This previous post highlighted the SEC’s recent $10 million Foreign Corrupt Practices Act enforcement action against Quad/Graphics and this post continues the analysis by highlighting additional issues to consider.
Timeline
As highlighted in this prior post, Quad voluntarily disclosed in April 2016. Thus, from start to finish, the company’s FCPA scrutiny lasted approximately 3.5 years. While this is slightly below the average length of time FCPA scrutiny tends to last in the current era (see here), 3.5 years is still too long for a company that voluntarily disclosed and cooperates to be under FCPA scrutiny.
Particularly since Quad, in the words of the SEC:
“[S]har[ed] facts developed during the course of its own internal investigation, produc[ed] documents and other materials (including documents from overseas), translat[ed] key documents, summariz[ed] findings of internal investigations, provid[ed] summaries of witness interviews, and assist[ed] in making current and former employees available for interviews.”
Invoice Scheme
“Pots of money” need to be created within a business organization to fund a bribery scheme. In the Quad/Graphics enforcement action – like prior enforcement actions – the “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.”
Local Counsel
Third-party compliance typically focuses (with good reason) on agents, representatives, distributors and others who assist a company in obtaining or retaining business.
However, as the Quad enforcement action once again demonstrates ANY third party that has a point of contact with a foreign official in the global marketplace can expose a company to FCPA scrutiny. Indeed, in regards to the judicial bribery scheme in Peru, the problematic third party was a local Peruvian law firm engaged by Quad Peru in connection with tax litigation.
International Expansion Got Ahead of Compliance
As stated by the SEC:
“Prior to 2010, Quad was a privately held printing company headquartered in Sussex, Wisconsin, with a focus on domestic sales. With the July 2010 acquisition of World Color Press, Inc. (“World Color”), a Canadian printing company, Quad quickly became a public company with a major international presence. Quad acquired over 16,000 World Color employees, several subsidiaries, and multiple plants throughout Latin America, and its common shares began trading on the NYSE. Despite becoming a publicly traded company with a large global workforce and operations in high risk areas, Quad’s compliance program was almost nonexistent in 2010. At the time, Quad failed to implement sufficient internal accounting controls or anti-corruption policies and procedures and failed to conduct meaningful due diligence on third parties. Likewise, internal audit had no visible role in anti-corruption testing and the company failed to conduct broad FCPA or ethics training until approximately 2012. It appointed its first Director of Compliance, an individual with no compliance experience or training and an information technology background, in 2011.”
The Quad enforcement action thus represents yet another FCPA enforcement in which international expansion got ahead of compliance.
For instance, in the Walmart enforcement action the DOJ stated: “Walmart profited from rapid international expansion, but in doing so chose not to take necessary steps to avoid corruption. In numerous instances, senior Walmart employees knew of failures of its anti-corruption-related internal controls involving foreign subsidiaries, and yet Walmart failed for years to implement sufficient controls comporting with U.S. criminal laws.”
In the Smith & Wesson enforcement action, the SEC stated: “This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales. When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”
Bribery, But No Bribery In China
The SEC’s administrative order contains an entire section titled “Bribery to Secure Sales in China” including to employees of state-owned entities. In addition, the DOJ’s so-called “declination letter” refers to “bribery committed by employees of the Company’s subsidiaries in Peru and China.”
Interestingly though, Quad was not found – even civilly – to have violated the FCPA’s anti-bribery provisions in connection with the China conduct. (Note: the FCPA anti-bribery violations in the enforcement action were in connection with the Peru conduct only).
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