Next Up – Smith & Nephew
[A new job has been posted to the Jobs Board – see here. Both job seekers and organizations seeking to hire individuals with FCPA or related experience will benefit from a wide selection of job listings, so please spread the word and send the job link to your HR department and professional contacts]
When Johnson & Johnson resolved its $70 million FCPA enforcement action in April 2011 (see here for the prior post) focused on foreign health care providers as “foreign officials”, I said (here) stay tuned for more as several more health care providers as “foreign official” enforcement actions were likely in the pipeline.
On the heels of the DOJ’s likely worst week ever enforcing the FCPA in individual enforcement actions, the DOJ and SEC announced parallel enforcement actions against medical devices maker Smith & Nephew Inc. (“S&N”) and Smith & Nephew plc. (“PLC”). PLC is a U.K. company with ADR shares traded on the New York Stock Exchange and S&N is a wholly-owned subsidiary of PLC headquartered in Memphis, TN.
Total fines and penalties were approximately $22.2 million ($16.8 million against S&N via a DOJ deferred prosecution agreement, and $$5.4 million against PLC via a settled SEC civil complaint).
DOJ
The DOJ enforcement action involved a criminal information (here) against S&N resolved through a deferred prosecution agreement (here).
Criminal Information
The information begins as follows. “Greece has a national healthcare system wherein most Greek hospitals are publily owned and operated. Health care providers who work at publicly-owned hospitals (“HCPs”) are government employees, providing health care services in their officials capacities. Therefore, such HCPs in Greece are “foreign officials” as that term in defined in the FCPA …”.
The conduct at issue focuses on S&N’s and Smith & Nephew Orthopaedics GmbH’s (“GmbH”) (a German company “reporting to S&N) relationship with the entities of the Greek Distributor (an “agent and distributor for S&N and GmbH in Greece”). According to the information, S&N and GmbH sold products to the entities “at a discount to the ‘list’ price and the Greek Distributor would re-selll to Greek HCPs and government hospitals at a profit.” The information also alleges that S&N and GmbH “would cover marketing expenses for [the] Greek Distributor, up to ten percent of sales.”
The information charges one count of conspiracy to violate the FCPA’s anti-bribery provisions and alleges that “the purpose of the conspiracy was to secure lucrative business with hospitals in the Greek public health care system by making and promising to make corrupt payments of money and things of value to publicly-employeed Greek HCPs.” According to the information, “S&N, certain of its executives, employees, and affiliates agreed to sell to [the] Greek Distributor at full list price, then pay the amount of the distributor discount – between 25 and 40 percent of the sales made by [the] Greek Distributor – to an off-shore shell company controlled by [the] Greek Distributor, in order to provide off-the-books funds for [the] Greek Distributor to pay cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of S&N products, while concealing the payments.” According to the information, S&N “falsely recorded or otherwise accounted for the payments to the shell companies on its books and records as ‘marketing services’ in order to conceal the true nature of the payments in the consolidated books and records of S&N and GmbH.”
According to the information, “[i]n total, from 1998 to 2008, S&N, and its affiliates and employees, authorized the payment, directly or indirectly, of approximately $9.4 million to [the] Greek Distributor’s shell companies, some or all of which was used to pay cash incentives to publicly-employeed Greek HCPs to induce the purchase of S&N products.”
According to the information, in 1999 “the S&N Chief Financial Officer raised with S&N Legal questions from internal auditors about the payments to the Greek Distributor’s shell companies.” The information states that the Greece Sales Manager (a U.S. citizen based in Memphis who oversaw S&N sales in Greece) met with Legal Advisor (a U.S. citizen based in Memphis who was Senior Corporate Counsel for S&N) “to discuss issues with GmbH’s relationship with [the] Greek Distributor, during which the fact that surgeons in Greece were being paid to use medical devices products was discussed …”. The information states that thereafter, the Legal Advisor “briefed a more senior S&N lawyer on the issue …”.
