Once upon a time there was a law enforcement system in this country where companies that committed crimes or engaged in other wrongdoing were prosecuted criminally and/or civilly and where companies that did not commit crimes or did not engage in other wrongdoing were not prosecuted. That system has to a large extent been abandoned by the DOJ years ago – particularly in the FCPA context – and now that system appears to be crumbling at the SEC as well.
In December 2010, the SEC entered into its first non-prosecution agreement - albeit not in the FCPA context (see here for the prior post) and yesterday the SEC announced its first deferred prosecution agreement - of any kind - against Tenaris to resolve an FCPA enforcement action.
As has generally happened with the DOJ’s enforcement of the FCPA, the SEC’s enforcement of the FCPA will now be even further removed from judicial scrutiny and resolutions will now more frequently be negotiated over private conference room tables.
This is a troubling development on many fronts and it gives the public little confidence that our laws are enforced in a consistent and transparent manner or that regulators and companies are being held accountable.
With that introduction, let's take a look at the Tenaris enforcement action.
Tenaris (here) "is a leading supplier of tubes and related services for the world’s energy industry and certain other industrial applications." Tenaris is headquartered in Luxembourg and its American Depository Receipts ("ADRs") are listed on the New York Stock Exchange. In FCPA-speak, that makes Tenaris an "issuer."
The enforcement action involved both a DOJ and SEC component. Total settlement amount was $8.9 million ($3.5 million criminal penalty via a DOJ non prosecution agreement; $5.4 million in disgorgement and prejudgment interest via a SEC deferred prosecution agreement ... its feels odd just writing that).
Both enforcement actions involve commission payments to an Uzbekistan agent to receive confidential bidding documents in connection with tenders conducted by alleged Uzbekistan state-owned or state-controlled companies. The enforcement actions state that Tenaris employees "were aware or substantially certain that all or a portion" of the commission payments would be offered by the Agent to employees at the SOEs and that certain of the payments were paid via a wire transfer through a New York bank account.
DOJ
The NPA (here - dated March 14, 2011) begins as follows.
The DOJ "will not criminally prosecute" Tenaris and its subsidiaries and affiliates for any crimes "related to Tenaris's knowing violations of the anti-bribery and books and records provisions of the FCPA ... arising from and related to the making of improper payments by employees and agents of Tenaris to officials of OJSC O'ztashqineftgaz ("OAO"), an Uzbekistan state-controlled oil and gas production company, and the accounting and record-keeping associated with these improper payments."
The NPA has a term of two years and Tenaris admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Tenaris agreed "not to make any public statement contradicting" the described conduct.
According to the NPA, Tenaris has more than 24,000 employees around the world and it conducts operations in 12 countries and its customers include the world's leading oil and gas companies. The NPA states that Tenaris's operations included supplying steel pipe and related servics in the Caspian Sea region, including Uzbekistan. This region accounted for approximately 1% of Tenaris's total global sales and services from 2003 to 2008. Tenaris's Caspian Sea business was run from offices in Azerbaijan and Kazakhstan.
According to the NPA, "Tenaris obtained oilfeld services business in the Caspian Sea region in part by bidding on contracts solicited by state-owned companies or governmental agencies to provide pipeline used in the development and production of oil and natural gas. Tenaris often used agents to assist in biddig on government contracts in the Caspian Sea region."
The conduct at issue focused on OAO contracts between 2006 and 2007. According to the NPA, OAO "was a wholly owned subsidiary of Uzbekneftegaz, the state holding company of Uzbekistan's oil and gas industry" and during the relevant time period "Uzbekneftegaz and OAO were wholly owned by the Government Uzbekistan." The NPA then states, "OAO was an agency and instrumentality of the Government of Uzbekistan and its employees were foreign officials within the meaning of the FCPA."
According to its website (here) the current ownership of OAO is as follows: "government’s share – 51%; foreign investors’ share – 37.27%; free market trade share – 11.73%."
According to the NPA, in December 2006, Tenaris "was introduced to a potential agent ("OAO Agent") to help Tenaris bid on additional contracts with OAO" and "as an incentive to retain the OAO Agent, the OAO Agent offered Tenaris access to confidential bidding information of competitors obtained from officials in OAO's tender department, who would allow Tenaris to submit revised bids after reviewing the confidential information." The NPA states that "Tenaris would use the confidential competitor bid information to submit revised bids in order to increase the likelihood of Tenaris being awarded the underlying contract."
According to the NPA, Tenaris "agreed to pay the OAO Agent a fee of 3.5% for these services" and that Employees A, B, C, and D (non-U.S. citizens but "employees and agents" of Tenaris) "were aware or substantially certain that all or a portion of such money would be offered by the OAO Agent to one or more OAO employees."
The NPA then lists approximately $19.4 million in contracts Tenaris obtained using this system and states that certain of the commission payments to the OAO Agent were paid via wire transfer through a New York bank account.
Under the heading "Additional Improper Conduct to Avoid Detection," the NPA states that in November 2007 the above referenced employees learned of complaints from company competitors as to the bidding process on certain of the contracts and that an investigation by Uzbekekspertiza JSC (a Uzbekistani government agency) might commence. According to the NPA, "in an effort to avert the potential investigation of the bidding process, the OAO Agent recommended to Tenaris that the OAO Agent make an improper payment to Uzbekekspertiza officials to refrain from recommending the investigation against Tenaris or re-opening the bidding process to Tenaris's competitors" and that the employees "agreed to pay the recommended payment" to the officials to avert the investigation. However, the NPA states as follows: "the investigation did not uncover evidence that any such payment was made."
As to books and records, the NPA states that "the books, records and accounts reflecting Tenaris's transactions ... were incorporated into Tenaris's consolidated year-end financial statements" and that "Tenaris knowingly failed to make and keep books, records, and accounts that accurately and fairly reflected Tenaris's transactions ... and the payments to the OAO Agent."
Based on the above conduct, Tenaris agreed to pay a $3.5 million criminal penalty. The NPA states as follows. "This substantially reduced monetary penalty reflects the DOJ's determination to meaningfully credit Tenaris for its extraordinary cooperation with the Department, including its timely and voluntary disclosure, its subsequent investigation, and the effective manner in which Tenaris conveyed information to the [DOJ and the SEC]."
Inquiring minds want to know - how much was the penalty "substantially reduced?"
According to the NPA, the DOJ agreed to resolve the action via an NPA based, in part, on the following factors.
