Let me be very clear: corruption has no place in the global marketplace. And today’s resolution signals that the United States will continue to play a leading role in its eradication.
The investigation and prosecution of Alstom and its subsidiaries have been exceedingly complex – and they have required the utmost skill and tenacity on the part of a wide consortium of law enforcement officials throughout the country and across the globe. I want to thank the Criminal Division’s Fraud Section and Office of International Affairs; the U.S. Attorney’s Offices in Connecticut, Maryland, and New Jersey; the FBI’s Washington Field Office and its Resident Agency in Meriden, Connecticut; the Corruption Eradication Commission in Indonesia; the Office of the Attorney General in Switzerland; the Serious Fraud Office in the United Kingdom; as well as authorities in Germany, Italy, Singapore, Saudi Arabia, Cyprus, and Taiwan, for their tireless efforts to advance this matter. The remarkable cross-border collaboration that these agencies made possible has led directly to today’s historic resolution. And this outcome demonstrates our unwavering commitment to ending corporate bribery and international corruption. Our hope is that this announcement will serve as an inspiration – and a model – for future efforts.”
In this speech at the press conference, Caldwell stated:
“Today represents a significant milestone in the global fight against corruption. It demonstrates the Department of Justice’s strong commitment to fighting foreign bribery and ensuring that both companies and individuals are held accountable when they violate the FCPA. The guilty pleas and resolutions announced today also highlight what can happen when corporations refuse to disclose wrongdoing and refuse to cooperate with the department’s efforts to identify and prosecute culpable individuals.
Let me first explain how the scheme worked. To conceal that it was the source of payments to government officials, Alstom funneled the bribes through third-party consultants who did little more than serve as conduits for corruption. Alstom then dummied up its books and records to cover up the scheme.
Alstom’s corruption spanned the globe, and was its way of winning business. For example, in Indonesia, Alstom and certain of its subsidiaries used consultants to bribe government officials – including high-ranking members of the Indonesian Parliament and the state-owned and state-controlled electricity company – to win several contracts to provide power-related services. According to internal documents, when certain officials expressed displeasure that a particular consultant had provided only “pocket money,” Alstom retained a second consultant to ensure that the officials were satisfied.
In Saudi Arabia, Alstom retained at least six consultants, including two close family members of high-ranking government officials, to bribe officials at a state-owned and state-controlled electricity company to win two projects valued at approximately $3 billion. As evidence that Alstom employees recognized that their conduct was criminal, internal company documents refer to the consultants only by code name.
Alstom similarly used consultants to bribe officials in Egypt and the Bahamas, and again Alstom employees clearly knew that the conduct violated the law. In connection with a project in Egypt, a member of Alstom’s finance department sent an email questioning an invoice for consultant services and, in response, was advised that her inquiry could have “several people put in jail” and was further instructed to delete all prior emails regarding the consultant.
If approved by the court, Alstom’s criminal penalty of $772 million represents the largest penalty ever assessed by department in a FCPA case. Through Alstom’s parent-level guilty plea and record-breaking criminal penalty, Alstom is paying a historic price for its criminal conduct — and for its efforts to insulate culpable corporate employees and other corporate entities. Alstom did not voluntarily disclose the misconduct to law enforcement authorities, and Alstom refused to cooperate in a meaningful way during the first several years of the investigation. Indeed, it was only after the department publicly charged several Alstom executives – three years after the investigation began – that the company finally cooperated.
One important message of this case is this: While we hope that companies that find themselves in these situations will cooperate with the Department of Justice, we do not wait for or depend on that cooperation. When Alstom refused to cooperate with the investigation, we persisted with our own investigation. We built cases against the various corporate entities and against culpable individuals. To date, the department publicly has charged four Alstom corporate executives in connection with the corrupt scheme in Indonesia, which also chose not to cooperate, and another company’s executive in connection with the scheme in Egypt. Four of these individuals already have pleaded guilty. In addition, Marubeni Corporation, a Japanese trading company that partnered with Alstom in Indonesia, pleaded guilty to conspiracy to violate the anti-bribery provisions of the FCPA and substantive violations of the FCPA, and paid an $88 million criminal penalty.
Another important message from this case is that the U.S. increasingly is not alone in the fight against transnational corruption. Earlier this year, Indonesia’s Corruption Eradication Commission, the KPK, assisted the department in its investigation. And, in turn, the department shared with the KPK information that federal investigators had obtained, which the KPK used in its prosecution of a former member of the Indonesian Parliament for accepting bribes from Alstom-funded consultants. This past spring, that Indonesian official was found guilty and sentenced to three years in an Indonesian prison. Our partnership with Indonesian law enforcement authorities in this case means that both the bribe payors and bribe takers have been prosecuted. And our investigation is not over yet.
This case is emblematic of how the Department of Justice will investigate and prosecute FCPA cases – and other corporate crimes. We encourage companies to maintain robust compliance programs, to voluntarily disclose and eradicate misconduct when it is detected, and to cooperate in the government’s investigation. But we will not wait for companies to act responsibly. With cooperation or without it, the department will identify criminal activity at corporations and investigate the conduct ourselves, using all of our resources, employing every law enforcement tool, and considering all possible actions, including charges against both corporations and individuals.”
See here for an additional DOJ statement at the press conference.
In this Alstom release, Alstom CEO Patrick Kron stated:
“There were a number of problems in the past and we deeply regret that. However, this resolution with the DOJ allows Alstom to put this issue behind us and to continue our efforts to ensure that business is conducted in a responsible way, consistent with the highest ethical standards.”
The release further states:
“Alstom has made significant progress in the area of compliance over the last several years. The conduct referred to in the agreement mainly arose from the use of external success fee based Sales Consultants hired by Alstom to support its commercial teams. In order to ensure that Alstom strives for the best compliance procedures, Alstom has discontinued the hiring of such Sales Consultants. Further, pursuant to a negotiated resolution agreement with the World Bank, Alstom committed in Feb 2012 to continue to improve its internal compliance programme, including by retaining a monitor to oversee its efforts in this regard. To date, the work of the Monitor has confirmed that Alstom has put in place a Corporate Compliance Programme that reflects the principles embedded in the WBG’s Integrity Compliance Guidelines.”
[…]
“The DOJ has also stipulated that no part of the fine can be passed on to General Electric as part of the projected sale of Alstom’s energy businesses.”
