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World Acceptance Corp. Resolves $21.7 Million Enforcement Action Based On The Conduct Of A Former Wholly-Owned Mexico Subsidiary

As highlighted in this prior post [1], in June 2017 World Acceptance Corporation (a South Carolina based consumer finance company) disclosed that it was “conducting an internal investigation of its operations in Mexico, focusing on the legality under the U.S. Foreign Corrupt Practices Act and certain local laws of certain payments related to loans, the maintenance of the Company’s books and records associated with such payments, and the treatment of compensation matters for certain employees.”

As highlighted in this prior post [2], in May 2020 the company disclosed that “discussions with the SEC have progressed to a point that the Company can now reasonably estimate a probable loss and has recorded an aggregate accrual of $21.7 million with respect to the SEC matters.”

Yesterday, the SEC announced [3] that World Acceptance Corp. agreed to resolve a $21.7 million FCPA enforcement action based on the actions of a former wholly-owned Mexican subsidiary it sold in July 2018.

In summary fashion, this administrative order [4] finds:

“This matter concerns violations of the anti-bribery, books and records, and internal accounting controls provisions of the FCPA by World Acceptance Corporation, a consumer loan company headquartered in Greenville, South Carolina. The bribery scheme took place at WAC’s former wholly-owned subsidiary in Mexico, WAC de Mexico, S.A. de C.V. (“WAC Mexico”), which paid approximately $4.1 million USD in bribes, directly or through intermediaries, to Mexican government officials and union officials, from at least December 2010 through June 2017 to obtain and retain business.

WAC failed to make and keep accurate books and records and failed to devise and maintain a sufficient system of internal accounting controls necessary to detect and prevent these bribe payments. The bribe payments were inaccurately recorded as legitimate “commission” expenses in WAC’s books and records. WAC failed to implement sufficient internal accounting controls over vendor management and accounts payable at WAC Mexico, failed to provide reasonable assurances that WAC Mexico had implemented an FCPA policy and was adhering to it, failed to provide FCPA training at WAC and WAC Mexico, and lacked sufficient entity level controls over WAC Mexico. In addition, WAC management lacked the appropriate tone at the top regarding internal audit and compliance, thereby undermining the effectiveness of those functions.

As a result of the bribery scheme, WAC was unjustly enriched by approximately $18 million.”

Under the heading the “bribery scheme,” the order finds:

“WAC, through its former wholly-owned subsidiary, WAC Mexico, engaged in a bribery scheme from at least December 2010 through June 2017, paying approximately $4.1 million USD ($64 million MXN) in bribes to obtain and retain business related to its Préstamos Viva business line (“Viva”).

WAC Mexico had two lines of business, Préstamos Avance (“Avance”) and Viva. Avance offered small loans directly to consumers, while Viva offered small loans to state and federal government employees. Viva had less collection risk than Avance because government employees had greater job security, and loan repayments were automatically deducted from the government employee’s paycheck, collected by the unions, and sent to WAC Mexico. WAC Mexico entered into at least 30 Viva contracts with government entities and/or worker unions representing government employees, most of whom worked in healthcare and education. To obtain Viva business and to ensure that loan repayments continued to be sent to WAC Mexico in a timely manner, WAC Mexico paid monetary bribes to Mexican government officials and union officials.

The Viva contracts were signed by government officials (e.g., the secretary of health or education for a particular state government), and/or union officials (e.g. the general secretary of a particular union). To enter into these contracts, WAC Mexico paid monetary bribes, known internally as the “glove,” to Mexican government officials and union officials. During the performance of these contracts, WAC Mexico also made ongoing payments, referred to as “royalty payments,” “scholarship,” or “support,” to officials to ensure that loan repayments continued to be sent to WAC Mexico in a timely manner. Regardless of who signed the contracts with WAC Mexico, government officials were paid bribes to obtain or retain the ability to make loans to the government employees under all of the contracts.

