Hewlett-Packard Co. (“HP”) has over 300,000 employees worldwide.
Among the employees during a certain relevant time period, were 5 individuals in Russia employed by a subsidiary, 1 individual in Poland employed by a subsidiary, and a vaguely defined group of individuals in Mexico employed by a subsidiary that worked on one sales deal.
The above individuals engaged in conduct largely occurring 7-14 years ago.
The government alleges that all of these individuals were specifically trained on the FCPA by HP and that HP had other internal controls in place as relevant to these individuals.
Notwithstanding these controls, the government alleges that the individuals willfully circumvented HP’s controls to make alleged improper payments to alleged “foreign officials” by, among other things, creating secret slush funds, concealing certain other information, making false representations, and engaging in other covert means such as anonymous e-mail accounts and pre-paid mobile telephones.
So reads the latest Foreign Corrupt Practices Act enforcement action.
Yesterday the DOJ and SEC announced (here and here) a coordinated FCPA enforcement action against various HP and related entities based on alleged conduct in Russia, Poland and Mexico. As noted in this previous post, HP has been under FCPA scrutiny since early 2010.
The enforcement action involved:
- a DOJ criminal information against ZAO Hewlett-Packard A.O (“HP Russia”) resolved via a plea agreement;
- a DOJ criminal information against Hewlett-Packard Polska, Sp Zoo (“HP Poland”) resolved via a deferred prosecution agreement;
- a DOJ non-prosecution agreement concerning Hewlett-Packard Mexico, S de R.L. de C.V. (“HP Mexico”);
- and an SEC administrative action against Hewlett-Packard Co. (“HP”).
HP and related entities agreed to pay approximately $108.2 million (all guaranteed by HP) to resolve the alleged FCPA scrutiny (approximately $76.7 million in the DOJ actions; and approximately $31.5 million in the SEC action).
The enforcement action, in terms of settlement amount, is the 11th largest of all-time and the 2nd largest of all-time against a U.S. company (recognizing of course that HP’s foreign subsidiaries were a large focus of the enforcement actions).
This post summarizes both the DOJ and SEC enforcement actions based on a review of the original source documents (comprising approximately 175 pages in total).
DOJ Enforcement Action
The enforcement action involved a criminal information against HP Russia resolved via a plea agreement; a criminal information against HP Poland resolved via a DPA; and an NPA concerning HP Mexico.
According to the information, HP Russia is a wholly owned subsidiary of HP and was principally responsible for transacting business in Russia and the Commonwealth of Independent States (“CIS”). During the relevant time period, the information alleges that HP Russia had approximately 315 and 55o employees and that HP Russia “was subject to HP’s internal accounting controls, and HP Russia’s financial results were included in the consolidated financial statements that HP filed with the SEC.”
The alleged conduct concerns five employees at HP Russia.
- HP Russia Executive 1
- HP Russia Executive 2
- HP Russia Manager 1
- HP Russia Manager 2
- HP Russia Manager 3
The conduct at issue concerns “a project to automate the telecommunications and computing infrastructure of the Office of the Prosecutor General of Russia (“GPO” or “GP”),” a project valued at approximately $100 million. According to the information, the Russian government used a state-owned entity organized under the Department of Affairs of the President of the Russian Federation, to manage the GPO project tender and execution.”
In pertinent part, the information alleges as follows.
“Between in or about 2000 and 2007, HP Russia and co-conspirators agreed to make and did make improper payments to secure, retain and implement the GPO project. Members of the conspiracy structured the deal to create a secret slush fund, which by 2003 totaled approximately ($10 million at then-prevailing exchange rates), at least part of which was intended for bribes, kickbacks, and other improper payments. To execute and hide the scheme, members of the conspiracy failed to implement internal controls intended to maintain accountability over HP’s assets, willfully circumvented existing internal controls, and falsified corporate books and records relied on by HP officers and external auditors to authorize the transaction and prepare HP’s consolidated financial statements.”
