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Cisco Systems Is Again Under FCPA Scrutiny

cisco

As highlighted in this prior post, in a discreet 2013 blog post, Cisco disclosed that it was under FCPA scrutiny for conduct in Russia.

As Reuters reported:

“In a series of audits in 2009, Cisco Systems Inc. found that much of the business between resellers of its products and a Russian state-owned telecommunications company, Svyazinvest, could not be verified because it was either “misrepresented” or documents were withheld by the resellers, according to an executive summary of the audits reviewed by Reuters. The June 2009 report on the audits, other internal Cisco documents, and interviews with two sources familiar with the situation, raise questions about whether the company knew what was happening to telecom equipment sales going through its resellers in Russia, as well as whether discounts were passed on to customers as planned.”

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Friday Roundup

Roundup

No comment, scrutiny alert, when the obvious is not so obvious, quotable, undercover, follow-up, and for the reading stack. It’s all here in the Friday roundup.

No Comment

The recent FCPA enforcement action against Chile-based LAN Airlines (in which the company paid $22 million to resolve DOJ and SEC enforcement actions concerning an alleged payment to resolve an Argentina labor dispute) suggested that both Argentine and Chilean law enforcement officials had commenced investigations of the conduct approximately five years ago.

I’ve tried to find information in the public domain regarding these apparent law enforcement investigations but have generally struck out.

For instance, I contacted LAN’s investor relations office and posed the following question:

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Friday Roundup

Root causes, a mere $855,000 per working day, “bad in law,” scrutiny alert, and for the reading stack.  It’s all here in the Friday roundup.

Root Causes

Understanding the root causes of FCPA enforcement actions can help inform pro-active FCPA compliance policies and procedures.  Moreover, recognizing the fallacy of “good companies don’t bribe” can help set realistic expectations in terms of what FCPA compliance policies and procedures can and can not accomplish.

I will be talking about both topics during a free webinar “Understanding the Root Causes of FCPA Scrutiny and Enforcement” on Thursday, May 22nd at 2 p.m. (EDT).  The webinar is hosted by Hiperos and you can register here.

Wal-Mart’s Pre-Enforcement Action Professional Fees and Expenses

Over the past 1.5 years I have tracked Wal-Mart’s disclosed pre-enforcement action professional fees and expenses.

While some pundits have ridiculed me for doing so, such figures are notable because, as has been noted in prior posts, settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.

Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.

In its 1Q FY2015 earnings conference call yesterday, Wal-Mart disclosed:

“FCPA and compliance-related expenses for the quarter were approximately $53 million. Approximately $34 million of these  expenses represented costs incurred for the ongoing inquiries and  investigations, and approximately $19 million was related to our global  compliance program and organizational enhancements.”

Doing the math, this equates to approximately $855,000 per working day.

While eye-popping, this recent figure suggests that Wal-Mart’s pre-enforcement action professional fees and expenses may have crested as the figures for the past two quarters were approximately $1.1 and $1.3 million per working day.

That pre-enforcement action professional fees and expenses are typically the most expensive aspect of FCPA scrutiny is a fact.  However it must nevertheless be asked – once again – whether FCPA scrutiny has turned into a boondoggle for many involved.

Is Wal-Mart’s conduct for which it is under scrutiny in violation of the FCPA?  Does it even matter?  See my article “Foreign Corrupt Practices Act Enforcement As Seen Through Wal-Mart’s Potential Exposure.”

“Bad in Law”

In 2007, the SEC brought this FCPA enforcement action against Dow Chemical.  The enforcement action was based on allegations that Dow’s “fifth-tier foreign subsidiary” in India, DE-Nocil Crop Protection Ltd. (“DE-Nocil”), made “approximately $39,700 in improper payments to an official in India’s Central Insecticides Board to expedite the registration of three DE-Nocil products.”

It is always interesting to see what happens when the “dust settles” (see here for the prior post).

India’s Hindustan Times reports here as follows.

