Entries in Subsidiaries (18)
Eli Lilly and Company resolved FCPA civil charges brought by the Securities and Exchange Commission based on bribes to government officials in Russia, Brazil, China, and Poland.
I’ve tried to map out some unfamiliar ways to think about FCPA reform. See these proposals as you might an old map -- exploratory, perhaps imprecise, still incomplete -- but meant to excite the human spirit.
Texas-based medical device company Orthofix International N.V. settled FCPA charges today relating to bribes in Mexico.
Simmering throughout 2011, the robust FCPA reform debate can now be divided into a number of distinct drafting and public policy battle fields.
Nearly a thousand posts later, that first one is still a favorite of ours. Although brief, it broke the ice . . .
The Securities and Exchange Commission kicked off the FCPA-enforcement year this week with civil books and records and internal controls charges against Texas-based oil and gas services firm NATCO Group Inc. The company admitted that its wholly owned subsidiary, TEST Automation & Controls, Inc., "created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan."
NATCO agreed to pay a $65,000 civil penalty. In settling with the SEC in federal court in Houston, NATCO admitted that its "system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO's consolidated books and records did not accurately reflect these payments." It also consented to an administrative cease and desist order against future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
The case confirms that civil FCPA charges can result from paying blackmail money to protect the welfare of employees overseas. Many companies are faced with extortionate demands from foreign police, bureaucrats and regulators, who threaten to hold, expel or even harm employees if ransoms aren't paid. There have always been questions whether those involuntary payments can violate the FCPA.
In criminal antibribery cases -- where intent is an element of the FCPA offense -- extortion is a defense. The issue came up in last year's criminal trial of Frederic Bourke for conspiracy to violate the FCPA. When he asked for a jury instruction on "true extortion," Judge Shira Scheindlin said evidence of extortion would go to the issue of whether Bourke possessed a corrupt intent in making alleged illegal payments. She explained that the government must prove beyond a reasonable doubt that a defendant had an improper motive or purpose for a payment intended to induce the recipient to misuse his official position in discharging an official act. On the other hand, she said, evidence of extortion can show the defendant acted without a corrupt intent. See our post here.
But unlike criminal cases, civil books and records and internal controls charges don't require mens rea or corrupt intent. So extortion isn't a defense. In NATCO's case, the SEC acknowledged the extortion. It said TEST's employees were threatened with fines, jail or deportation, and they believed the threats to be genuine. NATCO's violations, however, occurred not in paying the ransom but in mischaracterizing the payments to cover them up.
Here, from the SEC's complaint, is more of what happened:
In February and September 2007, Kazakh immigration prosecutors conducted audits and claimed that TEST expatriate workers lacked proper immigration documents. The prosecutors threatened to fine, jail or deport the workers if TEST did not pay cash fines. The TEST employees believed the prosecutor’s threats to be genuine. They sought guidance from TEST’s senior management in Harvey, Louisiana, who authorized the payments.
The TEST employees in Kazakhstan used personal funds to pay the prosecutors $25,000 in February and $20,000 in September, and then obtained reimbursement from TEST.
For the February 2007 payment, TEST made a $25,000 wire transfer to the affected employee. TEST inaccurately described it in an email as “an advance against his [the paying employee's] bonus payable in March.” As further camouflage, the email noted the bonus would be “substantial.” And in TEST’s letter to the bank providing wire instructions, the company inaccurately described the payment as a “Payroll Advance.” TEST then falsely recorded the payment in its books and records as a salary advance.
The SEC said TEST Kazakhstan used consultants to help obtain immigration documentation for its expatriate employees. It said,
One of these consultants did not have a license to perform visa services, but maintained close ties to an employee working at the Kazakh Ministry of Labor, the entity issuing the visas. On two instances, the consultant requested cash from TEST Kazakhstan to help him obtain the visas. . . . [T]he consultant provided TEST Kazakhstan bogus invoices for “cable” from third-party entities he controlled. TEST Kazakhstan knew these invoices were false, but nonetheless presented them to Kazakh banks to withdraw the requested cash. TEST Kazakhstan later submitted the false invoices – which totaled in excess of $80,000 – to TEST for reimbursement. TEST reimbursed these requests despite knowing the invoices mischaracterized the true purpose of the services rendered.