(a) Tenaris's timely, voluntary, and complete disclosure of the conduct at issue;
(b) Tenaris's extensive, thorough, real-time cooperation with the DOJ and the SEC;
(c) subsequent to its voluntary disclosure of certain conduct unrelated to Uzbekistan, but prior to discovery of the unlawful conduct related to Uzbekistan, Tenaris's voluntary investigation of the Company's business operations throughout the world, specifically including the thorough and effective manner in which this investigation was carried out and information was disclosed to the DOJ and SEC;
(d) Tenaris's remedial efforts already undertaken and to be undertaken, including voluntary enhancements to its compliance program; and
(e) Tenaris's commitment to implement enchanced compliance measures described in the NPA.
Based on (c) above, inquiring minds want to know - what did Tenaris originally voluntarily disclose?
Under the heading, "Disclosure and Investigation of Improper Activity," the NPA states as follows.
"In or about March 2009, a third party disclosed to Tenaris information indicating that certain sales agency payments were made by Tenaris in relation to business in a country other than Uzbekistan. These payments appeared to be for an improper purpose. In response to this information, Tenaris's Audit Committee retained outside counsel to investigate the allegations. Thereafter, in a Form 20-F filed with the SEC on or about June 30, 2009, Tenaris disclosed information related to these allegations. Tenaris also made a prompt, full disclosure of the information to the [DOJ] and the [SEC] concerning the allegations. In or around July 2009, counsel for Tenaris met with the [DOJ and SEC] and disclosed preliminary findings of the internal investigation. Such disclosure was related to facts known to Tenaris at the time but was not related to transactions in Uzbekistan. Tenaris's counsel also informed the [DOJ and the SEC] that it would conduct a thorough, world-wide investigation of its business operations and internal controls and would report the findings to the [DOJ and SEC]. Tenaris's investigation plan included significant collection and review of a substantial quantity of electronic and paper records from the company and third parties from multiple locations around the world, translation of all relevant materials into English, subsequent interviews of relevant personnel including senior executives and third parties, and review and testing of internal controls and compliance procedures. In or around June 2010, Tenaris disclosed the factual findings from its internal investigation in a thorough, complete and useful manner to the [DOJ and SEC]. As a result of its internal investigation, Tenaris discovered facts and transactions in Uzbekistan that constitute the violations set forth above. Tenaris voluntaly engaged in certain remediation efforts to include termination and disciplinary measures of the persons involved. Tenaris also thoroughly reviewed its pre-existing compliance program and applicable internal controls, and undertook voluntary, affirmative steps to update and improve its compliance program and to implement enhanced compliance measures and controls. Tenaris also agreed to provide real and meaningful cooperation with the [DOJ and SEC] and any law enforcement agency in connection with this matter."
Again, inquiring minds want to know - what did Tenaris originally voluntarily disclose?
See here for the DOJ's release announcing the enforcement action.
SEC
The SEC DPA (here) is based on the same core conduct described above.
As to internal controls, the SEC DPA states as follows.
"... Tenaris's system of internal controls failed to detect or prevent payments to OAO officials in an effort to obtain and retain business in Uzbekistan, including a failure to ensure that proper and effective due diligence was conducted on the Agent for the OAO contracts, and that the review process for authorization or approval of payments to the Agent failed to detect or prevent the illegal payments to OAO officials. Tenaris's policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act ("FCPA") compliance in place at that time warranted further strengthening to ensure effective compliance with the related laws."
One of the undertakings Tenaris agreed to in the DPA was the following.
"To conduct effective training regarding anticorruption and compliance with the FCPA for (1) all current officers and managers, (2) all employees working in Finance, Accounting, Internal Audit, Sales, and Government Relations, (3) all other employees working in positions Tenaris deems to involve activities implicated by Tenaris's policies regarding anticorruption and compliance with the FCPA, on or before December 31, 2011, and (4) all such future employees within 90 days oftheir affiliation with Tenaris."
Under the terms of the two-year DPA, Tenaris, without admitting or denying the SEC's allegations (the same way defendants are ordinarly allowed to resolve SEC enforcement actions), agreed to pay $5.4 million in disgorgement and prejudgment interest.
Pursuant to the DPA, Tenaris agreed "not to contest or contradict the factual statements" supporting the Statement of Facts. As noted in this prior post when the SEC announced its intention to make use of NPAs and DPAs, "[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses" is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.
Like the SEC's prior NPA, the Tenaris DPA is very similar to DOJ DPAs and NPAs.
In a release (here) the SEC touted its first use of a DPA.
Robert Khuzami (Director of the SEC's Division of Enforcement) stated as follows. “The Tenaris foreign bribery scheme was unacceptable and unlawful, but the company’s response demonstrated high levels of corporate accountability and cooperation. The company’s immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training made it an appropriate candidate for the Enforcement Division’s first Deferred Prosecution Agreement. Effective enforcement of the securities laws includes acknowledging and providing credit to those who fully and completely support our investigations and who display an exemplary commitment to compliance, cooperation, and remediation.”
Cheryl Scarboro (Chief of the SEC's FCPA Unit) stated as follows. “Tenaris’s conduct was clearly in violation of the FCPA. The company’s employees bribed government officials in Uzbekistan to obtain government contracts. But when Tenaris discovered the illegal conduct, it took noteworthy steps to address the violations and significantly enhance its anti-corruption policies and practices to remediate weaknesses in its internal controls.”
Robert Giuffra, Jr. of Sullivan & Cromwell (here) represented Tenaris.
Showing posts with label SEC Enforcement Action. Show all posts
Showing posts with label SEC Enforcement Action. Show all posts
Wednesday, May 18, 2011
Wednesday, May 4, 2011
Rockwell Automation Resolves SEC Action
[Note - because of my involvement in the below Rockwell matter while in private practice, this post is devoid of my customary commentary and analysis as to the enforcement action]
Yesterday, the SEC announced (here) a cease and desist proceeding and imposition of a cease and desist order as to Rockwell Automation, Inc.
As stated in the SEC's order, the matter involved "violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act ("FCPA") by Rockwell, through one of its former subsidiaries in China, Rockwell Automation Power Systems (Shanghai) Ltd. ("RAPS-China"), which was divested by Rockwell in January, 2007."
In summary fashion, the SEC found as follows.
"From 2003 to 2006, certain employees of RAPS-China paid approximately $615,000 to Design Institutes, which were typically state-owned enterprises that provided design engineering and technical integration services that can influence contract awards by end-user state-owned customers. The payments were made through third-party intermediaries at the request of Design Institute employees and at the direction of RAPS-China’s Marketing and Sales Director. RAPS-China’s Marketing and Sales Director intended that these funds be paid directly to the Design Institute employees, with the expectation that they would influence the ultimate state-owned customers to purchase RAPS products. While the Design Institutes did provide some bona fide engineering and other services in connection with RAPS-China’s end-user contracts, RAPS-China could not substantiate the specific services rendered or the value of those services. Also during the same period, employees of RAPS-China paid approximately $450,000 to fund sightseeing and other non-business trips for employees of Design Institutes and other state-owned companies."
