“Pots of money” need to be created within a business organization to fund a bribery scheme. In the Quad/Graphics enforcement action, a “pot of money” was created through an invoicing scheme as the SEC found in connection with “bribery to secure sales in Peru” that “improper payments were made through four purported third party vendors, which were sham companies owned by the same individual (“Sham Vendors”).
As stated by the SEC:
“The four Sham Vendors were all registered in Lima, Peru, three with the same address, and had no real business operations. The Sham Vendors were used to pay bribes to both government officials and private customers on behalf of Quad Peru. Quad failed to conduct any due diligence on the Sham Vendors.
Most of the invoices submitted by the Sham Vendors were purportedly for pre-press, modulation and/or packaging services provided to Quad Peru in connection with INEI contracts. In truth, none of the Sham Vendors performed any such services for Quad Peru. Instead, pre-press, modulation and packaging services were performed on site by Quad Peru employees or by unrelated external third parties.
The bribes that Quad Peru paid to INEI officials were approximately 13% of each government contract work order and were paid through fake invoices for services submitted by the Sham Vendors that were routinely approved by the Quad Peru Head Sales Executive and the Quad Peru General Manager.
Quad lacked a system of internal accounting controls sufficient to detect or prevent the payments despite the presence of numerous red flags, including vendor invoices with rounded dollar amounts, large invoice amounts that were disproportionate to the services described, invoices that were consecutively numbered (sometimes with the same date) and invoices without purchase orders or other supporting documentation.”
The Quad/Graphics enforcement action was certainly not the first Foreign Corrupt Practices Act enforcement action to involve an invoice scheme.
For instance, the 2013 Ralph Lauren enforcement action concerning conduct in Argentina included allegations that the company, through an agent, made payments to officials to “assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.” According to the government, the payments were generated by having the agent include in his invoices to the company “loading and delivery expenses” and a “stamp tax/label tax.”
Likewise, the 2014 Alstom enforcement action concerning conduct in numerous countries alleged that “employees instructed the consultants to submit false invoices and other back-up documentation reflecting purported legitimate services rendered that those employees knew were not actually performed, so that Alstom could justify the payments to the consultants.” In addition, the government found that “during the relevant time period, Alstom did not engage in auditing or testing of consultant invoices or payments”
The 2015 Goodyear enforcement action concerning conduct in Kenya and Angola found, as relevant to the Angolan conduct, that “to hide the scheme and generate funds for the improper payments, [a wholly-owned subsidiary] falsely marked-up the costs of its tires by adding to its invoice price phony freight and customs clearing costs” and that “on a monthly basis, as tires were sold, the phony freight and clearing costs were reclassified to a balance sheet account” and as “bribes were paid, the amounts were debited from the balance sheet account, and falsely recorded as payments to vendors for freight and clearing costs.”
The 2016 Analogic enforcement action concerning conduct in Russia found that after the company invoiced the distributor for the real price of the equipment, the distributor would request that the company provide it “with a second invoice reflecting an inflated sales price” and that following these requests company employees “would create a fictitious invoice outside the normal invoice-generation and accounting system that reflected an inflated amount of payment due.” According to the government, a subsidiary company “would keep two invoices in its books and records – a correct invoice created pursuant to the Company’s accounting procedures, and a fictitious invoice created outside these procedures.”
Large business organizations of course process numerous invoices during the ordinary course of business and finding problematic invoices in the absence of red flags may be a daunting task.
Nevertheless, it is clear that the enforcement agencies, particularly the SEC, have high expectations for gatekeepers such as finance and accounting personnel, and expect them to play a meaningful role in FCPA compliance. To play a meaningful role in FCPA compliance, finance and accounting personnel first need to have a pair of “FCPA goggles” and understand the elements of an FCPA violation, how the FCPA is enforced, and FCPA compliance best practices designed to manage and mitigate risk.
These topics and many more are discussed in the FCPA Institute Online – the most comprehensive online FCPA training course available.
Strategies For Minimizing Risk Under The FCPA
A compliance guide with issue-spotting scenarios, skills exercises and model answers. "This book is a prime example of why corporate compliance professionals and practitioners alike continue to listen to Professor Koehler."