When the violations occurred, NATCO was an issuer. Its common stock was registered with the SEC under Section 12(b) of the Exchange Act and listed on the New York Stock Exchange. In November 2009, NATCO became a subsidiary of Cameron International Corporation, a publicly held reporting corporation listed on the NYSE, and the registration of NATCO’s common stock and its listing on the NYSE ended.
View the Securities and Exchange Commission's Litigation Release No. 21374 and Accounting and Auditing Enforcement Release No. 3102 (both dated January 11, 2010) in Securities and Exchange Commission v. NATCO Group Inc., Civil Action No. 4:10-CV-98 (S.D. Tex.) here.
Download the SEC's civil complaint here.
Download the federal court's final judgment here.
Download NATCO's consent to the final judgment here.
Download the order instituting cease-and-desist proceedings here.
Special thanks to Marc Bohn in the District of Columbia for help with this post.
Agricultural equipment-maker AGCO Corporation will pay nearly $20 million in criminal and civil penalties to resolve charges related to kickbacks it paid under the U.N. oil for food program. Under its plea deal with the Justice Department, the Duluth, Ga.-based firm will pay a criminal penalty of $1.6 million and enter into a three-year deferred prosecution agreement. The DOJ charged its U.K. subsidiary, AGCO Limited, in a one- count criminal information with conspiracy (18 U.S.C. § 371) to commit wire fraud (18 U.S.C. § 1343) and to violate the books and records provisions of the Foreign Corrupt Practices Act by falsifying accounts of parent AGCO Corporation, an issuer ( 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5), and 78ff(a)).
In settling civil charges brought by the Securities and Exchange Commission, AGCO Corporation will disgorge $13,907,393 in profits and $2 million in pre-judgment interest. It will also pay a civil penalty of $2.4 million. The SEC charged the company with failing to maintain an adequate system of internal controls to detect and prevent the corrupt payments and failing to properly record the payments (Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934).
AGCO is also paying a fine of $630,000 to the Danish State Prosecutor for Serious Economic Crimes to resolve criminal charges against its Danish subsidiary.
From 2000 through 2003, wholly-owned subsidiaries in Denmark, the U.K. and France paid about $5.9 million in kickbacks to the Iraqi regime and officials there in connection with sales of equipment under the oil for food program. The illegal payments were made through an agent and falsely recorded as “after sales service fees.” The U.K. subsidiary maintained and used a second set of accounts to track the payments. The SEC said,
The [second] accrual account was created by AGCO Ltd.’s marketing staff with virtually no oversight from AGCO Ltd.’s finance department. No one questioned the existence of the dual accounts. No one questioned why the Ministry Accrual account contained approximately ten percent of the contract value despite the fact that there was no contract in place requiring that such ten percent be paid to the ministry or anyone else. Unlike other payments to the agent, the Ministry Accrual payments were made by bank guarantee and in French francs or Euros instead of U.S. dollars. Marketing and finance employees in the U.K., Denmark, and France were all instrumental in the scheme. . . .AGCO's cooperation with U.S. authorities was evident. Among other things, in its deferred prosecution agreement it undertook to give the DOJ and other agencies all information it has about the illegal conduct and individuals involved, including the material from its internal investigations. The company didn't reserve the right to assert any claims of attorney-client or work-product privilege. In return, the DOJ didn't charge the U.S. parent company but only its U.K. subsidiary, and didn't bring substantive criminal FCPA or wire fraud charges, but instead used only the federal conspiracy statute. That should preserve AGCO Corporation's eligibility to do business with the U.S. government and bid for World Bank and IMF-funded projects.
AGCO operates worldwide and has annual revenues of about $8 billion. It manufacturers and sells tractors, combines, hay tools, sprayers, and forage and tillage equipment through its Challenger, Fendt, Massey Ferguson and Valtra brands.
