The last week of December has traditionally been an active week for Foreign Corrupt Practices Act enforcement. However, with the partial government shutdown there was an open question what would happen with the end of 2018.
Yesterday, the SEC answered that question by announcing two enforcement actions: (i) a $2.5 million action against Brazil-based Centrais Elétricas Brasileiras S.A. (Eletrobras); and (ii) a $16 million action against Polycom.
This post highlights the Electrobras enforcement action and another post will highlight the Polycom enforcement action
In summary fashion, this administrative order finds:
“These proceedings arise out of Eletrobras’s violations of the internal accounting controls and record-keeping provisions of the FCPA.
As described below, former officers at Eletrobras Termonuclear S.A (“Eletronuclear”), Eletrobras’s majority-owned (over 99%) nuclear power generation subsidiary, engaged in an illicit bid-rigging and bribery scheme involving the construction of a nuclear power plant (“UTN Angra III”) from approximately 2009 until 2015. These officers used their influence at Eletronuclear in favor of a bid-rigging scheme among certain private Brazilian construction companies. The officers also misused their official positions in authorizing unnecessary contractors and inflating the cost of Eletronuclear’s infrastructure project. In return, the construction companies involved in the scheme agreed to pay, and did pay, the former Eletronuclear officers approximately $9 million.
Eletronuclear paid invoices related to the inflated contracts in the ordinary course of its business because Eletrobras had failed to devise and maintain a sufficient system of internal accounting controls from 2009 through 2015. The corruption scheme at Eletronuclear caused misstatements in Eletrobras’s books and records because Eletronuclear recorded payments made to UTN Angra III contractors, a percentage of which was used for bribes, as money legitimately spent to acquire and improve assets.”
Eletrobras is described as “a Brazilian power generation, transmission and distribution company based in Rio de Janeiro, Brazil” with common and preferred shares registered with the SEC and traded on the New York Stock Exchange. According to the order: “The Brazilian federal government currently owns a 51% stake in Eletrobras and appoints seven of Eletrobras’s eleven board members.”
Under the heading “Former Officers at Eletronuclear Received Bribes in a Bid-Rigging and Bribery Scheme,” the order finds:
“Several Brazilian government officials, the former Eletronuclear president, and other Eletronuclear officers received bribes from Brazilian construction company executives engaged in a bid-rigging and bribery scheme involving UTN Angra III. The scheme ultimately benefited certain construction companies, at least two Brazilian political parties and Brazilian government officials, and several now former officers at Eletronuclear.
Specifically, construction company executives agreed to pay 2% of the UTN Angra III contract value to officials associated with two of Brazil’s largest political parties (1% each). The former Eletronuclear president also received approximately $4.1 million relating UTN Angra III. Finally, other former Eletronuclear officers collectively received approximately $4.9 million.
In return, the former Eletronuclear officers used their influence over the UTN Angra III prequalification, budgeting and procurement processes to, among other things, authorize unnecessary contractors, and inflate the cost of Eletronuclear’s infrastructure project. The improper payments made by the construction companies to Brazilian officials were funded, in part, using inflated contract prices or sham invoices that contractors involved in the UTN Angra III scheme submitted to Eletronuclear for payment.”
Under the heading “Eletrobras’s Compliance Policies and Internal Accounting Controls were Insufficient or Ineffective,” the order finds:
“Eletrobras’s anti-corruption policies or procedures and accounting controls relied, in part, on general or boilerplate prohibitions that did not apply to all employees or were ignored. For example, Eletrobras adopted a code of ethics in 2005 to ensure that competiveness and profitability did not override ethical behavior. However, Eletrobras’s code of ethics only applied to the holding company and made no mention of the subsidiaries and special purpose entities.
In 2009, Eletrobras began anti-corruption training for a small number of its workforce. The company also approved a code of conduct for its subsidiaries in 2010 that required all employees, including employees at its subsidiaries, to observe Eletrobras’s ethical principles that prohibited, in part, support or contribution to political parties or campaigns for elective office. Additionally, Eletrobras’s ethical principles required the selection and hiring of suppliers based on specific criteria including legal, technical, quality, cost and timeliness. However, many accounting controls designed to promote these ethical principles, such as certain contractual measurement criteria requiring that payments to suppliers be proportional to the worked performed, were ignored or circumvented.
Many of these efforts were ineffective because of significant material weaknesses in Eletrobras’s internal control over financial reporting that were not remediated for many years. For example, from 2009 through 2015 Eletrobras disclosed in its annual reports material weaknesses related to its ability to maintain an effective control environment, adequately perform risk assessments, and effectively maintain and operate controls with respect to its accounting for property, plant and equipment. Many of these material weaknesses, including the failure to maintain effective controls to ensure the completeness, accuracy, validity, and valuation over the purchase and payments of goods and services, contributed to the bribery scheme flourishing undetected for years.
Additionally, Eletrobras failed to devise and maintain a sufficient system of internal accounting controls in part because of weaknesses that allowed employees at the subsidiary level to ignore prohibitions against direct payments to subcontractors and allow the payment of upfront costs for work not performed. This occurred against a backdrop where Eletrobras’s compliance policies and procedures were not specifically tailored to the inherent risks associated with Eletrobras’s business operations.”
Under the heading “Eletrobras Improperly Accounted for Expenses Relating to the UTN Angra III Project,” the order finds:
“In order to effectuate the bid-rigging and bribery scheme described above, the former Eletronuclear officers involved used their influence and official positions to, among other things, authorize certain contractors, services and expenses connected to the scheme. Pursuant to this scheme, the construction companies overcharged Eletronuclear under construction contracts and contracts to provide goods and services, and used the overpayment to fund the bribes to the executives and political parties. From about 2009 until 2015, the former Eletronuclear officers caused Eletronuclear to approve and pay invoices from contractors involved in the bid-rigging and bribery scheme relating the UTN Angra III project. At least 28 invoices were from a contractor used as a conduit for the bribes paid to the former Eletronuclear president.
These inflated contract prices and sham invoices were recorded by Eletronuclear as legitimate expenses for goods or services in connection with UTN Angra III and consolidated to Eletrobras. As such, Eletrobras’s books and records did not, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company’s assets.
As a result of the conduct described above, Eletrobras violated [the books and records provisions] by improperly recording, as legitimate expenses, the payment of invoices related to contracts with inflated prices that derived from the bid-rigging and bribery scheme. Eletrobras also violated [the internal controls provisions] by failing to devise and maintain a sufficient system of internal accounting controls.”
Without admitting or denying the SEC’s findings, Electrobras agreed to cease and desist from future FCPA violations and agreed to pay a $2.5 million civil penalty.
Under the heading “Eletrobras’s Remedial Efforts,” the order states:
“In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff. Eletrobras’s cooperation included sharing facts developed during the course of an internal investigation by its board and voluntarily producing and translating documents. Eletrobras’s remediation included disciplining employees involved in the misconduct, enhancing its internal accounting controls and compliance functions, remediating material weaknesses identified in its annual reports with the Commission, and adopting a new anti-corruption policies and procedures.”
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