Robert Luskin and Jay Darden of Squire Patton Boggs represented the Alstom entities.
Avon Resolves Long-Standing FCPA Scrutiny By Agreeing To $135 Million Settlement
Earlier this week, the DOJ and SEC announced resolution of Avon’s long-standing FCPA scrutiny in China. The conduct at issue took place between 2004 and 2008 and Avon disclosed the conduct to the enforcement agencies in 2008.
In short, the DOJ and SEC alleged that Avon’s indirect subsidiary (Avon China) provided approximately $8 million in things of value, including gifts, cash, and non-business travel, meals and entertainment, which it gave to Chinese officials in order to obtain and retain business benefits for Avon China. Avon resolved FCPA books and records and internal controls charges related to this conduct.
Consistent with Avon’s prior disclosure, the aggregate settlement amount was $135 million. While not a top-ten Foreign Corrupt Practices Act enforcement action, the settlement is the third-largest ever against a U.S. company.
The enforcement action included:
- a DOJ component (a criminal information against Avon China resolved via a plea agreement and a criminal information against Avon Products resolved via a deferred prosecution agreement with an aggregate fine amount of $67.6 million); and
- an SEC component (a civil complaint against Avon Products which it agreed to resolve without admitting or denying the allegations through payment of $67.4 million).
This post summarizes the approximately 175 pages of resolution documents. Because all of the resolution documents have substantial overlap, the core allegations are highlighted in connection with the Avon China criminal information, yet repeated in the other resolution documents as well.
DOJ
Avon Products (China) Co. Ltd. (“Avon China”) is described as an indirect subsidiary of Avon incorporated in China. According to the information, Avon China and its affiliates manufactured and sold beauty and healthcare products through direct sales, as well as through “beauty boutiques” that were independently owned and operated. The information states that in addition to independent sales representatives, Avon China had between 1,000 and 2,000 employees. According to the information, Avon China’s books, records and accounts were consolidated into Avon’s books and records and reported by Avon in its financial statements.
Under the heading “The Chinese Regulatory Regime for Direct Selling” the information states:
“In or around 1998, the Chinese government outlawed direct selling in China for all companies. In or around 2001, as a condition of its entry into the World Trade Organization, China agreed to lift its ban on direct selling. In or around 2005, in order to test its planned regulations for direct selling, the Chinese government decided to issue one company a temporary license to conduct direct sales (the ‘test license.’). In or around March 2005, the Chinese government awarded the test license to Avon China, the defendant. In or around late 2005, China lifted its ban on direct selling and allowed companies to apply for licenses to conduct direct sales. Under China’s newly promulgated direct selling regulations, to conduct direct sales, a company was required to obtain a national direct selling license and approvals from each province and municipality in which it sought to conduct direct sales. In order to obtain a license, a company was required to satisfy a number of conditions, including, in pertinent part, having a ‘good business reputation’ and a record that demonstrated no material violations of Chinese law for the preceding five years. In or around February 2006, Avon China, the defendant, obtained its national direct selling license. Between in or around February 2006 and in or around July 2006, Avon China, the defendant, obtained all of its provincial and municipal approvals to conduct direct selling.”
According to the information, Avon China created and maintained a Corporate Affairs Group whose duties included maintaining “guanxi (good relationships) with government officials and lobbying those officials on behalf of Avon China.”
Under the heading, “Overview of the Scheme to Falsify Books and Records,” the information states that from 2004 to 2008, Avon China, and Avon, acting through certain executives and employees, together with others, conspired to falsify Avon China’s and, thereby ultimately, Avon’s books and records in order to disguise the things of value Avon China executives and employees provided to government officials in China.
Specifically, the information alleges that from 2004 to 2008 Avon China “acting through certain executives and employees, disguised on its books and records over $8 million in things of value, including gifts, cash, and non-business travel, meals and entertainment, which it gave to Chinese officials in order to obtain and retain business benefits for Avon China.
The information alleges that:
Avon China “falsely and misleadingly described the nature and purpose of certain transactions on Avon China’s books and records, in part, because they believed that Chinese government officials did not want a paper trail reflecting their acceptance of money, gifts, travel, entertainment and other things of value from Avon China executives and employees. The executives and employees also knew that, contrary to how the expenses were being described in Avon China’s books and records, the expenses were not incurred for legitimate business purposes.”
According to the information:
“Avon executives and employees, including high-level executives, attorneys, and internal auditors, learned that executives and employees of Avon China, the defendant, had in the past routinely provided things of value to Chinese government officials and failed to properly document it. Instead of ensuring the practice was halted, disciplining the culpable individuals, and implementing appropriate controls at Avon and Avon China to address the problem, the Avon executives and employees, in conjunction with Avon China executives and employees, took steps to conceal the significant concerns raised about the accuracy of Avon China’s books and records and its practice of giving things of value to government officials. These Avon and Avon China executives and employees, knowing that Avon China’s books and records would continue to be inaccurate if steps were not taken to correct Avon China’s executives and employees’ conduct, failed to take steps to correct such actions, despite knowing that Avon China’s books and records were consolidated into Avon’s books and records.”
The information then alleges various categories of payments.
Under the heading “gifts for government officials,” the information details designer wallets, bags, or watches “to obtain benefits from government officials, such as obtaining and retaining the direct selling license and requisite provincial and local approvals, avoiding fines, avoiding negative media reports, obtaining favorable judicial treatment, and obtaining government approval to sell nutritional supplements and healthcare apparel products, via direct selling, that did not meet or had yet to meet government standards. According to the information, Avon China executives and employees, at various times, falsely or misleadingly described the gifts, including describing them as employee travel and entertainment, samples or public relations business entertainment.” Specific gifts mentioned include a $890 gift or entertainment expense, a $960 gift purchased from Louis Vuitton, a $800 Gucci Bag, and a $460 gift from Louis Vuitton.
Regarding avoiding negative media reports, the information alleges that a leading government-owned newspaper intended to run a story about Avon China improperly recruiting sales associates and that this article could cause Avon China to lose its direct selling license. According to the information, “in order to convince the newspaper not to run the article … an Avon China employee caused Avon China to pay approximately $77,500 to become a “sponsor” of the paper at the request of a government official at the paper who was in charge of determining whether the potential article would run and who may have received a commission on monies received from sponsors.”