Regarding the slush fund, the information alleges that HP Russia “created million of dollars in excess margin for use as a slush fund” by selling product to an “often-used channel partner of HP” which in turn sold product to an intermediary at a mark-up. According to the information, “To keep track of the fund, which was concealed in the project’s financials, HP Russia maintained two sets of project pricing records: off-the-books versions, known only to conspirators, which identified slush fund recipients, and sanitized versions of the same documents which were provided to HP credit, finance, and legal officers outside of HP Russia.” According to the information, “one example of an off-the-books document was an encrypted, password-protected spreadsheet.”
According to the information, various HP Russia employees concealed the slush fund during HP’s Solution Opportunity Approval and Review (“SOAR”) process which applied to “all-service related projects valued at greater than $500,000 anywhere in the world, including Russia.” Among other things, the information alleges that HP Russia employees made false representations and falsely certified the adequacy of HP Russia’s internal controls, a certification the information alleges that “was relied upon by HP’s EMEA business to certify to HP’s headquarters in the United States that EMEA’s financial statements were accurate.”
According to the information, the alleged improper payments (approximately €8 million) were made through various intermediaries to “Russian Official A,” a director of a Russian government agency who assumed responsibility for the GPO Project as well as “Individual A,” an associate of Russian Official A, for things such as:
- “expensive jewelry, luxury automobiles, travel, and other items typically associated with gifts”
- “travel services, vehicles, tuition, electronic equipment, cotton, textiles, and various other items”
- a “hotel bill: and “other luxury purchases” such as “expensive watches, swimming pool technology, and other items”
- “furniture, vehicles, clothing, travel services, household appliances, hotel stays, and other items”
Based on the above alleged conduct, the information charges (i) conspiracy to violate the FCPA’s anti-bribery provisions and books and records and internal controls provisions; (ii) one count of violating the FCPA’s anti-bribery provisions; (iii) one count of violating the FCPA’s internal controls provisions; and (iv) one count of violating the FCPA’s books and records provisions.
The conduct alleged in the information allegedly occurred between December 2000 and February 2007. As to U.S. jurisdictional allegations, the information alleges a 2001 meeting in Rockville, Maryland regarding the GPO project; a 2003 e-mail “which was routed through the United States;” and a 2003 certification “transmitted to HP’s offices in California.”
The above charges were resolved via a plea agreement in which HP Russia agreed to plead guilty to the four charges described above. Pursuant to the plea agreement, HP Russia agreed to pay a criminal fine of approximately $58.8 million. In the plea agreement, HP agreed to guarantee HP Russia’s payment as well as other conditions imposed upon HP Russia such as cooperation, and compliance obligations typical in corporate FCPA enforcement actions. Among other things, the plea agreement imposed upon HP a three year reporting obligation to the DOJ regarding remediation and implementation of various compliance measures. As pertinent to the above allegations, in the plea agreement HP Russia and HP waived any and all statute of limitation defenses.
According to the plea agreement, the advisory fine range based on the alleged conduct at issue was $87 million to $174 million. The plea agreement states that the approximate $58.8 million fine was appropriate based on the following factors:
“(a) monetary assessments that HP has agreed to pay to the SEC and is expected to pay to law enforcement authorities in Germany relating to the same conduct at issue …; (b) HP Russia’s and HP’s cooperation has been, on the whole, extraordinary, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (c) HP Russia and HP have engaged in extensive remediation, including by taking appropriate disciplinary action against culpable employees of HP and enhancing their internal accounting, reporting, and compliance functions; (d) HP has committed to continue enhancing its compliance program and internal accounting controls … (e) the misconduct identified … was largely undertaken by employees associated with HP Russia, which employed a small fraction of HP global workforce during the relevant period; (f) neither HP nor HP Russia has previously been subject of any criminal enforcement action by the Department or law enforcement authority in Russia or elsewhere; (g) HP Russia and HP have agreed to continue to cooperate with the Department and other U.S. and foreign law enforcement authorities, if requested by the Department …”
According to the information, HP Poland is a wholly owned subsidiary of HP and, among other functional responsibilities, HP Poland managed most of HP’s activities in Poland and had more than 200 employees during the relevant time period. According to the information, HP Poland “was subject to HP’s internal accounting controls, and HP Poland’s financial results were included in the consolidated financial statements that HP filed with the SEC.”