“As the Central Bureau of Investigation (CBI) did not attach evidence with the supplementary chargesheet against De-Nocil Crop Protection (presently Dow Agro Sciences India, a subsidiary of Dow Chemical of the US) and Agro Pack, the CBI special court, Haryana, at Panchkula, has discharged the companies in a case of bribing an Indian official to get their products registered. On December 30, 2011, the CBI had filed the supplementary charge sheet but attached no oral or documentary evidence. On Wednesday (May 7), special judge, CBI, Haryana, Rakesh Yadav ruled that being not supported by evidence, the supplementary chargesheet was “bad in law” and so the court could not take cognizance of it.  The accused companies no longer have to face trial.”

Query whether this end result is a function of the nature and quality of the India investigation or the nature and quality of SEC neither admit nor deny FCPA enforcement actions.

Scrutiny Alert

In case you missed April’s Buzzfeed report on Cisco’s alleged conduct in Russia, Reuters reports as follows.

“In a series of audits in 2009, Cisco Systems Inc. found that much of the business between resellers of its products and a Russian state-owned telecommunications company, Svyazinvest, could not be verified because it was either “misrepresented” or documents were withheld by the resellers, according to an executive summary of the audits reviewed by Reuters. The June 2009 report on the audits, other internal Cisco documents, and interviews with two sources familiar with the situation, raise questions about whether the company knew what was happening to telecom equipment sales going through its resellers in Russia, as well as whether discounts were passed on to customers as planned.”

For the Reading Stack

An interesting Q&A in Mothers Jones with Ken Silverstein regarding his new book “The Secret World of Oil” and the alleged use of so-called “fixers.”  Note:  the FCPA’s anti-bribery provisions prohibit not only direct payments to “foreign officials” to obtain or retain business, but also indirect payments through various third parties.  Thus, the use of “fixers” if true, is not a way to avoid the FCPA.  Moreover, if Silverstein’s allegations are true, the U.S. government is perhaps ignoring (or not caring) about certain alleged conduct.  Further note:  the Q&A is not completely accurate concerning the James Giffen matter.

*****

A good weekend to all.

Friday Roundup

Contorted, interesting, deserving?, scrutiny alerts and updates, and for the reading stack.  It’s all here in the Friday Roundup.

Contorted

One of the most contorted words in the FCPA vocabulary is “declination” (see here among other posts).

This K&L Gates report contains a useful summary of DOJ and SEC comments at a recent conference.  It states:

“Mr. Knox [DOJ Criminal Division Fraud Section Chief] stated that companies continue to request specific information regarding the Department’s declinations, but that it is the Department’s long-standing practice not to publish details of declinations without a company’s permission, which is rarely given.  According to Mr. Knox, however, over the last two years, the Department has declined to prosecute dozens of cases.  Notably, Mr. Knox stated that, aside from finding no evidence of criminal conduct, the Department may issue a declination when a case involves an isolated incident, the company had a strong compliance program, and the problem was remediated.”

Newsflash.

If the DOJ does not find evidence of criminal conduct and therefore does not bring a case, this is not a “declination,” it is what the law commands.

On the topic of voluntary disclosure, the K&L Gates report states:

“Mr. Cain [SEC FCPA Unit Deputy Chief] started by stating “there is no perfect compliance program;” therefore, companies will always have some “background issues” which need to be addressed, especially as business and risk profiles change.  Mr. Cain does not expect companies to disclose these “normative” problems; however, companies should disclose “significant problems.”  These “significant problems” are the types of issues which may end up being enforcement actions if the SEC learns of them through means other than self-disclosure.”

“Mr. Knox took the position that it would be “very reckless and foolish” for him “to try and draw a line between matters which should be self-disclosed and matters which shouldn’t.”  In making the decision of whether to self-disclose, he advised companies and counsel to apply “common sense” and ask whether this is “something that [the Department] would be interested in hearing about?”  According to Mr. Knox, if the answer to that question is “yes,” then the Department would “probably want [a company] to self-disclose it.”  Nonetheless, there are instances which are not worthy of self-disclosure because the conduct is “minor” and “isolated” or the allegation of wrongdoing is “much too vague.”  Mr. Knox advised companies to “be thoughtful” when making disclosure decisions and carefully document any decision not to disclose.”