"Rockwell realized approximately $1.7 million in net profits on sales contracts with end-user Chinese government-owned companies that were associated with payments to the Design Institutes."
"Rockwell failed to accurately record the payments in its books and records, and failed to implement or maintain a system of internal accounting controls sufficient to prevent and detect the payments."
Under the heading, "Discovery, Self-Reporting and Remediation" the SEC order states as follows.
"Rockwell discovered the DI Payments and the third-party payment mechanism in 2006 through its normal financial review process. This process was part of Rockwell’s global corporate compliance/internal controls program, which had targeted China for enhanced FCPA training and scrutiny starting in 2004. Upon discovery of the issue, Rockwell hired counsel and investigated the DI Payments with the oversight of its Board of Directors. It voluntarily self-reported the DI Payments to the Commission and voluntarily provided the Commission Staff with all relevant facts found in the investigation, and otherwise cooperated with the Commission. As a result of the discovery of this matter, Rockwell undertook numerous remedial measures, including employee termination and disciplinary actions, enhancements to its internal controls and compliance program and conducted a broad, global review of its other operations."
The SEC order further states as follows.
"In connection with the payments described above, Rockwell failed to make and keep accurate books, records and accounts as required by Section 13(b)(2)(A) of the Exchange Act."
"Further, as evidenced by the DI Payments (as described above) and leisure travel payments, Rockwell failed to devise or maintain sufficient internal controls as required by Section 13(b)(2)(B) of the Exchange Act."
As noted in the SEC order, Rockwell, without admitting or denying the SEC's findings, agreed to "pay disgorgement of $1,771,000, prejudgment interest of $590,091and a civil money penalty of $400,000."
The SEC order concludes by noting that "the Commission is not imposing a civil penalty in excess of $400,000 based upon [Rockwell's] cooperation" in the investigation.
See here for Rockwell's press release.
David Simon (Foley & Lardner - here) and Greg Bruch (Willkie Farr & Gallagher - here) represented Rockwell.
*****
The Rockwell matter represents the second time in the past month (approximately) that the SEC has resolved an FCPA inquiry via the administrative cease and desist route. See here for the prior post regarding Ball Corporation.
*****
Other FCPA enforcement actions focused on alleged improper travel and entertainment benefits to employees of Chinese state-owned enterprises include: Lucent Technologies (see here) and UTStarcom Inc. (see here).
*****
Other FCPA enforcement actions focused (in whole or in part) on allegedly improper payments to employees of so-called Chinese "Design Institutes" include: ITT Corp. (see here); and Avery Dennison (see here).
Yesterday, the SEC announced (here) a cease and desist proceeding and imposition of a cease and desist order as to Rockwell Automation, Inc.
As stated in the SEC's order, the matter involved "violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act ("FCPA") by Rockwell, through one of its former subsidiaries in China, Rockwell Automation Power Systems (Shanghai) Ltd. ("RAPS-China"), which was divested by Rockwell in January, 2007."
In summary fashion, the SEC found as follows.
"From 2003 to 2006, certain employees of RAPS-China paid approximately $615,000 to Design Institutes, which were typically state-owned enterprises that provided design engineering and technical integration services that can influence contract awards by end-user state-owned customers. The payments were made through third-party intermediaries at the request of Design Institute employees and at the direction of RAPS-China’s Marketing and Sales Director. RAPS-China’s Marketing and Sales Director intended that these funds be paid directly to the Design Institute employees, with the expectation that they would influence the ultimate state-owned customers to purchase RAPS products. While the Design Institutes did provide some bona fide engineering and other services in connection with RAPS-China’s end-user contracts, RAPS-China could not substantiate the specific services rendered or the value of those services. Also during the same period, employees of RAPS-China paid approximately $450,000 to fund sightseeing and other non-business trips for employees of Design Institutes and other state-owned companies."
"Rockwell realized approximately $1.7 million in net profits on sales contracts with end-user Chinese government-owned companies that were associated with payments to the Design Institutes."
"Rockwell failed to accurately record the payments in its books and records, and failed to implement or maintain a system of internal accounting controls sufficient to prevent and detect the payments."
Under the heading, "Discovery, Self-Reporting and Remediation" the SEC order states as follows.
"Rockwell discovered the DI Payments and the third-party payment mechanism in 2006 through its normal financial review process. This process was part of Rockwell’s global corporate compliance/internal controls program, which had targeted China for enhanced FCPA training and scrutiny starting in 2004. Upon discovery of the issue, Rockwell hired counsel and investigated the DI Payments with the oversight of its Board of Directors. It voluntarily self-reported the DI Payments to the Commission and voluntarily provided the Commission Staff with all relevant facts found in the investigation, and otherwise cooperated with the Commission. As a result of the discovery of this matter, Rockwell undertook numerous remedial measures, including employee termination and disciplinary actions, enhancements to its internal controls and compliance program and conducted a broad, global review of its other operations."
The SEC order further states as follows.
"In connection with the payments described above, Rockwell failed to make and keep accurate books, records and accounts as required by Section 13(b)(2)(A) of the Exchange Act."
"Further, as evidenced by the DI Payments (as described above) and leisure travel payments, Rockwell failed to devise or maintain sufficient internal controls as required by Section 13(b)(2)(B) of the Exchange Act."
As noted in the SEC order, Rockwell, without admitting or denying the SEC's findings, agreed to "pay disgorgement of $1,771,000, prejudgment interest of $590,091and a civil money penalty of $400,000."
The SEC order concludes by noting that "the Commission is not imposing a civil penalty in excess of $400,000 based upon [Rockwell's] cooperation" in the investigation.
See here for Rockwell's press release.
David Simon (Foley & Lardner - here) and Greg Bruch (Willkie Farr & Gallagher - here) represented Rockwell.
*****
The Rockwell matter represents the second time in the past month (approximately) that the SEC has resolved an FCPA inquiry via the administrative cease and desist route. See here for the prior post regarding Ball Corporation.
*****
Other FCPA enforcement actions focused on alleged improper travel and entertainment benefits to employees of Chinese state-owned enterprises include: Lucent Technologies (see here) and UTStarcom Inc. (see here).
*****
Other FCPA enforcement actions focused (in whole or in part) on allegedly improper payments to employees of so-called Chinese "Design Institutes" include: ITT Corp. (see here); and Avery Dennison (see here).