The specific alleged conduct concerned “HP Poland Executive” (a citizen of Poland who was the District Manager of Public Sector Sales and Public Sector Sales Lead).
According to the information, HP Poland “(i) caused the falsification of HP’s books and records; and (ii) circumvented HP’s existing internal controls, in connection with a scheme to make corrupt payments to one or more foreign officials in Poland, including the Polish Official [the Director of Information and Communications Technology within the Polish National Police Agency (“KGP”) which was part of the Polish Ministry of the Interior and Administration].”
According to the information, “the conduct was related to HP Poland’s efforts to secure and maintain millions of dollars in technology contracts with the Polish government.” The information alleges that HP Poland “resorted to corruption to foster a relationship with the Polish Official.”
Specifically, the information alleges that in 2006 the Polish Official attended a technology-industry conference in San Francisco and that the “weekend before the conference” HP Poland “paid for dinners, gifts, and sightseeing by the Polish Official in San Francisco.” The information also alleges that HP Poland took the Polish Official on a side trip to Las Vegas “with no legitimate business purpose” and that while in Las Vegas HP Poland paid for the Polish Official’s “transportation and expenses … including lodging, drinks, dining, shows, other events on or near the Las Vegas Strip, and a private tour flight over the Grand Canyon.” As to the above travel and entertainment allegations, the information also alleges that “another global technology company” (“Company A”) also wined and dined the Polish Official and paid for his expenses.
The information also alleges that “beginning in late 2006, HP Poland started providing technology products to the Polish Official for personal use.” The information states:
“Early gifts included HP products, such as desktop and laptop computers, and later expanded to include additional HP computers, HP-branded mobile devices, an HP printer, iPods, flat screen televisions, cameras, a home theater system, and other items.”
According to the information, the above things of value were provided to the Polish Official “in circumvention of HP’s internal controls” and were not “properly reflected in HP’s books and records.”
The information also alleges that in early 2007, “shortly after receiving the first of these gifts, Polish Official signed a contract with HP Poland on behalf of the Polish government, valued at approximately $4.3 million. A month later, the Polish Official signed another contract with HP Poland, valued at approximately $5.8 million.”
According to the information, “around the date of the second contract award, HP Poland expanded the bribes to include large cash payments to Polish Official from off-the-books accounts. HP Poland agreed to pay Polish Official 1.2% of HP Poland’s net revenue on any contract awarded by KGP.”
The information then specifically alleges that in 2007 “Polish Official signed a KGP contract with HP Poland valued at approximately $15.8 million” and that “HP Poland Executive delivered to Polish Official’s personal residence a bag filled with approximately $150,000 in cash.” The information also alleges another instance in which HP Poland Executive met Polish Official in a Warsaw parking lot and gave Polish Official another bag filled with approximately $100,000 in cash. Further, the information alleges that in 2008, on at least four separate occasions, HP Poland Executive gave Polish Official bags of cash totaling at least $360,000. According to the information, in 2008, Polish Official signed three contracts on behalf of KGP with HP Poland for approximately $32 million.
As to the above payments, the information alleges that HP Poland willfully circumvented HP’s internal controls and falsified corporate books and records relied on by HP’s officers and external auditors to prepare HP’s financial statements. Moreover, the information alleges that HP Poland facilitated the corrupt relationship with Polish Official through covert means such an anonymous e-mail accounts, pre-paid mobile telephones, and other means to circumvent HP’s internal controls.
In total, the information alleges between 2006 and 2010 HP Poland “provided Polish Official cash worth the equivalent of approximately $600,000, gifts valued in excess of $30,000, and several thousand dollars in improper travel and entertainment benefits.” According to the information, “during this same time span, the Polish government awarded to HP Poland at least seven contracts for KGP-related information technology products and services, with a total value of approximately $60 million.
Based on the above conduct, the information charges HP Poland with violating the FCPA’s books and records and internal controls provisions.
