SEC Enforcement Of The FCPA – Year In Review
FCPA enforcement, it is not just about the DOJ. Granted, its sticks are less sharp than the DOJ’s, but the SEC also claims a significant piece of the FCPA enforcement pie (query whether it should – but that is a subject for another day).
Today’s post is a Year in Review of SEC FCPA Enforcement. (See here for a similar post for 2010). Stay tuned for a similar post on the DOJ’s Enforcement of the FCPA in 2011.
In 2011, the SEC collected approximately $148 million in 13 corporate FCPA enforcement actions. By comparison, in 2010 the SEC brought in approximately $530 million in 19 corporate FCPA enforcement actions. SEC FCPA enforcement in 2011 was both small (Ball Corp. – $300,000) and large (Johnson & Johnson – $48.6).
Five corporate FCPA enforcement actions from 2011 were SEC only (IBM, Ball Corp., Rockwell Automation, Diageo, and Watts Water Technologies). Of the 13 corporate enforcement actions, only 5 (Armor Holdings, Johnson & Johnson, Tyson Foods, Maxwell Technologies, and Magyar Telekom / Deutsche Telekom) included FCPA anti-bribery charges. In other words 8 SEC FCPA enforcement actions charged FCPA books and records and internal controls only yet in those enforcement actions the SEC collected approximately $51 million in disgorgement and prejudgment interest. This is noteworthy because many question, and rightfully so, whether disgorgement is an appropriate remedy in cases that do not charge FCPA anti-bribery violations. See here for a prior post.
Of the $148 million the SEC collected in 2011 corporate FCPA enforcement actions, approximately $80 million (54%) were in two enforcement actions (Johnson & Johnson and Magyar Telekom / Deutsche Telekom). Of the $148 million, approximately $53 million (36%) were in enforcement actions against foreign issuers (Tenaris, Diageo, and Magyar Telekom / Deutsche Telekom).
The $148 million further breaks down as follows: $9.6 million in civil penalties; $138.4 in disgorgement and prejudgment interest. Thus 94% of SEC FCPA enforcement settlement amounts in 2011 consisted of disgorgement and prejudgment interest. This figure last year was 96%. If one tries to analyze why some SEC FCPA enforcement actions include a civil penalty, disgorgement and prejudgment interest (Watts Water Technologies, Diageo, Armor Holdings, Rockwell Automation, IBM), whereas other enforcement actions include only disgorgement and prejudgment interest (Comverse Technologies, Johnson & Johnson, Tenaris, Tyson Foods, Maxwell Technologies, Aon, Magyar Telekom / Deutsche Telekom), whereas other enforcement actions include only a civil penalty (Ball Corp.), good luck and please enlighten us all with your insight.
Other notable developments from corporate SEC FCPA enforcement in 2011 include use of the first alternative resolution vehicle (a DPA) against Tenaris (see here for the prior post) and four enforcement actions resolved via administrative proceedings (Ball Corp., Rockwell Automation, Diageo, and Watts Water Technologies). As noted in this previous guest post, a provision in Dodd-Frank granted the SEC broad authority to impose civil monetary penalties in administrative proceedings.
Another significant development in 2011, albeit not FCPA specific, was the much needed scrutiny on the SEC’s neither admit nor deny settlement policy – a policy relevant to SEC FCPA enforcement actions. See here for the prior post. This will remain an issue to watch in 2012 as neither admit nor deny heads to the Second Circuit.
In recent years, the DOJ has been the subject of well deserved criticism for the lack of individual prosecutions in many corporate FCPA enforcement actions. The same criticism can also be made of the SEC’s FCPA enforcement program. The SEC, at a minimum, has jurisdiction over the employees of companies settling an FCPA enforcement action and can, as demonstrated by certain FCPA enforcement actions, pursue civil FCPA anti-bribery charges, civil FCPA books and records and internal control charges, as well as other related civil charges.
However, in just 2 of the 13 (15%) corporate SEC FCPA enforcement actions in 2011 did the SEC charge individuals (Lessen Chang (Watts Water Technologies) and Elek Straub, Andras Balogh, and Tamas Morvai (Magyar Telekom)) despite allegations in other enforcement actions that employees, including in certain cases senior management, were engaged in the improper conduct at issue. Last year, the SEC charged individuals in only 3 of the 19 corporate enforcement actions (15%).
In 2011, the SEC did charge 1 individual (Paul Jennings – see here) in connection with the 2010 Innospec enforcement action as well as 7 individuals (Uriel Sharef, Herbert Steffen, Andres Truppel, Ulrich Bock, Stephan Signer, Carlos Sergi and Bernd Regendantz – see here) in connection with the 2008 Siemens enforcement action. It is interesting to note that all 12 of the individuals the SEC charged with FCPA violations in 2011 were foreign nationals (in a few cases, dual citizens of a foreign country and the U.S.).
