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“We Don’t Want The Auditors Raising Any Questions on Iraq Business”

Yet another Iraqi Oil-For-Food enforcement action.

Yesterday, the DOJ and SEC announced resolution of an enforcement action against AGCO Corp. (a Georgia-based manufacturer and supplier of agricultural machinery and equipment) as well as AGCO Limited (AGCO’s a wholly-owned subsidiary headquartered in the United Kingdom responsible for AGCO’s business in Europe, Africa, and the Middle East)(see here, here, here, here, and here).

Big picture, AGCO acknowledged responsibility for improper payments made by its subsidiaries and agents to the former government of Iraq in order to obtain contracts with the Iraqi Ministry of Agriculture under the United Nations Oil-For-Food program.

DOJ filed a criminal information against AGCO Limited charging one count of conspiracy to commit wire fraud and to violate the FCPA’s books and records provisions.

According to the DOJ, AGCO Limited paid approximately $550,000 to the former government of Iraq to secure three contracts. DOJ and AGCO entered into a three-year deferred prosecution agreement under which DOJ will defer prosecution upon, among other things, AGCO’s payment of a $1.6 million penalty. According to the DOJ, the basis for the deferred prosecution agreement was, among other things, AGCO’s cooperation in the DOJ’s investigation, its implementation of remedial measures, and its settlement with the SEC (see below).

Why no substantive FCPA anti-bribery charges in this case and other Iraqi Oil-For-Food cases (Novo Nordisk, Fiat, AB Volvo, etc.)? The anti-bribery provisions apply to payments to “foreign officials,” not foreign governments. Thus, in this and the other cases, conspiracy to commit wire fraud and to violate the FCPA books and records provisions were charged.

Because AGCO is an issuer, the SEC also played a role in the enforcement action. The SEC filed a settled civil complaint charging AGCO with violating the FCPA’s books and records and internal control provisions.

According to the SEC, certain AGCO subsidiaries made – through a Jordanian agent – approximately $5.9 million in kickback payments to Iraq in the form of “after-sales service fees” to secure contracts worth approximately $14 million. These payments were disguised or improperly recorded in the subsidiaries’ books and records which were consolidated with AGCO’s for SEC filing purposes. According to the SEC, “AGCO knew or was reckless in not knowing that kickbacks were paid in connection with its subsidiaries’ transactions.”

The SEC ordered AGCO to pay $18.3 million in combined disgorgement, interest, and penalties.

In a previous post (see here), it was noted that FCPA compliance is a task that not just company lawyers need to be concerned with, but rather a task that internal audit and finance should also be concerned with and actively involved in as well. It was noted that internal audit and finance personnel must be specifically trained to approach their specific job functions with “FCPA goggles” on.

Reading the SEC complaint against AGCO, it is clear that various AGCO personnel could have used a pair of “FCPA goggles” as the complaint is an indictment of the entire company’s control function.

In para 23, the SEC charges, among other things, that:

the “accrual account [where the kickback payments were recorded] was created by AGCO Ltd.’s marketing staff with virtually no oversight from AGCO Ltd.s’ finance department;”

“no one questioned the existence of the dual accounts;”

“no one questioned why the [accrual account] contained approximately ten percent of the contract value despite the fact that there was no contract in place requiring that such ten percent be paid to the ministry or anyone else;”

“when the finance department authorized payments from the [accrual account], it did not ask for or receive any proof of service to warrant the payments;” and

an employee cautioned the business manager for Iraq and his supervisor that “we don’t want the auditors raising any questions on Iraq Business!”

Further, in para 25, the SEC charges, among other things, that:

“Sales and marketing personnel were able to enter into contracts without review from the legal or finance departments;”

“an accounting employee described the Finance Department employees as ‘blind loaders’ who input information into AGCO’s books without any adequate oversight role;” and

“marketing personnel were able to create accrual accounts […] without any oversight and caused accounts to be created and payments to be made without proper documentation.”

In para. 26, the SEC charges, among other things, that:

“AGCO Ltd.’s structure at the time allocated inappropriate accounting and finance responsibilities to the marketing department;” and

“turnover in the marketing department […] was high and employees were forced to shoulder a great deal of the accounting burden.”

AGCO’s management and legal department did not fare much better.

In para. 27, the SEC charges, among other things, that:

“AGCO did not conduct any due diligence on the [Jordanian] agent or require that the agent undergo FCPA training;” and

the “agent’s contract with AGCO did not accurately explain the agent’s services and payments, and lacked any FCPA language.”

What would the results look like if your company or your client’s company was “put under the internal controls microscope” in an FCPA enforcement action?

Books and Records and Internal Controls Compliance … The Importance of FCPA Goggles

A reader recently commented that most companies know “what to do” when it comes to FCPA anti-bribery compliance training, but that when it comes to FCPA books and records and internal controls compliance training most people “scratch their heads.”

Below, I offer some thoughts on books and records and internal controls compliance training, but by no means does this cover the entire landscape.

I think the reader is correct in that most companies do in fact focus compliance efforts (if they have pro-active compliance efforts – see here) on the FCPA’s anti-bribery provisions. The FCPA’s other prong – the books and records and internal control provisions are usually mentioned (if at all) in passing.

An explanation for why likely has to do with the statute itself.

