Friday Roundup
Scrutiny alerts and updates, quotable, and for the reading stack. It’s all here in the Friday Roundup.
Scrutiny Alerts And Updates
Avon
Yesterday, Avon’s stock dropped approximately 22% to $17.50. The company disclosed a drop in third quarter sales and weaker than expected earnings. Avon also disclosed, in pertinent part, the following regarding its long-running FCPA scrutiny:
“As previously reported in our Quarterly Report on Form 10-Q for the period ending June 30, 2013, we made an offer of settlement to the DOJ and the SEC in June 2013 that, among other terms, would have included payment of monetary penalties of approximately $12. Although our offer was rejected by the DOJ and the staff of the SEC, we accrued the amount of our offer in the second quarter of 2013.
In September 2013, the staff of the SEC proposed terms of potential settlement that included monetary penalties of a magnitude significantly greater than our earlier offer. We disagree with the SEC staff’s assumptions and the methodology used in its calculations and believe that monetary penalties at the level proposed by the SEC staff are not warranted. We anticipate that the DOJ also will propose terms of potential settlement, although they have not yet done so and we are unable to predict the timing or terms of any such proposal. If the DOJ’s offer is comparable to the SEC’s offer and if the Company were to enter into settlements with the SEC and the DOJ at such levels, we believe that the Company’s earnings, cash flows, liquidity, financial condition and ongoing business would be materially adversely impacted.
Although we are working to resolve the government investigations through settlement, our discussions are at early stages and at this point we do not know if those efforts will be successful and, if they are, what the timing or terms of any such settlements would be. We expect any such settlements will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. We may be required to incur significant future costs to comply with the non-monetary terms of any settlements with the SEC and the DOJ. If we are able to reach settlements with the SEC and the DOJ, the Company believes that such settlements are likely to include monetary penalties that would be material to its earnings and cash flows in the relevant fiscal period and could, depending on the amounts of the settlements, materially adversely impact the Company’s liquidity, financial condition and ongoing business.
There can be no assurance that our efforts to reach settlements with the government will be successful. If we do not reach settlements with the SEC and/or the DOJ, we cannot predict the outcome of any subsequent litigation with the government but such litigation could have a material adverse effect on our earnings, cash flow, liquidity, financial condition and ongoing business.>We have not recorded an additional accrual beyond the amount recorded in the second quarter of 2013 because at this time, in light of the early stages of our discussions of possible settlement terms with the government, the magnitude of the difference between our offer and the amount proposed by the SEC and the absence of a proposal from the DOJ, and our inability to predict whether we will be able to reach settlements with the government, we cannot reasonably estimate the amount of additional loss above the amount accrued to date.
Until these matters are resolved, either through settlement or litigation, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations. Furthermore, under certain circumstances, we may also be required to advance and/or reimburse significant professional fees and expenses to certain current and former Company employees in connection with these matters.”
In certain respects, Avon’s disclosure was similar to its August disclosure (see here for the prior post) in which it stated “we made an offer of settlement to the DOJ and the SEC that, among other terms, included payment of monetary penalties of approximately $12 [million]. The DOJ and the SEC have rejected the terms of our offer.”
The fact that there is a negotiation and back and forth between the SEC and a company concerning an FCPA settlement number is not unusual, what is a bit unusual is that this back and forth is being aired in public via the company’s SEC filings.
Embraer
Previous posts here and here have profiled Embraer’s FCPA scrutiny. In an article titled “Plane Maker Embraer Faces Bribery Inquiries,” the Wall Street Journal reports:
“U.S. and Brazilian authorities are investigating whether aircraft maker Embraer SA bribed officials in the Dominican Republic in return for a $90 million contracts to furnish the country’s armed forces with attack planes.”
According to the article, U.S. authorities say they have “evidence – including bank records and e-mails – that they believe shows that Embraer executives had approved a $3.4 million bribe to a Dominican official with influence over military procurement.”
Mead Johnson
Mead Johnson Nutrition Company recently disclosed as follows.
“The company has initiated an internal investigation of, and is voluntarily complying with a Securities and Exchange Commission request for documents relating to, certain business activities of the company’s local subsidiary in China. The company’s investigation is focused on certain expenditures that were made by the subsidiary in connection with the promotion of the company’s products or may have otherwise been made and that may not have complied with company policies and applicable U.S. and/or local laws. The company has retained outside legal counsel to conduct the investigation, which is being overseen by a committee of independent members of the company’s board of directors. At this time, the company is unable to predict the scope, timing or outcome of this ongoing matter or any regulatory or legal actions that may be commenced related to this matter.”
National Geographic
The on-line publication Vocativ recently published an article “Tut-Tut: Did National Geographic Bribe Egypt’s Famed Indiana Jones?” The article begins as follows.
“This is not your typical story about international bribery. For one thing, it involves mummies. It also involves one of America’s most beloved institutions: National Geographic. Vocativ has learned that the Justice Department has opened a criminal bribery investigation into the prestigious nonprofit. At issue: Nat Geo’s tangled relationship with Dr. Zahi Hawass, a world-famous Indiana Jones–type figure who for years served as the official gatekeeper to Egypt’s glittering antiquities. Beginning in 2001 and continuing for a decade, National Geographic paid the archaeologist between $80,000 and $200,000 a year for his expertise. The payments came at a time when the popularity of mummies and pharaohs was helping transform the 125-year-old explorer society into a juggernaut with multiple glossies, a publishing house and a television channel. But they also came as Hawass was still employed by the Egyptian government to oversee the country’s priceless relics.”