Of the 13 corporate SEC FCPA enforcement actions in 2011, 12 enforcement actions (92%) were the result of corporate voluntary disclosures or previous foreign law enforcement investigations. The only exception is the Aon enforcement which, as noted in this prior post, “following inquiries from regulators, the Company commenced an internal review of its compliance with certain U.S. and non-U.S. anti-corruption laws, including the U.S. Foreign Corrupt Practices Act.” Stated in terms of the approximate $148 million the SEC collected in the 13 corporate FCPA enforcement actions in 2011, $133.5 million (90%) was the result of such disclosures. As noted in last year’s SEC Year in Review post, in 2010, 97% of the SEC’s intake in FCPA enforcement actions was the result of voluntarily or otherwise publicly disclosed information and not the result of original investigation by either the SEC.
This remainder of this post provides an overview of corporate SEC FCPA enforcement in 2011.
*****
Magyar Telekom / Deutsche Telekom (Dec. 29th)
See here for the prior post.
Charges: Settled civil complaint charging FCPA anti-bribery and books and records and internal controls violations.
Settlement: $31.2 million in disgorgement and pre-judgement interest.
Disclosure: Yes, voluntary disclosure.
Individuals Charged: Yes.
Related DOJ Enforcement Action: Yes.
Aon Corp. (Dec. 20th)
See here for the prior post.
Charges: Settled civil complaint charging FCPA books and records and internal controls violations.
Settlement: Approximately $14.5 million (disgorgement of $11,416,814 and prejudgment interest of $3,128,206).
Disclosure: Aon’s SEC filings stated that ”following inquiries from regulators, the Company commenced an internal review of its compliance with certain U.S. and non-U.S. anti-corruption laws, including the U.S. Foreign Corrupt Practices Act.”
Individuals Charged: No.
Related DOJ Enforcement Action: Yes.
Watts Water Technologies (Oct. 13th)
See here for the prior post.
Charges: None. Administrative cease and desist order finding violations of the FCPA’s books and records and internal control provisions.
Settlement: $3.8 million ($2.8 million in disgorgement, $820,000 in prejudgment interest and a $200,000 civil monetary penalty).
Disclosure: Yes, voluntary disclosure.
Individuals Charged: Yes.
Related DOJ Enforcement Action: No.
Diageo (July 27th)
See here for the prior post.
Charges: None. Administrative cease and desist order finding violations of the FCPA’s books and records and internal control provisions.
Settlement: Approximately $16.4 million (approximately $11.3 million in disgorgement, approximately $1.2 million in prejudgement interest; and a $3 million civil penalty).
Disclosure: Yes, voluntary disclosure and/or based on previous foreign law enforcement investigation.
Individuals Charged: No.
Related DOJ Enforcement Action: No.
Armor Holdings (July 13th)
See here for the prior post.
Charges: Settled civil complaint charging FCPA anti-bribery, books and records and internal controls violations.
Settlement: Approximately $5.7 million (approximately $1.5 million in disgorgement; $458,000 in prejudgment interest; and a $3.7 million civil penalty)
Disclosure: Yes, voluntary disclosure.
Individuals Charged: No.
Related DOJ Enforcement Action: Yes.
Comverse Technologies (April 7th)
See here for the prior post.
Charges: Settled civil complaint charging FCPA books and records and internal control violations.
Settlement: Approximately $1.6 million (approximately $1.2 million in disgorgement and approximately $360,000 in prejudgment interest).
Disclosure: Yes, voluntary disclosure.
Individuals Charged: No.
Related DOJ Enforcement Action: Yes.
Johnson & Johnson (April 8th)
See here for the prior post.
Charges: Settled civil complaint charging FCPA anti-bribery violations and FCPA books and records and internal controls violations.
Settlement: Approximately $48.6 million (approximately $38.2 million in disgorgement and $10.4 million in prejudgment interest).
Disclosure: Yes, voluntary disclosure (however the Iraq Oil for Food conduct was not voluntarily disclosed).
Related DOJ Enforcement Action. Yes.
Rockwell Automation (April 7th)
See here for the prior post.
Charges: None. Administrative cease and desist order finding violations of the FCPA’s books and records and internal control provisions.
Settlement: Approximately $2.7 million (approximately $1.7 million in disgorgement; approximately $590,000 in prejudgment interest; and a $400,000 civil penalty).
Disclosure: Yes, voluntary disclosure.
Individuals Charged: No.
Related DOJ Enforcement Action: No.
Tenaris (May. 17th)
See here for the prior post.
Charges: None – resolved via a deferred prosecution agreement – term two years.
Settlement: $5.4 million in disgorgement and prejudgment interest.
Disclosure: Yes, voluntary disclosure.
Individuals Charged: No.
Related DOJ Enforcement Action: Yes.
Ball Corporation (March 24th)
See here for the prior post.
Charges: None. Administrative cease and desist proceeding finding FCPA books and records and internal controls violations.
Settlement: $300,000 penalty.
Disclosure: Yes, voluntary disclosure.
Individuals Charged: No.
Related DOJ Enforcement Action: No.
IBM Corporation (March 18th)
See here for the prior post.
Charges: Settled civil complaint charging FCPA books and records and internal controls violations.
Settlement: $10 million ($5.3 million in disgorgement, $2.7 million in prejudgment interest, and a $2 million civil penalty).
Disclosure: Yes, the action is reportedly the result of a prior South Korean government investigation.