If the above leaves you scratching your head, join the club.

Interesting

My article “Why You Should Be Alarmed by the ADM FCPA Enforcement Action” highlights how ADM and its shareholders were victims of a corrupt Ukrainian government in that the government refused to give ADM something even the DOJ and SEC acknowledged ADM was owed – VAT refunds.  Among other things, the article discusses how VAT refund refusals were well-known and frequently criticized prior to the ADM enforcement action in late 2013.

Fast forward to the present day and VAT refund refusals remain a problem in Ukraine.  Recently the International Monetary Fund issued this release concerning a potential aid package for Ukraine.  Among the conditions is that Ukraine  adopt “reforms to strengthen governance, enhance transparency, and improve the business climate” such as taking “measures to facilitate VAT refunds to businesses.”

Deserving?

Earlier this week, the African Development Bank Group (AfDB) released this statement

“Kellogg Brown & Root LLC, Technip S.A. and JGC Corp. agree to pay the equivalent of US $17 million in financial penalties as part of Negotiated Resolution Agreements with the African Development Bank following admission of corrupt practices by affiliated companies in relation to the award of services contracts for liquefied natural gas production plants on Bonny Island, Nigeria, from 1995 until 2004.”

The Director of the AfDB’s Integrity and Anti-Corruption Department stated:

“This settlement demonstrates a strong commitment from the African Development Bank to ensure that development funds are used for their intended purpose.  At the same time, it is a clear signal to multinational companies that corrupt practices in Bank-financed projects will be aggressively investigated and severely sanctioned. These ground-breaking Negotiated Resolution Agreements substantially advance the Bank’s anti-corruption and governance agenda, a strategic priority of our institution.”

Pardon me for interrupting this feel good moment (i.e. a corporation paying money to a development bank), but why is AfDB deserving of any money from the companies?  As noted here, AfDB’s role in the Bonny Island project was relatively minor as numerous banks provided financing in connection with the project.  Moreover, as noted here, the AfDB “invested in the oil and gas sector through a USD 100 million loan to NLNG [Nigeria LNG Limited] to finance the expansion of a gas liquefaction plant located on Bonny Island.”

As alleged in the U.S. Bonny Island FCPA enforcement actions, the above-mentioned companies allegedly made corrupt payments to, among others, NLNG officials.  And for this, the specific companies paid $579 million (KBR, et al), $338 million Technip, and $219 million (JGC).

Why is the bank that loaned money to NLNG deserving of anything?  Is there any evidence to suggest that the $100 million given to NLNG was not used for its “intended purpose” of building the Bonny Island project?

Scrutiny Alerts and Updates

SBM Offshore, Sweett Group, Citigroup, Cisco, and Societe Generale.

SBM Offshore

The Netherlands-based company (with ADRs traded in the U.S. that provides floating production solutions to the offshore energy industry) has been under FCPA scrutiny for approximately two years.  It recently issued this statement which states, in summary, as follows.

“SBM Offshore presents the findings of its internal investigation, which it started in the first quarter of 2012, as the investigators have completed their investigative activities. The investigation, which was carried out by independent external counsel and forensic accountants, focused on the use of agents over the period 2007 through 2011. In summary, the main findings are:

  • The Company paid approximately US$200 million in commissions to agents during that period of which the majority relate to three countries: US$18.8 million to Equatorial Guinea, US$22.7 million to Angola and US$139.1 million to Brazil;
  • In respect of Angola and Equatorial Guinea there is some evidence that payments may have been made directly or indirectly to government officials;
  • In respect of Brazil there were certain red flags but the investigation did not find any credible evidence that the Company or the Company’s agent made improper payments to government officials (including state company employees). Rather, the agent provided substantial and legitimate services in a market which is by far the largest for the Company;
  • The Company voluntarily reported its internal investigation to the Dutch Openbaar Ministerie and the US Department of Justice in April 2012. It is presently discussing the disclosure of its definitive findings with the Openbaar Ministerie, whilst simultaneously continuing its engagement with the US Department of Justice. New information could surface in the context of the review by these authorities or otherwise which has not come up in the internal investigation to date;
  • At this time, the Company is still not in a position to estimate the ultimate consequences, financial or otherwise, if any, of that review;
  • Since its appointment in the course of 2012 the Company’s new Management Board has taken extensive remedial measures in respect of people, procedures, compliance programs and organization in order to prevent any potential violations of applicable anti-corruption laws and regulations. Both it and the Company’s Supervisory Board remain committed to the Company conducting its business activities in an honest, ethical, respectful and professional manner.”

The SBM Offshore release contains a detailed description of the scope and methodology of its review, as well as remedial measures the company has undertaken.  For this reason, the full release is an instructive read.

Sweett Group

As noted in this prior post, in June 2013 Sweett Group Ltd. (a U.K. based construction company) was the subject of a Wall Street Journal article titled “Inside U.S. Firm’s Bribery Probe.” The focus of the article concerned the construction of a hospital in Morocco and allegations that the company would get the contract if money was paid to “an official inside the United Arab Emirates President’s personal foundation, which was funding the project.”

Earlier this week, the company issued this release which stated:

“[T]here have been further discussions with the Serious Fraud Office (SFO) in the UK and initial discussions with the Department of Justice (DOJ) in the USA.  The Group is cooperating with both bodies and no proceedings have so far been issued by either of them.  The Group has commissioned a further independent investigation which is being undertaken on its behalf by Mayer Brown LLP.  Whilst this investigation is at an early stage and is ongoing, to date still no conclusive evidence to support the original allegation has been found.  However, evidence has come to light that suggests that material instances of deception may have been perpetrated by a former employee or employees of the Group during the period 2009 – 2011.  These findings are being investigated further.”

Citigroup

When first discussing Citigroup’s “FCPA scrutiny” I noted the importance of understanding that the FCPA contains generic books and records and internal controls provisions that can be implicated in the absence of any FCPA anti-bribery issues. (See here for a prior post on this subject).  As highlighted in this recent New York Times Dealbook article, this appears to be what Citigroup’s scrutiny involves.  According to the article:

“Federal authorities have opened a criminal investigation into a recent $400 million fraud involving Citigroup’s Mexican unit, according to people briefed on the matter …  The investigation, overseen by the FBI and prosecutors from the United States attorney’s office in Manhattan, is focusing in part on whether holes in the bank’s internal controls contributed to the fraud in Mexico. The question for investigators is whether Citigroup — as other banks have been accused of doing in the context of money laundering — ignored warning signs.”

Cisco

BuzzFeed goes in-depth as to Cisco’s alleged conduct in Russia that has resulted in FCPA scrutiny for the company. The article states, in pertinent part:

“[T]he iconic American firm is facing a federal investigation for possible bribery violations on a massive scale in Russia. At the heart of the probe by the Department of Justice and the Securities and Exchange Commission, sources tell BuzzFeed, are allegations that for years Cisco, after selling billions of dollars worth of routers, communications equipment, and networks to Russian companies and government entities, routed what may have amounted to tens of millions of dollars to offshore havens including Cyprus, Tortola, and Bermuda.”

“Two former Cisco insiders have described to BuzzFeed what they say was an elaborate kickback scheme that used intermediary companies and went on until 2011. And, they said, Cisco employees deliberately looked the other way.”

“No one is suggesting that Cisco bribed Russia’s top leaders. Instead, the investigation is centered on day-to-day kickbacks to officials who ran or helped run major state agencies or companies. Such kickbacks, according to the allegations, enabled the firm to dominate Russia’s market for IT infrastructure.”

“Last year, according to sources close to the investigation, a whistleblower came forward to the SEC, sketching out a vast otkat [kickback] scheme and providing documents as evidence.”