The above charges were resolved via a DPA in which HP Poland admitted and accepted responsibility for the above conduct. The DPA has a term of three years and it lists the following relevant considerations considered by the DOJ;
“(a) HP Poland’s cooperation with the Department’s investigation; (b) HP Poland’s ultimate parent corporation, HP, has committed to maintain and continue enhancing its compliance program and internal accounting controls …; and (c) HP Poland and HP have agreed to continue with the Department and other U.S. and foreign law enforcement authorities in any ongoing investigation …”
Based on the advisory guidelines calculation in the DPA, the fine range for the alleged conduct at issue was $19.3 million to $38.6 million. Pursuant to the DPA, HP Poland agreed to pay approximately $15.5 million, an amount deemed “appropriate” given the “nature and extent of HP Poland’s and HP’s cooperation and their extensive remediation in this matter.”
Like the HP Russia plea agreement, in the HP Poland DPA, HP agrees to guarantee the payment of HP Poland and to implement various compliance measures and report to the DOJ for a three year period. As is typical in FCPA DPAs, the HP Poland DPA contains a so-called “muzzle clause.”
The NPA with HP Mexico (a wholly-owned subsidiary of HP based in Mexico) states that beginning in 2008 “HP Mexico began presales activities and discussions with Pemex (Mexico’s alleged state-owned petroleum company) to sell to Pemex a suit of business technology optimization (“BTO”) software, hardware, and licenses.” According to the NPA, BTO is a niche product that requires sophisticated knowledge to integrate with other software products and the contracts for this software sale were for approximately $6 million.
According to the NPA, “HP Mexico sales managers on the BTO Deal ultimately decided that they could not win the business without working with, and making payments to, a Mexican information-technology consulting company. (“Consultant”)” According to the information, “HP Mexico sales managers knew that Pemex’s Chief Operating Officer (“Official A”) was a former principal of Consultant” and that “HP Mexico employees also knew that Official A supervised Pemex’s Chief Information Officer (“Official B”), who was a key signatory on behalf of Pemex for the BTO Deal.”
According to the NPA, while the Consultant had prior technical experience, “HP Mexico ultimately retained Consultant in connection with HP Mexico’s bid for the sale to Pemex primarily because of Consultant’s connections to Official A, Official B, and other senior Pemex officials.” According to the information, as part of its agreement with Consultant, HP Mexico agree to pay Consulant a commission, “which HP Mexico also called an ‘influencer fee,’ equal to 25% of the licensing and support components of the BTO Deal.”
To circumvent HP’s internal controls regarding channel partners, the NPA states that “HP Mexico executives pursuing the BTO Deal arranged for another entity (“Intermediary”), which was already an approved HP Mexico channel partner, to join in the transactions” and that “HP Mexico executives recorded Intermediary as the deal partner in its internal tracking system.”
The NPA states “HP Mexico through the Intermediary, Consultant made a cash payment of approximately $30,000 to an entity controlled by Official B” and that “Consultant made three additional cash payments totaling approximately $95,000 to the Official B controlled entity.”
According to the NPA, “in total, HP Mexico received approximately $2,527,750 as its net benefit on the BTO Deal.”
According to the NPA, the DOJ agreed to enter it based on the following factors:
“(a) HP Mexico and HP’s cooperation, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the DOJ; (b) HP Mexico and HP have engaged in extensive remediation, including taking appropriate disciplinary action against culpable employees, enhancing their due diligence protocol for third-party agents and consultants, and enhancing their controls for payments of sales commissions to channel partners in Mexico; (c) HP Mexico’s and HP’s continued commitment to enhancing their compliance programs and internal controls; and (d) HP Mexico’s and HP’s agreement to continue to cooperate with the DOJ in any ongoing investigation.”
In the NPA HP Mexico admitted and acknowledged responsibility for the above conduct. Pursuant to the NPA, HP Mexico agreed to pay a forfeiture of approximately $2.5 million. Pursuant to the NPA, which has a term of 3 years, HP Mexico and HP agreed to various compliance obligations. As is typical in FCPA NPAs, the NPA contains a so-called muzzle clause.