Under the heading “meals and entertainment,” the information alleges that Avon China “routinely entertained government officials in order to obtain the same business benefits highlighted above. According to the information, executives and employees of Avon China, “intentionally concealed these improper meal and entertainment expenses in Avon China’s books and records by (1) intentionally omitting reference to the participation of government officials in order to conceal their participation, using descriptions like business entertainment, public relation entertainment, or no description at all; or (2) revealing the participation of government officials but intentionally describing the event inaccurately by omitting the identity or number of officials, the cost of the event, or the true purpose of the event.”
Under the heading “travel for government officials,” the information alleges that executives and employees of Avon China caused Avon China to “pay for travel expenses for government officials, and sometimes their families” in order to obtain the same improper business benefits highlighted above. According to the information, “to conceal the true nature of these expenses, these executives and employees intentionally omitted from or concealed in Avon China’s records the name of the government officials, the fact that the travelers were government officials or relatives of government officials, and, at times, the number of travelers.” The information also alleges that executives and employees of Avon China “intentionally falsified in Avon China’s books and records the purpose of the travel, which often was for personal, not legitimate business, purposes. For example, the information alleges that certain personal trips for government officials (and occasionally their spouses and children) were described as “study trips” or “site visits” when the officials were instead sightseeing or taking a beach vacation.” Specifically, the information alleges, among other trips, that Avon China paid for six officials from the Guandong Food and Drug Administration to travel to Avon’s headquarters in New York City and its research and development facility in upstate New York for a “site visit/study visit.” According to the information, the “officials never visited Avon’s headquarters, only spent one morning at Avon’s research and development facility, and spent the rest of the 18-day trip sightseeing and being entertained by an Avon China employee in New York, Vancouver, Montreal, Ottawa, Toronto, Philadelphia, Seattle, Las Vegas, Los Angeles, Hawaii, and Washington D.C.
Under the heading “cash for government officials,” the information alleges that “executives and employees of Avon China, gave cash to government officials in order to obtain benefits for Avon China and falsified Avon China’s records to conceal the true recipient of and purpose for the money.” According to the information, “these employees accomplished this by submitting for reimbursement meal or entertainment receipts given to them by government officials and falsely claiming that the receipts reflected employee business expenses. In truth, the employees had no such expenses, and the receipts were used to obtain cash to make payments to government officials. The information also alleges other instances in which executives and employees of Avon China “gave cash to government officials in order to obtain business benefits for Avon China and falsely reported the payments as fine payments.” In other instances, the information alleges that Avon China executives and employees “made payments to organizations designated by government officials.”
The information also contains a separate section regarding payments to Consulting Company A that was retained by Avon China “purportedly” to provide various services to Avon China. The information alleges that these services “were memorialized in a scant two-page contract” and that Avon China “did not conduct any due diligence of Consulting Company A, nor did they require Consulting Company A to comply with Avon’s Code of Conduct (in particular, the provisions related to payments to government officials), even though Consulting Company A was retained specifically to interact with government officials on behalf of Avon China.” The information alleges that executives and employees of Avon China caused Avon China to pay Consulting Company A additional monies for purportedly legitimate, though ambiguously described, services even though an Avon China executive knew Consulting Company A’s invoices were often false, and no Avon China executives or employees knew of any legitimate services being provided by Consulting Company A.
Based on the above conduct, Avon China was charged with one count of conspiracy to violate the FCPA’s books and records provisions.
The information also contains a separate section titled “Discovery of the Falsification and Cover-Up.” In pertinent part, the information alleges:
- In 2005, a senior audit manager in Avon’s internal audit group reported to Avon’s Compliance Committee, that executives and employees of Avon China were not maintaining proper records of entertainment for government officials and that an Avon China executive had explained that the practice was intentional because information regarding that entertainment was “quite sensitive.”
- In 2005, Avon’s internal auditors audited the Corporate Affairs Group’s travel and entertainment and discretionary expenses and issued a draft report.
- The Draft Audit Report, which was reviewed by various Avon executives and Avon attorneys, contained conclusions regarding the Corporate Affairs Group’s expenses including: (1) high value gifts and meals were offered to government officials on an ongoing basis; (2) the majority of the expenses related to gifts, meals, sponsorships, and travel of substantial monetary value for Chinese government officials to maintain relationships with the officials; (3) a third party consultant was paid a substantial sum of money to interact with the government but was not contractually required to follow the FCPA, was not actively monitored by Avon China, and was paid for vague and unknown services; and (4) the payments, and the lack of accurate, detailed records, may violate the FCPA and other anti-corruption laws.
- The management team of Avon China “insisted that the internal audit team remove the discussion of providing things of value to government officials and potential FCPA violations from the Draft Audit Report.
- Certain Avon executives agreed with executives of Avon China to delete the discussion of the Corporate Affairs Group’s conduct from the Draft Audit Report. An Avon Executive then directed the internal audit team to either (1) retrieve every copy of the Draft Audit Report and destroy them or (2) instruct the individuals who possessed copies of the Draft Audit Report to destroy them.
- Avon executives did not instruct any executives or employees of Avon China to stop the conduct identified in the Draft Audit Report, put in place controls to prevent the conduct or ensure the accuracy of Avon China’s books and records.
- In 2006, Avon’s internal auditors again reviewed the Corporate Affairs Group’s travel and entertainment and discretionary expenses and found that Corporate Affairs Group executive and employees were continuing their practice of giving things of value to government officials. Notwithstanding learning that the conduct was continuing and that the books and records of Avon China were still being falsified, no Avon or Avon China executives or employees took steps to stop or prevent the conduct from recurring, and Avon China executives and employees continued operating in the same improper manner.
- In 2007, an Avon executive reported to the Avon Compliance Committee that the matter reported in 2005 regarding potential FCPA violations by executives and employees of Avon China had been closed as “unsubstantiated” even though the executive and others knew of Avon China’s previous – and continuing – practice of giving things of value to government officials and the ongoing failure of Avon China’s books and records to reflect accurately and fairly the nature and purpose of the transactions.
- From 2004 to 2008, Avon China executives signed false management representation letters to Avon China’s external auditor stating that Avon China’s books and records were fair and accurate.
According to the plea agreement, the advisory Sentencing Guidelines fine range was $73.9 million to $147.9 million. Pursuant to the plea agreement, Avon China agreed to pay a criminal fine in the amount of $67.6 million.
In the plea agreement, Avon China waived all defenses based on the statute of limitations.
