Earlier this week, the DOJ and SEC announced a parallel Foreign Corrupt Practices Act enforcement action against Stericycle Inc. concerning conduct in Brazil, Mexico, and Argentina.
Portions of the alleged conduct were egregious in that an executive of the company’s Latin America division orchestrated the bribery schemes and others associated with the company used “spreadsheets to track the bribe payments.”
Big picture though, according to the SEC, a root cause of the enforcement action was Stericycle’s rapid international expansion.
As stated by the SEC:
“Stericycle first entered the Latin America market in 1997, and rapidly expanded in Latin America through the acquisition of many local businesses in Argentina, Brazil, and Mexico. The prior local business owners continued to run the operations in each country. Each country had an executive team that reported to, among others, a former Stericycle executive responsible for all of Latin America (the “LatAm Executive”).
[…]
Despite risks inherent in its business, Stericycle lacked sufficient internal accounting controls with respect to its international business in Latin America. As Stericycle grew in Latin America through acquisition, the accounting processes and systems remained mostly decentralized with neither uniformity nor proper oversight, resulting in internal control deficiencies. Additionally, Stericycle had no centralized compliance department and failed to implement its FCPA policies or procedures prior to 2016.”
In the SEC’s release, Eric Bustillo (Director of the SEC’s Miami Regional Office) stated:
“Stericycle rapidly expanded in Latin America without any meaningful oversight or compliance measures, as evidenced by widespread bribery schemes lasting for many years in most of its Latin America operations. Companies in pursuit of global expansion cannot disregard the need for appropriate controls.”
As highlighted below, the Stericycle enforcement action was certainly not the first in which the SEC (or DOJ) cited rapid international expansion as a root cause of an FCPA enforcement action.
Approximately six months ago, in an enforcement action against advertising agency WPP concerning conduct in India, China, Brazil and Peru, the SEC stated:
“Until 2018, WPP implemented an aggressive acquisition strategy in order to grow its business. As part of its acquisition strategy, WPP acquired a controlling interest in small, localized agencies in high-risk markets, such as India, China, and South America that were previously majority-owned by the local agency’s founder. WPP often structured these acquisitions to include an earn-out provision. Under these earn-out provisions, the parties agreed to defer a portion of the purchasing price until the agency’s founder met future financial goals. In some cases, WPP agreed that the agency’s founder would continue as the Chief Executive Officer of the WPP controlled entity (hereinafter Founder-in-Control or “FIC” entities). WPP placed the FIC entities within a WPP Network and consolidated the FIC entities’ financial statements into WPP’s financial statements.
WPP centrally coordinated the group’s financial matters, reporting, control, treasury, tax, mergers, acquisitions, investor relations, legal affairs and internal audit from its headquarters. In larger markets, such as India and China, WPP appointed a regional Financial Director to work more closely with the Networks, which were primarily responsible for servicing WPP’s clients and overseeing the FIC entities. While WPP mandated that all companies follow WPP global policies and internal accounting control requirements, in reality, the founders and/or CEOs of the FIC entities exercised wide autonomy and outsized influence.
Following this growth strategy, WPP operated in 112 countries and employed approximately 100,000 people over 3,000 locations during the relevant period. WPP sourced 86% of its revenue from 10 companies and 88% of its revenue was from operations in 20 countries.
Despite the known corruption and fraud risks inherent in WPP’s FIC acquisitions, WPP lacked sufficient internal accounting controls with respect to its expansive international network. Additionally, WPP had no compliance department during the relevant period, and it lacked meaningful coordination between its legal and internal audit departments and Network management. While WPP charged Network management with remediating deficiencies identified by WPP’s legal and internal audit departments, in practice, neither WPP nor the Networks provided adequate oversight of the FIC entities to ensure that the FIC entities implemented WPP’s internal accounting controls and compliance policies. As a result of these structural deficiencies, WPP failed to promptly or adequately respond to repeated warning signs of corruption or identified control failures at certain FIC entities. Described below are examples of the schemes and circumvention of WPP’s internal accounting controls and compliance policies that occurred at FIC entities.”
