Last Friday, the SEC released this administrative order  finding that Israel-based Elbit Imaging Ltd. (a real estate company with shares traded on NASDAQ) violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act based on payments made to certain third parties “when some or all of the funds may have been used to make corrupt payments to Romanian government officials or were embezzled.”
The enforcement action concerned conduct between 2006 and 2012 (beyond any conceivable statute of limitations) and without admitting or denying the SEC’s findings Elbit agreed to pay $500,000 (an amount reflective of the fact that Elbit is currently winding down its operations).
The Elbit Imaging enforcement action is the first corporate FCPA enforcement action of 2018 and breaks a nearly six month dry spell in SEC corporate FCPA enforcement actions.
In terms of background, as highlighted in this prior post  in March 2016 Elbit disclosed:
“The Company have become aware of certain issues with respect to certain agreements that were executed in the past in connection with the Casa Radio Project in Bucharest, Romania that may contain potential violation of the requirements of the U.S. Foreign Corrupt Practices Act (FCPA), including the books and records provisions of the FCPA. As a result the above mentioned, the Company’s audit committee has decided to appoint a special committee to examine these matters, including any internal control and reporting issues. The Company intends to fully cooperate with the relevant governmental agencies in this matter.”
In summary fashion, the order states:
“This case concerns violations of the books and records and internal accounting controls provisions of the FCPA involving millions of dollars of payments made by Elbit, and its then majority-owned indirect subsidiary Plaza Centers NV (“Plaza”). Between 2007 and 2012, Elbit and Plaza, directly and indirectly, paid millions of dollars to third-party offshore consultants and sales agents purportedly for their services related to a real estate development project in Romania and the sale of a large portfolio of real estate assets in the U.S. However, Elbit and Plaza made these payments even though they had no evidence that the consultants and sales agents had actually provided the contracted for services. Elbit and Plaza failed to properly record those payments in a manner that, in reasonable detail, accurately and fairly reflected the nature of the payments in their books and records. Elbit and Plaza also failed to devise and maintain internal accounting controls sufficient to provide reasonable assurances that company funds would only be used as authorized for legitimate corporate purposes and that transactions were recorded as necessary to maintain accountability for assets, particularly with regard to the accounts payable process.”
Elbit and Plaza are described as follows:
“Elbit is an international holding company with several direct and indirect subsidiaries focused on, among other industries, real estate investment and development. Elbit exerts functional control over its indirect subsidiary Plaza, and between 2007 and 2012 Elbit consolidated Plaza’s financial statements into its own financial statements for the purposes of SEC reporting.
Plaza is an indirect subsidiary of Elbit, and is incorporated in the Netherlands. Its securities are listed on the London Stock Exchange, the Warsaw Stock Exchange, and the Tel Aviv Stock Exchange. Plaza is a Central and Eastern European developer of shopping and entertainment centers, focusing on developing new Western-style centers and, where there is significant redevelopment potential, redeveloping existing centers.”
Under the heading “The 2006 and 2011 Casa Radio Project Consultancy Contracts,” the order states:
“Elbit, through Plaza, has been engaged in the business of real estate development in Central and Eastern Europe, including in Romania. In 2006, Plaza sought to be included in a large real estate development project located in Bucharest, Romania – the Casa Radio Project.
In 2006, Plaza hired an international property consultancy firm to value the Casa Radio Project. The firm projected that the project would be highly profitable for Plaza, if it obtained the development rights.
In August 2006, at the direction of Executive A [described as an Israeli citizen, who, prior to February 2014, owned or controlled approximately 50 percent of Elbit’s equity, served as Elbit’s CEO and Plaza’s Executive Director, and had a seat on both companies’ boards of directors who passed away in June 2016] Plaza entered into a contract with a third-party offshore entity purportedly for consulting services (“2006 Consultant”) to assist Plaza in (a) procuring an invitation from the Romanian government to participate in the Casa Radio Project, and (b) thereafter acquiring the governmental approvals needed to perform the development work. There is no evidence to suggest that Plaza conducted any due diligence on the 2006 Consultant prior to entering into this agreement.
In February 2007, with the Romanian government’s consent, Plaza purchased a 75 percent interest in the Casa Radio Project for approximately $40 million in cash and an agreement to develop a Romanian public authority building onsite at Plaza’s expense. There is no documentation or other evidence showing that the 2006 Consultant provided any services in connection with this transaction.