The information is based on the same core conduct alleged in the Avon China information.
Under the heading “Avon’s Internal Controls,” the information alleges, in pertinent part, as follows.
“Although Avon … and certain of its subsidiaries had policies in place relating to the review and approval of employee expenses, it lacked adequate controls to ensure compliance with those policies and thus, in practice, employee expenses were not adequately vetted to ensure that they were reasonable, bona fide, or properly documented.
Avon … lacked sufficient controls to ensure the integrity of its internal audit process, particularly with regard to its review of allegations of and testing for improper payments made to foreign government officials. Avon’s internal audit group also failed to devote adequate funding, staffing, and resources to Avon China.
Avon … did not have adequate internal accounting and financial controls designed to detect and prevent, among other things, corruption-related violations, including FCPA violations. In particular, after senior Avon executives … learned of specific corruption issues in China related to the provision of cash, meals, gifts, travel, and entertainment to government officials, Avon failed to take the necessary steps to implement appropriate controls to address such issues and prevent such risks in the future.
Avon … had an inadequate compliance program. In fact, Avon did not have a dedicated compliance officer or compliance personnel. Avon’s compliance program was particularly weak with regard to risks associated with foreign bribery. For example, even though Avon operated in over 100 countries, including many countries with high corruption risks, Avon did not have a specific anti-corruption policy, nor did it provide any stand alone FCPA-related training. Moreover, although Avon had a code of conduct that covered all of its employees and its subsidiaries’ employees, which, among other things, prohibited paying bribes, many employees of Avon and its subsidiaries were unaware of its existence.
Avon .. did not conduct corruption-related due diligence on appropriate third parties or have effective controls for the meaningful approval of third parties. Avon also did not require adequate documentation supporting the retention of payments to third parties.
Avon … did not undertake periodic risk assessments of its compliance program and lacked proper oversight of gifts, travel, and entertainment expenditures. Avon’s failure to maintain an adequate compliance program significantly contributed to the company’s failure to prevent the misconduct in China.”
Based on the core conduct and the specific allegations detailed above, Avon was charged with one count of conspiracy to violate the FCPA’s books and records provisions as well as one count of violating the FCPA’s internal controls provisions for knowingly failing to implement a system of internal accounting controls sufficient to provide reasonable assurance of various aspects of its business as required by the provisions.
Pursuant to the three year DPA, Avon admitted, accepted and acknowledged that it was responsible for the conduct alleged in the information.
Under the heading “Relevant Considerations,” the factors the DOJ considered in resolving the action were:
“(a) the Company’s cooperation, which included conducting an extensive internal investigation in China and other relevant countries; voluntarily making U.S. and foreign employees available for interviews; collecting, analyzing, translating, and organizing voluminous evidence and information for the Department; (b) the Company’s voluntary disclosure of its employees’ and its subsidiary’s employees’ misconduct to the Department, which came relatively soon after the Company received a whistleblower letter alleging misconduct but years after certain senior executives of the Company had learned of and sought to hide the misconduct in China; (c) the Company’s extensive remediation, including terminating the employment of individuals responsible for the misconduct, enhancing its compliance program and internal controls, and significantly increasing the resources available for compliance and internal audit; (d) the Company’s commitment to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements [set forth in the DPA]; and (e) the Company’s agreement to continue to cooperate with the Department …”
The DPA also states:
“The Department also considered that the Company, taking into account its own business interests, expended considerable resources on a company wide review of and enhancements to its compliance program and internal controls. While the Company’s efforts in this regard were taken without Department request or guidance, and at times caused unintended delays in the progress of the Department’s narrower investigations, the Department recognizes that the Company’s efforts resulted in important compliance and internal controls improvements.”
Based on the conduct at issue, the DPA sets forth an advisory Sentencing Guidelines range of $84.6 million to $169.1 million. The DPA sets forth a criminal fine amount of $67.6 million and the above-mentioned Avon China criminal fine was deducted from this amount.
Pursuant to the DPA, Avon agreed to retain an independent compliance monitor for an 18 month term and agreed to various periodic reporting obligations to the DOJ.
The DPA contains a standard “muzzle clause” in which it (or those associated with it) agreed not to make any public statements contradicting its acceptance of responsibility under the DPA.
In this release, Assistant Attorney General Leslie Caldwell stated:
“Companies that cook their books to hide improper payments will face criminal penalties, as Avon China’s guilty plea demonstrates. Public companies that discover bribes paid to foreign officials, fail to stop them, and cover them up do so at their own peril.”
U.S. Attorney Preet Bharara of the Southern District of New York stated:
“For years in China it was ‘Avon calling,’ as Avon bestowed millions of dollars in gifts and other things on Chinese government officials in return for business benefits. Avon China was in the door-to-door influence-peddling business, and for years its corporate parent, rather than putting an end to the practice, conspired to cover it up. Avon has now agreed to adopt rigorous internal controls and to the appointment of a monitor to ensure that reforms are instituted and maintained.”
Assistant Director in Charge Andrew G. McCabe of the FBI’s Washington Field Office stated:
“When corporations knowingly engage in bribery in order to obtain and retain contracts, it disrupts the level playing field to which all businesses are entitled. Companies who attempt to advance their businesses through foreign bribery should be on notice. The FBI, with our law enforcement partners, is continuing to push this unacceptable practice out of the business playbook by investigating companies who ignore the law.”
