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Telling And Inexcusable

By on March 3, 2014 in Diebold, Enforcement Agency Policy, Monitor

Compliance monitors as a condition of resolving a Foreign Corrupt Practices Act enforcement action are:

(a) a necessary post-enforcement action condition of settlement because the conduct at issue in the enforcement action suggests that the company had deficient internal controls and/or an inadequate committment to FCPA compliance; or

(b) a unncessary, reactionary, more form over substance post-enforcement action condition of settlement that borders on a government required transfer of shareholder wealth to FCPA Inc.

If (a) is the correct response, and if a company’s internal controls are so deficient and if the company so lacks a genuine committment to FCPA compliance, it would seem that a compliance monitor should actually begin work as soon as the ink is dry on the resolution documents.

However, that rarely happens and the delay between when a compliance monitor actually begins work is telling.

For instance and as highlighted in this previous post regarding the Faro Technologies enforcement action, it took the DOJ and the company two years from the date of the enforcement action to agree on a compliance monitor.

While the next example has a way to go to reach two years, the same thing is currently happening in regards to the Diebold monitor.

As highlighted in this prior post, on October 22, 2013 Diebold agreed to resolve related DOJ and SEC enforcement actions.  Pursuant to the DPA, Diebold was required to engage a compliance monitor for “a period of not less than 18 months from the date the monitor is selected.”  As stated in the DPA, selection of the monitor shall be “prompt” and the DPA stated that the DOJ and Diebold “will use their best efforts to complete the [monitor] selection process within 60 days” of executing the DPA.

Despite this language, 60 days have passed.  90 days have passed.  Still no Diebold monitor.

Rather, Diebold’s VP Global Finance and Principal Financial Officer stated in the company’s February 13th earnings call as follows:  we “are in the process of working with the government agencies to identify the compliance monitor.”

This is telling and goes directly to the introductory question regarding the need and necessity of corporate monitors in many FCPA enforcement actions.

It is also inexcusable.

If the DOJ wants its FCPA enforcement program to be viewed as credible and effective by the business community, it owes the business community an obligation not to proceed at a glacial pace.  For instance, the gray cloud of FCPA scrutiny often lingers far too long (2-4 years tends to be the average from the point of first disclosure to any actual enforcement action with 6-8 years not uncommon).  When cooperation is the name of the game, and because of this black-letter legal concepts such as statute of limitations do not matter, this is the end result.  The revolving door that has come to infect DOJ and SEC FCPA enforcement also contributes to the glacial pace.

Likewise, if the DOJ wants its FCPA enforcement program to be viewed as credible and effective by the business community, monitors must be appointed promptly after an enforcement action as monitors represent costs, risks, and uncertainty.

FCPA Settlement Amounts Have Come A Long Way In A Short Amount Of Time

By on December 4, 2013 in Baker Hughes, Diebold, Fine / Penalty Issues

Many of the critiques of this new era of Foreign Corrupt Practices Act enforcement – including my own – have focused on enforcement theories, non-prosecution and deferred prosecution agreements, and other DOJ or SEC policies and procedures.

While there has been attention and focus on fine, penalty and disgorgement amounts (see here, here, here and here for prior posts including my own), more attention needs to be paid to such issues.

The reason is simple.

FCPA settlement amounts have come a long way in a short amount of time.  To be sure, historical issues with certain foreign issuers (i.e. Siemens, Total, and Daimiler) mostly account for this dynamic, as does the $6 billion Bonny Island, Nigeria liquified natural gas plant project that was the focus of 4 out of the top 10 FCPA enforcement actions of all time.

But consider this.

In 2007 – that is a mere six years ago – Baker Hughes resolved the largest FCPA enforcement action of all-time by agreeing to pay $44 million in combined DOJ and SEC settlements.  According to the criminal information, the company made approximately $4.1 million in improper payments – via an agent – in connection with the Karachaganak Project in Kazakhstan – a “giant gas and oil field” – according to the DOJ.  According to the DOJ’s sentencing guidelines calculation, the “benefit received or to be received [from the alleged improper conduct was] approximately $19 million.”

The SEC enforcement action against Baker Hughes was based on the same core set of conduct and the SEC stated in this release as follows:

“Baker Hughes paid approximately $5.2 million to two agents while knowing that some or all of the money was intended to bribe government officials, specifically officials of State-owned companies, in Kazakhstan. […] Baker Hughes engaged the agent and was awarded an oil services contract in the Karachaganak oil field in Kazakhstan that generated more than $219 million in gross revenues from 2001 through 2006.”

