This recent post about the Rio Tinto FCPA enforcement action posed the lingering question of whether FCPA enforcement is a convenient cash cow for the U.S. government. After all, when several former FCPA enforcement officials suggest as much, what are the rest of us supposed to think?
After all, in the Rio Tinto matter the U.S. extracted $15 million from a company (with headquarters in Australia and the United Kingdom) after the SEC found that the company hired a French investment banker and close friend of a former senior Guinean government official as a consultant to help the company retain mining rights in Guinea. Even though both Australia and the United Kingdom have laws and law enforcement resources to adequately address the conduct at issue, the SEC nevertheless got involved because the company had American Depository Shares that traded on a U.S. exchange.
Earlier this week (and on the same day as the Rio Tinto matter was announced), the SEC also announced a $4 million FCPA enforcement action against Flutter International (a company headquartered in Ireland) – the successor in interest to The Stars Group (a company that was headquartered in Canada) – based on the finding that the “Company paid approximately $8.9 million to consultants in Russia in support of the Company’s operations and its efforts to have poker legalized in that country.” Even though both Ireland and Canada have laws and law enforcement resources to adequately address the conduct at issue, the SEC nevertheless got involved because The Stars Group at one time had shares traded on a U.S. exchange.
This administrative order states in summary fashion:
“This matter concerns violations of the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act of 1977 (“FCPA”) by the Company. Between May 26, 2015 and May 15, 2020 while the Company’s shares were registered with the Commission (the “Relevant Period”), the Company paid approximately $8.9 million to consultants in Russia in support of the Company’s operations and its efforts to have poker legalized in that country. The Company failed to devise and maintain a sufficient system of internal accounting controls over its operations in Russia during the Relevant Period with respect to third party consultants, certain of which the Company retained without adequate due diligence or written contracts, and paid without adequate proof of services. The Company also failed to consistently make and keep accurate books and records regarding consultant payments in Russia, including by inaccurately recording certain payments as lobbying fees.”
The order highlights the following relevant background.
“Prior to its acquisition by the Respondent (Flutter International), the Company (The Stars Group) operated a number of gaming and sports betting websites, including PokerStars, one of the largest online poker websites in the world. The Company acquired PokerStars and other online gaming brands as part of its acquisition of Oldford Group Ltd. (“Oldford Group”) on August 4, 2014 (the “PokerStars Acquisition”). As part of the PokerStars Acquisition, the Company acquired Oldford Group’s operations in Russia and inherited certain Russia-based consultants who had been engaged by Oldford Group.
During the Relevant Period, revenues originating from users in Russia were a significant source of revenue for the Company. Russia was a so-called “gray market” where poker was neither affirmatively permitted nor explicitly prohibited. The Company employed various consultants to lobby Russian government officials as part of its efforts to promote the legalization of poker in Russia and expand the Company’s operations in the Russian market. Despite the Company’s efforts, poker was never legalized in Russia. In March 2022, following Russia’s invasion of Ukraine, Respondent exited the Russian market.”
Under the heading “The Russian Consultants,” the order states:
“During the Relevant Period, the Company’s legalization strategy primarily relied on services provided by three legacy Oldford Group consultants (Consultants “A,” “B,” and “C,” and collectively, the “Russian Consultants”):
a. Consultant A was a lobbyist initially retained to help establish the Company’s business in Russia;
b. Consultant B was an attorney retained to provide legal advice regarding Russian gaming law; and
c. Consultant C was head of a business interest group and a well-known businessperson in Moscow whom the Company retained to support its business in Russia, which included interacting with and lobbying Russian Government officials.
Throughout the Relevant Period, and as further detailed below, the Company failed to devise and maintain a reasonable system of internal accounting controls governing its relationship with and payments to the Russian Consultants and failed to adequately monitor and record such payments in its books and records.
Failure to Perform Adequate Due Diligence
The predecessor parent company of PokerStars (a subsidiary of the Oldford Group) initially retained the Russian Consultants prior to the PokerStars Acquisition in August 2014. Then existing policies required employees to perform certain due diligence on third parties, including background and reference checks and written contracts. Nevertheless, no due diligence was performed on the Russian Consultants upon their initial retention, in connection with the PokerStars Acquisition, or in the subsequent months as the Company maintained the predecessor parent company’s compliance program while supplementing it with additional controls.