According to the article, Hawass also worked with National Geographic competitor, the Discovery Channel.
Although National Geographic is a non-profit entity, the FCPA’s definition of “domestic concern” is “any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship …”.
Teva Pharmaceuticals
As noted in this previous post, in August the company disclosed that it “received a subpoena … from the SEC to produce documents
with respect to compliance with the FCPA in Latin America.” Earlier this week, Teva disclosed as follows.
“Beginning in 2012, Teva received subpoenas and informal document requests from the SEC and the Department of Justice (“DOJ”) to produce documents with respect to compliance with the Foreign Corrupt Practices Act (the “FCPA”) in certain countries. Teva has provided and will continue to provide documents and other information to the SEC and the DOJ, and is cooperating with the government in their investigations of these matters. Teva is also conducting a voluntary investigation into certain business practices that may have FCPA implications and has engaged independent counsel to assist in its investigation. In the course of its investigation, which is continuing, Teva has identified in Russia, certain Eastern European countries, and certain Latin American countries issues that could potentially rise to the level of FCPA violations and/or violations of local law. Teva has brought these issues to the attention of the SEC and the DOJ. No conclusion can be drawn at this time as to any likely outcomes in these matters.”
JPMorgan
As highlighted in this previous post, in August JPMorgan’s hiring practices in China came under scrutiny.
The company recently disclosed:
“The Firm has received subpoenas and requests for documents from the SEC’s Division of Enforcement regarding, among other things, hiring practices relating to candidates referred by clients, potential clients and government officials, the Firm’s employment of certain former employees in Hong Kong, its business relationships with certain related clients in the Asia Pacific region and its engagement of consultants in the Asia Pacific region. The Firm has also received a request for documents from the U.S. Department of Justice regarding the same referral hiring practices. The Firm is cooperating with these investigations. Separate inquiries on these or similar topics have been made by other authorities, including authorities in other jurisdictions, and the Firm is responding to those inquiries.”
Quotable
From Attorney General Eric Holder at the Arab Forum on Asset Recovery in Morocco.
“As we’ve all seen – and as President Obama has said – “[t]he struggle against corruption is one of the great struggles of our time.” Fortunately […] corruption is no longer widely seen as an accepted cost of doing business. It is no longer tolerated as an unavoidable aspect of government. On the contrary – it is now generally understood that the consequences of corruption are devastating – eroding trust in public and private institutions, undermining confidence in the fairness of free and open markets, siphoning precious resources at a time when they could hardly be more scarce, and all too often breeding contempt for the rule of law.
[…]
This is why, as Attorney General, I’ve consistently worked to ensure that anticorruption remains a top priority for my colleagues at every level of the United States Department of Justice – within as well as beyond our borders.”
A recent article in Corporate Counsel titled “The Perils of Keeping FCPA Infractions Under Wraps” states:
“Charles Duross, the deputy chief of the U.S. Justice Department’s Foreign Corrupt Practices Act Unit, delivered an ominous message Monday to in-house lawyers at the Association of Corporate Counsel’s Annual Meeting in Los Angeles: Failure to report potential bribery is more perilous than ever. Duross, who is based in Washington, D.C., said DOJ is handling a “pretty steady stream of cases,” with every major U.S. attorney’s office investigating alleged violations of the FCPA, which prohibits bribery of foreign officials. “The risk of getting caught . . . is greater today than any point previously,” Duross said. “I think that’s kind of a no-brainer.” Duross said he isn’t naïve about the calculus companies have to perform when deciding whether to report a potential FCPA infraction to the U.S. government. But if a company makes the disclosure on its own, he noted, the Justice Department stands ready to help. DOJ can make deferred-prosecution or non-prosecution agreements with businesses—or even decline to pursue any action against them, he said. “It’s a tough one” for companies, Duross said. “No doubt about it.” Self-reporting can be overrated, according to New York-based Morrison & Foerster partner Carl Loewenson Jr., a co-chairman of the firm’s securities litigation, enforcement, and white-collar defense group who also spoke at the ACC event. Making the disclosures is great for business at the DOJ, as well as law firms and accounting offices, he said. But companies that report almost always get some type of a public charge, he noted. “I think that these days there are too many cases in which too many companies are being too reflexive about self-reporting” to the government, Loewenson said. “In some cases, not in all, you can solve these problems yourself.”
Reading Stack
Several spot-on observations in the most recent issue of the always informative FCPA Update from Debevoise & Plimpton concerning the recent Diebold enforcement action (see here and here for prior posts).
“Although there are significant aggravating factors that might explain imposing $48 million in penalties and disgorgement on a company that voluntarily disclosed what are, unfortunately, common improprieties in China, combined with wholly unrelated commercial bribery in Russia, the size of the financial resolution – apart from the substantial burdens of the monitorship – raises questions about future enforcement of the FCPA, as well as the incentives for companies to self-report.
The first noteworthy aspect of this resolution is the enforcement agencies’ decision to use the books and records and internal controls provisions as a vehicle for obtaining monetary relief penalizing purely commercial bribery (40% of the improper payments at issue). While not entirely novel or outside the theoretical reach of those provisions, were the enforcement agencies routinely to investigate issuers in connection with commercial bribery abroad, the “risk-based” calculus of almost all corporate compliance programs would potentially need to be rebalanced.