Based on the allegations in the information and the SEC complaint discussed below, the Greek Distributor seems to be the same distributor/agent at issue in the previous Johnson & Johnson enforcement action.
The S&N information alleges that the “Greek Distributor traveled to Memphis, Tennessee and met with VP International (a U.S. citizen based in Memphis who served as Vice President for International Sales for S&N) and others regarding reductions in Greek government reimbursement rates for S&N products sold by [the] Greek Distributor” and that “during the meeting, [the] Greek Distributor proposed that the discount to [the] Greek Distributor be increased to account for the reimbursement reduction, without any reduction in the ‘marketing’ payments to the Shell Company.” According to the information, the Greek Distributor communicated with VP International and the Greece Sales Manager that his commission could not be reduced because he was “paying cash incentives right after each surgery.” According to the information, “S&N terminated all relationships with [the] Greek Distributor and related entities in June 2008.”
Based on the same core set of conduct, the information also charges one count of FCPA anti-bribery violations and one count of FCPA books and records violations.
DPA
The DOJ’s charges against S&N were resolved via a deferred prosecution agreement. Pursuant to the DPA, S&N admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees and agent, and wholly-owned subsidiaries.”
The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors: (a) S&N investigated and disclosed to the DOJ and SEC the misconduct at issue; (b) S&N reported its findings to the DOJ and SEC; (c) S&N cooperated fully with the DOJ’s and SEC’s investigation; (d) S&N undertook remedial measures, including the implementation of an enhanced compliance program and agreed to undertake further remedial measures; (e)-(f) S&N agreed to continue to cooperate with the DOJ, and with foreign authorities, in any investigation of its directors, officers, employees, agents, consultants, subsidiaries, contractors and subcontractors relating to violations of the FCPA or other corrupt payments; (g) S&N “has cooperated and agreed to continue to cooperate with the DOJ in the DOJ’s investigations of other companies and individuals in connection with business practices overseas in various markets;” and (h) “were the DOJ to initiate a prosecution of S&N and obtain a conviction, instead of entering into this Agreement to defer prosecution, S&N would potentially be subject to exclusion from participation in federal health care programs pursuant to 42 USC 1320a-7(a).”
Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $21 – $42 million. The DPA states as follows. “S&N agrees to pay a monetary penalty in the amount of $16.8 million, a 20 percent reduction off the bottom of the fine range. S&N and the DOJ agree that this fine is appropriate given S&N’s internal investigation, the nature and extent of S&N’s cooperation in this matter, and S&N’s extensive remediation.”
Pursuant to the DPA, S&N agreed to engage an independent compliance monitor “for a period of not less than 18 months” and to provide periodic reports to the DOJ regarding remediation and implementation of the enhanced compliance measures set forth by the monitor as described in an attachment to the DPA. As is customary in FCPA DPA’s, S&N agreed that it shall not make any public statement contradicting its acceptance of responsibility.
See here for the DOJ’s release. The DOJ release states as follows. “The matter is part of an investigation into bribery by medical device companies of physicians employed by government institutions.”
SEC
The SEC’s settled civil complaint (here) against PLC is based on the same core conduct as described above and “concerns violations of the [FCPA] by PLC through its subsidiaries to obtain sales for their medical device business.” In summary fashion, the SEC complaint alleges as follows. “From 1997 to June 2008, two of PLC’s subsidiaries engaged in a scheme with a distributor who made illicit payments to public doctors employed by government hospitals or agencies in Greece.” The complaint further alleges that PLC failed to “have an adequate internal control system in place to detect and prevent the illicit payments” and that PLC “improperly recorded these payments in its accounting books and records.” The complaint specifically alleges that PLC “failed to act on numerous red flags of bribery.” The complaint states as follows. “Among other things, even though PLC was aware that S&N and GmbH were conducting business in Greece and was aware of the heightened risks of the Greek market, PLC did not require proof of services rendered by Company A and B [entities associated with the Greek Distributor]. PLC failed to question the reasons for paying the Greek Distributor for Greek sales to accounts in the names of entities located outside of Greece. PLC failed to conduct due diligence on Company A and Company B. PLC also failed to conduct any audits of the transactions.”