Individuals Charged: No.
Related DOJ Enforcement Action: No.
Tyson Foods (Feb. 10th)
See here for the prior post.
Charges: Settled civil complaint charging FCPA anti-bribery violations and books and records and internal control violations.
Settlement: $1.2 million in disgorgement and prejudgment interest.
Disclosure: Yes, voluntary disclosure.
Individuals Charged: No.
Related DOJ Enforcement Action: Yes.
Maxwell Technologies (Jan. 31st)
See here for the prior post.
Charges: Settled civil complaint charging: FCPA anti-bribery, books and records and internal controls violations; and Section 13 disclosure violations.
Settlement: Approximately $6.3 million (approximately $5.6 million in disgorgement and $700,000 in prejudgment interest)
Disclosure: Yes, voluntary disclosure.
Individuals Charged: No.
Related DOJ Enforcement Action: Yes.
Informative Reads
[You will see a new “Jobs” tab on the site today and I am pleased to announce this new feature of FCPA Professor. FCPA Professor readers include a world-wide audience of attorneys and business, accounting, finance, and compliance professionals with knowledge and experience of the FCPA and related topics. Both job seekers and organizations seeking to hire individuals with FCPA experience will benefit from a wide selection of job listings, so please spread the word and send this link to your HR department and professional contacts]
The quality of FCPA resources continues to impress. Three law firm periodic publications I make sure to put on my reading stack are those authored by Gibson Dunn & Crutcher, Shearman & Sterling, and Miller & Chevalier.
Gibson Dunn’s “2011 Year-End FCPA Update” (here) begins as follows. “2011 marked yet another dynamic year for the Foreign Corrupt Practices Act, including numerous significant enforcement actions, more trials than in any other year in the history of the statute, and a growing public debate about the policy ramifications of a U.S.-dominated international anti-corruption enforcement field. Those close to the statute can feel the unmatched pace at which the 34-year-old law is now developing. With more litigated decisions, more bills pending in Congress, and more interplay between the FCPA and other international laws prohibiting cross-border bribery, there is a growing sense of urgency amongst FCPA practitioners as to the direction the statute will take in the coming years. […] There can be no dispute about it–these are interesting times for the FCPA.” The Update concludes as follows. “Perhaps the most intriguing current development in the FCPA is that everything that made 2011 such a fascinating year promises only to increase in the years to come, as there will only be more litigation, more legislation, and more international coordination in the near future. Companies and their executives doing business in an increasingly global marketplace are well advised to stay abreast of these developments.” Sandwiched between is much useful information and analysis sure to be of interest to readers.
Gibson Dunn also released (here) its annual update on corporate deferred prosecution and non-prosecution agreements. According to the report, the DOJ and SEC entered into 29 NPAs/DPAs in 2011. Such vehicles were used in FCPA enforcement actions (DOJ or SEC) 11 times – approximately 40% of the total.
Shearman & Sterling’s “Recent Trends and Patterns in the Enforcement of the FCPA” (here) always impresses. The latest edition begins as follows. “Although the pace of new FCPA enforcement actions was somewhat off in 2011 – only sixteen corporate cases and eighteen new individual defendants – 2011 was nevertheless an eventful year for FCPA enforcement and indeed for enforcement of other countries’ similar laws. Among the highlights: defendants took the government to trial in a number of FCPA matters, with mixed results reflecting the difficulty and uncertainty of proving foreign bribery beyond a reasonable doubt; judges in multiple districts largely adopted the government’s expansive interpretation of what constitutes an “instrumentality” of a foreign government, including state-owned entities indirectly controlled by a foreign government; the DOJ and the SEC continued their focus on prosecution of individuals; the U.S. enforcement authorities brought fewer cases in 2011 against non-U.S. companies; despite claims that the government extracted exorbitant fines in FCPA matters, the average penalty continued to be less than $25 million; the DOJ and the SEC almost completely withdrew from their prior practice of routinely requiring an independent monitor in all cases and demonstrated a willingness to accept various forms of self-monitoring; with the advent of the U.K.’s Bribery Act, the British government offered considerable guidance on compliance and began exploring ways of encouraging voluntary disclosures and cooperation by emulating the U.S. system of deferred prosecution agreements.”
Shearman & Sterling publications are always strong on jurisdictional issues and its most recent “Trends and Patterns” states as follows regarding the Magyar Telekom enforcement action (see here for the prior post). “The year ended with an entirely new expansion of what constitutes territorial acts. In Magyar Telekom, the DOJ’s sole claim to anti-bribery jurisdiction (but not to books and records jurisdiction) was based on a foreign official’s “U.S.-based email address,” whereby email was “passed through, stored on, and transmitted from servers located in the U.S.” This is a particularly weak jurisdictional basis, given that this one count resulted in a Sentencing Guidelines calculation of eight times what the company would have had to pay under just the books and records provisions.”
Shearman & Sterling’s FCPA Digest (here), at 692 pages, is as complete of an FCPA source as you will find.
