There has been only two “traditional” (that is involving foreign bribery) corporate Foreign Corrupt Practices Act enforcement actions thus far in 2021.
However, there have been several other FCPA enforcement actions.
Don’t be, just realize that the FCPA has always been a law much broader than its name suggests and the FCPA’s books and records and internal controls provisions (among the most generic legal provisions one can possibility find) can be implicated in a variety of circumstances that have nothing to do with foreign bribery.
The latest example to demonstrate this point is last week’s announcement by the SEC of a $62 million enforcement action against The Kraft Heinz Company for “a long-running expense management scheme that resulted in the restatement of several years of financial reporting.”
In summary fashion, the SEC’s order found:
“This matter concerns a multi-year expense management scheme by The Kraft Heinz Co. (“KHC”) procurement division to improperly reduce KHC’s cost of goods sold and achieve cost savings that were externally touted to the market and internally tied to performance-based targets. The misconduct resulted in KHC reporting inflated earnings before interest, taxes, depreciation and amortization (“EBITDA”), a key performance metric for investors. From the fourth quarter of 2015 through the end of 2018 (the “Relevant Period”), procurement employees negotiated agreements with numerous suppliers to obtain upfront cash payments and discounts, in exchange for future commitments to be undertaken by KHC, while improperly documenting the agreements in ways that caused the company to prematurely and improperly recognize the expense savings.
In accordance with accounting principles generally accepted in the United States (“Generally Accepted Accounting Principles” or “U.S. GAAP”), if the upfront cash and discounts are tied to future commitments, then the expense savings must be recognized over the period the future obligations are satisfied. Procurement division employees, however, negotiated and maintained false and misleading supplier contracts that made it appear as if expense savings were provided in exchange for past or same-year events performed by KHC, when, in reality, they were upfront payments in exchange for a future benefit from KHC, in order to improperly recognize costs savings prematurely.
Over the Relevant Period, KHC entered into approximately 59 transactions which were improperly recognized as a result of the false and misleading documentation negotiated and generated by procurement division employees. Had these transactions been properly documented and accounted for, KHC’s cost of goods sold during that period would have been approximately $50 million higher than reported.
These misleading transactions, along with numerous other misstated accounting entries, led KHC, in June 2019, to restate its financial statements on Form 10-K. The restatement included financial data reported for fiscal year (“FY”) 2015, as well as the financial statements contained in Forms 10-Q and 10-K for FYs 2016 and 2017 and the first three quarters of FY 2018 that were filed with the Commission. KHC corrected a total of $208 million in cost savings arising from 295 transactions, and also corrected its Adjusted EBITDA during the relevant period, as reflected in the restatement.
Eduardo Pelleissone, KHC’s then Chief Operating Officer and Global Head of Operations, was presented with several warning signs indicating that expenses were being managed through manipulating supplier agreements, imposed pressures on the procurement division to deliver unrealistic savings targets, and, as a member of the company’s disclosure committee, unreasonably approved KHC financial statements that he should have known were materially false and misleading.
A procurement executive who reported to Pelleissone (“Procurement Executive”), managed the procurement division, approved certain of KHC contracts with suppliers, and had sub-certification responsibilities in 2018. Despite numerous warning signs that should have alerted him that procurement division employees were circumventing KHC’s internal controls in order to achieve cost savings targets, the Procurement Executive approved and failed to prevent several supplier contracts that masked the true nature of the underlying transactions. The Procurement Executive also should have known that this false and misleading contract documentation was provided to KHC’s finance and controller groups, thus causing KHC to prematurely recognize cost savings in contravention of U.S. GAAP.”
Based on the above, the SEC found that KHC violated, among other things, the FCPA’s books and records and internal controls provisions. The SEC also found that Pelleissone, among other things, caused KHC’s violations of the books and records and internal controls provisions. Without admitting or denying the SEC’s findings, KHC consented to cease and desist from future violations and pay a civil penalty of $62 million, and Pelleissone consented to cease and desist from future violations, pay disgorgement and prejudgment interest of $14,211.31, and pay a civil penalty of $300,000.
Under the heading “KHC’s Internal Controls Deficiencies,” the order states:
“Throughout the Relevant Period, the company did not design or maintain effective controls for the procurement division, including those implemented by the finance and controller groups, in connection with the accounting for supplier contracts and related arrangements. The company reported this material weakness in its annual report on Form 10-K filed on June 7, 2019. For example, on the Friday after the close of the August 2017 books, the controller group allowed KHC to recognize fully in 2017 a rebate that it had previously determined correctly to spread over a future-year period. The changed decision by that Monday to allow immediate recognition was not adequately documented nor explained to internal stakeholders, and it was made after procurement employees were instructed by a superior in operations to “find a way . . . to get back” the payments into the August books.
During the Relevant Period, finance personnel in gatekeeping roles also overlooked indications that some expenses were potentially being improperly managed and accounted for in the procurement division. In one internal communication, for example, a member of KHC’s controller group acknowledged a procurement buyer’s effort to “jam [a] rebate in to help [KHC’s] results in 2017.” That member of the controller group took no steps to report this conduct to legal or compliance, nor to determine whether it was part of a larger practice within procurement.
During the Relevant Period, KHC also tied internal performance metrics and compensation of the procurement legal group staff to assisting the procurement division’s efforts to reduce costs. Additionally, prior to 2018, KHC failed to provide the legal group with adequate staffing and resources for reviewing numerous global supply contracts, many of which were under negotiation at the same time. Under these conditions, the part of the legal group in charge of reviewing procurement contracts overlooked facts indicating that contract documentation was inconsistent with the underlying negotiated transaction, and the group failed to have reasonably sufficient controls over the procurement contracting process.
Pelleissone should have known that, in not properly addressing several indicia that supplier contracts were being used to manage expenses, he caused KHC’s internal accounting controls failures, including those relating to: (i) its accounting-related policies and procedures, (ii) the preparation and signing of contract approval forms which were to communicate the key commercial terms of procurement transactions to the controllers, (iii) the review of contract documentation and contract approval forms by KHC’s controllers, (iv) the completion and approval of management representation letters affirming the accuracy and completeness of the financial records of KHC’s Zones, business units, and procurement division, and (v) a disclosure committee whose function was to review and confirm the accuracy and completeness of KHC’s draft periodic filings.”
In a separate complaint, and based on the same core conduct, the SEC charged Klaus Hofmann (KHC’s Global Head of Procurement and Chief Procurement Officer) with a variety of securities laws offenses. Without admitting or denying the SEC’s allegations, Hofmann consented to a final judgment permanently enjoining him from future violations, ordering him to pay a civil penalty of $100,000, and barring him from serving as an officer or director of a public company for five years.
In the SEC’s release, Gurbir Grewal (Director of the SEC’s Division of Enforcement) stated:
“Investors rely on public companies to be 100% truthful and accurate in their public statements, especially when it comes to their financials. When they fall short in this regard, we will hold them accountable. [This] action demonstrates that no matter how complex and far-reaching the financial misconduct, we will vigorously pursue wrongdoers because that’s what investor protection requires.”
Anita Bandy (Associate Director of the SEC’s Division of Enforcement) stated:
“Kraft and its former executives are charged with engaging in improper expense management practices that spanned many years and involved numerous misleading transactions, millions in bogus cost savings, and a pervasive breakdown in accounting controls. The violations harmed investors who ultimately bore the costs and burdens of a restatement and delayed financial reporting. Kraft and its former executives are being held accountable for placing the pursuit of cost savings above compliance with the law.”
Strategies For Minimizing Risk Under The FCPA
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