In addition, the SEC release stated:

  • from 1998 to 2004, Baker Hughes authorized commission payments of nearly $5.3 million to an agent (who worked in Kazakhstan, Russia and Uzbekistan) under circumstances in which the company failed to determine whether such payments were, in part, to be funneled to government officials in violation of the FCPA;
  • in Indonesia, between 2000 and 2003, Baker Hughes paid certain freight forwarders to import equipment into Indonesia using a “door-to-door” process under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Indonesian customs officials;
  • in Nigeria, between at least 2001 and 2005, Baker Hughes authorized payments to certain customs brokers to facilitate the resolution of alleged customs deficiencies under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Nigerian customs officials; and
  • in Angola, from 1998 to 2003, Baker Hughes paid an agent more than $10.3 million in commissions under circumstances in which the company failed to adequately assure itself that such payments were not being passed on to employees of Sonangol, Angola’s state-owned oil company, to obtain or retain business in Angola.

The record-setting 2007 Baker Hughes FCPA enforcement was then.

In October, the DOJ and SEC announced an FCPA enforcement action against Diebold.

As noted in this previous post, the enforcement action was primarily an excessive travel and entertainment enforcement action focused on conduct in China and Indonesia wherein the DOJ alleged in the criminal information that the company provided various things of value (such as Las Vegas sightseeing, a dance show, a Grand Canyon tour, a Universal Studios tour and a Napa Valley tour) totaling approximately $1.75 million to alleged “foreign officials” over a five year period.  (Note:  the enforcement action also contained non-specific monetary allegations concerning relationships with private business customers in Russia.  However, the DOJ’s sentencing guidelines calculation makes clear that the Russia conduct was a minor factor in determining the fine and penalty amount).  As to the core conduct – the China and Indonesia conduct – the DOJ’s sentencing guidelines calculation references a “value of benefit received [from the alleged improper conduct] more than $7 million.”

The SEC enforcement action against Diebold was based on the same core set of conduct and the SEC alleged in this complaint that Diebold subsidiaries in China and Indonesia spent approximately $1.8 million on travel, entertainment, and other improper gifts for senior officials with the ability to influence the banks’ purchasing decisions.  The SEC further alleged that Diebold falsified books and records to hide approximately $1.2 million of bribes paid to employees at privately owned banks in Russia.

In short, the recent Diebold enforcement action involved significantly less egregious allegations than the Baker Hughes enforcement action.

Yet the combined fine and penalty in the Diebold action ($48 million) was more than the record-setting $44 million Baker Hughes enforcement action from a mere six years ago.

Of course, factors beyond the core conduct at issue – such as volunatary disclosure, cooperation and a company’s past history –  can influence settlement amounts in an FCPA enforcement action.  However, the Baker Hughes and Diebold enforcement actions were substantively identical in these regards (i.e. both companies had a past history, both companies voluntarily disclosed and both companies cooperated).

This raises the obvious issue – have FCPA settlement amounts increased … just because?

Perhaps you have noticed this general trend in other areas.  Pfizer recently resolved a $2.2 billion enforcement action (and now for the weather), SAC Capital recently resolved a $1.2 billion enforcement action (can you please pass the butter) and JPMorgan recently resolved a $13 billion enforcement action.

In a recent speech SEC Commissioner Daniel Gallagher noted:

“[T]he amounts of the penalties that the SEC imposes against corporations today are eye-popping and likely would have shocked the legislators who voted for the Remedies Act and the Commission that sought penalty authority from Congress.”

As to the JPMorgan action, as noted in this recent Wall Street Journal article, the company’s top lawyer asked at a recent event “at what point does this [record-setting fines] stop.”  As Professor Peter Henning noted in this recent New York Times DealBook column regarding the JPMorgan matter:

“A standard part of enforcement actions against companies these days is the multimillion-dollar – or even multibillion-dollar – penalty. What can be perplexing is figuring out how those penalties were determined, and whether they have much if any direct relationship to either the gains realized from the violations or the harm inflicted.”

Indeed, at the same event discussed above, a government official acknowledged that the government’s application of fines in legal settlements “is more art than science.”

Spot-on.

In many cases. there is little rhyme or reason to how FCPA settlement amounts are calculated.  As noted in this prior post, in the SEC context some FCPA settlements include a civil penalty, disgorgement and prejudgment interest, whereas other enforcement actions include only disgorgement and prejudgment interest, whereas other enforcement actions include only disgorgement and a civil penalty, whereas other enforcement actions include only disgorgement, whereas other enforcement actions include only a civil penalty.

As noted in this prior post, double-dipping by multiple government enforcement agencies is the norm in corporate FCPA settlements.

When a NPA is used to resolve an FCPA enforcement action, the ultimate fine amount and how it as calculated is not transparent.  Even with corporate DPAs and plea agreements, there remains little transparency regarding FCPA criminal fine amounts, particularly as to the value of the benefit allegedly received through the improper payment.  The DOJ simply cites a number.

As noted in this prior post, in 2012 the Supreme Court held in Southern Union that any fact that substantially increases a criminal defendant’s fine amount must be provable to a jury beyond a reasonable doubt.  As noted in the prior post however, the Supreme Court’s decision was great in theory, but it is rare for anything connected to a corporate FCPA enforcement action to be provable to a jury beyond a reasonable doubt.