SEC
Based on the same core conduct alleged in the DOJ actions, in this civil complaint the SEC charged Avon with violating the FCPA’s books and records and internal controls provisions. In summary, the SEC’s complaint states:
“This matter concerns violations by A von Products, Inc. (“A von”) of the corporate record keeping and internal controls provisions of the federal securities laws. […] . From 2004 through the third quarter of 2008, Avon’s books and records failed to accurately and fairly reflect payments by Avon Products (China) Co., Ltd. (“Avon Products China”) to Chinese government officials. Avon Products China provided cash and things of value, including gifts, travel, and entertainment, to various Chinese government officials, including government officials responsible for awarding a test license, and subsequently a direct sales business license, that would allow a company to utilize direct door-to-door selling in China. Avon Products China was, in fact, awarded a test license and, then, the first official direct selling business license in China. Avon Products China also adopted an internal “no penalty policy” and provided cash and things of value to Chinese government officials to avoid fines and other penalties in order to maintain an ostensibly pristine corporate image. Avon Products China also paid a third-party consultant for purportedly legitimate interactions with government officials, even though Avon Products China management knew the consultant’s invoices were often false and could not point to legitimate services provided by the consultant. At times , payments were made to suppress negative news in state-owned media and to obtain competitor information. In addition, Avon Products China provided cash to government officials on behalf of other Avon subsidiaries in China. Avon Products China falsified its books and records so as to conceal the cash and things of value provided to government officials. Near the end of 2005, an Avon internal audit team reported potential issues concerning things of value provided to Chinese government officials. Nevertheless, remedial measures sufficient to address the issues were not implemented at Avon Products China. Similar issues related to Avon Products China were raised at the end of 2006. Again, responsive remedial measures were not implemented. The books and records at A von Products China were consolidated into the books and records of Avon. Avon thus violated [the books and records provisions] by failing to make and keep books, records , and accounts, which, in reasonable detail , accurately and fairly reflected the transactions and disposition of assets of the issuer. By failing to ensure that it maintained adequate internal controls sufficient to record the nature and purpose of payments, or to prevent improper payments, to government officials, Avon failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that its transactions and the disposition of its assets were recorded correctly, accurately, and in accordance with authorization of management. Avon thereby violated [the internal controls provisions]. Finally, in May 2008, Avon began a review of its compliance with the Foreign Corrupt Practices Act (“FCPA”), the U.S . legislation that, among other things, prohibits payments to foreign government officials to obtain or retain business. As a result of its review, the company instituted extensive, related reforms.”
In certain respects, the SEC’s complaint contains additional details regarding certain of the alleged conduct such as:
- Certain of the Chinese “foreign officials” are alleged to be individuals associated with the Ministry of Commerce (“MOFCOM”) and the State Administration for Industry and Commerce (“AIC”).
- Regarding the Draft Audit Report, “Avon’s Legal Department took the position that conclusions about potential FCPA violations fell within the purview of Legal, and not Internal Audit.”
- Regarding Avon’s initial investigation of the matter, Avon engaged a “major law firm” but “in mid-December 2005, sent the law firm a short e-mail stating that the company had “moved on” from the issues and asking for an estimate of the fees incurred.”
- “In May 2008 , the Avon Products China Corporate Affairs executive who had been terminated wrote to Avon’ s Chief Executive Officer alleging improper payments to Chinese government officials over several years in the form of meals, entertainment, travel, sponsorship of cultural events, gifts of art, and cash. The letter was forwarded to A von’s Legal Department and, in tum, to the audit committee of Avon’s board of directors. The audit committee commenced an internal investigation into the allegations and, in October 2008, Avon informed the Commission and the Department of Justice.”
- As to various things of value: (i) “The majority of these payments were for meals and entertainment expenses under $200 per occurrence, without indication as to who attended the meal/entertainment or the business purpose of the expense.” (ii) a “Pearl River cruise for 200 State and Regional AIC officials during a conference of officials with responsibility for the oversight of Avon Products China’s direct selling business license.”; (iii) “corporate boxes at the China Open tennis tournament, given to AIC and other government officials in 2004 and 2005 “to thank them for their support.” During these years, Avon Products China was a corporate sponsor of the tournament and received the tickets as part of that sponsorship . Avon Products China also provided government officials with gifts that included Louis Vuitton merchandise, Gucci bags, and Tiffany pens.” (iv) “$23,000 for travel and expenses for government journalists to attend the ceremony at which Avon Products China launched its direct selling test;” (v) “Avon Products China’s employees also made payments to government officials for conferences, and related meals, gifts, and entertainment, in 150 instances aggregating $143,000. Records for these expenses do not indicate who attended the conferences, or the business purpose of the expenses. Approximately $15,000 of this amount was for expenses related to government journalists’ attendance at an Avon Products China media event.”
As noted in this SEC release:
“Avon, which neither admitted nor denied the allegations, agreed to pay disgorgement of $52,850,000 in benefits resulting from the alleged misconduct plus prejudgment interest of $14,515,013.13 for a total of more than $67.36 million. In the parallel criminal matter, Avon entities agreed to pay $67,648,000 in penalties. Avon also is required to retain an independent compliance monitor to review its FCPA compliance program for a period of 18 months, followed by an 18-month period of self-reporting on its compliance efforts. Avon would be permanently enjoined from violating the books and records and internal controls provisions of the federal securities laws. In reaching the proposed settlement, which is subject to court approval, the SEC considered Avon’s cooperation and significant remedial measures.”
In the release, Scott Friestad (Associate Director in the SEC’s Enforcement Division) stated:
“Avon’s subsidiary in China paid millions of dollars to government officials to obtain a direct selling license and gain an edge over their competitors, and the company reaped substantial financial benefits as a result. Avon missed an opportunity to correct potential FCPA problems at its subsidiary, resulting in years of additional misconduct that could have been avoided.”
In this release, Sheri McCoy (CEO of Avon Products, Inc.) stated: “We are pleased to have reached agreements with the DOJ and the SEC.”
Avon was represented by Evan Chesler and Benjamin Gruenstein of Cravath, Swaine & Moore.
DOJ And SEC Officials Talk FCPA
In what has become a mid-November tradition, DOJ and SEC officials yesterday gave speeches at a Foreign Corrupt Practices Act conference.
Topics discussed included the following: individual prosecutions, voluntary disclosure and cooperation, compliance programs, asset recovery, foreign law enforcement cooperation. (For factual information concerning DOJ and SEC individuals prosecutions see this prior post and as relevant to the issue of “success” – a topic touched upon in both speeches – you might want to read the article “What Percentage of DOJ FCPA Losses is Acceptable?“)
In many respects, yesterday’s DOJ and SEC speeches were very similar to previous speeches delivered by enforcement agency officials in September and October (see here, here, here and here for prior posts).
This post excerpts this speech by Assistant Attorney General Leslie Caldwell and this speech by Andrew Ceresney, Direct of the SEC’s Enforcement Division.
DOJ
Caldwell began her remarks as follows.
“I want to focus my remarks on one of our most important enforcement priorities – our efforts to combat corruption around the world.
At the Criminal Division, we are stepping up our efforts in the battle against corruption, at home and abroad. Through our Public Integrity Section, which prosecutes corruption cases involving U.S. federal, state, and local officials, we are attacking domestic corruption.