The $4.1 million in bribe payments to government officials and union officials were paid in cash, a bank deposit into their bank account, or a bank deposit into the bank account of a relative or friend of the official. WAC Mexico also hired third-party intermediaries to assist with obtaining business, and make ongoing bribe payments to officials. These intermediaries kept a small portion of the payments as their fee. One of WAC Mexico’s intermediaries flew to different municipalities in Mexico with large bags of cash to pay officials. Employees at WAC Mexico communicated with the intermediaries via email through servers located in the U.S.

Of the $4.1 million USD in payments, at least $1.5 million was paid to government officials, $580,000 paid to union officials, and $480,000 paid to third party intermediaries who used the funds to pay government officials and union officials. Due to the lack of appropriate recordkeeping at WAC Mexico, it is unclear how the remaining $1.5 million in payments were split between those made directly to government officials or union officials, or an intermediary 4 who used the funds to pay the officials.”

[5]

Under the heading “WAC’s Inaccurate Books and Records and Insufficient Internal Accounting Controls to Detect or Prevent Bribery,” the order finds:

“The bribe payments were inaccurately recorded as legitimate “commission” expenses in WAC’s books and records. WAC and WAC Mexico lacked the internal accounting controls sufficient to detect or prevent such payments. For example, WAC Mexico did not have a vendor management system, did not maintain a master list of approved vendors, did not conduct formal due diligence on new vendors, and did not have formal procedures or controls in place to approve new vendors. These internal control failures over vendors allowed WAC Mexico to hire third party intermediaries to pay bribes to government officials and union officials.

In addition, WAC Mexico did not have a sufficient accounts payable system. Instead, manual checks were used for payment, which resulted in managers pre-signing blank checks, making it impossible to enforce authorization limits in place over payments. Moreover, WAC Mexico manually prepared a monthly spreadsheet that listed the checks paid that month, and provided an expense category for each check. The payments made to government officials and union officials were inaccurately categorized as “commission” expenses. WAC Mexico sent the spreadsheet each month to WAC’s accounting department in Greenville, South Carolina without invoices or backup support, and WAC failed to require such backup support. WAC then manually coded each expense, including the “commission” expenses, for recording in WAC’s general ledger, which was used to prepare WAC’s financial statements. Another example of the lack of controls over accounts payable was the senior vice president of WAC Mexico approved check payments with or without invoices, and starting in or about July 2014, WAC increased his authorization limit to $1 million MXN (about $75,000 USD) to make payments related to any Viva contract.

WAC did not identify the high risk of bribery and corruption in Mexico and did not implement sufficient internal accounting controls to address that risk. Although starting sometime in 2013, WAC had an FCPA policy in its corporate compliance manual, there was no effective formal monitoring, or internal controls in place, to ensure that WAC Mexico was adhering to that policy. Moreover, neither WAC or WAC Mexico provided FCPA training to its personnel from at least December 2010 through October 2017.

WAC also lacked entity level controls over WAC Mexico as a result of the lack of oversight over personnel in Mexico.

Lastly, the tone at the top from WAC management did not support robust internal audit and compliance functions, and undermined the effectiveness of those functions. For example, in October 2015 the then-CEO of WAC terminated the vice president of internal audit after he raised compliance concerns, including concerns about the lack of internal accounting controls at WAC Mexico. The then-CEO then combined the internal audit function and the compliance function into one department under one VP, had the VP report to her, and pressured the VP to eliminate staffing and become more “bare-bones,” according to the VP. Prior to this change, both vice presidents of internal audit and compliance had reported directly to the Board of Directors and the Audit Committee. In November 2016, the then-CEO told the internal audit and compliance VP that she would now report to the then-general counsel. Shortly thereafter, the VP voiced concerns that the internal audit and compliance functions were not sound, and the thenCEO terminated her. The then-general counsel took over as the head of internal audit and compliance, even though the general counsel had no prior audit or accounting experience. WAC’s then-CEO also told the then-general counsel and an internal audit director that she did not care whether WAC had a “world class [internal] audit function.”