In the DOJ release, Deputy Assistant Attorney General Bruce Swartz states:
“Hewlett-Packard subsidiaries created a slush fund for bribe payments, set up an intricate web of shell companies and bank accounts to launder money, employed two sets of books to track bribe recipients, and used anonymous email accounts and prepaid mobile telephones to arrange covert meetings to hand over bags of cash. Even as the tradecraft of corruption becomes more sophisticated, the department is staying a step ahead of those who choose to violate our laws, thanks to the diligent efforts of U.S. prosecutors and agents and our colleagues at the SEC, as well as the tremendous cooperation of our law enforcement partners in Germany, Poland and Mexico.”
Melinda Haag (U.S. Attorney for the N.D. of California) states:
“The United States Attorney’s Office, working alongside our colleagues in the Criminal Division, will vigorously police any efforts by companies in our district to illegally sell products to foreign governments using bribes or kickbacks in violation of the FCPA, Today’s resolution with HP reinforces the fact that there is no double standard: U.S. businesses must respect the same ethics and compliance standards whether they are selling products to foreign governments or to the United States government.”
Valerie Parlave (Assistant Director in Charge of the FBI’s Washington Field Office) states:
“This case demonstrates the FBI’s ability to successfully coordinate with our foreign law enforcement partners to investigate and bring to justice corporations that choose to do business through bribery and off-the-book dealings. I want to thank the agents who worked on this case in Washington, New York and in our Legal Attaché offices in Mexico City, Moscow, Berlin and Warsaw as well as the prosecutors. Their work ensures a level playing field for businesses seeking lucrative overseas government contracts.”
Richard Weber (Chief of the Internal Revenue Service – Criminal Investigation) states:
“This agreement is the result of untangling a global labyrinth of complex financial transactions used by HP to facilitate bribes to foreign officials. IRS-CI has become a trusted leader in pursuit of corporations and executives who use hidden offshore assets and shell companies to circumvent the law. CI is committed to maintaining fair competition, free of corrupt practices, through a potent synthesis of global teamwork and our dynamic financial investigative talents.”
SEC Enforcement Action
The enforcement action involved an administrative cease and desist order against HP and is based on the same Russia, Poland and Mexico conduct described above.
Under the heading “Summary,” the order states:
“From approximately 2003 to 2010 (the “relevant period”), HP Co.’s indirect, wholly-owned subsidiaries in Russia, Mexico and Poland, by and through their employees, agents and intermediaries, made unlawful payments to various foreign government officials to obtain business. These payments were also falsely recorded in the subsidiaries’ books and records and, ultimately, in HP Co.’s books and records. In Russia, HP Co.’s subsidiary (“HP Russia”) made payments through HP Russia’s agents to a Russian government official to retain a multi-million dollar contract with the federal prosecutor’s office. The payments were made through shell companies engaged by the agents to perform purported services under the contract. In Poland, certain agents or employees of HP Co.’s Polish subsidiary (“HP Poland”) provided gifts and cash bribes to a Polish government official to obtain contracts with Poland’s national police agency. In Mexico, HP Co.’s Mexican subsidiary (“HP Mexico”) made improper payments to a third party in connection with a sale of software to Mexico’s state-owned petroleum agency. HP Co. and its consolidated subsidiaries (collectively, “HP”) earned approximately $29 million in illicit profits as a result of this improper conduct.
The payments and improper gifts to government officials made directly or through intermediaries were falsely recorded in the relevant HP subsidiaries’ books and records as legitimate consulting and service contracts, commissions, or travel expenses. In fact, the true purpose of the payments and gifts was to make improper payments to foreign government officials to obtain lucrative government contracts for HP. During the relevant period, HP lacked sufficient internal controls to detect and prevent the improper payments and gifts made by executives and representatives of certain of its foreign subsidiaries.”
As to HP Russia, the order also states under the heading “Additional Conduct,” as follows.
“In June and July 2006, several European HP subsidiaries, including HP Russia, arranged for a high-profile customer marketing event in connection with the FIFA World Cup soccer tournament in Germany. Despite managerial directives not to invite representatives of government customers, certain HP sales employees arranged for a number of government or state-owned customers to attend the event. In all, HP Russia and other European subsidiaries of HP paid tens of thousands of dollars in travel and entertainment expenses for these government customers, and HP Co.’s internal controls failed to detect or prevent the conduct.
