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Compliance Practitioners: Are You Reading Foreign Newspapers?


I’ve read every Foreign Corrupt Practices Act enforcement action in the public domain.

The recent Hitachi enforcement action (see here and here for prior posts) contained allegations I’ve never seen before.

In its settled civil complaint, the SEC mentioned several South African newspaper articles to support its allegations that Hitachi (a Japanese company) knew, or should have known, that Chancellor House was an African National Congress funding vehicle.

Specifically, the SEC alleged:

“In August 2006, an HPA [a majority-owned subsidiary of HPE based in South Africa, that executed power station orders in South Africa, HPE in turn is wholly-owned subsidiary of Hitachi based in Germany] director received a telephone call from a reporter with the Mail & Guardian, a South African weekly newspaper that focuses on political analysis, investigative reporting, and South African news and culture. The reporter asked HPA to comment on whether there was a link between HPA’s 25% shareholder, Chancellor, and the ANC. HPA declined to comment.

On November 10, 2006, the same day that Hitachi submitted its bid for the Medupi power station contract, the Mail & Guardian published an article entitled, The ANC’ s New Funding Front. The article exposed Chancellor as a business front set up by the ANC “to seek profit on its behalf,” generally by acquiring “empowerment” stakes in businesses seeking state procurements. “This means,” the Mail & Guardian stated, “the ANC, as ruling party, has been both player and referee.”

Both HPA and HPE were aware of the Mail & Guardian’s reporting on Chancellor’s relationship to the ANC. On November 13, 2006, an HPA director forwarded two HPE executives a copy of The ANC’s New Funding Front. The same HPA director reported to the HPE executives that he had spoken to Chancellor’s chairman, who had denied the allegations in the newspaper.

In January 2007, both the Mail & Guardian and a separate South African newspaper, the Financial Mail, published articles that confirmed Chancellor was a funding vehicle for the ANC. In Financing the ANC, published on January 19, 2007, the Financial Mail quoted the ANC Secretary General and organizational head of the ANC’s operations as admitting that Chancellor was an “ANC vehicle” that existed for the sole purpose of funding the ANC. The Mail & Guardian reported this same admission by the ANC Secretary General a week later, in an article entitled, ANC Admits It Used BEE Funding Front.


In December 2007, the Financial Mail published another article about Hitachi’s relationship with Chancellor. The Financial Mail quoted an HPE executive as saying that there was “no proof’ that Chancellor was an ANC front company and if Chancellor was indeed a front· for the ANC, “this would contradict our own governance rules.” In fact, as Hitachi knew well before December 2007, and as the ANC’s Secretary General had confirmed publicly eleven months earlier, Chancellor was an alter ego of the ANC.

A week after the publication of the Financial Mail article, on December 14, 2007, Eskom and Hitachi -through HPE and HPA- executed the second of two contracts: a $2.71 billion contract to build the boiler works for the Kusile power station.”

The above allegations were not necessary for the SEC to properly allege the claims it brought against Hitachi (violations of the FCPA’s books and records and internal controls provisions).

However, I take the position that when the SEC includes specific non-outcome determinative allegations in an FCPA enforcement action, the SEC is doing more than just practicing its typing skills.

Were the above allegations in the Hitachi enforcement action intended to send a message to compliance practitioners that they have constructive knowledge of information in foreign newspapers?

If so, this is troubling as journalists frequently get things wrong and/or take things out of context. Indeed, several FCPA articles in major U.S. newspapers have been wrong.

Issues To Consider From The Hitachi Enforcement Action


This recent post highlighted the SEC’s FCPA enforcement action against Hitachi.

This post continues the analysis by highlighting various issues to consider from the enforcement action.

Too Lenient?

A $19 million FCPA enforcement action is nothing to yawn about.

However, it is not every Foreign Corrupt Practices Act enforcement action in which the SEC alleges that approximately $10.5 million in improper payments or benefits were provided in connection with two contracts worth approximately $5.6 billion in business.

Against this backdrop, a $19 million settlement amount appears at first blush to be very lenient.  Particularly because the SEC makes no mention of voluntary disclosure or cooperation in its resolution documents (something the SEC typically mentions in resolution documents if indeed it has occurred).  Moreover, most FCPA enforcement actions (even those that merely charge books and records and internal controls violations) typically include disgorgement.  There was no disgorgement in the Hitachi enforcement action, only a civil penalty.

Hitachi was represented by Linda Chatman Thomsen (a former SEC Director of Enforcement currently at Davis Polk & Wardwell).