Last, but certainly not least, is Miller & Chevalier’s FCPA Winter Review 2012 (here). Complete with charts and graphs, it is a comprehensive resource on the latest developments in the following areas: enforcement actions against companies and individuals; FCPA-related private litigation; domestic legislative and U.S. enforcement agency developments; as well as international developments.
If you have not yet had the opportunity to read the above three publications, you should, it will be time well spent.
In Depth On The Magyar Telekom and Deutsche Telekom Enforcement Action
This post analyzes the DOJ and SEC enforcement actions against Magyar Telekom, Deutsche Telekom and certain former executives of Magyar generally discussed in this previous post.
Total fines and penalties were approximately $95 million ($59.6 million against Magyar Telekom via a DOJ deferred prosecution agreement, $4.4 million against Deutsche Telekom via a DOJ non-prosecution agreement, and $31.2 million against Magyar Telekom via a settled SEC civil complaint). The SEC action against former Magyar executives remains active.
Because Magyar Telekom and Deutsche Telekom were “foreign issuers,” jurisdiction under the FCPA’s anti-bribery provisions require “use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance” of a bribery scheme. The sole jurisdictional allegations in the enforcement action (other than the companies made filings with the SEC) are two e-mails that passed through, were stored on, and transmitted to servers located in the U.S.
It is also noteworthy that the companies faced FCPA exposure based on the conduct of a few Magyar executives who concealed their conduct from others. Indeed, the DOJ alleged that the existence and true purpose of the sham contracts used in the bribery scheme “were unknown to anyone within Magyar Telekom and Deutsche Telekom other than [two executives]’ and a relatively small number of additional participants.” Furthermore, the DOJ alleges that the executives, assisted by Greek intermediaries, circumvented Magyar Telekom’s internal controls by, among other things, backdating contracts and creating other fabricated documents.
The DOJ’s NPA with Deutsche Telekom states that the DOJ “will not criminally prosecute Deutsche Telekom … for any crimes … related to the offering or making of improper payments by employees of Magyar Telekom to foreign officials, foreign political parties, and officials of foreign political parties in Macedonia and the accounting and record-keeping associated with these improper payments in violation” of the FCPA’s books and records provisions.” Yet one struggles to find any facts that would justify criminal charges against Deutsche Telekom. The DOJ has said in the past that it “does not prosecute corporations based on the acts of a single rogue employee.” Yet all one learns from reading the NPA is that a Deutsche Telekom executive was a board member of Magyar Telekom and one of its subsidiaries and that the executive had passive knowledge of the scheme and later learned of the Magyar Telekom executives circumvention of Magyar Telekom’s internal controls. In all other respects, Deutsche Telekom’s criminal and civil exposure appears to be based on a strict liability like theory in that Magyar Telekom’s financial results were incorporated into Deutsche Telekom’s for purposes of financial reporting.
DOJ
The DOJ enforcement action involved a criminal information (here) against Magyar Telekom resolved through a deferred prosecution agreement (here) as well as a non-prosecution agreement (here) with Deutsche Telekom.
Criminal Information
The information focuses on conduct in Macedonia and Montenegro.
Macedonia
As to Macedonia, the information alleges as follows. “During 2005 and 2006, certain executives then employed by Magyar engaged in a course of conduct with consultants, intermediaries and other third parties, including contracting through sham contracts to pay an aggregate amount of €4.875 million to
the Cypriot Shell Company [a shell company controlled by Greek Intermediary #1 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials), Greek Intermediary #2 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials), and Greek Intermediary #3 (an individual who assisted Magyar Telekom in its dealings with Macedonian government officials) that executed contracts with, submitted paperwork to, and received payments from, Magyar Telekom and its subsidiaries]
and one of its affiliates, under circumstances in which they knew, or were aware of a high probability that circumstances existed in which, all or a portion of the proceeds of such payments would be offered, given, promised or paid, directly or indirectly to
Macedonian Government Official #1 [a high-ranking government official with responsibility related to telecommunications laws and regulations and a leader of Macedonian Political Party A],
Macedonian Government Official #2 [a high-ranking government official with responsibility for telecommunications laws and regulations and a leader of Macedonian Political Party B],
Macedonian Political Party A, and/or Macedonian Political Party B [collectively political parties in the Macedonian governing coalition each representing a traditional ethnic group in Macedonia]
with the intention of obtaining business and advantages for Magyar Telekom. In addition, Macedonian Political Party B was offered the opportunity to designate the beneficiary of a business venture in exchange for the party’s support of Magyar Telekom’s desired benefits.”
According to the information, in early 2005, the Macedonian Parliament enacted a law designed to liberalize the telecommunications market in a manner that would have been unfavorable to Magyar Telekom. Specifically the law authorized the telecommunications regulatory bodies in Macedonia to hold a public tender for a license to operate a third mobile telephone business that would directly compete in Macedonia against Magyar Telekom’s Macedonian subsidiary, MakTel, and imposed increased frequency fees and other regulatory burdens. According to the information, certain Magyar Telekom executives and the Greek Intermediaries met with Macedonian Official #1 and others to “inform them that a third mobile license was not acceptable.”