Second, the total financial aspect of the resolution was 16 times the total value of alleged improper payments. In describing the improper payments, the enforcement agencies aggregated a number of often small payments over five years. When considered alongside the Ralph Lauren enforcement action from earlier this year, the Diebold enforcement action, and in particular its imposition of a monitor, long-considered one of the most burdensome aspects of FCPA settlements, could call into question one common view of the statements relating to gifts and corrupt intent in the November 2012 DOJ/SEC joint Resource Guide to the U.S. Foreign Corrupt Practices Act: namely, that FCPA covered companies should not “sweat the small stuff.”
[…]
“[T]he Diebold enforcement actions revive the pre-guidance confusion about the government’s enforcement priorities and raise significant questions about the value of voluntary disclosure. The confusion, arising from repeated charges related to relatively small expenditures, including, even, $500 for four pairs of shoes provided as gifts to Chinese officials, was part of the background of frustration with the government’s enforcement of the FCPA that led to publication of the joint DOJ/ SEC Resource Guide. It has been commonly thought that the Resource Guide’s distinctions between “expensive gifts” and “token[s] of esteem or gratitude” signified at least an implicit recognition by U.S. enforcement agencies that compliance resources would be better allocated to topics other than gifts valued at a few hundred dollars, let alone gifts that individually do not exceed $100 in value. But the Diebold case will raise new questions about the government’s enforcement priorities, questions that will only be amplified by the imposition of a monitor, potentially one of the most disruptive, burdensome, and costly components of FCPA settlement tools, and one that had been in declining use for several years.”
An observant article from The Lawyer titled “Round Table on Cross-Border Disputes – Bandwagons Roll.” It states:
“Co-operation [between foreign law enforcement regulators] is good.'” […] More co-operation between regulators when they are trying to address the same issues is welcome.” However, co-operation – while praised for attempting to provide consistency – has its drawbacks. “They all want to impose sanctions for the same conduct.” […] “It’s common now for a company to finish a US Foreign Corrupt Practices Act or UK Bribery Act investigation that has taken three years and generated huge fees, to turn around and see a long line of regulators from, say, China or India with their own legal and political concerns.”
It does not necessarily justify the behavior, but the following article at least puts the behavior in the proper context and highlights why Congress specifically included a facilitation payments exception in the FCPA’s anti-bribery provisions.
“Seventy-five percent of businesses in Vietnam pay bribes to government agencies on their own volition in order to avoid being stuck in red tape, a World Bank specialist says. At an anti-corruption conference held in Hanoi Thursday, Soren Davidsen said that sixty-three percent of firms questioned in a survey said they paid the “unofficial fees” to speed up procedures.”
A useful compliance resource here from the U.S. – China Business Council titled “Best Practices for Managing Compliance in China.”
*****
A good weekend to all,
Diebold Resolves $48 Million FCPA Enforcement Action Based Primarily On Excessive Travel And Entertainment Payments By Subsidiaries
Yesterday, the DOJ and SEC announced (here and here) that Ohio-based Diebold, Inc. agreed to resolve a Foreign Corrupt Practices Act enforcement action concerning alleged business conduct by its subsidiaries in China, Indonesia and Russia. The enforcement action has been expected for some time (as noted in this prior post, in August the company disclosed that it had agreed in principle to the settlement announced yesterday).
The enforcement action involved a DOJ criminal information resolved via a deferred prosecution agreement and a SEC settled civil complaint. Diebold agreed to pay approximately $48.1 million to resolve its alleged FCPA scrutiny ($25.2 million to resolve the DOJ enforcement action and $22.9 million to resolve the SEC enforcement action).
DOJ
The DOJ enforcement action involved a criminal information against Diebold resolved through a deferred prosecution agreement. (See here for the original source documents).
Information
Under the heading “conduct in China and Indonesia” the information alleges:
“Diebold sold ATMs and provided ATM-related services to banks in China and Indonesia, including state-owned banks such as Bank 1 and Bank 2”
Both Bank 1 and Bank 2 are described as follows.
“[The Banks] were controlled and approximately 70% owned by the [Chinese government] … and were [two] of several state-owned banks in [China] that together maintained a monopoly over the banking system in [China] and provided core support for the government’s projects and economic goals. The government retained a controlling right in [the Banks], including appointing or nominating a majority of board of directors and top managers at the bank. [The Banks] were an ‘instrumentality’ of a foreign government [under the FCPA].”
The information then alleges:
“The contracts between Diebold and the banks in China provided that Diebold would train employees from the bank customers with respect to Diebold’s ATMs.”
“In order to secure and retain business with bank customers, including state-owned banks such as Bank 1 and Bank 2, Executive A, Executive B, Employee A, Employee B, and other Diebold employees repeatedly provided things of value, including payments, gifts, and non-business travel for employees of the banks, totaling approximately $1.75 million over a five year period.”
“Executive A, Executive B, Employee A, Employee B, and other Diebold employees attempted to disguise the payments and benefits through various means, including by making payments through third parties designated by the banks and by inaccurately recording leisure trips for banks employees as ‘training.'”