Tuesday, April 12, 2011
Comverse Technology ... Is It Really That Simple?
Question: "If you did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year.
Answer by Mark Mendelsohn, former FCPA chief DOJ: "If the Department only had the option of bringing a criminal charge or declining to bring a case, you would certainly bring fewer cases."
Mark Mendelsohn on the Rise of FCPA Enforcement, 24 Corporate Crime Reporter 35, September 10, 2010.
"... [T]he S.E.C.’s practice of permitting defendants to neither admit nor deny the charges against them remains pervasive, presumably for no better reason than that it makes the settling of cases easier."
U.S. District Court Judge Jed Rakoff (S.D.N.Y.) in SEC v. Vitesse Semiconducter Corp., March 21, 2010.
****
A U.S. company has a subsidiary A.
Subsidiary A has a subsidiary - subsidiary B.
Subsidiary B engaged an agent who made improper payments partially facilitated by subsidiary's B's inflated commission payments to him.
There is no allegation that Subsidiary A knew about the payments.
There is no allegation that the U.S. company knew about the payments.
But subsidiary B's books, records and accounts are incorporated into the books, records and accounts of the U.S. company for purposes of financial reporting.
These are the essential facts from last week's FCPA enforcement action against Comverse Technology Inc. - "a world leader in multimedia telecommunications applications".
The enforcement action involved both a DOJ and SEC component. Total settlement amount was $2.8 million ($1.2 million criminal fine via a DOJ non prosecution agreement; $1.6 million in disgorgement and prejudgment interest via a SEC settled complaint).
Is it really that simple?
Some have suggested that Comverse received "lenient" treatment (see here). Yet, it is questionable whether Comverse would have faced any criminal liability should the DOJ have been required to satisfy its high burden of proof in court.
Yet, FCPA enforcement actions like Comverse seem to be becoming norm.
DOJ
The DOJ enforcement action was resolved via a non-prosecution agreement, meaning there was not, and will never, be judiciary scrutiny of the DOJ's enforcement theory.
The NPA (here) begins as follows.
The DOJ "will not criminally prosecute Comverse Technology, Inc. ("CTI"), Comverse Inc., a wholly owned subsidiary of CTI ("Comverse Inc."), and the subsidiaries of Comverse Inc., including Comverse Ltd. (collectively referred to as Comverse) for any crimes ... related to Comverse's knowing violation of the books and records provisions of the Foreign Corrupt Practices Act ... arising from and related to Comverse's failure accurately to record certain improper payments made by employees of Comverse Ltd. and certain subsidiaries of Comverse Ltd. and a third party agent from 2003 to 2006."
According to the NPA, Comverse Inc. was wholly-owned subsidiary of CTI and Comverse Ltd., an Israeli company based in Tel Aviv, was a wholly owned subsidiary of Comverse Inc.
The NPA has a term of two years and Comverse admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Comverse agreed "not to make any public statement contradicting" the information below.
The conduct at issue focuses on monthly retainer fees paid by Comverse Ltd. to Agent G (an Israeli citizen engaged by Comverse Ltd. as an independent consultant with a particular focus on Greece) and commissions paid to Agent G on purchase orders. According to the NPA, "Agent G would keep 15% of the total commission, and the remaining 85% was used to make improper payments."
According to the NPA, "between 2003 and 2006, Comverse Ltd. made approximately $536,000 in cash payments to Corporation H [a Cyprus-based company created by Agent G at the direction of Comverse Ltd. employees to facilitate the payment of cash to representatives of certain Comverse Ltd. customers in exchange for securing purchase orders] with the intent that the money woudl be passed on to individuals connected to OTE, including employees of OTE's subsidiaries Cosmote, Cosmofon, and Cosmorom, in order to obtain purchase orders from those companies for Comverse Ltd. products and services, resulting in approximately $1.25 million in adjusted operating income."
OTE?
That would be the "Hellenic Telecommunications Organization S.A. - a telecommunications provider controlled and partially owned by the Greek Government." According to the NPA, "the Greek Government was OTE's largest single shareholder and maintained an interest in over one-third of OTE's issued share capital."
The DOJ agreed to resolve the enforcement action via a NPA "based, in part, on the following factors: (a) Comverse's timely, voluntary, and complete disclosure of the facts" [described above]; (b) Comverse's full cooperation with the Department and the [SEC]; and (c) the remedial efforts already undertaken and to be undertaken by Comverse."
The DOJ release (here) states as follows. "The [NPA] recognizes the company’s thorough self-investigation and the results of its investigation, voluntary disclosure of the underlying conduct, and full cooperation with the department. CTI has also undertaken extensive remedial efforts and overhauled its overall compliance culture, including through the implementation of mandatory training programs focused on anti-corruption and the use of third-party agents and intermediaries, as well as more rigorous accounting controls for the approval of third-party payments. As a result of these mitigating factors, the department has agreed not to prosecute CTI or its subsidiaries for failing to maintain accurate books and records, provided that CTI satisfies its obligations under the agreement for a period of two years. Those obligations include ongoing cooperation, payment of the $1.2 million penalty, and the continued implementation of rigorous internal controls."
SEC
The SEC's civil complaint (here) is based on the same core conduct described above.
The complaint alleges, in summary fashion, as follows.
"Between 2003 and 2006, Comverse Technology, Inc. (“Comverse”) violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act (the “FCPA”) when its Israeli operating subsidiary, Comverse Limited (“Comverse Limited”), engaged in a scheme to make improper payments to obtain or retain business."
"In order to facilitate and conceal the payments, Comverse Limited employed a third-party agent (the “Agent”) to establish an offshore entity in Cyprus which, in turn, funneled the improper payments to Comverse Limited’s customers. Employees of Comverse Limited made payments to the Cyprus entity and, after taking 15% off the top of these payments, the Agent paid or facilitated the payment of the remaining 85% to Comverse Limited’s customers in the form of cash bribes."
"Comverse Limited did not accurately record these improper payments in its books and records, which, in turn, caused them to be improperly classified in Comverse’s consolidated financial statements. Comverse failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions at all levels of the organization were recorded properly."
Specifically, the SEC alleged as follows.
"Between 2003 and 2006, Comverse Limited made improper payments to employees connected to OTE in order to obtain or retain business with OTE. The scheme originated in Comverse Limited's EMEA (Europe, Middle East, and Africa) sales division and the improper payments were inaccurately recorded on Comverse Limited's books and records, which, in turn, were consolidated with Comverse's financial results."