Based on the above allegations, the SEC complaint charges FCPA anti-bribery, books and records and internal controls violations.
As stated in the SEC’s release (here), without admitting or denying the SEC’s allegations, PLC consented to entry of a court order permanently enjoining it from future FCPA violations and ordering it to pay $4,028,000 in disgorgement and $1,398,799 in prejudgment interest.
The SEC’s release states as follows. “The SEC’s investigation into the medical device industry is continuing.” In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows. “Smith & Nephew’s subsidiaries chose a path of corruption rather than fair and honest competition. The SEC will continue to hold companies liable as we investigate the medical device industry for this type of illegal behavior.”
In this release, Smith & Nephew stated as follows. “Smith & Nephew and other medical device companies were asked by the SEC and DOJ in late 2007 to look into possible improper payments to government-employed doctors and voluntarily report any issues. Smith & Nephew found and reported evidence of improper payments by a distributor in Greece that had been appointed by Smith & Nephew subsidiaries and was terminated in 2008. The individuals implicated are no longer associated with the Group. In the release, Olivier Bohuon (CEO of Smith & Nephew) states as follows. “We have what I believe to be a world-class compliance programme, having enhanced it significantly since this investigation began in 2007. These legacy issues do not reflect Smith & Nephew today. But they underscore that we must remain vigilant every place we do business and let nothing compromise our
commitment to integrity.”
Paul Gerlach (here – Sidley & Austin, the former Associate Director of the SEC’s Enforcement Division) and Angela Burgess (here – Davis Polk & Wardwell) represented Smith & Nephew.
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.
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 Meets Insurance – Aon Resolves Enforcement Action
This post analyzes the DOJ and SEC enforcement actions against Aon Corporation (one of the largest insurance brokerage firms in the world) announced yesterday. Total fines and penalties are approximately $16.3 million ($1.8 million via a DOJ non-prosecution agreement and $14.5 million via a settled SEC civil complaint).
DOJ
The NPA (here) begins as follows. The DOJ will not criminally prosecute Aon Corporation or its subsidiaries for any crimes “related to Aon’s knowing violation of the anti-bribery, books and records, and internal controls provisions of the FCPA .. arising from and related to the making of improper payments to government officials in Consta Rica in order to assist Aon in obtaining and retaining business” or “for the conduct related to improper payments and associated recordkeeping […] relating to Aon’s improper payments in Bangladesh, Bulgaria, Egypt, Indonesia, Myanmar, Panama, the United Arab Emirates, and Vietnam that it discovered during its thorough investigation of its global operations.”
The NPA has a term of two years. As is typical in FCPA NPAs or DPAs, Aon agreed “not to make any public statement” contradicting the below facts.
According to the NPA, the DOJ agreed to resolve the action via an NPA based, in part, on the following factors:
(a) Aon’s extraordinary cooperation with the DOJ and SEC;
(b) Aon’s timely and complete disclosure of facts relating to the above payments; [unlike many corporate FCPA enforcement actions, the Aon action does not appear to be the result of a voluntary disclosure; as stated in Aon’s most recent quarterly SEC filing, “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.”]
(c) the early and extensive remedial efforts undertaken by Aon, including the substantial improvements the company has made to its anti-corruption compliance procedures;
(d) the prior financial penalty of 5.25 million paid to the U.K. Financial Services Authority (“FSA”) [see here] by Aon Limited, a U.K. subsidiary of Aon, in 2009 concerning certain of the conduct at issue; and
(e) the FSA’s close and continuous supervisory oversight over Aon Limited.