Executive A is described as a “senior executive at Diebold” who “held several positions, initially overseeing Diebold’s operations in the Asia Pacific region and later overseeing Diebold’s international operations.” [The SEC’s complaint refers to an Executive A as being a citizen of Taiwan and a resident of China].
Executive B is described as “a vice president of Diebold’s Asia Pacific division” with responsibilities “overseeing Diebold’s operations in the Asia Pacific region.” [The SEC’s complaint refers to an Executive A as being a citizen of Taiwan and a resident of China].
Employee A is described as “an employee in Diebold’s Asia Pacific division” who was “involved in sales and customer relations in the Asia Pacific region.”
Employee B is described as “an employee in Diebold’s Asia Pacific division” who was “in the Finance Department responsible for the Asia Pacific region.”
Under the heading “conduct in Russia,” the information alleges that in connection with sales efforts to “privately-owned banks in Russia,” Diebold entered into a distributor agreement with Distributor 2. According to the information, Diebold, through its employees and agents, “created and entered into false contracts with Distributor 2 for services that Distributor 2 was not performing” and that “Distributor 2, in turn, used the money that Diebold paid to it, to pay bribes to employees of Diebold’s privately-owned bank customers in Russia in order to obtain and retain contracts with those customers.”
The information also alleges that “in connection with due diligence being conduct [by a Diebold employee] and other Diebold employees for a potential acquisition of Distributor 1 in Ukraine, [the employees] learned that Distributor 1 paid bribes to employees of bank customers to secure business.”
Based on the above allegations, the information charges (i) conspiracy to violate the FCPA’s anti-bribery provisions and books and records provisions; and (ii) substantive FCPA books and records violations.
DPA
The above charges against Diebold were resolved via a DPA in which Diebold admitted, accepted, and acknowledged that it was responsible for the acts of its officers, employees, agents as charged in the information.
The DPA has a term of three years and under the heading “relevant considerations” it states:
“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and Diebold. Among the facts considered were the following: (a) following discovery of the FCPA violations during the course of acquisition-related due diligence, Diebhold initiated an internal investigation and voluntarily disclosed to the DOJ the misconduct …; (b) Diebold cooperated fully and conducted an extensive internal investigation; (c) Diebold has committed to continue to enhance its compliance program and internal controls …; and (d) Diebold has agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of the company and its officers, directors, employees, agents, and consultants.
The DPA specifically mentions a previous accounting fraud enforcement action by the SEC (see here for the prior post) and states: “the DOJ believes that the Company’s remediation is not sufficient to address and reduce the risk of recurrence of the company’s misconduct and warrants the retention of an independent corporate monitor …”.
Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $36 million to $72 million. The DPA states that the monetary penalty of $25.2 million “is appropriate given the facts and circumstances of this case, including the nature and extent of the Company’s voluntary disclosure and cooperation.”
Pursuant to the DPA, Diebold agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA and other applicable anti-corruption laws. The specifics are detailed in Attachment C to the DPA. The DPA also requires Diebold to engage a corporate compliance monitor for “a period of not less than 18 months from the date the monitor is selected.” The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA. As is common in FCPA corporate enforcement actions, the DPA contains a “muzzle clause” prohibiting Diebold or anyone on its behalf “contradicting the acceptance of responsibility by the company” as set forth in the DPA.
In the DOJ’s release, Acting Assistant Attorney General Mythili Raman stated:
“In China, Indonesia and Russia, Diebold chose to pay bribes for business and falsify documents to cover its tracks. Through its corrupt business practices, Diebold undermined the sense of fair play that is critical for the rule of law to prevail. Today’s action – which holds Diebold accountable for its criminal conduct, while also recognizing its cooperation and voluntary disclosure to the government of its conduct – underscores that fighting global corruption is and will remain a mainstay of the Criminal Division’s mission.”
In the same release, Steven Dettelbach (U.S. Attorney for the N.D. of Ohio) stated:
“Companies that pay bribes to public officials, whether those officials are in Cleveland, in Ohio or overseas, violate the law. Corporate earnings cannot be placed above the rule of law, and today’s penalties – nearly $50 million in all – send the message again, loud and clear, that such conduct is unacceptable. We hope that Diebold will use this opportunity, including the internal controls and compliance monitor required by today’s agreement, to turn the page to a newer and more ethical corporate culture.”
SEC
The SEC’s complaint (here) is based on the same core set of facts alleged in the above DOJ action.
In summary fashion, the complaint alleges:
“This matter concerns violations of the anti-bribery, books and records, and internal control provisions of the FCPA by Diebold […] From 2005 through 2010, Diebold, through its agents and subsidiaries, lavished international leisure trips, entertainment, and other improper gifts on foreign officials to obtain and retain lucrative business with government owned banks in China and Indonesia. During that same period, Diebold, through its Russian subsidiary, paid bribes in connection with the sale of ATMs to private banks in Russia. In all, Diebold made approximately $3 million in illicit payments in China, Russia, and Indonesia.”
“From 2005 through 2010, through its subsidiary Diebold Financial Equipment Company (China), Ltd. (“Diebold China”), Diebold provided international leisure trips and entertainment to officials of government owned banks in China. This included trips to Europe, with stays in Paris, Amsterdam, Florence, Rome, and other European cities, and trips to the United States, with travel to the Grand Canyon, Napa Valley, Disneyland, Las Vegas, and other popular tourist destinations. Diebold spent approximately $1.6 million on leisure trips, entertainment, and other improper gifts for government bank officials in China. During this same time period, through its subsidiary P.T. Diebold Indonesia (“Diebold Indonesia”), Diebold spent over $147,000 on leisure trips and entertainment for officials of government owned banks in Indonesia. Diebold executives in charge of the company’s operations in Asia knew of these improper practices. The illicit payments were falsely recorded in Diebold’s books and records as training or other legitimate business expenses.”