AGCO Corporation trades on the New York Stock Exchange under the symbol AGCO.
Download the DOJ's September 30, 2009 release here.
Download the criminal information in U.S. v. AGCO Limited here.
Download AGCO Corporation's September 29, 2009 plea agreement with the Justice Department here.
View the SEC's Litigation Release No. 21229 dated September 30, 2009 in Securities & Exchange Commission v. AGCO Corporation, Civil Action No. 1:09-CV-01865 (D.D.C.)(RMU) here.
Download the SEC's civil complaint against AGCO Corporation here.
California-based Con-way, Inc., a global freight forwarder, has paid a $300,000 penalty and accepted a cease and desist order to settle a Foreign Corrupt Practices Act enforcement action with the Securities and Exchange Commission. Con-way's FCPA violations were caused by a Philippines-based subsidiary, Emery Transnational. It made about $244,000 in improper payments between 2000 and 2003 to officials at the Philippines Bureau of Customs and the Philippine Economic Zone Area, and $173,000 in improper payments to officials at fourteen state-owned airlines.
The bribes to customs officials consisted of hundreds of small payments. They were intended to induce the officials to violate customs regulations, settle customs disputes, and reduce or not enforce otherwise legitimate fines for administrative violations. To fund the payments, Emery's employees obtained cash advances to complete customs processing. The SEC said that "unlike legitimate customs payments, the payments at issue were not supported by receipts from the Philippines Bureau of Customs and the Philippine Economic Zone Area. Emery Transnational did not identify the true nature of these payments in its books and records."
Emery's employees also made corrupt payments between 2000 and 2003 to employees at fourteen state-owned airlines that did business in the Philippines. According to the SEC, the "payments were made with the intent of improperly influencing the acts and decisions of these foreign officials and to secure a business advantage or economic benefit." There were “weight shipped” payments intended to induce airline officials to improperly reserve space for Emery on the airplanes, and “gain shares” payments to induce airline officials to falsely under-weigh shipments and to consolidate multiple shipments into a single shipment, resulting in lower shipping charges. Emery paid the airline employees 90% of the reduced shipping costs.
Government-owned or controlled airlines receiving payments were Air France, Alitalia (Italy), China Airlines, EgyptAir, Emirates (Dubai), Gulf Air (Bahrain, Abu Dhabi, Oman), Kuwait Airways, Malaysian Airlines, Pakistan International Airlines, Royal Brunei Airlines, Saudi Arabian Airlines, SilkAir (Singapore), Singapore Airlines, and Thai Airways International.
According to the SEC's complaint, none of Emery's improper payments were accurately reflected in Con-way’s books and records. Also, Con-way knowingly failed to implement a system of internal accounting controls concerning Emery that would both ensure that Emery complied with the FCPA and require that the payments it made to foreign officials were accurately reflected on its books and records. As a result, Con-way violated Sections 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)).
Con-way discovered the illegal conduct at Emery in early 2003. After a preliminary internal investigation, Con-way self-disclosed the potential FCPA violations to the SEC. Following a more thorough internal investigation, Con-way imposed strict financial reporting and compliance requirements on Emery, fired a number of Emery employees involved in the misconduct, provided FCPA training and education to Con-way's own employees and strengthened its compliance program. In December 2004, Con-way sold Emery to UPS.
In the Philippines, payments to customs officials by local employees are a common compliance problem. Such payments are locally referred to as "facilitating payments" but shouldn't be confused with payments of the same name that are permitted under the FCPA. There's an exception in the FCPA for facilitating payments -- but only as defined by the FCPA itself. Among other things, the payments must be for “routine governmental action . . . which is ordinarily and commonly performed by a foreign official." See 15 U.S.C. §§78dd-1 (b) and (f) (3) [Section 30A of the Securities Exchange Act of 1934].
The exception will not apply, however, if there was no legitimate routine governmental action pending and for which the payment was made. A governmental action obtained or sought to be obtained by subornation of the official’s duty is not an action “ordinarily and commonly performed by a foreign official” and therefore is outside the scope of the exception. For example, paying a customs clerk to schedule an inspection of goods already in the customs queue may be permissible. But paying a customs clerk to jump the queue, or paying for positive inspection results, may be outside the exception.