The NPA’s Statement of Facts begin by detailing the business of reinsurance – that is insurance for insurance companies. Specifically, the NPA states as follows. “Reinsurance involves the transfer of all or part of the risk of paying claims under a policy from the insurance company that issued the policy to a reinsurance company. A reinsurance broker arranges this transfer of risk, which takes place under a contract of reinsurance. The insurance company is the reinsurance broker’s client and the broker acts on behalf of the insurance company. The broker collects the premium due from the insurance company under the contract of reinsurance, and is typically paid for its services by retaining a portion of the premium for its own account. The portion of premium retained by the broker is known as ‘brokerage.'”
The conduct at issue focuses on the Instituto Nacional De Deguros (“INS”), Costa Rica’s state-owned insurance company” (here) that “had a monopoly over the Costa Rican insurance industry.” The NPA states as follows. “INS was created by Act No. 12 of October 30, 1924, with the aim of meeting the protection needs of Costa Rican society. All insurance agreements in Costa Rica, including the reinsurance contracts that Aon Limited [a subsidiary of Aon Corporation based in and organized under U.K. law that “reported financially through a series of intermediary entities into its U.S.-based issuer parent] assisted in obtaining to insure Costa Rican entities, were required to be issued through INS. The head of INS was appointed by the President of Costa Rica.”
According to the NPA, a company Aon Limited acquired established a “Training and Education Fund” or “Brokerage Fund” for the benefit of INS “to sponsor training and education trips for INS officials.” The NPA states that the “Brokerage Fund eventually became used for a wide variety of purported ‘training’ purposes, as well as to pay for client renewal trips to European insurers.” The NPA also states that a second training account (the so-called 3% Fund) was funded by premiums to reinsurers and that “INS required that Aon Limited manage the fund, handle the paperwork, and provide reimbursement for the expenses incurred by INS officials.”
According to the NPA, “the supposed purpose of both the Brokerage Fund and the 3% Fund was to provide education and training for INS officials.” However, the NPA states, “Aon Limited used a significant portion of the funds to reimburse for non-training related activity or for uses that could not be determined from Aon’s books and records.”
The NPA cites an e-mail from a former Aon Limited executive which stated as follows. “INS started telling [another brokerage company] how [various reinsurers] were inviting their managers to seminars and were contributing positively to INS’s technological improvement with all expenses paid by the reinsurers. The message was clear to both [the other brokerage company] and ourselves that unless we did the same we would see the gradual process of disintermediation and a continued erosion of our orders.”
The NPA then states as follows. “Aon Limited disbursed nearly all of the $215,000 in the Brokerage Fund from 1997 until 2002, approximately $650,000 of the money in the 3% Fund from 1999 until 2002, and made a small number of additional disbursements from these funds between 2003 and 2005 to pay for the third-party services used by INS officials. These services often included travel related expenses, such as airfare and hotel accommodations, as well as conference fees, meals, and other related expenses for INS officials and their relatives. It was common for INS to hire a
travel agency or tourism company to arrange for the particulars of the travel and educational conferences attended by its officials. The majority of the money paid from the two funds was disbursed to a tourism company in Costa Rica. The director of INS’ reinsurance department, who played an active role in setting up the training funds, served on the board of directors of tourism company. The director of INS’ reinsurance department himself took fourteen trips from 1996 to 2001 with expenses totaling approximately $44,000 that Aon Limited paid from the two funds. The funds also covered the official’s wife’s attendance on at least five of the trips. On several occasions, Aon Limited reimbursed the official directly for expenses that were invoiced for his various trips, sometimes with cash payments. The director of INS took six trips from 1998-2001 with expenses totaling approximately $20,000 that Aon Limited paid from the two funds. The director’s spouse accompanied him on four of these trips. The director of INS, the director of reinsurance at INS, their wives, and another INS official and her husband traveled to Europe in 1998 and charged their expenses of approximately $15,160 to the Brokerage Fund. While these trips had a small business-related component, a significant portion of the funds expended on the trips were used for the personal benefit of the officials and their wives. A substantial number of the trips taken by INS offcials were in connection with conferences and seminars in tourist destinations, including London, Paris, Monte Carlo, Zurich, Munich, Cologne, and Cairo. Many of the invoices and other records for these trips do not provide the business purpose of the expenditures, if any, or showed that the expenses were clearly not related to a legitimate business purpose. In addition, the subject matters of some of the better documented conferences and trainings, such as a literary conference and a Mexican information technology conference, had no logical connection to the insurance industry. INS officials traveled to the United States for approximately twenty-five training events. Aon Limited paid approximately $115,000 out of the funds in connection with these events in the United States. In some instances, Aon Limited paid third parties at INS’s direction where the business purpose of the travel or expenses could not be discerned from the documentation, or where the purpose of the travel and expenses appeared to be improper, such as those pertaining to literary conferences, holiday expenses, and pure entertainment. Aon Limited paid large expenses for hotels, without any indication that the stays were business related. Aon Limited’s employees did not question the requests for payment or reimbursement from the funds. While virtually all payments made in connection with the funds originated in London, Aon Limited made at least forty payments via, or that terminated in, the United States. From 1995 to 2002, Aon Limited [and the company it acquired] earned profits of approximately $1.840,200 in connection with reinsurance brokerage business with INS.”