"Between 2003 and 2006, Comverse Limited, using [Corporation H], made improper payments totaling approximately $536,000 to individuals connected to OTE, including employees of OTE's subsidiaries Cosmote, Cosmofon, and Cosmorom to obtain or retain OTE's business. The improper payments resulted in $1.2 million of improper benefit to Comverse Limited, which flowed through to Comverse."
As to internal controls, the SEC alleged as follows. "During the relevant time period, neither Comverse nor Comverse Limited had a process, formal or otherwise, for conducting due diligence of third-party agents or for the independent review of third-party agent contracts outside of the sales departments." The SEC further alleged as follows. "At the time of the conduct, while Comverse did have an omnibus anti-corruption policy that prohibited improper payments to government-affiliated third parties and others, Comverse did not widely circulate this policy and provided no training on it to any employees."
As to books and records, the SEC alleged as follows. "Comverse Limited falsified its books and records by characterizing and recording the bribes as legitimate sales commissions, thereby failing accurately to reflect the payments and their purpose. These improper expenses, in turn, were consolidated into Comverse's financial records."
Based on the above conduct, the SEC charged Comverse with FCPA books and records and internal control violations.
As noted in the SEC release (here) without admitting or denying the SEC's allegations, Comverse consented "to a conduct-based injunction that prohibits Comverse from having books and records that do not accurately reflect, or from having internal controls that do not prevent or detect, any illegal payments made to obtain or retain business." In addition, Comverse consented to pay $1,249,614 in disgorgement and $358,887 in prejudgment interest.
Daniel Horwitz (Lankler and Carragher - see here) represented Comverse.
The company's 8-K filing on April 7th stated as follows. " As originally disclosed by the Company on March 16, 2009, the Audit Committee of the Board of Directors of the Company conducted its own internal investigation into such payments. The Audit Committee found that the conduct at issue did not involve the Company’s executive officers."
The company's 10-K filing on January 25, 2011 suggests that the company's internal investigation was prompted by a whistleblower complaint and the filing details the company's remedial actions in connection with the investigation. According to the filing "the Company recorded charges of $2.9 million associated with [the FCPA matter] during the fiscal year ended January 31, 2009." The company has not yet disclosed what its fees and expenses were during the fiscal year ended January 31, 2010.
*****
Another interesting item from Comverse's SEC filings. "For the fiscal year ended January 31, 2010, approximately one quarter of Verint's [Comverse's majority-owned publicly traded subsidiary] business was generated from contracts with various governments around the world, including federal, state, and local government agencies."
Answer by Mark Mendelsohn, former FCPA chief DOJ: "If the Department only had the option of bringing a criminal charge or declining to bring a case, you would certainly bring fewer cases."
Mark Mendelsohn on the Rise of FCPA Enforcement, 24 Corporate Crime Reporter 35, September 10, 2010.
"... [T]he S.E.C.’s practice of permitting defendants to neither admit nor deny the charges against them remains pervasive, presumably for no better reason than that it makes the settling of cases easier."
U.S. District Court Judge Jed Rakoff (S.D.N.Y.) in SEC v. Vitesse Semiconducter Corp., March 21, 2010.
****
A U.S. company has a subsidiary A.
Subsidiary A has a subsidiary - subsidiary B.
Subsidiary B engaged an agent who made improper payments partially facilitated by subsidiary's B's inflated commission payments to him.
There is no allegation that Subsidiary A knew about the payments.
There is no allegation that the U.S. company knew about the payments.
But subsidiary B's books, records and accounts are incorporated into the books, records and accounts of the U.S. company for purposes of financial reporting.
These are the essential facts from last week's FCPA enforcement action against Comverse Technology Inc. - "a world leader in multimedia telecommunications applications".
The enforcement action involved both a DOJ and SEC component. Total settlement amount was $2.8 million ($1.2 million criminal fine via a DOJ non prosecution agreement; $1.6 million in disgorgement and prejudgment interest via a SEC settled complaint).
Is it really that simple?
Some have suggested that Comverse received "lenient" treatment (see here). Yet, it is questionable whether Comverse would have faced any criminal liability should the DOJ have been required to satisfy its high burden of proof in court.
Yet, FCPA enforcement actions like Comverse seem to be becoming norm.
DOJ
The DOJ enforcement action was resolved via a non-prosecution agreement, meaning there was not, and will never, be judiciary scrutiny of the DOJ's enforcement theory.
The NPA (here) begins as follows.
The DOJ "will not criminally prosecute Comverse Technology, Inc. ("CTI"), Comverse Inc., a wholly owned subsidiary of CTI ("Comverse Inc."), and the subsidiaries of Comverse Inc., including Comverse Ltd. (collectively referred to as Comverse) for any crimes ... related to Comverse's knowing violation of the books and records provisions of the Foreign Corrupt Practices Act ... arising from and related to Comverse's failure accurately to record certain improper payments made by employees of Comverse Ltd. and certain subsidiaries of Comverse Ltd. and a third party agent from 2003 to 2006."
According to the NPA, Comverse Inc. was wholly-owned subsidiary of CTI and Comverse Ltd., an Israeli company based in Tel Aviv, was a wholly owned subsidiary of Comverse Inc.
The NPA has a term of two years and Comverse admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Comverse agreed "not to make any public statement contradicting" the information below.
The conduct at issue focuses on monthly retainer fees paid by Comverse Ltd. to Agent G (an Israeli citizen engaged by Comverse Ltd. as an independent consultant with a particular focus on Greece) and commissions paid to Agent G on purchase orders. According to the NPA, "Agent G would keep 15% of the total commission, and the remaining 85% was used to make improper payments."
According to the NPA, "between 2003 and 2006, Comverse Ltd. made approximately $536,000 in cash payments to Corporation H [a Cyprus-based company created by Agent G at the direction of Comverse Ltd. employees to facilitate the payment of cash to representatives of certain Comverse Ltd. customers in exchange for securing purchase orders] with the intent that the money woudl be passed on to individuals connected to OTE, including employees of OTE's subsidiaries Cosmote, Cosmofon, and Cosmorom, in order to obtain purchase orders from those companies for Comverse Ltd. products and services, resulting in approximately $1.25 million in adjusted operating income."
OTE?
That would be the "Hellenic Telecommunications Organization S.A. - a telecommunications provider controlled and partially owned by the Greek Government." According to the NPA, "the Greek Government was OTE's largest single shareholder and maintained an interest in over one-third of OTE's issued share capital."
The DOJ agreed to resolve the enforcement action via a NPA "based, in part, on the following factors: (a) Comverse's timely, voluntary, and complete disclosure of the facts" [described above]; (b) Comverse's full cooperation with the Department and the [SEC]; and (c) the remedial efforts already undertaken and to be undertaken by Comverse."