Emery's payments to customs officials were intended to induce them to (i) violate customs regulations by allowing Emery to store shipments longer than otherwise permitted, thus saving the company transportation costs related to its inbound shipments; and (ii) improperly settle Emery's disputes with the Philippines Bureau of Customs, or to reduce or not enforce otherwise legitimate fines for administrative violations. Those clearly weren't actions “ordinarily and commonly performed by a foreign official.” That's why the payments fell outside the scope of the FCPA's facilitating payments exception. And whether or not the payments were permissible, Con-way was required to accurately account for them in its books and records, which it didn't do.
The case is also a reminder that employees of government- owned or controlled airlines are "foreign officials" for purposes of the FCPA. Contact with them, either directly or through travel agents or others, should be covered by compliance programs.
Con-way Inc. trades on the NYSE under the symbol CNW.
View SEC Litigation Release No. 20690 and Accounting and Auditing Enforcement Release No. 2866 (August 27, 2008) here.
View the Complaint in Securities and Exchange Commission v. Con-way Inc., Civil Action No. 1:08-CV-01478 (D.D.C.) (EGS) here.
View the SEC's Administrative Enforcement Action / Cease and Desist Order here.
Reason #1. Ignorance. Some companies don't discover their own FCPA problems. It sounds improbable, but it happens. The usual scenario is this: One or more employees in a foreign outpost draw cash by manipulating the company's accounts-payable or expense-reporting system. They use the money to bribe government officials to obtain business for the company. Sometimes it's one employee in a sales job or government-relations role, or a small group whose pay and bonuses depend on the office's performance. The expatriate supervisor, if there is one, is crooked or clueless, so the phony accounting and illegal payments remain a local secret.
Reason #2. Silence. When organizations learn of their own FCPA problems, they have a choice -- to self-disclose or keep quiet. Public companies ought to be disclosing just about everything these days. Sarbanes Oxley targets illegal conduct anywhere, including overseas bribery. So the number of issuers choosing not to report potential FCPA offenses -- both antibribery and books and records violations -- should be small. Privately-held companies, however, are more likely to stay silent. That's most common, we suspect, where founding-family members are still in charge. Sadly for them, someone in the conspiracy of silence usually plays ball with the DOJ to save their own skin. The former insiders -- now known as Co-operating Witnesses -- can drive a stake through the heart of the organization.
Reason #3. Compliance. How many potential FCPA violations are discovered, self-disclosed to the DOJ or SEC, but never publicized or prosecuted? Nobody on the outside knows the numbers. But here's what can happen. A compliance-minded organization reports its own potential violation to the feds. At the same time, it submits evidence demonstrating that:
(1) It had an effective compliance program before the problem occurred;A year goes by, maybe more. One day the company's lawyers receive a call from the DOJ. It's off the record. "We're satisfied justice has been served," the caller says. "Case closed."
(2) There are no prior offenses;
(3) Although the compliance program didn't prevent the conduct this time, it detected it quickly;
(4) This was an isolated event -- a rogue employee broke the rules for personal gain and not for the company's sake;
(5) The culprit has already been fired and the company is suing for restitution of misused corporate funds;
(6) Supervision over the problem office has been reorganized and managers replaced;
(7) The company's compliance program has been reviewed and tweaked to prevent similar incidents from happening;
(8) The company reported the problem to authorities in the U.S. and the host country right away, and is eager to help them with their own investigations; and
(9) Management's commitment to compliance has never been stronger.
The question our readers most want answered -- after we tell them bloggers have no way to predict Powerball winners -- is, Who's covered by the Foreign Corrupt Practices Act? It's always the jurisdiction thing -- and for good reason. How, for gosh sakes, does the FCPA reach from Washington to the four corners of the earth and back again? It's unnatural -- until you know how it works. Then it's just plain terrifying.