“From 2005 through 2008, through its subsidiary Diebold Self-Service Ltd. (“Diebold Russia”), Diebold also paid bribes on the sale of ATMs to private banks in Russia. These bribes, which totaled approximately $1.2 million, were funneled through a Diebold distributor in Russia. Diebold Russia executed phony service contracts with its distributor to hide and falsely record the payments as legitimate business expenses.’
The SEC complaint alleges as follows concerning “international leisure trips that Diebold provided to government bank officials in China.”
“In 2005, Diebold paid for a fifteen-day leisure trip to the U.S. for two officials from Bank A, a bank owned and controlled by the government of China. This trip included travel to Universal Studios and Disneyland in Los Angeles, Las Vegas, the Grand Canyon, Washington, DC, New York City, San Francisco, and Hawaii.”
“In 2006, Diebold paid for a twelve-day trip to Europe for eight officials from Bank B, a bank owned and controlled by the government of China. This was a leisure and sightseeing trip to Rome, Italy, and Stockholm, Sweden.”
“Also in 2006, Diebold paid for a two-week leisure trip to Australia and New Zealand for five officials from Bank C, a bank owned and controlled by the government of China.”
“In 2007, Diebold paid for a two-week trip to France for thirteen Bank A employees. While purportedly for training at Diebold’s offices, the primary purpose of the trip was leisure.”
“In 2008, Diebold paid for a two-week leisure trip to Europe for eight officials of Bank D, a bank owned and controlled by the government of China. The trip included travel to Paris, Brussels, Amsterdam, Cologne, Frankfurt, Munich, Salzburg, Vienna, Klagenfurt, Venice, Florence, and Rome.”
“Also in 2008, Diebold paid for a two-week leisure trip to the U.S. for three officials from Bank E, a bank owned and controlled by the government of China.”
“Also in 2008, Diebold paid for a two-week leisure trip for ten employees of Bank F, a bank owned and controlled by the government of China. This trip included travel to Hong Kong, Singapore, Malaysia, and Bali.”
“In 2009, Diebold paid for a two-week trip to the U.S. for twenty-four Bank A employees that included travel to Chicago; to Las Vegas for sightseeing, a dance show, and tour of the Grand Canyon; to Los Angeles for a tour of Universal Studios; to San Diego and San Francisco, which included a tour of Napa Valley.”
The SEC further alleges that “many of the government bank employees who received these leisure trips and other improper gifts were senior officials who had the ability to influence purchasing decisions by the banks.”
As to internal controls, the complaint alleges that “Diebold lacked sufficient internal controls to detect and prevent these illicit payments, many of which were paid to third-parties in China” and that “all of the illicit payments were falsely recorded in the company’s books and records as training or other legitimate business expenses.”
As to Executive A and B, the SEC complaint states that “even after these Diebold executives received FCPA training administered by the company in 2007, they took no action to halt these improper practices. Instead, these executives took further steps to hide the leisure nature of these trips including, on at least one occasion, providing false information to the company’s auditors in China.”
The complaint further states:
“Other executives at Diebold were on notice of potential corruption issues at Diebold China. In 2007, a regional government agency in China, the Chengdu Administration of Industry & Commerce (“CDAIC”), opened an investigation involving, among other issues, leisure trips and gifts Diebold China had provided to bank officials. Company executives in China and the U.S. learned of the investigation after a Diebold field office in Chengdu was raided by authorities. Executives A and B took the lead in responding to the investigation. Diebold was able to settle the matter with no corruption charges filed, by paying CDAIC an administrative penalty of 600,000 RMB (approximately $80,000) for business registration violations. Despite being on notice of potential corruption issues at Diebold China, Diebold failed to effectively investigate and remediate these problems.”
Based on the above conduct, the SEC’s complaint charges violations of the FCPA’s anti-bribery provisions and books and records and internal controls provisions.
As noted in the SEC release, Diebold agreed to pay $22.9 million in disgorgement and prejudgment interest, appoint an independent compliance monitor, and consent to a final judgment permanently enjoining the company from violating the FCPA’s anti-bribery and books and records and internal controls provisions. In the release, Scott Friestad (Associate Director of Enforcement) stated:
“A bribe is a bribe, whether it’s a stack of cash or an all-expense paid trip to Europe. Public companies must be held accountable when they break the law to influence government officials with improper payments or gifts.”
Jonathan Leiken (Jones Day) represented Diebold.
This Law360 article states:
“Mike Jacobsen, a spokesman for […] Diebold, called the settlement ‘an important step for the company moving forward.’ ‘It’s imperative for Diebold to recognize these issues head on, acknowledge responsibility, put the FCPA investigation period behind it and get on with the business of managing the company,’ Jacobsen said in a statement. ‘Given the experience the company has gained and its continued focus on global ethics and compliance, Diebold is confident in its ability to manage ethics-related issues as they arise.'”
Yesterday Diebold’s stock was up approximately .7%.