“The two former Cisco executives laid out for BuzzFeed how the alleged scheme worked:  In Cisco’s Russia operations, funds for kickbacks were built into the large discounts Cisco gave certain middleman distributors that were well-connected in Russia. The size of the discounts are head-turning, usually 35% to 40%, but sometimes as high as 68% percent off the list price.  And there was a catch: Instead of discounting equipment in the normal way, by lowering the price, parts of the discounts were often structured as rebates: Cisco sent money back to the middlemen after a sale. Some intermediaries were so close to the Russian companies and government agencies — Cisco’s end customers — that these intermediaries functioned as their agents. These middleman companies would direct the rebate money to be sent to bank accounts in offshore havens such as Cyprus, the British Virgin Islands, or Bermuda.”

According to the article, WilmerHale is conducting the internal investigation.

Societe Generale

Like other financial services company, Societe Generale has come under FCPA scrutiny for business dealings in Libya.  (See here for the prior post).  As noted in this recent article in the Wall Street Journal, in a U.K. lawsuit the Libyan Investment Authority has alleged that the company “paid a middleman $58 million in alleged bribes to secure almost $2 billion in business … during the final years of dictator Moammar Gadhafi’s rule.”

Reading Stack

The most recent issue of the always informative FCPA Update from Debevoise & Plimpton contains a useful analysis of the DOJ’s recent opinion procedure release (see here for the prior post).  Among other things, the Update states:

“[W]hy did it take eight months for the DOJ to issue an Opinion which could have simply cited [a prior Opinion Release]? The delay does not appear to be related to the DOJ’s heavy workload or bureaucratic inertia, as “significant backup documentation” was provided and “several follow up discussions” took place during the eight months.”

*****

A good weekend to all.  On Wisconsin!

Friday Roundup

It’s not every day that …, denied, scrutiny alerts, and a kleptocracy forfeiture action.  It’s all here in the Friday roundup.

It’s Not Every Day …

It’s not every day that a U.S. Senator takes to the Senate floor to accuse a company of violating the Foreign Corrupt Practices Act.

However, as noted here by the Hill, on Tuesday Senator Harry Reid (D-NV) did just that.

“Senate Majority Leader Harry Reid (D-Nev.) on Tuesday accused the Koch  brothers of unlawful business practices in an effort to portray the conservative  billionaires as election-year bogeymen.  Reid charged that Charles and David Koch, who are tied for fourth place on the Forbes list of 400 richest people in the United States, violated the Foreign  Corrupt Practices Act, citing a 2011 report by Bloomberg Markets magazine.  “These are the same brothers whose company, according to a Bloomberg  investigation, paid bribes and kickbacks to win contracts in Africa, India and the Middle East,” Reid said on the Senate floor. “These are the same brothers  who, according to the same report, used foreign subsidiaries to sell millions of  dollars of equipment to Iran, a state sponsor of terrorism.”  Representatives of the Kochs’s business empire fired back quickly in what has  become an escalating battle between the top Democrat in Congress and the press-shy business titans.  A lawyer for Koch Industries said the allegations in the Bloomberg article have been subsequently debunked and did not result in any legal penalty. “Nothing has ever come of any of the allegations that Mr. Reid referred to,” said Mark Holden, general counsel of Koch Industries. “Sen. Reid’s allegations are false,” he added.”

See here for a prior post regarding the referenced Bloomberg article.

Of course it is not just executives or companies that support Republican causes that have come under FCPA scrutiny.  As noted in this prior post the CEO of DreamWorks Animation and the co-founder of Qualcomm Inc., are big spenders for President Obama and the Democratic Party.  Both companies have been the subject of FCPA scrutiny.

Denied

The goal of FCPA Professor is to be a forum in which various views of the FCPA and FCPA enforcement can be expressed.  I frequently extend invitations for guest posts and for years have extended such an invitation to the DOJ.  The answer has always been no.  With Patrick Stokes becoming the new FCPA Unit Chief, I extended the invitation once again.  The DOJ response?  While Mr. Stokes “appreciates the invitation he’ll decline the opportunity.”