Rare Civil Complaint

Since 2014, the SEC has brought, including the Hitachi action, 15 corporate FCPA enforcement actions. Along with Avon, Hitachi was the only enforcement action resolved through a settled SEC civil complaint filed in federal court.

Why? Presumably because the SEC wanted to invoke the injunctive powers of a federal court to enjoin Hitachi from future violations of the FCPA’s books and records and internal control provisions.

An FCPA First

The Hitachi enforcement action is believed to be the first FCPA enforcement action to allege improper conduct in South Africa.

Root Causes

The root causes of many FCPA enforcement are often foreign trade barriers or distortions.

As relevant to this topic, the SEC alleged:

“[I]n establishing a local presence in South Afiica, Hitachi [sought] to identify a local black-owned entity or entities with whom HPA could partner in connection with its submission of bids, or “tenders,” for government business. By partnering with a local black-owned entity, HPA would seek to qualify under the requirements of South Africa’s Black Economic Empowerment Act of 2003 (“BEE”), which promoted participation in the South African economy by companies that were at least 25% owned by black South Africans or black-owned South African entities. In general, companies that qualified under the terms of the BEE enjoyed preferential status in government procurements.”

No Anti-Bribery Charges

Certain readers may be surprised that the Hitachi enforcement action did not include violations of the FCPA’s anti-bribery provisions.

However, in order for the anti-bribery provisions to apply to a foreign issuer like Hitachi, the jurisdictional element of the provisions must be met – in other words “use of the mails or any means or instrumentality of interstate commerce” in furtherance of a payment scheme.

There is no allegation, inference or suggestion that the conduct at issue had a U.S. nexus.

Thus, based on the information in the SEC’s complaint, there were no anti-bribery charges to bring.

Hitachi Inspires The Next FCPA Enforcement Action Against A Foreign Company


What happens when a Japanese company has a German-based subsidiary, which in turn has a South African subsidiary, that both allegedly make improper payments to a South African political party?

Why of course, $19 million to the U.S. treasury because the Japanese company just happened to have American Depositary Shares traded in the U.S.

In the latest Foreign Corrupt Practices Act enforcement action against a foreign company, yesterday the SEC announced an enforcement action against Tokyo-based Hitachi, Ltd.  for violating the FCPA “when it inaccurately recorded improper payments to South Africa’s ruling political party in connection with contracts to build two multi-billion dollar power plants.”

As alleged in this settled SEC civil complaint:

“In 2005, Hitachi created a subsidiary in South Africa for the purpose of establishing a local presence in that country to pursue lucrative public and private contracts, including government contracts to build two new major power stations.

Hitachi sold 25% of the stock in the newly created subsidiary to Chancellor House Holdings (Pty) Ltd. (“Chancellor”), a local South African company that was a front for the African National Congress (“ANC”), South Africa’s ruling political party. Hitachi’s arrangement gave Chancellor- and by proxy the ANC- the ability to share in the profits from any power station contracts secured by Hitachi. Hitachi also entered into an undisclosed “success fee” arrangement with Chancellor, wherein Chancellor would be entitled to “success fees” in the event that the contract awards were “substantially as a result” of Chancellor’s efforts.

During the bidding process, Hitachi was aware that Chancellor was a funding vehicle for the ANC. Hitachi nevertheless continued to partner with Chancellor and encourage Chancellor’s use of its political influence to help obtain the government contracts.

As a result, Hitachi was awarded power station contracts in South Africa worth approximately $5.6 billion. In April and July 2008, Hitachi paid the ANC- through Chancellor- “success fees” totaling approximately $1 million.

Hitachi’s South African subsidiary inaccurately recorded its “success fee” payments to Chancellor as “consulting fees” in its books and records for the year ended December 31, 2008. The inaccurate books and records of Hitachi’s subsidiary were consolidated into Hitachi’s financial statements for the fiscal year ended March 31, 2009, which were filed with the Commission.

In 2010, Hitachi’s South African subsidiary also inaccurately recorded a dividend worth over a million dollars to be paid to Chancellor, its 25% shareholder. The journal entry recorded this dividend as “Dividends Declared” in the subsidiary’s books and records for the year ended December 31, 2010. The books and records did not reflect that the dividend was, in fact, an amount due for payment to a foreign political party in exchange for its political influence in assisting Hitachi land two government contracts. The subsidiary’s inaccurate books and records were consolidated into Hitachi’s financial statements for the fiscal year ended March 31, 2011, which were filed with the Commission.”