According to the information, certain Magyar Telekom executives approved and executed two secret agreements with Macedonian Official #1 to delay or preclude the issuance of a third mobile telephone license and to mitigate the other adverse effects of the new law, including not requiring MakTel to pay the full amount of the increased frequency fee. The information alleges, among other things, that an e-mail was sent to a Macedonian government official “at his U.S. based e-mail address” that “was passed through, stored on, and transmitted from servers located in the United States” and that a MakTel executive received an e-mail discussing the secret agreements in his “Hotmail email account, which passed through, was stored on, and transmitted to servers located in the United States.”
The information alleges that between 2005 and 2006 Magyar Telekom received the benefits promised in the agreements and that Magyar Telekom executives authorized MakTel and other Magyar Telekom subsidiaries to enter into a series of sham contracts and to pay an aggregate amount of € 4.875 million under those contracts to the Cypriot Shell Company and one of its affiliates, under circumstances in which the Magyar Telekom Executives knew, or were aware of a high probability that circumstances existed in which, all or a portion of the proceeds of such payments would be offered, given, promised, or paid, directly or indirectly to Macedonian government officials.
The information alleges that following the sham contracts “the Macedonian government delayed the introduction of a third mobile telephone competitor until 2007 and reduced the frequency fee tariffs imposed on Magyar Telekom’s Macedonian subsidiary, MakTel.”
According to the information, “the existence and true purpose of the agreements were unknown to anyone within Magyar Telekom and Deutsche Telekom other than [the two executives] and a relatively small number of additional participants.” In fact, the information alleges that the two executives, assisted by Greek Intermediary #1, circumvented Magyar Telekom’s internal controls by, among other things, backdating contracts or creating other fabricated documents.
Nevertheless the information alleges as follows. “The payments made under these sham contracts were recorded on Magyar Telekom’s books and records in a manner that did not accurately reflect the true purposes of the contracts under which they were made, and the false books and records were consolidated into DT’s financial statements.”
Based on the above allegations as to Macedonia, the information charges FCPA anti-bribery violations and FCPA books and records violations.
Montenegro
The information states as follows. “In October 2004, the Government of Montenegro issued a tender to privatize its approximately 51% stake in the state-owned telecommunications company TCG [Telekom Crne Gore A.D.]. Magyar Telekom submitted a bid that sought to obtain a super-majority ownership stake, consisting of the government’s 51% share, plus enough additional minority shares from private investors to give Magyar Telekom ownership of at least two-thirds of TCG.” According to the information, in March 2005 Magyar Telekom succeeded in acquiring an approximately 73% stake in TCG, and after the Government of Montenegro facilitated Magyar Telekom’s acquisition of shares of TCG from minority shareholders, certain Magyar Telekom executives caused Magyar Telekom, TCG, and/or its affiliates to enter into four contracts that purported to relate to the TCG acquisition and/or Magyar Telekom’s operations in Montenegro, but under which no valuable performance was actually rendered. The information alleges that “payments under those contracts were not recorded accurately on Magyar Telekom’s or Magyar Telekom’s subsidiaries’ books and records.”
According to the information, “the payments under the four contracts … were recorded on Magyar Telekom’s books and records, or those of certain of Magyar Telekom’s subsidiaries, in a manner that did not accurately reflect the true purposes of the contracts under which they were made, and the false books and records were consolidated into Magyar Telekom’s and DT’s financial statements.”
Based on the above conduct as to Montenegro, the information charges FCPA books and records violations.
DPA
The DOJ’s charges against Magyar Telekom were resolved via a deferred prosecution agreement. Pursuant to the DPA, Magyar Telekom admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees, agents, and those of Magyar Telekom’s subsidiaries as charged in the Information.”
The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors.
(a) following reports by the company’s auditors, Magyar Telekom made a timely and voluntary disclosure to the DOJ and SEC about potential misconduct;
(b) over the course of several years, Magyar Telekom’s audit committee led a thorough global internal investigation concerning bribery and related misconduct;
(c) Magyar Telekom’s audit committee reported its findings to the DOJ and SEC;
(d) the pervasiveness of the scheme, the involvement of a number of now-former senior managers at Magyar Telekom and certain of its subsidiaries , and conduct by some of those employees designed to obstruct the audit committee’s investigation;
(e) Magyar Telekom undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures; and
(f) Magyar Telekom agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of Magyar Telekom’s current and former employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.
As detailed in the DPA, the advisory Sentencing Guidelines range for the charges at issue was $72.5 million – $145 million. Pursuant to the DPA, Magyar agreed to pay $59.6 million (18% below the minimum Guidelines range). According to the DPA, this amount was “appropriate given the nature and extent of Magyar Telekom’s cooperation in this matter and the remediation undertaken by Magyar Telekom.”
Pursuant to the DPA, Magyar Telekom represented that “it has implemented and will continue to implement a compliance and ethics program designed to prevent and detect violations of the FCPA” and related laws throughout its operations. The specific compliance provisions are set forth in an attachment to the DPA. In addition, Magyar Telekom agreed to “report to the DOJ annually during the term of the Agreement regarding remediation and implementation of the compliance measures” set forth in the attachment. As is common in FCPA DPA’s Magyar Telekom expressly agreed “that it shall not [directly or indirectly through others] make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by Magyar Telekom” of the above described facts.