You could however, if you are willing to pay over $1,000, have heard Stokes speak yesterday about FCPA “Recent Developments and New Trends” at the ABA National Institute on White Collar Crime in Miami.

As highlighted in this previous post, one should not have to pay to hear public servants speak about the law they enforce.

Scrutiny Alerts

Cisco

This February 14th post was the first to highlight Cisco’s discreet blog post concerning its FCPA scrutiny.  Recently in its quarterly SEC filing the company disclosed:

“At the request of the U.S. Securities and Exchange Commission and the U.S. Department of Justice, the Company is conducting an investigation into allegations which the Company and those agencies received regarding possible violations of the U.S. Foreign Corrupt Practices Act involving business activities of the Company’s operations in Russia and certain of the Commonwealth of Independent States, and by certain resellers of the Company’s products in those countries.  The Company takes any such allegations very seriously and is fully cooperating with and sharing the results of its investigation with the Commission and the Department.  While the outcome of the Company’s investigation is currently not determinable, the Company does not expect that it will have a material adverse effect on its consolidated financial position, results of operations, or cash flows. The countries that are the subject of the investigation collectively comprise less than two percent of the Company’s revenues.”

Citigroup

As has been widely reported (see here from Reuters for instance):

“The SEC is investigating Citigroup for accounting fraud after it disclosed bogus loans in its Mexican Banamex unit, a source familiar with the investigation said.  The securities regulator is also examining whether Citigroup violated the Foreign Corrupt Practices Act, the source said.”

I think it is important to emphasize at times like this, that the FCPA contains generic books and records and internal controls provisions that can be implicated in the absence of any FCPA anti-bribery issues.  (See here for a prior post on this subject).

Rolls Royce Holdings

Rolls Royce Holdings, previously known to be under investigation by the U.K. Serious Fraud Office (see here for the prior post) added the Department of Justice to its recent annual report disclosure.

“A large part of the Group’s business is characterised by competition for individually significant contracts with customers which are often directly or indirectly associated with governments and the award of individually significant contracts to suppliers. The procurement processes associated with these activities are highly susceptible to the risk of corruption. In addition the Group operates in a number of territories where the use of commercial intermediaries is either required by the government or is normal practice. The Group is currently under investigation by law enforcement agencies, primarily the Serious Fraud Office in the UK and the US Department of Justice. Breaches of laws and regulations in this area can lead to fines, penalties, criminal prosecution, commercial litigation and restrictions on future business.”

Rolls Royce later clarified its disclosure as follows.

“Rolls-Royce has been co-operating with regulatory authorities on both sides of  the Atlantic in regard to allegations of bribery and corruption. The Serious  Fraud Office in the UK has launched a formal investigation. The Department of  Justice is also investigating these matters, however we have received no  notification of a formal inquiry being launched in the United States.”

Kleptocracy Forfeiture Action

It receives scant attention compared to FCPA enforcement, but another prong of the DOJ’s efforts to combat bribery and corruption is its Kleptocracy Asset Recovery Initiative under which prosecutors in the DOJ Asset Forfeiture and Money Laundering Section work in partnership with federal law enforcement agencies to forfeit the proceeds of foreign official corruption. (See this 2009 post highlighting Attorney General Holder’s announcement of the program).

Earlier this week, the DOJ announced:

“[The DOJ has] frozen more than $458 million in corruption proceeds hidden in bank accounts around the world by former Nigerian dictator Sani Abacha and conspirators. A civil forfeiture complaint unsealed today in the United States District Court in the District of Columbia seeks recovery of more than $550 million in connection with the largest kleptocracy forfeiture action brought in the department’s history. The restraint of funds announced today includes approximately $313 million in two bank accounts in the Bailiwick of Jersey and $145 million in two bank accounts in France.   In addition, four investment portfolios and three bank accounts in the United Kingdom with an expected value of at least $100 million have also been restrained, but the exact amounts in the accounts will be determined at a later date.”

*****

A good weekend to all.

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