The DOJ release (here) states as follows. "The [NPA] recognizes the company’s thorough self-investigation and the results of its investigation, voluntary disclosure of the underlying conduct, and full cooperation with the department. CTI has also undertaken extensive remedial efforts and overhauled its overall compliance culture, including through the implementation of mandatory training programs focused on anti-corruption and the use of third-party agents and intermediaries, as well as more rigorous accounting controls for the approval of third-party payments. As a result of these mitigating factors, the department has agreed not to prosecute CTI or its subsidiaries for failing to maintain accurate books and records, provided that CTI satisfies its obligations under the agreement for a period of two years. Those obligations include ongoing cooperation, payment of the $1.2 million penalty, and the continued implementation of rigorous internal controls."
SEC
The SEC's civil complaint (here) is based on the same core conduct described above.
The complaint alleges, in summary fashion, as follows.
"Between 2003 and 2006, Comverse Technology, Inc. (“Comverse”) violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act (the “FCPA”) when its Israeli operating subsidiary, Comverse Limited (“Comverse Limited”), engaged in a scheme to make improper payments to obtain or retain business."
"In order to facilitate and conceal the payments, Comverse Limited employed a third-party agent (the “Agent”) to establish an offshore entity in Cyprus which, in turn, funneled the improper payments to Comverse Limited’s customers. Employees of Comverse Limited made payments to the Cyprus entity and, after taking 15% off the top of these payments, the Agent paid or facilitated the payment of the remaining 85% to Comverse Limited’s customers in the form of cash bribes."
"Comverse Limited did not accurately record these improper payments in its books and records, which, in turn, caused them to be improperly classified in Comverse’s consolidated financial statements. Comverse failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions at all levels of the organization were recorded properly."
Specifically, the SEC alleged as follows.
"Between 2003 and 2006, Comverse Limited made improper payments to employees connected to OTE in order to obtain or retain business with OTE. The scheme originated in Comverse Limited's EMEA (Europe, Middle East, and Africa) sales division and the improper payments were inaccurately recorded on Comverse Limited's books and records, which, in turn, were consolidated with Comverse's financial results."
"Between 2003 and 2006, Comverse Limited, using [Corporation H], made improper payments totaling approximately $536,000 to individuals connected to OTE, including employees of OTE's subsidiaries Cosmote, Cosmofon, and Cosmorom to obtain or retain OTE's business. The improper payments resulted in $1.2 million of improper benefit to Comverse Limited, which flowed through to Comverse."
As to internal controls, the SEC alleged as follows. "During the relevant time period, neither Comverse nor Comverse Limited had a process, formal or otherwise, for conducting due diligence of third-party agents or for the independent review of third-party agent contracts outside of the sales departments." The SEC further alleged as follows. "At the time of the conduct, while Comverse did have an omnibus anti-corruption policy that prohibited improper payments to government-affiliated third parties and others, Comverse did not widely circulate this policy and provided no training on it to any employees."
As to books and records, the SEC alleged as follows. "Comverse Limited falsified its books and records by characterizing and recording the bribes as legitimate sales commissions, thereby failing accurately to reflect the payments and their purpose. These improper expenses, in turn, were consolidated into Comverse's financial records."
Based on the above conduct, the SEC charged Comverse with FCPA books and records and internal control violations.
As noted in the SEC release (here) without admitting or denying the SEC's allegations, Comverse consented "to a conduct-based injunction that prohibits Comverse from having books and records that do not accurately reflect, or from having internal controls that do not prevent or detect, any illegal payments made to obtain or retain business." In addition, Comverse consented to pay $1,249,614 in disgorgement and $358,887 in prejudgment interest.
Daniel Horwitz (Lankler and Carragher - see here) represented Comverse.
The company's 8-K filing on April 7th stated as follows. " As originally disclosed by the Company on March 16, 2009, the Audit Committee of the Board of Directors of the Company conducted its own internal investigation into such payments. The Audit Committee found that the conduct at issue did not involve the Company’s executive officers."
The company's 10-K filing on January 25, 2011 suggests that the company's internal investigation was prompted by a whistleblower complaint and the filing details the company's remedial actions in connection with the investigation. According to the filing "the Company recorded charges of $2.9 million associated with [the FCPA matter] during the fiscal year ended January 31, 2009." The company has not yet disclosed what its fees and expenses were during the fiscal year ended January 31, 2010.
*****
Another interesting item from Comverse's SEC filings. "For the fiscal year ended January 31, 2010, approximately one quarter of Verint's [Comverse's majority-owned publicly traded subsidiary] business was generated from contracts with various governments around the world, including federal, state, and local government agencies."
Saturday, August 1, 2009
Gray Sky Over Nature's Sunshine As It Settles FCPA Enforcement Action
Companies have varying degrees of FCPA risks. Generally, at the high-end of the spectrum is a resource extraction company operating in a third-world country with an unstable government. At the low-end of the spectrum, it would seem, is a Utah-based company which got its start as a small family business selling encapsulated cayenne and other herbs to health food stores.
Yet, as evidenced by the SEC's recent FCPA enforcement action against Nature's Sunshine Products, Inc. ("NSP"), even a company with a relatively low FCPA risk profile can run afoul of the FCPA.
As described in the SEC's Litigation Release (see here) NSP, without admitting or denying the allegations in an SEC civil complaint, agreed to pay a $600,000 civil penalty to resolve allegations that it violated (among other securities laws - see below) the FCPA's anti-bribery, books and records, and internal control provisions.
According to the SEC complaint (see here), Brazil was NSP's largest foreign market, but in approximately 2000, the Brazilian governmental agency responsible for regulating nutritional products reclassified certain of NSP's products as medicines, thus requiring a registration process prior to import and sale of the products in Brazil. As alleged in the SEC complaint, NSP's wholly-owned subsidiary in Brazil ("NSP Brazil") circumvented the registration process by making approximately $1 million in cash payments to customs brokers, some of which was later used to pay Brazilian customs officials so that they would allow NSP Brazil to import unregistered product into Brazil. According to the SEC, these payments were booked by NSP Brazil as "importation advances," but without supporting documentation. Thereafter, as alleged by the SEC, NSP Brazil purchased fictitious supporting documentation for the payments.
As suggested above, in addition to the FCPA charges, the SEC complaint also charges other securities laws violations not typically found in an FCPA enforcement action such as fraud in connection with the purchase and sale of securities and false filings with the SEC. These other charges appear to be based on the allegation that NSP, in a prior Form 10-K filing with the SEC, stated that NSP Brazil experienced a significant decline in sales "due to import regulations imposed by the Brazilian government" but which failed to disclose any material information related to the above-mentioned cash payments.