By at least 2016, the Company’s Board undertook a review of whether the Company, any of its subsidiaries, or any of its personnel had made improper payments, directly or through external consultants, to government officials in certain foreign jurisdictions. As a result of this review, the Company voluntarily contacted the Commission and other U.S. and Canadian regulators and thereafter adopted a policy requiring risk-based due diligence, written contracts, and approval by the CEO or general counsel of all consultants, lobbyists, and lawyers. The policy prohibited payments to any such third party unless the aforementioned steps had been completed.
Nevertheless, the Company continued to make payments to the Russian Consultants in violation of this policy. The only due diligence performed on the Russian Consultants was for Consultants B and C, consisting of a public records database search in 2016 – i.e., 18 months after the PokerStars Acquisition – followed by more detailed background reports for Consultants B and C in 2018. This after-the-fact diligence was insufficient according to the Company’s risk-based due diligence policies, particularly for Consultant C, who was retained in part to advance the Company’s commercial interests by liaising with foreign government officials.
Failure to Obtain and Monitor Consultant Contracts
Throughout the Relevant Period, the Company failed to adhere to internal policies requiring that the Company maintain written contracts with its consultants. The Company did not have a written contract with Consultant C until late 2017 despite Consultant C’s retention years earlier. While existing contracts were in place between the Company and Consultants A and B prior to 2017, such contracts were perfunctory documents and did not include anti-bribery and anticorruption provisions or safeguards despite internal requirements that all third-party agents and consultants adhere to applicable Company policies.
Even after the Company executed new contracts with the Russian Consultants in 2017 that included anti-bribery and anti-corruption provisions, the Company failed to effectively enforce them. For example, while the Russian Consultant contracts required that each consultant submit monthly invoices containing details of the services they provided, as well as any relevant backup or supporting documents, this information was not provided or included on the invoices, which contained only general statements including “consulting services” or “legal services” without any further detail. Additionally, while the contracts required that the Russian Consultants submit monthly reports detailing their activities, such reports were neither submitted to nor requested by the Company.
Further, the Company regularly paid Consultant C for office expenses incurred by a poker-related non-profit organization, including charges related to that organization’s rent and staff salaries, without a formal contractual requirement and without receiving supporting documents evidencing the actual rent or expenses until 2019.
Failure to Obtain and Review Invoices and Supervise Consultants
As detailed above, the Russian Consultants submitted to the Company invoices containing no details or information about the services they provided to the Company. Additionally, invoices for Consultant C were prepared and submitted by a company employee, rather than by Consultant C until 2019. Until 2019, no Company employee substantively reviewed the invoices, i.e., to determine if the services were in fact provided. The invoices were simply approved and paid as long as the amount fell within the overall budget allocated to the Russian Consultants’ activities.
In particular, with respect to Consultant C, from 2015 to 2018, the Company made payments totaling approximately $461,000 for expense reimbursements that lacked documentation and that the Company therefore could not substantively review. These payments included the following:
a. In June 2015, Consultant C submitted an invoice for the equivalent of $57,000, which stated it was for “bill draft and submission.” Consultant C claimed the request was an expense reimbursement to retain lawyers to draft legislation for the Duma, Russia’s lower house of parliament. However, there is no record of what attorneys were retained nor whether any draft legislation was provided to the Duma. A contemporaneous email from a Company employee stated that the invoice “is urgent now and needs to be paid this week. The bill is going to the Duma and could be rejected if we don’t pay.” The Company employee responsible for reviewing and approving the invoice made no further inquiries as to the nature of the expense and the Company paid the invoice on June 10, 2015.
b. In 2016, the Company made two separate payments totaling approximately $22,000 to Consultant C as reimbursement for expenses described in supporting e-mails alternatively as payments “regarding Roskomnadzor” or “to cover [Consultant C’s] payment to Roskomnadzor” or “to cover [Consultant C’s] second payment to RSKM” 2 – While these descriptions refer to “payments” to a Russian government agency, no receipt or other proof of payment to RSKM was provided. Moreover, the Company inaccurately recorded payments to Consultant C as “Lobbying Fees / Rent – Offices.” [The order states: “Roskomnadzor,” also abbreviated as “RSKM” or “Roskom,” is a Russian state agency responsible for, among other things, administering Russian internet censorship filters. During the Relevant Period, Roskom on numerous occasions blocked the Company’s online poker sites, thereby negatively affecting the Company’s operations in Russia.]