As to statute of limitation issues, Aon’s recent quarterly filing states as follows. Aon “has agreed with the U.S. agencies to toll any applicable statute of limitations pending completion of the investigations.”
Under the heading “Books and Records/Internal Controls,” the NPA states as follows. “The books and records of Aon Limited were consolidated into those of Aon Corporation. With respect to the Costa Rican training funds, although Aon Limited maintained accounting records for the payments that it made from both the Brokerage Fund and the 3% Fund, these records did not accurately and fairly reflect, in reasonable detail, the purpose for which the expenses were incurred. A significant portion of the records associated with payments made through tourist agencies gave the name of the tourist agency with only generic descriptions such as “various airfares and hotel.” Additionally, to the extent that the accounting records did provide the location or purported educational seminar associated with travel expenses, in many instances they did not disclose or itemize the disproportionate amount of leisure and non-business related activities that were also included in the costs. As a result, during the relevant time period, Aon failed to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflected the transactions and disposition of its assets and failed to devise and maintain an adequate system of internal accounting controls with respect to foreign sales activities sufficient to ensure compliance with the FCPA.”
Pursuant to the NPA, “Aon admits, and accepts and acknowledges responsibility” for the above conduct; however, there is no suggestion or implication in the NPA that anyone at Aon Corporation knew of, participated in, or authorized the conduct at issue.
See here for the DOJ’s release.
Pursuant to the NPA, Aon agreed to pay a monetary penalty in the amount of $1.76 million. The NPA states as follows. “This substantially reduced monetary penalty reflects the Department’s determination to credit meaningfully Aon for its extraordinary cooperation with the Department, including its thorough investigation of its global operations and complete disclosure of facts to the Department, and its early and extensive remediation. In agreeing to this monetary penalty, the Department also took into account the penalty paid to the FSA relating to Aon Limited’s systems and controls in countries other than Costa Rica.” Pursuant to the NPA, Aon also agreed to “continue to strengthen its compliance, bookkeeping, and internal controls standards and procedures” as set forth in “Corporate Compliance Program” appendix to the NPA.
SEC
The SEC’s settled civil complaint (here) begins as follows. “From as early as 1983 until as recent as 2007, subsidiaries of Aon Corporation in numerous countries made improper payments to various parties as a means of obtaining or retaining insurance business in those countries. During this period, over $3.6 million in such payments were made, including some directly or indirectly to foreign government officials who could award business directly to Aon subsidiaries, who were in position to influence others who could award business to Aon subsidiaries, or who could otherwise provide favorable business treatment for the Company’s interest. These payments were not accurately reflected in Aon’s books and records. During this period, Aon failed to maintain an adequate internal control system reasonably designed to detect and prevent these payments.”
According to the SEC complaint, “the improper payments made by Aon’s subsidiaries fall into two general categories: (i) training, travel and entertainment provided to employees of foreign-government owned clients and third parties and (ii) payments made to third-party facilitators.”