Swiss National, A Former Maxwell Technologies Exec, Criminally Charged
When highlighting the frequent lack of individual Foreign Corrupt Practices Act charges in connection with most corporate FCPA enforcement action, the qualifier “at least yet” has always been used. This qualifier if warranted because in certain instances individual charges follow years after a corporate FCPA enforcement action.
For instance, in January 2011 Maxwell Technologies (a California-based manufacturer of energy storage and power delivery products) resolved parallel DOJ and SEC FCPA enforcement actions concerning alleged business conduct in China by agreeing to pay approximately $14 million.
Alleging the same core conduct at issue in the 2011 corporate enforcement action, earlier this week the DOJ criminally charged Alain Riedo, a Swiss citizen, with conspiracy and substantive violations of the FCPA’s anti-bribery provisions, books and records and internal controls provisions. According to the indictment, Riedo was, at various relevant times, a Vice President and General Manager of Maxwell Technologies S.A. (a wholly-owned subsidiary of Maxwell Technologies incorporated and located in Switzerland) as well as a Senior Vice President and officer of Maxwell. As noted in this SEC filing, in July 2009 the employment contract between Riedo and Maxwell was terminated.
According to this Wall Street Journal Risk and Compliance post, Riedo is currently “the director of the Fribourg chapter of the Chamber of Commerce and Industry of Switzerland” and the DOJ considers Riedo a fugitive.
As indicated above, the allegations in the Riedo indictment mirror the conduct at issue in the 2011 Maxwell corporate enforcement action.
In pertinent part, the DOJ alleges that Riedo and others made “corrupt payments to Chinese government officials, including officials at Pinggao Group, Xi-an XD and Shenyang HV, and to others” and falsely “record[ed] such payments on Maxwell’s books, records, and accounts, in order to obtain and retain business, prestige, and increased compensation for Riedo, Maxwell, Maxwell S.A. and others.”
As in the prior corporate enforcement action, Pinggao is alleged to be a “state-owned and state-controlled manufacturer of electric-utility infrastructure in Henan Provice, China,” Xi-an XD is alleged to be a “state-owned and state-controlled manufacturer of electric-utility infrastructure in Shaanxi Province, China,” and Shenyang HV is alleged to be “either state-owned or substantially controlled by the Chinese government.”
Like the prior corporate enforcement, Agent 1 (a Chinese national who served as Maxwell S.A.’s third party agent from 2002 to 2009 and was “responsible for the sale of Maxwell capacitors to customers” in China) is prominently mentioned in the Riedo indictment. According to the indictment, Agent 1 “would and did pay bribes to Chinese government officials” and “would and did ensure that the quotes [obtained from Maxwell S.A.] contained a secret mark-up of approximately 20 percent, resulting in a higher total price to the Chinese customers for Maxwell S.A.’s equipment.” According to the indictment, Riedo and another individual caused Maxwell S.A.’s books and records to “falsely record the ‘extra amount’ bribe payments as commissions, sales expenses, or consulting fees.”
The indictment further alleges that Riedo and another individual “would and did hamper efforts by other Maxwell executives to learn the truth about operations and finances at Maxwell S.A’s operations in Switzerland” and that “after Maxwell terminated its sales-representative arrangement with Agent 1, Riedo would and did attempt to re-hire Agent 1 as the company’s sales agent in China under the name of another company and against the instructions of Maxwell’s CEO.”
The DOJ generally alleges the following U.S. acts by Riedo.
- Riedo electronically transmitted or caused to be transmitted to Maxwell’s headquarters in California Maxwell S.A’s false books and records and also caused the false entries to be included “in Maxwell’s books, records, and accounts, including Maxwell’s publicly filed financial statements and SEC filings.”
- Riedo signed a “sub-certification” as part of Maxwell’s Sarbanes-Oxley process and falsely certified information that Riedo knew was incorrect and that Riedo caused the false “sub-certification” and other financial data to be sent to corporate headquarters in California.
- Riedo sent an e-mail from Switzerland to California “asking Maxwell’s CFO to release funds to Agent 1 to retain business in China”
- Riedo sent an e-mail from Switzerland to California attaching an “FCPA” certificate and asking Maxwell’s CFO to proceed in approving payment of an extra amount.
The DOJ further alleges that Riedo completed an internal Maxwell questionnaire and answered “no” to various FCPA issues “when in fact Riedo knew that Agent 1 was, directly and indirectly, receiving extra-amount payments and passing those payments along to employees of Chinese state-owned entities and other companies in order to obtain or retain business.”
Based on the above allegations, the indictment charges conspiracy to violate the FCPA’s anti-bribery and books and records and internal controls provisions, two substantive violations of the anti-bribery provisions, five substantive violations of the FCPA’s books and records provisions, and one substantive violation of the FCPA’s internal controls provisions.
This will be an interesting case to follow should Riedo choose to contest the DOJ’s charges.
Aside from the enforcement theory that employees of alleged China SOEs are “foreign officials” under the FCPA (the same general issue is currently on appeal before the 11th Circuit – see here), are potential jurisdiction issues. In certain respects, this action may implicate the same general issues as in SEC v. Elek Strab et. al (see here for the pre-trial motion to dismiss decision) and SEC v. Herbet Steffen (see here for the pre-trial motion to dismiss decision).
Should Motivations Matter?
GlaxoSmithKline’s (GSK) scrutiny in China – by the Chinese government – dominated the headlines in July (see here for a prior post).