More relevant to this audience, we are also deeply committed to fighting corruption abroad. Now, more than ever, we are bringing to justice individuals and corporations who use foreign bribery as a way to gain a business advantage. In part, we are doing this using the tools and methods that have made our past enforcement efforts so successful – FCPA prosecutions and penalties.
But there have been some really big changes in the Justice Department’s FCPA work since I last worked there. First, thanks to the expertise and knowledge we have acquired over the years, we are now able to investigate FCPA cases much more quickly. We also are better equipped to prosecute individuals who are actually making corrupt payments, as well as intermediary entities hired to serve as conduits for bribes.
And now we also are prosecuting the bribe takers, using our money laundering and other laws. And, importantly, we have begun stripping corrupt officials of the proceeds of their corruption involving both bribes and kleptocracy, using both criminal and civil authorities.
The Criminal Division’s FCPA enforcement program and our Kleptocracy Initiative are really two sides of the same anti-corruption coin. We bring those who pay bribes to justice, no matter how rich and powerful they are. But by itself, that is not enough. We also attack corruption at its source – by prosecuting and seizing the assets of the corrupt officials who betray the trust of their people.
Another big change – one that has been building for years but now has really developed momentum – is that we increasingly find ourselves shoulder-to-shoulder with law enforcement and regulatory authorities in other countries. Every day, more countries join in the battle against transnational bribery. And this includes not just our long-time partners, but countries in all corners of the globe.
Together with our foreign law enforcement and regulatory partners we are taking a truly global approach to rooting out international corruption. And make no mistake, this international approach has dramatically advanced our efforts to uncover, punish and deter foreign corruption.
Increasingly, we and our counterparts share information about bribery schemes. We report schemes to one another. And, where appropriate, we discuss strategy and coordinate our use of investigative techniques, so that we can obtain the best possible results, especially in very high-impact cases.
These efforts are incredibly important. The World Bank estimates that more than $1 trillion is paid every year in bribes, which amounts to about 3 percent of the world economy. That amount is stunningly wasteful. No one benefits from corruption other than the corrupt officials.
But corruption is far more insidious and harmful than can be measured numerically. We all know that when corruption takes hold, the fundamental notion of playing-by-the-rules gets pushed to the side, and individuals, businesses and governments instead begin to operate under a fundamentally unfair – and destabilizing – set of norms. This undermines confidence in the markets and governments, and destroys the sense of fair play that is absolutely critical for the rule of law to prevail.
In emerging economies, corruption stifles economic development that would lift people out of poverty, improve infrastructure, and better people’s lives. And the fruits of corruption can prop up autocratic and oppressive rulers even in wealthier countries.
Make no mistake, the effects of foreign corruption are not just felt overseas. In today’s global economy, the negative effects of foreign corruption inevitably flow back to the United States. For one, American companies are harmed by global corruption. They are denied the ability to compete in a fair and transparent marketplace. Instead of being rewarded for their efficiency, innovation, and honest business practices, U.S. companies suffer at the hands of corrupt governments and lose out to corrupt competitors.
International corruption also presents broader public safety concerns. Indeed, criminal networks of all kinds, including narcotics traffickers, cyber criminals, terrorists, and human traffickers, often take advantage of countries whose commitment to the rule of law is weakened by corruption of its officials. And, as we’ve seen in the more extreme cases, thoroughly corrupted regimes have created safe havens for criminals by giving them a secure base from which they can orchestrate their criminal activities.
You have no doubt heard my predecessors speak of the evils of corruption. It is because of these evils that the fight against international bribery has been, and continues to be, a core priority of the Department of Justice.
Our commitment to the fight against foreign bribery is reflected in our robust enforcement record in this area, which includes charges against corporations and individuals alike from all over the world. Since 2009, we have convicted more than 50 individuals in FCPA and FCPA-related cases, and resolved criminal cases against more than 50 companies with penalties and forfeiture of approximately $3 billion. Twenty-five of the cases involving individuals have come since 2013 alone. And those are just the cases that are now public. These individuals run the gamut of actors involved in bribery schemes: corporate executives, middlemen, and corrupt officials.”
Caldwell next focused on asset recovery and international cooperation:
“As our enforcement actions demonstrate, we are focusing our attention on bribes of consequence – ones that fundamentally undermine confidence in the markets and governments. And our record of success in these prosecutions has allowed us to show – rather than just tell – corporate executives that if they participate in a scheme to improperly influence a foreign official, they will personally risk the very real prospect of going to prison.
[…]
Stripping individuals of the proceeds of their conduct – and thus depriving them of the very profits that are driving the corrupt conduct in the first place – is one technique that we are using increasingly in our fight against foreign bribery. And, we are not just pursuing these corrupt proceeds through criminal actions.
The FCPA Unit’s efforts to eradicate foreign corruption also are assisted by the work of our Kleptocracy Asset Recovery Initiative, through which prosecutors in the Criminal Division’s Asset Forfeiture and Money Laundering Section and Office of International Affairs are pursuing ill gotten riches from corrupt officials using our civil authority. […] [W]e are ready, willing, and able to confiscate the riches of corrupt leaders who drain the resources of their countries for their own benefit.”
[O]ur efforts to hold bribe takers as well as bribe payors accountable for their criminal conduct are greatly aided by our foreign partners. Transnational bribery is a global problem and an international solution truly is beginning to develop. Every day, more countries reject the notion that bribery in international business is inevitable and acceptable. Indeed, in just the last few years several countries have enacted new anti-corruption laws or enhanced existing laws. Admittedly, the global trend against foreign corruption continues to face many challenges, but the tide has turned and I truly believe that it is now on our side.
This level of collaboration is the product of hard work and strategic coordination, which has allowed us to forge the international partnerships that are essential to fight global corruption. For example, just a couple of weeks ago, about 200 judges, prosecutors, investigators, and regulators from more than 50 countries, multi-development banks, and international organizations around the world joined prosecutors, investigators, and regulators from the Criminal Division, SEC, and FBI in Washington, D.C., for a week long training course to exchange ideas and best practices on combating foreign corruption.
I had the opportunity to participate in this meeting and saw its value first-hand. The meeting provided a critical opportunity for the people who fight global corruption in the trenches every day to meet face-to-face, discuss ongoing cases, identify new opportunities to collaborate, and improve intelligence sharing.
The results from this increased international collaboration speak for themselves.”