As to the first category of payments, the SEC complaint is largely focused on the same Costa Rica / INS payments described in the DOJ’s NPA. Additional payments concern Egypt and the complaint alleges that from 1983 to 2009 Aon (or its predecessor) “served as insurance broker for an Egyptian government-owned company, the Egyptian Armament Authority (“EAA”), and its U.S. arm, the Egyptian Procurement Office (“EPO”). According to the complaint, delegation trips for EAA and EPO officials to various U.S. destinations “had some business component” but also “included a disproportionate amount of leisure activities and lasted longer than the business component would justify.” According to the SEC, the company’s “books and records did not fairly and accurately reflect the true nature of the payments made in connection with the delegation trips.”
As to the second category of payments, under the heading “Payments to Third-Party Facilitators” the complaint alleges as follows. “Aon’s subsidiaries also made payments to third parties that were retained to assist in obtaining accounts in several countries. In some instances, the subsidiaries made payments to the third parties without taking steps to assure that they would not be passed to foreign government officials. The subsidiaries made some payments under circumstances in which the third parties appeared to have performed no legitimate services relating to the prospective accounts, thereby suggesting that they were simply conduits for improper payments to government officials in order to obtain or retain business for Aon.”
In Vietnam, the complaint alleges that “Aon Limited served as a co-broker on an insurance policy for Vietnam Airlines, a Vietnamese government-owned entity, since 2003.” According to the complaint, a third-party facilitator assisted in securing the account and “company record indicate that the third-party facilitator did not provide legitimate services, but instead transferred some of the money that Aon Limited paid under its consultancy agreement to unidentified individuals referred to as ‘related people.'”
In Indonesia, the complaint alleges that “Aon Limited served as a broker on reinsurance contracts with BP Migas and Pertamina, two Indonesian state-owned entities in the oil and gas industry.” The complaint alleges that “several former Aon Limited employees authorized improper payments to government officials in Indonesia to secure the Pertamina and BP Migas accounts for Aon Limited.”
In the United Arab Emirates, the complaint alleges that “Aon Limited provided brokerage services to a privately-held insurance company” and that payments were made “to the general manager of the insurance company as inducements to secure and retain the account for Aon Limited.”
In Myanmar, the complaint alleges that “Aon Limited retained an introducer in Myanmar to assist Aon Limited in connection with its account with Myanmar Airways and Myanmar Insurance, two government-owned entities.” According to the complaint, “company records indicate that the introducer likely used a portion of his commission to improperly influence a government official on Aon Limited’s behalf in connection with the Myanmar account.”
In Bangladesh, the complaint alleges that “Aon Limited made approximately $1.07 million in payments to secure its account with Biman Bangladesh Airways and Sudharan Bima Corporation, two government-owned entities.”
Based on the above allegations, the SEC complaint alleges FCPA books and records and internal controls violations – but not FCPA anti-bribery violations – notwithstanding the fact that the DOJ’s NPA refers to “Aon’s knowing violation of the anti-bribery, books and records, and internal controls.”
As stated in the SEC’s release (here), without admitting or denying the allegations in the SEC’s complaint, Aon consented to entry of a final judgment permanently enjoining it from future FCPA books and records and internal controls violations and ordering the company to pay “disgorgement of $11,416,814 in profits together with prejudgement interest thereon of $3,128,206 for a total of $14,545,020.”
In a release (here) Aon stated as follows. “Since beginning an internal review of these issues in 2007, Aon has put in place a comprehensive, global and robust anti-corruption program designed to prevent and detect improper conduct.” Greg Case, Aon’s President and Chief Executive Officer stated as follows. “Acting with integrity is Aon’s core value and we embody this in our commitment to the highest professional standards for our clients, markets and colleagues. Aon has invested a significant amount of time and resources in anti-corruption compliance and transparency to greatly enhance our controls and processes.”
Kirkland & Ellis attorneys Laurence Urgenson (here) and Craig Primis (here) represented Aon.