Shortly thereafter, many began to question the motivations of the Chinese government in investigating GSK and several other multinational pharmaceutical companies operating in China. Did the Chinese government have pure motivations? Or was there something else going on as the scrutiny was occurring at the same general time the Chinese government was seeking price concessions from multinational pharma companies in an effort to make healthcare more affordable for its citizens
See here from Bloomberg, here from Reuters.
The general issue gained plenty of traction in the blogosphere and editorial pages.
See here (“The decision of the Chinese government to act against Glaxo is likely motivated by a desire to make a strategic example of an international pharma company in China”).
See here (“With national healthcare expenses expected to reach $1 trillion annually by the end of the decade, China is looking for ways to reduce costs. The country’s National Development and Reform Commission has targeted the drug pricing policies of GSK, Merck, Novartis, Baxter, Astellas Pharma and almost 60 other international drug manufacturers for investigation. […] Growing drug costs in China thus appear to have provided the Chinese government with the motivation to institute and “go public” with the GSK investigation, as well widening the probe into other pharmaceutical companies.
See here (“Still to be seen, however, is what’s motivating the crackdown. Drug makers have faced increasing pressure by Beijing to cut prices and share intellectual property, but neither aim should be accomplished through prosecuting bribery.”)
If GSK and other foreign firms operating in China did indeed violate Chinese law, should the real motivations of the Chinese government in investigating GSK and other companies even matter? What if the motivations of the Chinese government are less than pure?
Bringing the question home, if a company subject to the FCPA violates the law, should the real motivations of the U.S. government in bringing an enforcement action even matter? Are the motivations of our government always pure when it comes to FCPA enforcement? After all, the lack of FCPA anti-bribery charges against Siemens and BAE was hardly pure. The DOJ’s sentencing memorandum in those cases make clear that the settlements were structured in such a way as to avoid debarment issues for the company (and for the U.S. government). That is hardly a pure motivation for enforcing a law.
The mysterious end to the James Giffen enforcement action (see here for the prior post) – in which he asserted a public authority defense and that his actions were undertaken with the knowledge and approval of the highest levels of U.S. government – was hardly pure.
Impure motives are improve motives whether the impurity leads to lax enforcement or aggressive enforcement.
And certainly the U.S. is not alone. When the U.K. Serious Fraud Office dropped its investigation of BAE concerning business conduct in Saudi Arabia because the Saudis allegedly threatened to cease cooperation on terrorism issues, that was not a pure motive.
The interesting thing is this. With increased competition among nations in enforcing anti-bribery laws (an issue frequently discussed on these pages – see here instance), we can expect to see more motives being questioned.
This makes it all the more important – as I highlighted several years ago – in “The Facade of FCPA Enforcement” that we get things right here in the U.S. when it comes to FCPA enforcement.
But then again, this is not merely an enforcement issue.
Let’s not forget that the real reason the U.S. ended up with the Foreign Corrupt Practices Act in 1977 was not exactly pure.
Sure, one will find certain statements in the legislative history to support the notion that what motivated Congress to enact the FCPA was so-called post-Watergate morality. However, as detailed in “The Story of the Foreign Corrupt Practices Act,” the main motivation of Congress in enacting the FCPA was clearly foreign policy.
Senator Frank Church, an FCPA leader, was clear in opening initial hearings as to the so-called foreign corporate payments in May 1975. He stated.
“For what we are concerned with is not a question of private or public morality. What concerns us here is a major issue of foreign policy for the United States. […] It is time to treat the issue for what it is: a serious foreign policy problem.”
In chairing another Congressional hearing in 1975, Senator Church likewise stated: “I have focused on the foreign policy aspects of this issue because that is the chief concern of my subcommittee.”
Representative Solarz, who emerged as an FCPA leader in the House, stated:
“What is in fact at stake is the foreign policy and national interest of the United States. It is clearly in our interest to put a stop to these pernicious practices. […] We simply cannot permit activity which so damages U.S. foreign policy.”
Representative Moss stated:
“Business practices of these corporations abroad often impact directly on U.S. foreign policy. Disclosures have shown that United Brands dealings with the Honduran Government and Lockheed’s relationship with the Dutch Crown, Italian political parties, and former key leaders of the ruling Japanese party had an impact as great as the Department of State might have had. Surely the public expects more than to have foreign policy made in the board rooms of United Brands or Lockheed. Not only is a publicly owned corporation unaccountable to the public when it uses its assets to bribe foreign governmental officials, but also it is unaccountable to its shareholders, the ones to whom the assets belong.”
In short, Congressional leaders wanted foreign governments and foreign political parties accountable and answerable to the U.S. government itself, not to private enterprise because of the bribe payments. This was not a pure or altruistic reason for enacting the FCPA, it was a power play tied directly to foreign policy.
Should motivations matter?
Friday Roundup
In the classroom, what if, scrutiny alerts and updates, and for the reading stack. It’s all here in the Friday roundup.
In the Classroom
I am pleased to share this release concerning a new Foreign Corrupt Practices Act class I am teaching this semester at Southern Illinois University School of Law. As noted in the release, the course is believed to be one of the first specific FCPA law school classes offered that is exclusively devoted to the FCPA, FCPA enforcement and FCPA compliance.
I am grateful for the media coverage the class has attracted. See here from Corporate Counsel, here from Main Justice, and here from Corporate Crime Reporter.