c. From March 2017 to January 2018, the Company made six payments totaling approximately $139,000 to Consultant C as lobbying fees or costs, without any supporting documentation. Contemporaneous emails indicate that some funds were to reimburse Consultant C for New Year’s gifts to individuals including Russian government officials, which relevant Company policies prohibited.
Failure to Accurately Record Consultant Payments
During the Relevant Period, the Company consistently recorded payments to Consultant B as “lobbying” expenses or “CIS MKTG” (Marketing), despite Consultant B’s having been purportedly engaged to provide legal services.”
Under the heading “Consulting Company A,” the order states:
“In addition to the individual Russian Consultants, the Company in January 2015 also retained Consulting Company A to, among other things, consult regarding Russian gaming legislation and liaise with Russian government officials. Without any indication that Consulting Company A provided any of its contracted-for services and despite numerous red flags around its retention, the Company paid Consulting Company A a total of $2 million across multiple payments in 2015, half of which the Company paid after registering its securities with the Commission.
As early as August 2014, the Company considered proposals from Consultant A to retain a new consultant to assist in the Company’s efforts to legalize poker in Russia; the Company ultimately retained Consulting Company A at the urging of Consultant A and the Company’s local regional manager. Numerous red flags regarding the retention existed at the time that the Company retained Consulting Company A. For example, Consulting Company A was registered in Belize and maintained its payment account in Latvia, two foreign jurisdictions unrelated to the services to be provided. Further, the payments to be made by the Company to Consulting Company A were initially described to the Company’s senior management as being for a “success fee” regarding getting legislation passed in Russia but later were described as a retainer fee to employ lawyers and other consultants to draft legislation.
Nevertheless, the Company did almost no due diligence regarding Consulting Company A, only performing a public records database search for Consulting Company A, and taking no steps to investigate its principals or ultimate beneficial owner.
Despite the aforementioned red flags and lack of diligence, the Company in January 2015 signed a services contract with Consulting Company A. That contract, which was never counter-signed, did not contain any anticorruption provisions, in violation of relevant Company policies.
Following the retention of Consulting Company A, the Company performed little to no follow-up or monitoring of the relationship. The only documentation submitted by Consulting Company A to justify its payments were monthly invoices, perfunctory documents containing no detail about any services provided by Consulting Company A or related expenses it may have incurred. No one reviewing or approving those payments checked to ensure that Consulting Company A was in fact providing services to the Company.
Of the $2 million the Company paid to Consulting Company A, $1 million was paid while the Company’s securities were registered with the Commission. The Company recorded these payments as “lobbying fees” but, as detailed above, the Company was at no point provided with documentary justification to support this accounting.”
Based on the above, the SEC found that the Company violated the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, Flutter International agreed to pay a $4 million civil penalty.
Under the heading “Flutter’s Cooperation and Remedial Efforts and Subsequent Events,” the order states:
“In determining to accept the Offer, the Commission considered the Company’s and Flutter’s cooperation and remedial efforts. The Company’s and Flutter’s cooperation included sharing facts developed in the course of its own internal investigation and forensic accounting reviews, providing translated copies of various documents and relevant witness statements, and encouraging parties outside of the Commission’s subpoena power to provide relevant evidence and information. Flutter’s remedial measures have included taking steps intended to enhance its internal accounting controls, global compliance organization, and its policies and procedures regarding due diligence, use of third parties, and maintenance of adequate records. Flutter has also terminated its relationship with Consultants A and C in March 2021; withdrawn from the Russian market following Russia’s invasion of Ukraine in early 2022; and is winding down its relationship with Consultant B, who remains engaged for the limited purpose of assisting with the closure of the Russia business.”
Mark Filips and Nader Salehi of Kirkland & Ellis represented Flutter.
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