The DOJ’s enforcement action also included a non-prosecution agreement against Deutsche Telekom. It states that the DOJ “will not criminally prosecute Deutsche Telekom … for any crimes … related to the offering or making of improper payments by employees of Magyar Telekom to foreign officials, foreign political parties, and officials of foreign political parties in Macedonia and the accounting and record-keeping associated with these improper payments in violation” of the FCPA’s books and records provisions.
The DOJ agreed to enter into the NPA based on the following factors: “(a) DT’s timely, voluntary, and complete disclosure of the facts [described below]; (b) DT’s thorough cooperation with the DOJ and SEC; and (c) DT’s remedial efforts already undertaken and to be undertaken, including enhancements to its compliance program …”.
The NPA relates only to conduct in Macedonia and the NPA contain similar facts as described above. The NPA also states that a DT Executive was a board member of Magyar Telekom and a MakTel mobile subsidiary. According to the NPA, the “DT Executive supported” Magyar Telekom entering into an agreement described above and the DT executive was aware an executed agreement “was not kept in Magyar Telekom’s books and records.” As to the sham contracts with Greek Intermediaries used to circumvent Magyar Telekom’s internal controls and to avoid detection, the NPA states that the DT Executive “later learned of these contracts and the circumstances in which they were executed.”
Under the section heading “Impact on DT’s Books and Records,” the NPA states as follows. “Magyar Telekom recorded the payments under [the sham contracts] on its books and records in a manner that did not accurately reflect the true purpose of the contracts. The false entries in Magyar Telekom’s books and records were consolidated into the books and records of DT, which reported the results of Magyar Telekom’s operations in its consolidated financial statements.”
The NPA has a term of two years and, as is standard, DT agreed not to make any public statements contradicting the described facts. Under the NPA, DT agreed to pay a monetary penalty of $4.36 million.
See here for the DOJ’s release.
SEC
The SEC enforcement action involved a settled complaint against Magyar Telekom and Deutsche Telekom as well as a separate complaint against former Magyar Telekom executives.
The SEC’s settled civil complaint (here) against the companies involves “multiple violations” of the FCPA by Magyar Telekom and “corresponding violations of the books and records and internal controls provisions of the FCPA by Magyar Telekom’s parent company Deutsche Telekom.” The complaint concerns the same Macedonia and Montenegro schemes identified in the DOJ enforcement action.
In summary fashion, the SEC complaint alleges as follows. “During the relevant time period, Magyar Telekom and Deutsche Telekom lacked sufficient internal accounting controls to prevent and detect violations of the FCPA. As a result, the contracts described above [used in furtherance of the schemes] were not subjected to meaningful review, and substantially all of the amounts were paid without question, prior to the initiation of an internal investigation at the direction of the Audit Committee of Magyar Telekom. Magyar Telekom recorded the payments to third-parties under these contracts on its books and records in a manner that did not accurately reflect the true purpose of the contracts. The false entries in Magyar Telekom’s books and records were consolidated into the books and records of Deutsche Telekom, which reports the results of Magyar Telekom’s operations in its consolidated financial statements.”
Based on the above allegations, the SEC complaint charges FCPA anti-bribery, books and records and internal controls violations as to both the Macedonia and Montenegro conduct. As stated in the SEC’s release (here), without admitting or denying the allegations in the SEC’s complaint, Magyar Telekom agreed to settle the SEC’s charges by paying approximately $31.2 million in disgorgement and pre-judgment interest; Deutsche Telekom settled the SEC’s charges, and as part of a non-prosecution agreement with the Department of Justice agreed to pay a penalty of $4.36 million.
The SEC’s complaint (here) against the former Magyar Telekom executives, Elek Straub (former Chairman and CEO of Magyar Telekom) and Andras Balogh and Tamas Morvai (two former senior executives in Magyar Telekom’s Strategy Department), is also based on the same Macedonia and Montenegro schemes. In both schemes, the SEC alleged that the individuals authorized or caused the payments at issue with “knowledge, the firm belief, or under circumstances that made it substantially certain” that all or a portion of the money would be forwarded to foreign officials. The complaint also alleges that the individuals caused the payments to be falsely recorded in Magyar Telekom’s books and records.
In addition, the complaint alleges that the individuals “made false or misleading statements or omissions to Magyar Telekom’s auditors in connection with the preparation of the company’s financial statements.” Specifically, the SEC alleged that the individuals signed management representation letters or management sub-representation letters that contained false or misleading information. The complaint states as follows. “Had Magyar Telekom’s auditors known [the various facts falsified or concealed] they would not have accepted the management representation letters and other representations provided by Straub. Nor would the auditors have provided an unqualified audit opinion to accompany Magyar Telekom’s annual report.”
The SEC’s complaint against Straub, Balogh, and Morvai alleges that they violated or aided and abetted violations of the anti-bribery, books and records, and internal controls provisions of the FCPA; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor. The SEC seeks disgorgement and penalties and the imposition of permanent injunctions.