[…]
[T]hese coordinated global actions sent a powerful message – countries all over the world are now engaged in the fight against foreign bribery and together, we can and will hold to account individuals and companies who engage in corruption, regardless of where they operate or reside.
The increase in international collaboration is not only enhancing our own FCPA enforcement efforts but it is also resulting in anti-corruption enforcement actions by other countries.”
[…]
Continued international collaboration is absolutely critical if we are going to have a meaningful impact on corruption across the globe and we are committed to maintaining – and enhancing – our working relationships with our foreign partners.
By enhancing our coordination with our overseas counterparts, continually improving our already successful methods of investigating and prosecuting FCPA cases, and increasing our efforts to prosecute corrupt officials and recover their ill-gotten gains, we are now, more than ever, making a tangible difference in the fight against foreign bribery.”
Caldwell next shifted to voluntary disclosure and cooperation and stated:
“When I last worked at the department and even over the 10 years that I was in private practice, it seemed that many FCPA investigations were initiated by self-disclosures. While we of course still welcome self-disclosure, today we are far from reliant on it.
[…]
And in a world of whistleblowers and international cooperation, I expect that will be the case more often than not going forward. That said, we still encourage and reward self-disclosure and cooperation.
When you detect significant potential criminal conduct at your company, or a company that has retained you, I encourage you to disclose it to the Justice Department – and to do so in a timely manner. As I am sure you all know, the department’s Principles of Federal Prosecution of Business Organizations provides that prosecutors should consider “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents” in deciding how to proceed in a corporate investigation.
So, in addition to promptly disclosing the conduct to us, I also encourage you to conduct a thorough internal investigation and to share with us the facts you uncover in that investigation. We do not expect you to boil the ocean in conducting your investigation but in order to receive full credit for cooperation, we do expect you to conduct a thorough, appropriately tailored investigation of the misconduct.
And we expect you to provide us useful facts in a timely manner. And that includes, importantly, facts about the individuals responsible for the misconduct, no matter how high their rank may be.
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The sooner you disclose the conduct to us, the more avenues we have to investigate culpable individuals. And, the more open you are with us about the facts you learned about that conduct during your investigation, the more credit you will receive for cooperation.
But, if you delay notifying us about an executive’s conduct or attempt to whitewash the facts about an individual’s involvement, you risk receiving any credit for your “cooperation.”
This does not mean that we expect you to use law-enforcement style techniques to investigate your employees. To the contrary, it simply means that when you do an internal investigation, and you choose to cooperate with us, you should understand that we will expect to hear not just what happened, but who did what, when, and where.
We also expect that a truly cooperating company will provide relevant documents in a timely fashion, even if those documents are located overseas. We recognize that some countries’ laws pose real challenges to data access and transfer of information, but we also know that many do not.
The Criminal Division investigates and prosecutes a large volume of international cases and through these cases, we have developed an understanding of these laws. We will not give full cooperation credit to companies that hide behind foreign data privacy laws instead of providing overseas documents when they can. Foreign data privacy laws exist to protect individual privacy, not to shield companies that purport to be cooperating in criminal investigations.
Put simply, cooperation – and the quality and timeliness of that cooperation – matter. This is a well-established principle that we have applied in criminal cases across the spectrum – from violent and organized crime cases to corporate fraud cases – for decades.
If a company works with us, it not only helps the Department, but it helps itself.
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Fighting corruption is not a choice we have made. It is, increasingly, a global imperative. Given the critical nature of this mission, we are bringing more resources to bear than ever before – and we will continue doing so. We have achieved significant successes using our traditional FCPA enforcement tools. We are building on those successes and continuing to evolve our enforcement efforts. Especially with the power of so many countries now standing by our side, we are determined to use every lawful means available to hold the perpetrators of corruption to account.”
SEC
Ceresney began his remarks as follows.
“Pursuing such [FCPA] violations remains a critical part of our enforcement efforts, as international bribery has many nefarious impacts, including sapping investor confidence in the legitimacy of a company’s performance and undermining the accuracy of a company’s books and records. Our specialized FCPA unit as well as other parts of the Enforcement Division continue to do remarkable work in this space, bringing significant and impactful cases often in partnership with the DOJ and FBI. […] Looking ahead, I anticipate another productive year of FCPA enforcement, as we have a robust pipeline of investigations across the globe. I thought I would spend my time this morning discussing some areas we will be focusing on in the coming year and beyond, and then, if we have time, I can take some questions.”
Under the heading “Focus on Individuals,” Ceresney stated:
“Let me start with cases against individuals. It is a hot topic of the day, in the face of some significant enforcement actions against entities alone, to ask the question of whether enforcement actions against entities are as impactful as actions against individuals, and whether actions against entities actually deter misconduct.
I always have said that actions against individuals have the largest deterrent impact. Individual accountability is a powerful deterrent because people pay attention and alter their conduct when they personally face potential punishment. And so in the FCPA arena as well as all other areas of our enforcement efforts, we are very focused on attempting to bring cases against individuals.
That is not to say that cases against companies are unimportant — in fact, I think FCPA enforcement is perhaps one of the best examples of how actions against entities can have a tremendous deterrent effect. Our actions against entities have had a tremendous impact in the last 10 years on FCPA compliance. Companies have increased their compliance spending and focus exponentially — the attendance at this conference is but one example of that. And these actions continue to provide significant deterrence and send important messages about areas that companies should be focused on. Every action we bring is scrutinized closely and dissected for information on areas of risk. That is a great dynamic and one we should continue to foster. But individual accountability is critical to FCPA enforcement — and imposing personal consequences on bad actors, including through bars and monetary sanctions, will continue to be a high priority for us.
Now it is important to recognize that FCPA cases against individuals can present some unique challenges for us and we simply are unable to bring cases against individuals in connection with a number of our cases. For example, in many cases we face significant investigative hurdles, including difficulties in gathering specific testimony and documents from overseas that will be admissible at trial. This is one area where we have been working closely with our counterparts in other jurisdictions, to access foreign witnesses, bank statements, and company records. These efforts have been more and more successful as we form strong partnerships with other countries to combat corruption.
When the conduct involves foreign nationals — as it often does — another challenge can be establishing personal jurisdiction over the bad actor. We have had some favorable decisions in this area, but it still remains a challenge in certain cases. Statute of limitations issues also complicate these cases.