In September 2011, once again at the direction of Executive A, Plaza entered into a second contract with a third-party offshore entity purportedly for consulting services (“2011 Consultant”) related to the Casa Radio Project. The 2011 Consultant was to assist Plaza in (a) once again acquiring all of the governmental approvals needed to perform the development work, and (b) purchasing an additional 15 percent interest in the project from the Romanian government. There is no evidence to suggest that Plaza conducted any due diligence on the 2011 Consultant prior to entering into this agreement.
There are no documents or other evidence showing that either of the consultants performed any work related to Plaza acquiring governmental approvals necessary for the Casa Radio Project’s development, or that the 2011 Consultant provided any services in furtherance of Plaza purchasing the Romanian government’s 15 percent interest in the project. For example, the consultants did not attend any meetings between Romanian officials and Plaza officials and do not appear to have submitted any other materials evidencing any consulting work.
Between 2007 and 2012, Plaza, directly and indirectly, paid the consultants approximately $14 million. Plaza’s top officers authorized making these payments, even though the documentation supporting the payments did not identify the services that the consultants provided pursuant to the contracts. Plaza characterized the payments to the consultants in its books and records as legitimate business expenses for services rendered, when some or all of the funds may have been used to make corrupt payments to Romanian government officials or were embezzled.”
Under the heading, “The 2011 Real Estate Portfolio Sale Agency Contract,” the order states:
“In October 2011, a joint venture of investors (“Joint Venture”), including Elbit and Plaza who together held a 45.4 percent interest in the Joint Venture, sought to sell a portfolio of 47 shopping center real estate assets located in the U.S. (the “Portfolio”).
On November 15, 2011, at the direction of Executive A, Elbit and Plaza together (not the Joint Venture as a whole) entered into a sales agency contract with a third-party offshore entity (“Sales Agent A”), purportedly to assist in selling the Portfolio (“Sales Agent Contract”). Elbit and Plaza conducted no due diligence on Sales Agent A, and Executive A did not obtain a second signature for the Sales Agent Contract that he executed on behalf of Elbit, as required by Elbit’s signature authorization policy.
Pursuant to the Sales Agent Contract, Sales Agent A was to create marketing materials, locate potential buyers, and assist in negotiating a sales contract in exchange for a fee of 0.9 percent of the Portfolio’s gross sale price.
Unbeknownst to Elbit and Plaza, the day after the execution of the Sales Agent Contract, Sales Agent A entered into a subcontract with another offshore entity (“Sales Agent B”), assigning its rights and obligations under the Sales Agent Contract to Sales Agent B. Under this agreement, Sales Agent A was to pay Sales Agent B 0.88 percent of the Portfolio sale’s gross price (i.e. approximately 98 percent of the 0.9 percent commission that Sales Agent A was entitled to under the Sales Agent Contract). At the time, Sales Agent B was indirectly beneficially owned by Executive A. Executive A did not disclose this subcontract or his interest in Sales Agent B to Elbit or Plaza.
Approximately a month and a half prior to the execution of the Sales Agent Contract, the Joint Venture (as a whole) hired another financial institution to serve as its financial advisor for the Portfolio sale (“Financial Advisor”). The Financial Advisor was retained to provide nearly the same services to the Joint Venture as Sales Agent A had agreed to perform for Elbit and Plaza.
While no evidence suggests that Sales Agent A or Sales Agent B provided any known financial advisory services to Elbit and Plaza in connection with the Portfolio sale, the Financial Advisor did fulfill its obligations pursuant to its contract with the Joint Venture.
On June 21, 2012, Elbit announced that the Joint Venture obtained a gross sales price of $1.428 billion from the Portfolio sale. In August 2012, Elbit and Plaza paid Sales Agent A a total of $13 million (i.e. nearly double the $6.75 million that the Joint Venture paid to the Financial Advisor that had actually provided services) for “commissions” and “expenses.” Elbit and Plaza made these payments despite the fact that the documentation supporting the payments did not identify the services that the consultants provided pursuant to the contracts. Thereafter, unknown to anyone at Elbit or Plaza besides Executive A, Sales Agent A paid Sales Agent B $12.75 million.”