Magyar Telekom’s release (here) (which per the DPA needed to be cleared by the DOJ) states as follows. “As previously disclosed, the Audit Committee of Magyar Telekom conducted an internal investigation regarding certain contracts relating to the activities of the Company and/or its affiliates in Montenegro and Macedonia that totaled more than EUR 31 million. In particular, the internal investigation examined whether the Company and/or its Montenegrin and Macedonian affiliates had made payments prohibited by U.S. laws or regulations, including the FCPA. The Company’s Audit Committee informed the DOJ and the SEC of the internal investigation. The DOJ and the SEC commenced investigations into the activities that were the subject of the internal investigation. The Company has previously disclosed the results of the internal investigation. As also previously disclosed, the Company’s Board of Directors approved an agreement in principle with the staff of the SEC to resolve the SEC’s investigation through a settlement.” The release further states as follows. “The final settlements recognize the DOJ’s and the SEC’s consideration of the Company’s self-reporting, thorough internal investigation, remediation and cooperation with the DOJ’s and the SEC’s investigations. The Company has undertaken several remedial measures to address the issues identified during the course of these investigations. These measures include steps designed to revise and enhance the Company’s internal controls, as well as the establishment of the Corporate Compliance Program. The Corporate Compliance Program promotes awareness of the Company’s compliance policies and procedures through training, the operation of a whistleblower hotline, and monitoring of, and communications with, employees and subsidiaries of the Company. The Company remains fully committed to responsible corporate behavior.”
Peter Clark (Cadwalader, Wickersham & Taft – here – a former DOJ FCPA Unit chief) represented Magyar Telekom. Debevoise & Plimpton attorneys Mary Jo White (here – the former U.S. Attorney for the S.D. of N.Y.) and Jonathan Tuttle (here) represented Deutsche Telekom.
Magyar Telekom and Deutsche Telekom Resolve $95 Million FCPA Enforcement Action – SEC Also Charges Former Magyar Executives
Hold the phone on the 2011 FCPA enforcement statistics.
Once again, the end of the year sees a telecom company resolving an FCPA enforcement action. In 2007, it was Lucent Technologies (see here and here); in 2009 it was UTStarcom (see here for the prior post); in 2010 it was Alcatel-Lucent (see here for the prior post); and in 2011 it is Magyar Telekom and Deutsche Telekom.
Earlier today, the DOJ and SEC announced (see here and here) parallel FCPA enforcement actions against Magyar Telekom (a Hungarian telecommunications company) and Deutsche Telekom (a German telecommunications company that is the majority owner of Magyar). Fines and penalties in the DOJ and SEC enforcement actions is approximately $95 million.
DOJ
The DOJ release states that the companies agreed to pay a combined $63.9 million criminal penalty to resolve an FCPA investigation into activities by Magyar Telekom and its subsidiaries in Macedonia and Montenegro.
The DOJ filed a three-count information (see here) against Magyar Telekom charging it with one count of violating the FCPA’s anti-bribery provision and two counts of violating the FCPA’s books and records provisions. The DOJ release notes that at the time of the charged conduct, Magyar Telekom’s American Depository Receipts (ADRs) traded on the New York Stock Exchange.
The DOJ’s release states as follows. “Magyar Telekom’s scheme in Macedonia stemmed from potential legal changes being made to the telecommunications market in that country. In early 2005, the Macedonian government tried to liberalize the Macedonian telecommunications market in a way that Magyar Telekom deemed detrimental to its Macedonian subsidiary, Makedonski Telekommunikacii AD Skopje (MakTel). Throughout the late winter and spring of 2005, Magyar Telekom executives, with the help of Greek intermediaries, lobbied Macedonian government officials to prevent the implementation of the new telecommunications laws and regulations. Magyar Telekom eventually entered into an agreement with certain high-ranking Macedonian government officials to resolve its concerns about the legal changes. In the secret agreement, a so-called “protocol of cooperation,” Macedonian government officials agreed to delay the entrance of a third mobile license into the Macedonian telecommunications market, as well as other regulatory benefits. Magyar Telekom executives signed two copies of the protocol of cooperation, each with high-ranking officials of the different ruling parties of Macedonia. The Magyar Telekom executives then kept the only executed copies outside of Magyar Telekom’s company records. According to court documents, in order to secure the benefits in the protocol of cooperation, the Magyar Telekom executives engaged in a course of conduct with consultants, intermediaries and other third parties, including through sham consultancy contracts with entities owned and controlled by a Greek intermediary, to pay €4.875 (approximately $6 million) under circumstances in which they knew, or were aware of a high probability that circumstances existed in which, all or part of such payment would be passed on to Macedonian officials. The sham contracts were recorded as legitimate on MakTel’s books and records, which were consolidated into Magyar Telekom’s financials. Deustche Telekom, which owned approximately 60 percent of Magyar Telekom, reported the results of Magyar Telekom’s operations in its consolidated financial statements. Additionally, the criminal information charges Magyar Telekom with falsifying its books and records in regard to its activity in Montenegro. According to the court filing, Magyar Telekom made improper payments in connection with its acquisition of a state-owned telecommunications company in Montenegro. These payments were documented on Magyar Telekom’s books and records through the execution of four bogus contracts. For example, two of the contracts were backdated and concealed the true counterparties, and no legitimate services were provided under the contracts even though the contracts were for €4.47 million.”