So to keep the FCPA's jurisdiction straight, we take inspiration from the Justice Department. That means we think about it by categories. Here's how:
Category One: Issuers. An "issuer" is a corporation that has issued securities that have been registered in the United States or who is required to file periodic reports with the SEC. See 15 U.S.C. §§ 78c(a)(8), 78dd-1(a). All issuers are covered by the FCPA, wherever they are.
Category Two: Domestic concerns. A "domestic concern" is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States, or a territory, possession, or commonwealth of the United States. See § 78dd-2(h)(1). All domestic concerns are covered by the FCPA, wherever they are. Helpful hint: If your lawyer calls you a domestic concern, it's more likely to be a warning than an insult.
Category Three: Parent companies. U.S. parent corporations (issuers or domestic concerns) may be held liable for the acts of their foreign subsidiaries if they (the U.S. parent) authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, themselves domestic concerns, who were employed by or acting on behalf of such foreign-incorporated subsidiaries.
Category Four: Foreign companies and individuals. A foreign company or person is subject to the FCPA if it, he or she takes any act in furtherance of a corrupt payment while within the territory of the United States. See § 78dd-3(a), (f)(1). When a foreign company or person acts on U.S. soil, the FCPA applies. Note, however, that the Justice Department interprets Category Four much more expansively. The government's position --untested in court -- is that there's FCPA jurisdiction whenever a foreign company or national (wherever they are) causes an act to be done within the territory of the United States by any person acting as that company's or national's agent.
Those are the categories. As we said, they're inspired by the Justice Department -- specifically the United States Attorneys' Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign Corrupt Practices” (November 2000).
And now, back to our Powerball picks.
View CRM §1018 here.
It's easy enough to scoff at the slogans, proverbs and aphorisms that line the halls of the great corporations. Who hasn't emerged from a conference-room donnybrook wondering who the Teamwork posters are supposed to be talking about? And yet, THINK helped create an industry and a company to lead it, and Safety First really can save lives.
How about compliance? Can we ever be reminded too many times to play by the rules, obey the law, keep our noses clean? Just as the best safety programs prevent accidents before they happen, so the best compliance programs should likewise head off illegal schemes before they hatch. So, could it be that the best -- which means the most memorable -- lessons about the FCPA might just be the shortest?
With that in mind, here are ten fast facts about the FCPA. Some aren't all that "fast" and none will fit on a bumper sticker. But we'll keep trying -- and we'll welcome your help.
1. Companies and individuals subject to the FCPA's antibribery provisions cannot give or promise to give anything of value to foreign officials directly or indirectly in order to obtain or retain business.
2.Those subject to the FCPA's accounting standards must make and keep books and records that accurately and fairly reflect the transactions and dispositions of the assets of the corporation, and have internal accounting controls adequate to provide reasonable assurance of the integrity of the company's financial systems and its disclosures.
3. An FCPA antibribery offense is punishable by up to five years in jail; intentionally violating the accounting standards can result in 20 years in prison.
4. The antibribery provisions generally apply to all organizations based or operating in the United States, and the accounting standards apply to companies with securities trading on a U.S. exchange and filing periodic reports with the SEC. Directors, officers, employees and agents of the foregoing are covered by the FCPA, as is anyone who does anything to cause an FCPA offense while they're on U.S soil.
5. Even if a foreign subsidiary isn't covered by the FCPA, its acts might cause its U.S. parent to be in violation.
6. Indirect payments or promises to pay foreign officials through partners, agents or other intermediaries can violate the law.
7. Corrupt payments to a foreign political party, party official or candidate for foreign political office intended to obtain or retain business are prohibited.
8. Anyone acting on behalf of a "public international organization" such as the International Olympic Committee, the United Nations, the World Bank and the International Red Cross is a “foreign official” for the FCPA.
9. Members of a royal family are “foreign officials” for the FCPA.
10. The best protection against an FCPA violation is an "effective compliance program." It can result in penalty reductions for companies by up to 95%, according to the U.S. Federal Sentencing Guidelines.
10-A. The board of directors is always responsible for the oversight and management of the company’s FCPA compliance program.