Late last Friday afternoon on a holiday weekend, the SEC released one of the more pedestrian FCPA enforcement actions of recent memory.
The action involved Gartner Inc. (a technological research and consulting company) concerning conduct in 2014 and 2015 in South Africa.
To resolve the matter, Gartner agreed to pay approximately $2.5 million (856,764 in disgorgement and prejudgment interest and a $1.6 million civil penalty).
In summary fashion, this administrative order states:
The first time ABB resolved a Foreign Corrupt Practices Act enforcement action was in 2004 concerning conduct in Nigeria, Angola and Kazakhstan.
The second time ABB resolved an FCPA enforcement action was in 2010 concerning conduct in Mexico as well as in connection with the Iraqi U.N. Oil for Food program.
Since 2017 (see here for the prior post), ABB has been under additional FCPA scrutiny and last Friday ABB became the first company to resolve an FCPA enforcement action for a third time. The latest enforcement action concerned conduct in South Africa and the net FCPA settlement amount was $147.5 million (a DOJ component of net $72.5 million and an SEC component of net $75 million).
As highlighted in this previous post, in February 2016 SAP (a German company with American Depository Shares registered with the SEC) resolved an FCPA enforcement action based on conduct in Panama. Without admitting or denying the SEC’s finding’s in an administrative order the company agreed to pay approximately $3.9 million and the SEC ordered the company to cease and desist from committing or causing any violations and any future violations of the FCPA’s books and records and internal controls case.
Fresh off this 2016 FCPA enforcement action, SAP is again under FCPA scrutiny.
Scrutiny alert, on cue, across the pond, survey says, and for the reading stack. It’s all here in the Friday roundup.
Scrutiny Alert
According to various Nigerian media reports (here and here):
“A group which goes by the name: Concerned Itsekiri Coastal Dwellers Association, CICDA, has petitioned the United States, US Department of Justice, Criminal Division over alleged fraudulent and corrupt practices by some Delta state government officials with Chevron Nigeria Limited, CNL.”
In 2007 ,Chevron agreed to pay $30 million to resolve an FCPA enforcement action in connection with the Iraq Oil for Food program (see here).
On Cue
“Given the allegations and findings, it is curious why SB even voluntarily disclosed the conduct at issue to the SFO, particularly in light of Sec. 7′s adequate procedures defense.But then again, counsel to SB (like counsel in other FCPA or related internal investigations) no doubt secured substantially more in legal fees by making the disclosure (compared to the other reasonable alternative of not disclosing and remedying any internal control deficiencies) plus the deferred prosecution agreement comes with post-enforcement action compliance obligation. Moreover, counsel achieved name recognition by being the first law firm to represent a Sec. 7 corporate defendant and secure a DPA on behalf of its client. (One can only imagine the speaking opportunities in the future for “how they did it”).”
As if on cue, the law firm that represented SB is currently marketing a seminar about the enforcement action. The teaser e-mail states:
“Join the legal team who acted on the UK’s first ever Deferred Prosecution Agreement for a breakfast seminar about the process. […] We hope you will join us to hear how this ground-breaking and highly anticipated agreement was arrived at, the pivotal legal points which were discussed, and the key lessons for senior in-house counsel from the process.”
Across the Pond
The U.K. Serious Fraud office recently announced:
“UK printing company Smith and Ouzman Ltd, [previously] convicted of making corrupt payments, was … ordered to pay a total of £2.2 million in a sentencing hearing at Southwark Crown Court. The conviction and sentence follows a four-year investigation by the Serious Fraud Office.
The … company, which specialises in security documents such as ballot papers and exam certificates, was convicted in December 2014 under the Prevention of Corruption Act 1906. The corrupt payments totalling £395,074 were made to public officials for business contracts in Kenya and Mauritania.
The sum broken down included a fine of £1,316,799 as well as £881,158 to satisfy a confiscation order applied for by the SFO and £25,000 in costs. The fine is payable in instalments every six months until the full amount is paid, while the confiscation order must be satisfied within 28 days and the costs paid within six months.
In passing sentence, Recorder Andrew Mitchell QC said:
“Corruption of foreign officials is damaging to the country in which the corruption occurs, is damaging to the reputation of UK business and of course, in the market in which a business operates, it is anti-competitive.”
Director of the SFO, David Green CB QC commented:
“The bribery of foreign officials by UK companies damages this country’s reputation, commercially, politically and ethically. The SFO will pursue such criminal behaviour at both the corporate and individual level.”
Survey Says
According to this recent survey of South Africans conducted by the Ethics Institute of South Africa and sponsored by Massmart, only 22% of respondents believe that it is possible to successfully navigate daily life in the country without paying a bribe.
For the Reading Stack
In a recent article “Four Ways to Improve SEC Enforcement,” Professor Andrew Vollmer (a former Deputy General Counsel of the SEC and former partner in the securities enforcement practice of Wilmer Cutler) touches on some basic rule of law principles that sometimes bear repeating
“The first way to improve SEC enforcement is for the Commission to assert violations of law based only on well established and widely accepted legal principles and not to base claims on new, untested, and extreme legal theories.
[…]
Regulating and enforcing by unelaborated and expanding legal rules raise serious issues for both the private party and the system as a whole. Once the government charges a private party, the person is labeled publicly as a law breaker, even if a small group of knowledgeable practitioners appreciates that the legal theory is new and untested, and faces severe and frequently career or business ending sanctions. The private party must incur the costs, distress, and adverse publicity associated with a defense or succumb and settle, and the pressure to settle is over-powering even when the SEC case lacks merit.
The threats to the overall system are equally grave, and here they come in two forms. First, a federal agency breaks fundamental bonds of trust and accountability in our system of democratic governance when it exceeds its governing law. An Executive Branch agency must take care to stay well within the legal boundaries set by Congress or it acts as lawlessly as those who really violated the securities laws.
Second, enforcement agencies must exercise their power within established rules and precedent so regulated persons know what is required of them and may act accordingly and “so that those enforcing the law do not act in an arbitrary or discriminatory way.” “A fundamental principle in our legal system is that laws which regulate persons or entities must give fair notice of conduct that is forbidden or required.” A charge based on a new agency legal interpretation is essentially a claim against an innocent person. “It is one thing to expect regulated parties to conform their conduct to an agency’s interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency’s interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference.” An SEC enforcement case based on an interpretation that has not been properly communicated to the public is not valid.
Thus, when the Chair said SEC enforcement should be “aggressive and creative,” she sent the wrong message to her staff. Expansive, untested theories of law to impose liability weaken the SEC’s enforcement efforts, short-change investigations of core misconduct, mistreat the private parties who must respond, and breach a trust between the agency and the country. One way to improve the SEC enforcement process therefore is to reward the staff for recommending cases based on established and accepted legal doctrines and to eschew over-reaching legal positions.
[…]
Another area worth attention is the time SEC investigations take. Potential wrongdoing must be investigated promptly and charges, when justified, must be brought promptly to serve a range of important interests. Avoiding delay during investigations helps deter, uses SEC resources efficiently, reduces uncertainty and costs for private parties, keeps evidence fresh, and promotes finality.
Unfortunately, investigations lasting for many years are the norm.
[…]
Extended investigations disserve the enforcement process and the persons being investigated. The delays increase the costs of defense and the burdens on private parties. Lengthy investigations create uncertainty for both companies and individuals, and uncertainty about the SEC’s plans can harm reputations, stall careers, and postpone financings and investments, research, and product development.
The delays also seriously harm the quality of justice and the SEC’s cases.”
*****
A good weekend to all.
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:
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).