The criminal charges against Magyar Telekom were resolved via a deferred prosecution agreement (see here). Pursuant to the DPA, Magyar Telekom agreed to pay a $59.6 million penalty for its illegal activity, implement an enhanced compliance program and submit annual reports regarding its efforts in implementing the enhanced compliance measures and remediating past problems.
The DOJ also entered into a two-year non-prosecution agreement (see here) with Deutsche Telekom for its failure to keep books and records that accurately detailed the activities of Magyar Telekom. At the time of the conduct at issue, Deutsche Telekom’s ADRs traded on the NYSE. The NPA requires Deutsche Telekom to pay a $4.36 million penalty and to enhance its compliance program.
The DOJ release states as follows. “Both agreements acknowledge Magyar Telekom and Deutsche Telekom’s voluntary disclosure of the FCPA violations to the department and the leadership of Magyar Telekom’s audit committee in pursuing a ‘thorough global internal investigation concerning bribery and related misconduct.’ In addition, the agreements highlight that the companies have already undertaken remedial measures and have committed to further remedial steps through the implementation of an enhanced compliance program.”
SEC
Based on the same core conduct, the SEC also charged (see here for the complaint) Magyar Telekom and Deutsche Telekom. Magyar Telekom is charged with FCPA anti-bribery violations as well as books and records and internal controls violations. Deutsche Telekom is charged with FCPA books and records and internal controls violations.
Without admitting or denying the SEC’s allegations, Magyar Telekom and Deutsche Telekom consented to the entry of final judgments. Magyar Telekom agreed to settle the SEC’s charges by paying $31.2 million in disgorgement and pre-judgment interest.
The SEC also alleged in a separate complaint (see here) that the three former top executives at Magyar Telekom “orchestrated, approved, and executed” the Macedonia and Montenegro bribery schemes. Charged in the complaint are: Elek Straub (former Chairman and CEO); Andras Balogh (former Director of Central Strategic Organization); and Tamas Morvai (former Director of Business Development and Acquisitions).
The complaint alleges that the individuals violated or aided and abetted violations of the FCPA’s anti-bribery, books and records, and internal controls provisions; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor. Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows. “Magyar Telekom’s senior executives used sham contracts to funnel millions of dollars in corrupt payments to foreign officials who could help them keep competitors out and win business. They purposely structured the sham contracts to circumvent internal review, and when questions were eventually raised about their use of ‘consulting’ contracts, they reconfigured them as ‘marketing’ contracts to avoid scrutiny and prolong their scheme.” The SEC seeks disgorgement and penalties and the imposition of permanent injunctions against the individuals.
Stay tuned for additional analysis of the enforcement actions.
The FCPA Looks South
Many foreign companies (most with shares traded on a U.S. exchange) have previously resolved FCPA enforcement actions. A few companies (JGC Corp. and Bridgestone) have been from Japan, but the vast majority of foreign companies resolving FCPA enforcement actions have been from Europe (Diageo, Tenaris, Royal Dutch Shell, Panalpina, Daimler, ABB, Siemens, Technip … to name a few).
I do not believe that a company based in the Southern Hemisphere has ever resolved an FCPA enforcement action. That could change.
Brazil based Embraer (here), one of the world’s largest manufacturer of commercial jets with shares traded on the New York Stock Exchange, last week disclosed (here) as follows.
“In response to a subpoena issued in an investigation by the U.S. Securities and Exchange Commission (“SEC”) relating to possible violations of the U.S. Foreign Corrupt Practices Act, the Company retained outside counsel to conduct an internal investigation into transactions in three specific countries. That internal investigation is ongoing, and the Company is fully cooperating with the SEC and the U.S. Department of Justice (“DOJ”). The Company’s outside counsel has been in regular contact with the SEC and the DOJ and has provided both agencies with documents and other information. The Company’s outside counsel recently met with both agencies to brief them on the status of its investigation. The Company and its outside counsel expect to continue to have discussions with the SEC and the DOJ. The Company is unable to predict duration, scope or results of the investigation.”
Words matter in an SEC filing, and based on the above language, it is reasonable to conclude that the SEC’s investigation is not the result of a voluntary disclosure. For instance, it is unusual for a company that voluntarily discloses to receive a subpoena. Whether the SEC’s investigation was prompted by a whistleblower, a competitor’s complaint, or as Joe Palazzolo at the Wall Street Journal (here) asks another industry sweep, remains to be seen. As Palazzolo noted, over the summer Reuters reported (here) that the “FBI briefed other government agencies … about a project focused on possible corruption associated with sales and maintenance contracts between aerospace companies and state-owned airlines.” According to the report, the new project focuses on “sales and maintenance contracts on the commercial side, not in defense.”
According to media reports, Embraer is currently trying to sell Super Tucano aircraft to the U.S. Military. During an investor conference call last week Embraer CEO Frederico Curado was “confident” that the current FCPA scrutiny of the company would not prevent it from participating in any bidding process.