The largest FCPA enforcement action of all time is the $800 million action against Siemens in 2008.  It is only a matter of time before there is an FCPA enforcement action in the “b” (as in billion) category.

Indeed, as the Baker Hughes and Diebold enforcement actions highlight, FCPA settlement amounts have come a long way in a short amount of time.

If a billion dollar FCPA enforcement action is what the conduct at issue warrants … fine.  But if it is just because, this is a problem and a significant public policy concern as even alleged wrongdoers have due process rights.

Friday Roundup

By on November 1, 2013 in Avon, China, Compliance, Diebold, Embraer, Enforcement Agency Speeches, Facilitating Payments, JPMorgan, Mead Johnson, National Geographic, Related Foreign Investigations, Teva Pharmaceuticals, Vietnam, Voluntary Disclosure

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,

Of Note From The Diebold Enforcement Action

By on October 24, 2013 in Diebold, Related Foreign Investigations, Repeat Offenders, Rogue Employees

Yesterday’s post (here) went long and deep as to the Diebold enforcement action.  Today’s post continues the analysis by highlighting additional notable issues.

Prior China Investigation

It is merely one paragraph in the SEC’s complaint, but it may be perhaps the most notable issue in the Diebold enforcement action (an action based primarily on excessive travel and entertainment payments by subsidiaries – the bulk of which occurred in China).  Para. 28 of the SEC’s complaint 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.”

In short, the bulk of the conduct at issue in the $48 million Diebold enforcement action was previously investigated by a foreign law enforcement agency and was resolved without corruption charges.

Repeat Offender

As noted in yesterday’s post, in resolving the SEC enforcement action, Diebold agreed to a permanent injunction prohibiting future FCPA violations.

As noted in this prior post, in July 2010 Diebold previously agreed to a permanent injunction prohibiting future FCPA books and records and internal controls violations in a “non-FCPA FCPA enforcement action.”

In other words, Diebold is a repeat FCPA offender (at least as to books and records and internal controls provisions).  As noted in yesterday’s post, this was the reason why the enforcement agencies imposed a compliance monitor on Diebold notwithstanding its voluntary disclosure and cooperation.

The Diebold action once again raises the issue of whether SEC permanent injunctions represent meaningless settlement language.   (See here and here for prior posts).

Rogue?

Notwithstanding the fact that Diebold is a repeat offender, a separate question ought to be asked – was the Diebold enforcement action the result of rogue employees?

According to its website, Diebold employs 16,000 employees with representation in more than 90 countries worldwide.  The enforcement action primarily focuses on the conduct of two employees – Executive A and Executive B.  The SEC’s complaint specifically states that these executives received FCPA training in 2007, yet still continued their alleged improper practices.  In addition, the SEC specifically states that the “executives took further steps to hide the leisure nature of [the problematic] trips including, on at least one occasion, providing false information to the company’s auditors in China.”

Is it fair for Diebold shareholders to pay $48 million to resolve an enforcement action (let alone many millions more in pre and post enforcement action professional fees and expenses) based on conduct allegedly engaged in primarily by .0001% of its employees, employees who were trained on the FCPA, and employees who took steps to conceal their activity from others in the company?

Typical Chronology

Diebold’s FCPA scrutiny followed a typical pattern as set forth below.

As noted in this prior post, in July 2010, the company voluntarily disclosed to the DOJ and SEC conduct it learned of “while conducting due diligence in connection with a potential acquisition in Russia.”

This original source of scrutiny caused the company to conduct an internal review of its “global FCPA compliance” which resulted, as noted in this prior post, in the company thereafter disclosing as follows.  “In the fourth quarter of 2010, the Company identified certain transactions within its Asia Pacific operation over the past several years which may also potentially implicate the FCPA.”

As noted in this prior post, in August 2013, the company disclosed as follows.

“The company has agreed in principle with the DOJ and the SEC to the terms of a proposed settlement of their inquiries, which terms remain subject to final approval by all parties. These proposed settlement terms include combined payments to the U.S. government of approximately $48.0 million in disgorgement, penalties and prejudgment interest, and the appointment of an independent compliance monitor for a minimum period of 18 months.”

In short, the time period from first instance of public disclosure to actual settlement was approximately 3.25 years.  The time period from disclosure of a settlement in principle to actual settlement was approximately 3 months.

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

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

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

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

DOJ

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

Information

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

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

Both Bank 1 and Bank 2 are described as follows.

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

The information then alleges:

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

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

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

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

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

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

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

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

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

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

DPA

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

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

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

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

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

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

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

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

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

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

SEC

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

In summary fashion, the complaint alleges:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The complaint further states:

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

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

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

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

Jonathan Leiken (Jones Day) represented Diebold.

This Law360 article states:

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

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

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