Despite these various challenges, we continue to vigorously pursue cases against individuals.”
Under the heading “Importance of FCPA Compliance Programs,” Ceresney stated:
“This is a message that I think has started to get through in the past 5 years. Nothing situates a company better to avoid FCPA issues than a robust FCPA compliance program.
The best companies have adopted strong programs that include compliance personnel, extensive policies and procedures, training, vendor reviews, due diligence on third-party agents, expense controls, escalation of red flags, and internal audits to review compliance. You can look to our Resource Guide on the FCPA that we jointly published with the DOJ, to see what some of the hallmarks of an effective compliance program are. I won’t mention them all because you should be familiar with many that relate to policies, procedures and training. But, I’ll highlight just a few others. Companies should perform risk assessments that take into account a host of factors listed in the guide and then place controls in these risk areas. Companies should have disciplinary measures in place to deter violations and compliance programs should be periodically tested and reviewed to ensure they are keeping pace with the business. Such programs, properly implemented, will also help companies avoid other problems at foreign subsidiaries, like self-dealing, embezzlement and financial fraud.
As part of our settlements, we have on occasion required the retention of a monitor to assist in administering such compliance programs. For those companies that have developed robust programs during the investigation, we have required self-reporting and certifications. But the overwhelming message that one has to take away from our actions is how important such programs are for ensuring compliance.
Of course, it is critical for such programs to be real programs. When I was in private practice, I saw companies that had great paper programs but did not implement them effectively. When the business would push back, they would remove requirements and make exceptions. The best companies would put the compliance program ahead of business interests and allow decisions to be made to ensure compliance with the law, no matter the business consequences. It is that sort of attitude that is the measure of whether such programs will be successful.
As I said, we have seen many companies improving and properly implementing their compliance programs, as the message from our cases over the years has penetrated the legal and compliance community. But there is still more work to be done, particularly for small-to-medium sized companies trying to enter foreign markets to grow their businesses. As those businesses seek to expand and globalize, their compliance functions must keep pace.
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The bottom line is that no responsible company should operate overseas without a comprehensive compliance program to guard against FCPA risk.
One other aspect of compliance programs is the benefit that companies will derive from having them if a problem should arise. I can tell you that the SEC staff will look well on companies that have robust programs and that the existence of such programs will pay dividends should an FCPA issue arise despite the existence of such programs.”
Under the heading “Cooperation,” Ceresney stated:
“Related to the issue of the existence of FCPA compliance programs, I wanted to focus for a moment on self-reporting and cooperation. The existence of FCPA compliance programs place the company in the best position to detect FCPA misconduct. But the question is what a company does once it learns of such misconduct. There has been a lot of discussion recently about the advisability of self-reporting FCPA misconduct to the SEC. Let me be clear about my views — I think any company that does the calculus will realize that self-reporting is always in the company’s best interest. Let me explain why.
Self-reporting from individuals and entities has long been an important part of our enforcement program. Self-reporting and cooperation allows us to detect and investigate misconduct more quickly than we otherwise could, as companies are often in a position to short circuit our investigations by quickly providing important factual information about misconduct resulting from their own internal investigations.
In addition to the benefits we get from cooperation, however, parties are positioned to also help themselves by aggressively policing their own conduct and reporting misconduct to us. We recognize that it is important to provide benefits for cooperation to incentivize companies to cooperate. And we have been focused on making sure that people understand there will be such benefits. We continue to find ways to enhance our cooperation program to encourage issuers, regulated entities, and individuals to promptly report suspected misconduct. The Division has a wide spectrum of tools to facilitate and reward meaningful cooperation, from reduced charges and penalties, to non-prosecution or deferred prosecution agreements in instances of outstanding cooperation.
Last year, for example, we announced our first-ever non-prosecution agreement in an FCPA matter with a company that promptly reported violations and provided real-time, extensive cooperation in our investigation.
More commonly, we have reflected the cooperation in reduced penalties. Companies that cooperate can receive smaller penalties than they otherwise would face, and in some cases of extraordinary cooperation, pay significantly less.
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The bottom line is that the benefits from cooperation are significant and tangible. When I was a defense lawyer, I would explain to clients that by the time you become aware of the misconduct, there are only two things that you can do to improve your plight — remediate the misconduct and cooperate in the investigation. That obviously remains my view today. And I will add this — if we find the violations on our own, and the company chose not to self-report, the consequences will surely be worse and the opportunity to earn significant credit for cooperation may well be lost.
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The SEC’s whistleblower program has changed the calculus for companies considering whether to disclose misconduct to us, knowing that a whistleblower is likely to come forward. Companies that choose not to self-report are thus taking a huge gamble because if we learn of the misconduct through other means, the result will be far worse.”
Under the heading “Items of Value,” Ceresney stated:
“The statute precludes the payment or provision of “anything of value” to a foreign official in order to induce that official to take official action for the purpose of obtaining or retaining business. Obviously, money or property is an item of value. Gifts to foreign officials also easily qualify as items of value.
But we also have successfully brought FCPA cases where other, less traditional, items of value have been given in order to obtain or retain business. For example, in three separate actions, Stryker, Eli Lilly and Schering-Plough, we brought bribery charges against pharmaceutical or medical technology companies that made contributions to charities that were headed by or affiliated with foreign government officials to induce them to direct business to the companies.
We also have charged companies for providing items of value to family members of foreign officials. In Tyson Foods, for example, we charged the company for providing no-show jobs to the spouses of foreign officials who were responsible for certifying the company’s products for export. More recently, in Weatherford, we charged the company for a variety of bribes to foreign officials and their families, including paying for the honeymoon of an official’s daughter and a religious trip by an official and his family that was improperly recorded as a donation.
As these examples make clear, bribes come in many shapes and sizes. So it is critical that we carefully scrutinize a wide range of unfair benefits to foreign officials when assessing compliance with the FCPA — whether it is cash, gifts, travel, entertainment, or employment of the family and friends of foreign officials. We should and will continue to pursue a broad interpretation of the FCPA that precludes bribery in all forms.”
In conclusion, Ceresney stated:
“[T]he Enforcement Division will continue to look for opportunities to enhance our impact with respect to FCPA enforcement. We have made significant progress over the last 10 years but there is still much more we can do. We will continue our efforts to level the playing field for companies doing business abroad and hold corrupt actors accountable when they fail to play by the rules.”