Also charged in the SEC complaint were Douglas Faggioli, the current President and Chief Executive Officer of NSP and a member of its board of directors who during the relevant time period was NSP's Chief Operating Officer, and Craig Huff, NSP's former CFO. The complaint alleges that Faggioli and Huff, as "control persons" of NSP, violated the FCPA's books and records and internal control provisions. In language that is sure to induce a cold sweat for any executive, the SEC generally alleged that both Faggioli and Huff had "supervisory responsibilities" over NSP's senior management and policies, yet as "control persons," "failed to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions of NSP" and failed to devise and maintain an adequate system of internal accounting controls. Without admitting or denying the SEC's allegations, Faggioli and Huff each agreed to pay a $25,000 civil penalty.
According to an NSP press release (see here) no "current NSP officers, directors, or employees are alleged to have participated in or had knowledge of any of the improper conduct" alleged in the SEC complaint. The press release also notes that NSP voluntarily disclosed the conduct at issue to both the SEC and the DOJ and fully cooperated in the government's investigation. The press release also states that NSP "anticipates no action by the DOJ" as to the disclosed conduct.
The NSP FCPA enforcement action, and other such enforcement actions against traditionally low FCPA risk companies, should serve notice to all that no industry is immune from FCPA scrutiny.
Yet, as evidenced by the SEC's recent FCPA enforcement action against Nature's Sunshine Products, Inc. ("NSP"), even a company with a relatively low FCPA risk profile can run afoul of the FCPA.
As described in the SEC's Litigation Release (see here) NSP, without admitting or denying the allegations in an SEC civil complaint, agreed to pay a $600,000 civil penalty to resolve allegations that it violated (among other securities laws - see below) the FCPA's anti-bribery, books and records, and internal control provisions.
According to the SEC complaint (see here), Brazil was NSP's largest foreign market, but in approximately 2000, the Brazilian governmental agency responsible for regulating nutritional products reclassified certain of NSP's products as medicines, thus requiring a registration process prior to import and sale of the products in Brazil. As alleged in the SEC complaint, NSP's wholly-owned subsidiary in Brazil ("NSP Brazil") circumvented the registration process by making approximately $1 million in cash payments to customs brokers, some of which was later used to pay Brazilian customs officials so that they would allow NSP Brazil to import unregistered product into Brazil. According to the SEC, these payments were booked by NSP Brazil as "importation advances," but without supporting documentation. Thereafter, as alleged by the SEC, NSP Brazil purchased fictitious supporting documentation for the payments.
As suggested above, in addition to the FCPA charges, the SEC complaint also charges other securities laws violations not typically found in an FCPA enforcement action such as fraud in connection with the purchase and sale of securities and false filings with the SEC. These other charges appear to be based on the allegation that NSP, in a prior Form 10-K filing with the SEC, stated that NSP Brazil experienced a significant decline in sales "due to import regulations imposed by the Brazilian government" but which failed to disclose any material information related to the above-mentioned cash payments.
Also charged in the SEC complaint were Douglas Faggioli, the current President and Chief Executive Officer of NSP and a member of its board of directors who during the relevant time period was NSP's Chief Operating Officer, and Craig Huff, NSP's former CFO. The complaint alleges that Faggioli and Huff, as "control persons" of NSP, violated the FCPA's books and records and internal control provisions. In language that is sure to induce a cold sweat for any executive, the SEC generally alleged that both Faggioli and Huff had "supervisory responsibilities" over NSP's senior management and policies, yet as "control persons," "failed to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions of NSP" and failed to devise and maintain an adequate system of internal accounting controls. Without admitting or denying the SEC's allegations, Faggioli and Huff each agreed to pay a $25,000 civil penalty.
According to an NSP press release (see here) no "current NSP officers, directors, or employees are alleged to have participated in or had knowledge of any of the improper conduct" alleged in the SEC complaint. The press release also notes that NSP voluntarily disclosed the conduct at issue to both the SEC and the DOJ and fully cooperated in the government's investigation. The press release also states that NSP "anticipates no action by the DOJ" as to the disclosed conduct.
The NSP FCPA enforcement action, and other such enforcement actions against traditionally low FCPA risk companies, should serve notice to all that no industry is immune from FCPA scrutiny.
Wednesday, July 29, 2009
Avery Dennison Settles FCPA Matter - Is There a Strict Liability Standard for FCPA Books and Records and Internal Controls Violations?
The FCPA's books and records and internal control provisions, as written, generally state where an issuer "holds 50 per[cent] or less of the voting power with respect to a domestic or foreign firm" the books and records and internal control provisions "require only that the issuer proceed in good faith to use its influence, to the extent reasonable under the issuer's circumstances, to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls..." See 15 USC 78m(b)(6). The section further notes that "[s]uch circumstances include the relative degree of the issuer's ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located. An issuer which demonstrates good faith efforts to use such influence shall be conclusively presumed to have complied with the requirements of [the books and records and internal control provisions]." Id.
As readers of this blog are perhaps keenly aware - the FCPA, as written, and the FCPA, as enforced, are sometimes two different things.
Such is the case with the SEC's apparent position that issuers are liable (in a way that closely resembles strict liability) for any record keeping or internal control deficiency of any entity (no matter how remotely related to the issuer) in its corporate hierarchy. Although it is sometimes difficult to draw conclusions from negotiated settlement documents, the recent FCPA enforcement action against Avery Dennison Corporation would seem on-point. (See here for the SEC Cease- and-Desist Order, here for the SEC Litigation Release).
"Big picture," and as noted in the Litigation Release, the SEC filed a settled civil complaint against Avery Dennison (a California-based manufacturer of self-adhesive materials, offices products, labels, and graphics imaging media) ("Avery"), charging Avery with violations of the FCPA's books and records and internal control provisions. The SEC also issued an administrative cease-and-desist order ("Order") finding that Avery violated these same provisions.
The alleged violations principally involve Avery (China) Co. Ltd. ("Avery China"), an "indirect subsidiary" of Avery. I wish I knew how to post a flow-chart in this forum, because to connect Avery to Avery China, a flow-chart would indeed be useful. In any event, here is the narrative version as found in para 6 of the Order:
"Avery China is a wholly-owned subsidiary of Avery headquartered in Shanghai, China. It is incorporated under the laws of China and wholly-owned by Avery Dennison Hong Kong BV, which is in turn wholly owned by Avery Dennison Group Danmark ApS, which is in turn wholly owned by Avery Dennison Corporation. The Reflective Division is part of Avery China and is currently part of Avery's Graphics Division. Avery China is overseen by Avery's Asia Pacific Group, an unincorporated group based in Hong Kong within the Avery Dennison Hong Kong BV entity."