After the bribery allegations came to light in March 2017, WAC’s management and its independent audit firm reported in WAC’s FYE 2017 Form 10-K (ending March 31, 2017) that WAC had material weaknesses in its Internal Control over Financial Reporting (“ICFR”) and, as a result, WAC did not maintain effective ICFR. Specifically, WAC’s independent audit firm identified the following material weaknesses: “control design gaps in [WAC’s] accounts payable environment related to vendor management and payment processes in Mexico and in [WAC’s] entity level control environment related to adherence to U.S. and foreign laws and regulations, including the FCPA, and corporate governance of the Mexico operations.” WAC’s management also identified the same material weaknesses.”

Based on the above, the order finds that WAC violated the FCPA’s anti-bribery provisions and books and records and internal controls provisions.

Without admitting or denying the SEC’s findings, WAC agreed to pay approximately $21.7 million to resolve the action ($17.8 million in disgorgement, $1.9 million in prejudgment interest, and a $2 million civil penalty).

Under the heading “WAC’s Cooperation and Remedial Efforts,” the order states:

“In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by WAC and cooperation afforded the Commission staff, including facilitating witnesses traveling from Mexico to the U.S. for interviews. WAC’s remedial acts included personnel changes made in late 2017 and early 2018, such as terminating the senior vice president of WAC Mexico, and WAC’s CEO and general counsel (on terms previously disclosed), and in mid-2018 WAC divested itself of WAC Mexico.”

In the SEC release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:

“This long-running bribe scheme did not happen in a vacuum.  Through a lack of adequate internal accounting controls and a culture that undermined its internal audit and compliance functions, World Acceptance Corporation created the perfect environment for illicit activity to occur for nearly a decade.”

Yesterday, the DOJ posted this letter [6] on the “declinations” page of its FCPA website. In pertinent part, it states:

“Consistent with the FCPA Corporate Enforcement Policy, the DOJ … has declined prosecution of … World Acceptance Corporation for violations of the FCPA. We have reached this conclusion despite the bribery committed by employees of the Company and its subsidiaries in Mexico.

The Department’s investigation found that evidence that beginning in 2010 and continuing through 2017, World’s Mexican subsidiary, through its employees and agent, paid over $4 million to third-party intermediaries that was used, in part, to pay bribes to Mexican union officials and state government officials in order to obtain contracts with Mexican unions and Mexican state governments that allowed World to make loans to union members and to receive payments on such loans directly from the unions, which withheld the amount of the loan repayment from the paychecks of the union members.

The Department has decided to decline prosecution of this matter based on an assessment of the factors set forth in the Corporate Enforcement Policy … and the Principles of Federal Prosecution of Business Organizations … including but not limited to: (1) World’s prompt, voluntary self-disclosure of the misconduct; (2) World’s full and proactive cooperation in this matter (including its provisions of all known relevant facts about the misconduct; (3) the nature and seriousness of the offense; (4) World’s full remediation, including the additional FCPA training added to World’s compliance program, separation from executives under whom the misconduct took place, and discontinuing relationships with third parties in Mexico involved in the misconduct; and (5) the fact that World agrees to and will disgorge to the SEC the full amount of its ill-gotten gains.”

In this company release [7], Luke Umstetter (General Counsel, Chief Compliance Officer and Secretary) stated:

“We are pleased to reach these resolutions which reflect the Company’s full and robust cooperation in this matter. Having undertaken an extensive independent investigation led by our board and addressing these past issues, we emerge with a renewed focus on operating our business with integrity and in compliance with applicable laws and regulations.”

Chad Prashad (President and CEO) stated:

“Since selling our foreign businesses over two years ago, our team has been focused on designing and offering affordable credit solutions that help people realize their financial goals. We are pleased to put this matter behind us and believe we are well positioned for the future.”

World Acceptance Corp. was represented by Womble Bond Dickinson attorneys Mark Schamel, Robert Ambler and James Connelly.

On the day of the enforcement action, WAC’s stock closed up 1.7%.

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