What If?
As highlighted in this previous post concerning JPMorgan’s scrutiny in China, the conduct at issue in the front-page New York Times article was disclosed (sort of) in the company’s August 7th quarterly filing. That filing identified, under the heading “Regulatory Developments” the following.
“A request from the SEC Division of Enforcement seeking information and documents relating to, among other matters, the Firm’s employment of certain former employees in Hong Kong and its business relationships with certain clients.”
In the disclosure context, it has been noted by various courts that once a company “speaks” on an issue, its statements to the market can not be so incomplete as to be misleading. Was JPMorgan’s August 7th disclosure misleading? If not misleading, a bit “too cute?” If JPMorgan’s August 7th disclosure mentioned the reason for the SEC’s request for information and that the request was in connection with an FCPA inquiry, would there even have been a front-page article in the NY Times on August 18th? And if there was no front-page NY Times article would JPMorgan’s FCPA scrutiny have dominated the news this week?
Scrutiny Alerts and Updates
Entertainment Gaming Asia
Entertainment Gaming Asia, Inc., a company with shares listed on NASDAQ, is the focus of this article in the Cambodia Daily which states:
“Venturing into Cambodia’s casino market in May 2011, Macau-backed gambling firm Entertainment Gaming Asia (EGA) promised tens of thousands of dollars to the wife of Pailin’s provincial governor in order to lease land for the construction of a new casino … […] There is no suggestion that the land lease arrangement breaks any laws. But EGA’s registration with the SEC means the company is subject to the U.S. Foreign Corrupt Practices Act (FCPA). […] EGA senior vice president Traci Mangini declined to comment on the land-lease arrangement.“We are not available for comment,” Ms. Mangini said in an email. Contacted this week, Mr. Chhean [who has held the powerful local position of governor in Pailin for more than a decade] insisted there was nothing improper about the land being rented from his wife. “It is correct that they hire the land [from my wife], they have hired it for two years already,” he said. He said the casino was fully approved by the government in Phnom Penh, and that he had no role in the licensing decision. Mr. Chhean said there was nothing inappropriate about the wife of a governor having business interests.”
Microsoft
This March 2013 post highlighted Microsoft’s FCPA scrutiny and how the DOJ and SEC “are examining kickback allegations made by a former Microsoft representative in China, as well as the company’s relationship with certain resellers and consultants in Romania and Italy.” Add Pakistan and Russia to the list. As reported in this Wall Street Journal article:
“In Russia, an anonymous tipster told Microsoft that resellers of its software allegedly funneled kickbacks to executives of a state-owned company to win a deal, the people familiar with the matter said. In Pakistan, a tipster alleged that Microsoft authorized a consulting firm to pay for a five day trip to Egypt for a government official and his wife in order to win a tender, the people familiar with the matter said. The two contacted Microsoft directly in the last eight months, the people said.”
Eli Lilly
In December 2012, Eli Lilly agreed to pay $29 million to resolve an SEC FCPA enforcement action concerning alleged conduct in China, Brazil, Poland and Russia (see here for the prior post).
Lilly is again under scrutiny. As referenced here by Reuters:
“U.S. drugmaker Eli Lilly and Co said it was ‘deeply concerned’ about allegations published in a Chinese newspaper that it spent more than 30 million yuan ($4.90 million) to bribe doctors in China to prescribe the firm’s medicines instead of rival products. A former senior manager for the company, identified by the pseudonym Wang Wei, told the 21st Century Business Herald that bribery and illegal payments at Eli Lilly’s China operations were widespread. […] Eli Lilly said in an emailed statement to Reuters that it was looking into the matter. ‘Although we have not been able to verify these allegations, we take them seriously, and we are continuing our investigation,’ the statement said. The U.S. firm said it had been made aware of “similar allegations” of kickbacks in 2012 by a former sales manager. It said the firm had opened an investigation at that time involving staff interviews, e-mail monitoring and expense report audits.”
For the Reading Stack
Informative posts here and here on the FCPAmericas blog on how Brazil’s new bribery law compares to the FCPA. Also on the FCPAmericas blog, informative posts here and here regarding the unknows of the law.
In reference to JPMorgan’s FCPA scrutiny over its alleged hiring of family members of alleged “foreign officials,” this article in the Economist states:
“Connections also count in the West, of course. Following initial reports of the SEC’s investigation in the New York Times, a flood of stories have noted the jobs held in politically sensitive American firms by the sprogs of American politicians. Even when offspring are not involved, the revolving door between the public and private sectors raises questions about why people are hired. JPMorgan Chase did not hire Tony Blair as a senior adviser for his knowledge of risk weights, after all. Mary Schapiro, a former head of the SEC, recently joined Promontory, a consultancy packed with ex-regulators used by banks to cope with regulation (she has said she will not lobby any government body in her new role). If it is unfair to cite these names, it is only because there are so many others. If the regulators genuinely fret about why firms make hiring decisions, they may want to extend their inquiries to Washington, DC, and New York as well.”
In the context of GlaxoSmithKline’s scrutiny in China, this Wall Street Journal article highlights “China’s fast-growing but deeply underfunded medical system” where “doctors are widely seen as underpaid, which makes them prime recipients of honorariums, which are
legal, or illegal cuts of sales from drug companies …”.
*****
A good weekend to all.