The anti-bribery provisions have specific elements tied to things we can all generally understand such as – things of value, foreign official, and obtain or retain business – and companies can easily tailor compliance training to those elements, or it is probably more accurate to say, DOJ and SEC’s interpretations of those elements.

In contrast, the FCPA’s book and records and internal control provisions are rather generic and have key terms such as “reasonable detail,” “accurately and fairly,” “sufficient,” “reasonable assurances, and “general or specific authorization.”

Tailoring compliance training to such general concepts can be difficult. Moreover, the books and records, and internal control provisions apply to issuers in ALL instances, not just those instances in which the company is doing business or seeking business abroad. Thus, it may be more difficult to frame books and records and internal control issues to training, because the provisions apply to everything an issuer does.

Against this backdrop, what works best I think is to view FCPA compliance as not just a task that company lawyers and selected key positions from an anti-bribery perspective (i.e. sales, marketing, business development) need to be concerned with, but rather a task that internal audit and finance should also be concerned with and actively involved in as well.

This means that internal audit and finance personnel must be specifically trained to approach their specific job functions not only in a traditional way, but also with “FCPA goggles” on.

It is clear from recent FCPA enforcement actions that the SEC expects much more from non-legal personnel when it comes to FCPA compliance, including the ability to spot FCPA issues and display a high degree of (I’ll call it) intellectual curiosity as to certain issues.

For instance, in the 2007 York matter, the SEC alleged in its civil complaint (see here at para 51) that (i) “York International’s management had the ability to review or cause internal audit to review [the problematic contracts] and, had this been done, it would have been immediately apparant that the consultancy agreements were a sham; and (ii) it was “clear that local finance personnel did not provide an independent internal control function, but rather acquiesced in questionable practices and documentation without critical review.”

Again, because the FCPA’s books and records and internal control provisions are rather generic, I think a “best practice” (not only for issuers, but for any company) is to specifically train internal audit and finance personnel to view their job with “FCPA goggles” on.

This means that internal audit and finance personnel should:

(1) Understand the broad interpretations given to the anything of value, foreign official, and obtain or retain business elements of anti-bribery violation so that they clearly understand that conduct other than a “suitcase full of cash to a government official to get a government contract” is problematic. For instance,
excessive travel and marketing expenses, payment of scholarships, etc. can be things of value. Internal audit and finance personnel also need to understand that employees of state-owned or state-controlled companies are considered “foreign officials” by DOJ/SEC (even if that interpretation has not been tested or challenged). This means that things a company does to “wine and dine” its purely private customers can become problematic when state-owned or state-controlled customers receive the same treatment. In terms of state-owned or state-controlled customers, it is also a good idea for a company to maintain a roster of such entities so that heightened review will be triggered when any corporate personnel deals with such customers or prospective customers. Internal audit and finance personnel also need to understand that payments which result in a company securing a foreign license, permit, or certification can satisfy the “obtain or retain business” element of an anti-bribery violation on the theory that such payments help the company, in the general sense, obtain or retain business.

(2) Pay particular attention to employee reimbursement requests and think about FCPA issues in connection with these requests. For instance, if a specific sales and marketing employee is the designated “wine and dine” person, is there any heightened scrutiny of that individuals reimbursement requests?

(3) Be aware of the FCPA’s third-party payment provisions and be able to spot (and follow-up on) the following issues relevant to engaging and supervising a foreign agent or representative: payments made to personal (rather than company) bank accounts; payments to off-shore bank accounts; payments which could be made in one lump sum but are split up to avoid detection; and payments made to an account in a country different than where the service provider is located. When utilizing third parties, commission payments are obviously a big FCPA risk. Thus, internal audit and finance personnel need to ask what steps the company has taken to assure itself that the commission payments are reasonable. Moreover, such personnel should specifically look for evidence that the third party actually provided legitimate value-added services before payment was made by the company.

(4) Figure out who within the company, the relevant business unit, etc. has the authority to authorize large payments and make sure those authorizations are scrutinized. Because of title, prestige and in some countries – gender – certain individuals are subjected to less oversight and scrutiny when it comes to authorizing payments. If any such trends or patterns emerge within a company as to this issue, internal audit and finance personnel must be diligent in understanding why.

(5)Pay particular attention to the following accounts (all of which, per recent FCPA enforcement actions, were used to conceal improper payments) – “additional assessments,” “extra costs,” “extraordinary expenses,” “urgent processing,” “urgent dispatch,” “customs processing,” “importation advances,” . These accounts, and all other accounts described in a vague or ambiguous manner, should be subject to heightened scrutiny by internal audit and finance personnel.

Back to the original issue raised by the reader as to how best to offer FCPA books and records, and internal controls compliance training. Again, because the books and records and internal control provisions are so generic, I think the “best practice” is to couple such training with anti-bribery training and to make sure that internal audit and finance personnel have the FCPA tools necessary to properly execute their jobs.

Internal audit and finance personnel clearly have an FCPA compliance role to play, and the SEC is clearly expecting them to play that role. However, internal audit and finance personnel can only raise FCPA issues if they first know what FCPA issues to look for. Providing internal audit and finance personnel with a good pair of “FCPA goggles” is a good way to achieve books and records, and internal controls compliance.

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