In the SEC’s release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:
“A company cannot allow a focus on profitability or market share to come at the expense of appropriate controls. Further, it is essential for companies to identify the root cause of problems when red flags emerge to prevent a pattern of corrupt behavior from taking hold.”
In the 2019 FCPA enforcement action against printing company Quad Graphics concerning conduct in Peru and China, the SEC stated:
“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.”
In the SEC’s release, Tracy Price (Deputy Chief of the SEC’s FCPA Unit) stated:
“As a U.S.-listed company expanding abroad, Quad/Graphics failed to ensure that its internal accounting controls were sufficient to prevent the type of widespread bribery in Peru and China and the concealment of commercial sales in Cuba.”
In the 2019 FCPA enforcement action against Walmart concerning conduct in Mexico, Brazil, India, and China, the SEC stated:
“At the end of Walmart’s fiscal year 1990, the Company had 1,528 stores which had generated annual sales of $26 billion—all within the United States. Walmart, recognizing that international expansion could help it become the world’s largest retailer, entered its first foreign market, Mexico, in 1991. In 1993, Walmart established Walmart International as an operating segment, headquartered in Bentonville, Arkansas, responsible for overseeing the Company’s operations outside the United States. Between 1994 and 1996, the Company established additional outposts in other countries, including Brazil and China. During fiscal year 2010, the year in which Walmart opened its first Indian wholesale outlet, the Company operated stores in 14 foreign countries, with international sales of approximately $100 billion.
Walmart’s formula for success centered on Everyday Low Prices and Everyday Low Cost. Walmart’s rapid international growth, combined with its low-cost philosophy, contributed to the Company’s insufficient anti-corruption related internal accounting controls in Walmart’s subsidiaries in Mexico, India, China, and Brazil from in or around July 2000 until in or around April 2011.”
In the SEC’s release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:
“Walmart valued international growth and cost-cutting over compliance. The company could have avoided many of these problems, but instead Walmart repeatedly failed to take red flags seriously and delayed the implementation of appropriate internal accounting controls.”
Likewise, DOJ Assistant Attorney General Brian Benczkowski 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 2014 FCPA enforcement action against gun company Smith & Wesson concerning conduct in Pakistan, Indonesia, Turkey, Nepal and Bangladesh the SEC stated that during the relevant time period “Smith & Wesson’s international business was in its developing stages and accounted for approximately 10% of the company’s revenues. Smith & Wesson’s employees and representatives engaged in a systemic pattern of making, authorizing and offering bribes while seeking to expand the company’s overseas business.” The SEC further stated: “Despite making it a high priority to grow sales in new and high risk markets overseas, the company failed to design and implement a system of internal controls or an appropriate FCPA compliance program reasonably designed to address the increased risks of its new business model.”
In the SEC’s release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) 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.”
In the 2011 FCPA enforcement action against beverage company Diageo concerning conduct in India, Thailand, and South Korea, the SEC stated that: “Diageo’s history of rapid multinational expansion through mergers and acquisitions contributed to defects in its FCPA compliance programs.”
Indeed, the conduct at issue focused on Diageo India Pvt. Ltd. (“DI”) (a wholly-owned indirect subsidiary acquired as a result of a merger); Diageo Moet Hennessy Thailand (“DT”) (a joint venture Diageo acquired an indirect majority interest in as a result of a merger) and Diageo Korea Co. Ltd. (“DK”) (a wholly-owned indirect subsidiary acquired during an acquisition). According to the SEC, “at the times of these acquisitions, Diageo recognized that its new subsidiaries had weak compliance policies, procedures, and controls” but “nevertheless, Diageo failed to make sufficient improvements to these programs until mid-2008 in response to the discovery of illicit payments.”
In short, if business and compliance professionals didn’t already know, the above FCPA enforcement actions are instructive and demonstrate that rapid international expansion is an FCPA risk factor that should be managed and mitigated.