Based on the above allegations, the SEC charged Hitachi with violating the FCPA’s books and records and internal controls provisions.

The conduct at issue focused on:

  • Hitachi Power Europe GmbH (“HPE”), during the relevant time period a wholly-owned subsidiary of Hitachi based in Germany, that was an international supplier of boilers for power stations; and
  • Hitachi Power Africa (Pty) Ltd. (“HPA”), during the relevant time period, a majority-owned subsidiary of HPE based in South Africa, that executed power station orders in South Africa.

The SEC’s complaint alleges as follows regarding Chancellor House:

“Chancellor House Holdings (Pty) Ltd. is a South African investment finn created by the ANC as a funding vehicle. Chancellor was named after a building in downtown Johatmesburg that in the 1950s housed the law finn of Nelson Mandela and Oliver Tambo, two future ANC presidents. From 2005 to at least 2008, Chancellor’s parent organization, Chancellor House Trust, was administered by a member of the ANC National Executive Committee and a director of Eskom Enterprises, an Eskom subsidiary.”

Eskom is described as follows.

“Eskom Holdings SOC Ltd. (“Eskom”) is a government-owned and government-run public utility established by the Government of South Africa. Eskom supplies approximately 95% of all electricity in South Africa and the Government of South Africa is Eskom’s sole shareholder. Thus, Eskom is an instrumentality of a foreign government. From 2006 to at least 2008, Eskom’s chainnan simultaneously served as a member of the ANC’s National Executive Committee.”

According to the SEC:

“While its political com1ections were extensive, Chancellor lacked any engineering or operational capabilities that could assist Hitachi with contract perfotmance should it secure the Eskom contracts. Chancellor differed in this respect from at least one other local South African entity that Hitachi initially considered for partnership with HPA.

Hitachi was fully aware of Chancellor’s operational shortcomings, and sought a partnership with Chancellor precisely because Chancellor would not provide it operational support. From an internal profile of Chancellor prepared in 2005, HPE’s senior management was advised that Chancellor “has a lean HQ staff and it does not get involved in the operational business of the companies in which it invests. Supp0rt for invested companies is provided via networking at board level.” The internal profile also specifically highlighted Chancellor’s “good connections within Eskom.”

The SEC further alleged:

“[I]n total, Chancellor – the ANC’s funding vehicle – received approximately $10.5 million from Hitachi, a return of over 5,000% on its investment in HPA.”

As to internal controls, the SEC specifically alleged:

“During the time it was registered with the Commission, Hitachi failed to devise and maintain an adequate system of internal accounting controls. HPE and HPA were able to enter into a shareholders’ agreement and an undisclosed “success fee” arrangement with Chancellor- a front for the ANC- to pay that entity for exerting its political influence. Although HPE had a code of conduct in place before the success fees were paid that specifically prohibited contributions to political parties, HPA paid Chancellor more than $1.1 million pursuant to this side-arrangement. HPA was able to do so despite a stream of reporting in the South African media that publicized the fact that HPA’s 25% shareholder was a funding vehicle for the ANC.

HPA also was able to record Chancellor’s invoices for success fee payments as “consulting” expenses, which they were not, without proper documentation or reasonable detail. Hitachi’s intemal accounting controls failed again when Hitachi declared and recorded as dividends to be paid to Chancellor transactions that, in fact, would instead be payments to a foreign political party for its assistance in securing govemment contracts. Among other further intemal accounting controls deficiencies, Hitachi failed to conduct adequate due diligence of Chancellor, a potential agent and a potential shareholder of HPA, and to keep records of such due diligence, even though Hitachi intended for Chancellor to use its political influence to help obtain government contracts.

Hitachi’s intemal accounting controls, or lack thereof, also were inadequate to provide reasonable assurances that Hitachi would not violate its own codes of conduct and compliance policies, the FCPA, or South African law. For example, Hitachi failed to adequately supervise and ensure compliance with its policies and procedures, and neither HPE nor HP A conducted any FCPA-specific compliance training during the time period in which Hitachi through HPE and HPA- was seeking lucrative contracts with an instrumentality of a foreign government and authorizing the payments of”success fees” to a foreign political party.”

As noted in the SEC’s release, without admitting or denying the SEC’s allegations, Hitachi agreed to settlement that requires it to pay a $19 million penalty and to be enjoined from future FCPA books and records and internal controls violations.

Hitachi was represented by Linda Chatman Thomsen (a former SEC Director of Enforcement, currently at Davis Polk & Wardwell).

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