As set forth in the Order, the SEC found that: "Avery China's Reflective Division paid or authorized the payments of several kickbacks, sightseeing trips, and gifts to Chinese government officials" with "the purpose and effect of improperly influencing decisions by foreign officials to assist Avery China to obtain or retain business." (See para. 2).
The SEC also found that "after Avery acquired a company in June 2007, employees of the acquired company continued their pre-acquisition practice of making illegal petty cash payments to customs or other officials in several foreign countries." (See para. 3). These findings, which relate to payments to customs officials in Indonesia and Pakistan, and China, are interesting as well from the standpoint that the Order, at various times, refers to these payments as "certain potential [FCPA] violations" (para. 1), "illegal" (para. 3, 16 and 17), "possible improper payments" (para. 15), and "illicit" (para. 17).
The Order is silent as to Avery's participation in, or knowledge of, any of this conduct.
Yet the SEC found that "Avery failed to accurately record these payments and gifts in the company's books and records, and failed to implement or maintain a system of internal accounting controls sufficient to detect and prevent such illegal payments or promises of illegal payments." (See para. 4).
More specifically, the SEC found that:
"Avery's books, records, and accounts did not properly reflect the illicit payments, sightseeing trips and gifts that Avery China made or provided to government officials, and the illicit payments to customs officials in several countries by employees of the acquired subsidiaries. As a result, Avery violated the [the books and records provisions]" (para. 19).
"Avery also failed to devise or maintain sufficient internal controls to provide reasonable assurance that Avery China and the acquired subsidiaries complied with the FCPA and that payments, gifts or sightseeing expenses they provided to foreign officials were accurately reflected on its books and records. As a result Avery violated [the internal control provisions]" (para 20).
Avery agreed to settle the matter by paying approximately $520,000 (disgorgement, prejudgment interest, and a civil penalty) and agreeing to cease and desist from future violations of the FCPA's books and records and internal control provisions.
Notwithstanding 15 USC 78m(b)(6), this sure seems like a strict liability standard for multinational issuers. So long as this is the SEC's position, the FCPA compliance message is clear - multinational issuers will be held responsible for the conduct of all entities within its corporate hierarchy (no matter how remote or indirect) which could potentially implicate the FCPA. For this reason, corporate leaders are wise to fully implement FCPA compliance policies and procedures and audit protocols throughout the entire corporate hierarchy.
As readers of this blog are perhaps keenly aware - the FCPA, as written, and the FCPA, as enforced, are sometimes two different things.
Such is the case with the SEC's apparent position that issuers are liable (in a way that closely resembles strict liability) for any record keeping or internal control deficiency of any entity (no matter how remotely related to the issuer) in its corporate hierarchy. Although it is sometimes difficult to draw conclusions from negotiated settlement documents, the recent FCPA enforcement action against Avery Dennison Corporation would seem on-point. (See here for the SEC Cease- and-Desist Order, here for the SEC Litigation Release).
"Big picture," and as noted in the Litigation Release, the SEC filed a settled civil complaint against Avery Dennison (a California-based manufacturer of self-adhesive materials, offices products, labels, and graphics imaging media) ("Avery"), charging Avery with violations of the FCPA's books and records and internal control provisions. The SEC also issued an administrative cease-and-desist order ("Order") finding that Avery violated these same provisions.
The alleged violations principally involve Avery (China) Co. Ltd. ("Avery China"), an "indirect subsidiary" of Avery. I wish I knew how to post a flow-chart in this forum, because to connect Avery to Avery China, a flow-chart would indeed be useful. In any event, here is the narrative version as found in para 6 of the Order:
"Avery China is a wholly-owned subsidiary of Avery headquartered in Shanghai, China. It is incorporated under the laws of China and wholly-owned by Avery Dennison Hong Kong BV, which is in turn wholly owned by Avery Dennison Group Danmark ApS, which is in turn wholly owned by Avery Dennison Corporation. The Reflective Division is part of Avery China and is currently part of Avery's Graphics Division. Avery China is overseen by Avery's Asia Pacific Group, an unincorporated group based in Hong Kong within the Avery Dennison Hong Kong BV entity."
As set forth in the Order, the SEC found that: "Avery China's Reflective Division paid or authorized the payments of several kickbacks, sightseeing trips, and gifts to Chinese government officials" with "the purpose and effect of improperly influencing decisions by foreign officials to assist Avery China to obtain or retain business." (See para. 2).
The SEC also found that "after Avery acquired a company in June 2007, employees of the acquired company continued their pre-acquisition practice of making illegal petty cash payments to customs or other officials in several foreign countries." (See para. 3). These findings, which relate to payments to customs officials in Indonesia and Pakistan, and China, are interesting as well from the standpoint that the Order, at various times, refers to these payments as "certain potential [FCPA] violations" (para. 1), "illegal" (para. 3, 16 and 17), "possible improper payments" (para. 15), and "illicit" (para. 17).
The Order is silent as to Avery's participation in, or knowledge of, any of this conduct.
Yet the SEC found that "Avery failed to accurately record these payments and gifts in the company's books and records, and failed to implement or maintain a system of internal accounting controls sufficient to detect and prevent such illegal payments or promises of illegal payments." (See para. 4).
More specifically, the SEC found that:
"Avery's books, records, and accounts did not properly reflect the illicit payments, sightseeing trips and gifts that Avery China made or provided to government officials, and the illicit payments to customs officials in several countries by employees of the acquired subsidiaries. As a result, Avery violated the [the books and records provisions]" (para. 19).
"Avery also failed to devise or maintain sufficient internal controls to provide reasonable assurance that Avery China and the acquired subsidiaries complied with the FCPA and that payments, gifts or sightseeing expenses they provided to foreign officials were accurately reflected on its books and records. As a result Avery violated [the internal control provisions]" (para 20).
Avery agreed to settle the matter by paying approximately $520,000 (disgorgement, prejudgment interest, and a civil penalty) and agreeing to cease and desist from future violations of the FCPA's books and records and internal control provisions.
Notwithstanding 15 USC 78m(b)(6), this sure seems like a strict liability standard for multinational issuers. So long as this is the SEC's position, the FCPA compliance message is clear - multinational issuers will be held responsible for the conduct of all entities within its corporate hierarchy (no matter how remote or indirect) which could potentially implicate the FCPA. For this reason, corporate leaders are wise to fully implement FCPA compliance policies and procedures and audit protocols throughout the entire corporate hierarchy.
Subscribe to:
Posts (Atom)