Under the heading “Elbit and Plaza’s Deficient Books and Records and Internal Accounting Controls,” the order states:
“Elbit and Plaza’s applicable internal accounting controls were deficient. Elbit’s and Plaza’s internal accounting controls failed to identify the approximately $27 million in payments made to the 2006 Consultant, the 2011 Consultant, and Sales Agent A, despite having no evidence that these counter-parties actually provided any of the contracted for services.
Elbit and Plaza did not devise and maintain internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to maintain accountability for assets, particularly with regard to the accounts payable process Elbit did not make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected its transactions and dispositions of its assets. Plaza’s legal department had limited involvement with or supervision of contracts entered into between Plaza and third-party consultants or agents. Elbit and Plaza also did not have policies and procedures in place to detect corruption risks and provided little, if any, anti-corruption compliance training to employees during the relevant time period.
Elbit and Plaza mischaracterized the numerous payments made to the 2006 Consultant, the 2011 Consultant, and Sales Agent A as legitimate business expenses, even though some or all of the funds may have been used to make corrupt payments to Romanian government officials or were embezzled.”
Under the heading “Discovery, Internal Investigation, and Self-Report,” the order states:
“When Elbit discovered evidence which suggested that certain payments that Plaza, directly or indirectly, made in connection with the Casa Radio Project were improper and may have been recorded incorrectly in Plaza’s books and records, Elbit and Plaza self-reported this information to authorities in both Romania and the U.S., fully cooperated with the Commission staff’s investigation, and implemented extensive remedial measures.
Elbit, through a special committee of its board of directors, hired outside counsel (“Counsel”) to conduct an independent investigation to determine the scope of potential issues related to Elbit’s and Plaza’s business in connection with the Casa Radio Project. During the pendency of this investigation, additional facts were learned concerning the payments Elbit and Plaza made to Sales Agent A and the ownership of Sales Agent B, resulting in the formation of a joint special committee by Elbit and Plaza to investigate the Portfolio sale transaction as well. As the investigations progressed, Elbit shared Counsel’s findings with the Commission staff, was fully responsive to requests for additional information, and provided translations of certain documents.
The joint special committee also directed Counsel to examine and recommend revisions to Elbit’s and Plaza’s internal accounting controls and anti-bribery policies and procedures. Counsel did so, and both Elbit’s and Plaza’s boards accepted all of the recommendations, and directed management to implement them.”
Under the heading “Commission’s Consideration of Elbit’s Remedial Efforts and Business Wind Down,” the order states:
“In determining to accept the Offer, the Commission considered remedial acts that Respondent promptly undertook, its self-reporting, and its cooperation afforded to the Commission staff, including having conducted a thorough internal investigation, voluntarily providing detailed reports to the staff, fully responding to the staff’s requests for additional information in a timely manner, and providing translations of certain documents.
The Commission also considered that Elbit is in the process of selling its principal assets in order to service its debt obligations, and does not develop current or new businesses.”
As noted in this release :
“Without admitting or denying the findings, Elbit agreed to a cease-and-desist order and to pay a $500,000 civil money penalty. In determining to accept the offer, the SEC considered Elbit’s self-reporting, cooperation, remedial acts, and that it is in the process of winding down operations by selling its principal assets.”
The SEC order also states:
“Respondent acknowledges that the Commission is not imposing a civil penalty in excess of $500,000 based upon its cooperation in a Commission investigation and related enforcement action.”
In this release , Elbit stated:
“In March 2016, Plaza Centers N.V. (a subsidiary of the Company) (“PC”) announced that its board of directors became aware of certain issues with respect to certain agreements that were executed in the past by PC in connection with the Casa Radio Project in Romania that may indicate potential violation of the requirements of the FCPA, including the books and records provisions of the FCPA.
In addition, in April 2017, the Company’s board of directors and PC’s board of directors became aware of certain issues with respect to an agency and commission agreement from 2011 regarding the sale in 2012 of property in the U.S. jointly owned by PC and the Company. The characteristics of the said agreements could raise red flags that these agreements may be a potential violation of the requirements of the FCPA, including the books and records provisions of the FCPA.
Upon the discovery of each of the cases described above, the Company appointed internal committees to examine these events and, at the same time, updated the SEC.”
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