Finally, in June 2005, HP Russia paid more than $2.5 million to a third party distributor for the supply of software and implementation services to a Russian state-owned enterprise. HP Russia’s records do not reflect what, if any, work was actually performed by the distributor for these payments, and communications among HP Russia employees suggest that the distributor may have played an influential role in connection with obtaining the contract. The payments to the distributor were recorded in HP Russia’s books and records as a payment for providing software and services, even though there was minimal evidence concerning what was actually provided for these payments.”
Based on the above, the order finds violations of the FCPA’s books and records and internal controls provisions. Specifically, the order states:
“HP’s global operations are organized by geographic regions and sub-regions, as well as business units. Employees in HP’s foreign subsidiaries may report to a supervisor in both their geographic region and their business unit. During the relevant period, HP’s foreign subsidiaries operated pursuant to compliance policies and directives developed by HP and implemented at the local subsidiary level by the country or regional management. Although HP had certain anti-corruption policies and controls in place during the relevant period, those policies and controls were not adequate to prevent the conduct described herein and were insufficiently implemented on the regional or country level. Further, HP failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that: (1) access to assets was permitted only in accordance with management’s authorization; (2) transactions were recorded as necessary to maintain accountability for assets; and (3) transactions were executed in accordance with management’s authorization.
As described above, HP Co. violated Section 13(b)(2)(A) of the Exchange Act. Its subsidiaries in Russia, Poland and Mexico falsely recorded the payments made to agents as payments for legitimate services or commissions, when the true purpose of these payments was to make corrupt payments to government officials to obtain business. The false entries were then consolidated and reported by HP in its consolidated financial statements. HP Co. also violated Section 13(b)(2)(B) by failing to devise and maintain sufficient accounting controls to detect and prevent the making of improper payments to foreign officials and ensure that payments were made only to approved channel partners.”
Under the heading “Remedial Efforts,” the order states:
“In response to the Commission’s investigation, HP retained outside counsel to assist it in conducting an internal investigation into improper conduct in the jurisdictions that were the subject of the staff’s inquiry, as well as in other jurisdictions where HP identified additional issues. HP cooperated with the Commission’s investigation by voluntarily producing reports and other materials to the Commission staff summarizing the findings of its internal investigation. HP also cooperated by, among other things, voluntarily producing translations of numerous documents, providing timely reports on witness interviews, and by making foreign employees available to the Commission staff to interview.
HP has also undertaken significant remedial actions over the course of the Commission’s investigation, including by implementing a firm-wide screening process for its channel partners, training its public sector sales staff on its policies for dealing with business intermediaries, increasing compliance-related training for its global work force, and implementing additional enhancements to its internal controls and compliance functions. In addition, HP took disciplinary actions against certain of its employees in response to the conduct identified by the Commission staff and by the company through its internal investigation.”
In resolving the matter, the SEC ordered HP to cease and desist from committing future violations of the FCPA’s books and records and internal controls provisions and to pay disgorgement of $29 million and prejudgment interest of $5 million. According to the order, approximately $2.5 million of the disgorgement amount will be satisfied by HP’s payment of $2.5 million in forfeiture in connection with the HP Mexico DOJ action. The order also requires HP to report to the SEC for a three year period regarding the status of its remediation and implementation of various compliance measures.
In the SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) states:
“Hewlett-Packard lacked the internal controls to stop a pattern of illegal payments to win business in Mexico and Eastern Europe. The company’s books and records reflected the payments as legitimate commissions and expenses. Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf.”
Gibson Dunn attorneys Joseph Warin and John Chesley represented the HP entities.
In this release (a release HP had to consult with the DOJ before issuing) HP Executive Vice President and General Counsel John Schultz states:
“The misconduct described in the settlement was limited to a small number of people who are no longer employed by the company. HP fully cooperated with both the Department of Justice and the Securities and Exchange Commission in the investigation of these matters and will continue to provide customers around the world with top quality products and services without interruption.”
HP’s stock closed yesterday up approximately .8%