Earlier this week the DOJ and SEC announced a wide ranging enforcement action against ABB Ltd. and its subsidiaries ABB Inc., and ABB Ltd. – Jordan.

Swiss-based ABB Ltd. (here) is a provider of power and automation technologies with American Depositary Shares publicly traded on the New York Stock Exchange.

This post summarizes the various aspects of the enforcement action in which ABB Ltd. and ABB Inc. agreed to pay a total of $58.3 million ($19 million in DOJ criminal penalties and $39.3 million in SEC disgorgement and civil penalties).

DOJ

ABB Ltd. Deferred Prosecution Agreement

As noted in this DOJ release, ABB Ltd. agreed to enter into a deferred prosecution agreement (DPA). ABB’s press release (here) states that the DPA “includes provisions related to the involvement of a subsidiary in Jordan in the Oil for Food Program” and that “in lieu of an external compliance monitor, the DOJ and SEC have agreed to allow ABB to report on its continuing compliance efforts and the results of the review of its internal processes for a three-year period going forward.”

In other words, the DPA appears limited to the conduct of ABB Ltd. – Jordan (summarized below) and not the conduct of ABB Inc. (summarized below).

[Note - to my knowledge the DPA has yet to be publicly released. Here is a request for DOJ readers of this blog. Under the DOJ's "old" website, the charging documents were released and linked along with the press release. With the revamped website, the charging documents are nowhere to be found requiring interested persons to go to Pacer or other sources. The charging documents ultimately end up on the DOJ's FCPA specific website, but in many cases it takes weeks. DOJ may want to consider the old system which provided real-time access to these important charging documents]

ABB Ltd. – Jordan Criminal Information

The information charges ABB Ltd. – Jordan (“ABB-Jordan”) with one count of conspiracy to commit wire fraud and to violate the FCPA’s books and records provisions.

According to the information (here), ABB-Jordan was a wholly-owned subsidiary of ABB Ltd. ABB-Jordan, through its 95% owned subsidiary ABB Near East Trading Ltd. (“ABB Near East”) provided equipment and services to electrical utilities, including control measurement and protection systems, transducers, and metering equipment.

The information charges that ABB Near East “had three principle customers under the United Nations Oil-for-Food Program (“OFFP”) … the General Company for Electricity Energy Production, the Baghdad Mayoralty, and State Company Baghdad Electricity Distribution all of which were regional companies of the Iraqi Electricity Commission, an Iraqi government agency” (collectively the “Iraqi Electricity Companies”).

The information charges that “from in or about April 2000 through in or about April 2004, ABB Near East, received eleven purchase orders for electrical equipment and services worth over $5.9 million with the Iraqi Electricity Companies, pursuant to the OFFP.” According to the information, “to obtain these purchase orders, ABB Near East caused over $300,000 in kickbacks to be paid to the government of Iraq” and that “in order to generate the funds to pay the kickbacks to the Iraqi government and conceal those payments, ABB Near East would inflate the price of its contracts with the Iraqi government by approximately 10% before submitting the contracts to the U.N. for approval.”

According to the information, the kickback payments were falsely characterized on ABB-Jordan’s or ABB Near East’s books and records which were “incorporated into the books and records of ABB Ltd. for purposes of preparing ABB Ltd’s year-end financial statements.”

According to the DOJ release, “ABB Ltd. admitted that [ABB-Jordan] agreed to pay kickback payments to the former Iraqi government” in connection with OFFP contracts and “agreed to pay a criminal penalty of $1.9 million.”

ABB Inc. Criminal Information

According to the information (here) ABB Inc. is an “indirect subsidiary” of ABB Ltd. incorporated under Delaware law. The information charges that ABB Inc. “conducted business, in part, through a business unit called ABB Network Management (“ABB NM”) that had its principal place of business in Sugar Land, Texas and was acquired by ABB Inc. in or around January 1999.”

According to the information, “ABB NM’s primary business was to provide products and services to electrical utilities for network management in power generation, transmission, and distribution.” The information charges that “many of ABB NM’s clients were foreign state-owned utilities” and that “ABB NM conducted business in a number of its foreign markets through sales representatives.”

The information largely centers on the conduct of John Joseph O’Shea and Fernando Maya Basurto and business with Comision Federal de Electricidad (“CFE”) – a Mexican electrical company. According to the information, O’Shea was the “General Manager of ABB NM” who “oversaw its operations both before and after its acquisition by ABB Inc.” and was “responsible for approving payments to sales representatives.” According to the information, Basurto was a “citizen of Mexico” who “performed work for ABB NM on its contracts with CFE.”

O’Shea was criminally charged in November 2009 (see here). Basurto has pleaded guilty (see here). For more, see this prior post.

For additional FCPA enforcements involving CFE see this recent post.

The information details an elaborate scheme that is summarized in the DOJ release as the payment of bribes “from 1997 to 2004 that totaled approximately $1.9 million” to various officials at CFE and that “in exchange for the bribe payments … ABB NM received contracts worth more than $81 million in revenue.”

As noted in the DOJ release, “ABB Inc. pleaded guilty to a criminal information charging it with one count of violating the anti-bribery provisions of the FCPA and one count of conspiracy to violating these provisions of the FCPA.” According to the release, the court “imposed a sentence that included a criminal fine of $17.1 million.”

The information specifically states that “ABB Inc. terminated O’Shea in November 2004 and thereafter conducted a thorough internal investigation of the improper payments. It voluntarily disclosed the conduct to the DOJ and the SEC in April 2005.”

SEC

The SEC’s civil complaint against ABB Ltd. (see here) picks up both the Iraq and Mexico conduct mentioned above and charges ABB Ltd. with violating the FCPA’s anti-bribery, books and records, and internal control provisions.

The complaint alleges in summary fashion as follows:

“From 1999 to 2004, ABB, through a U.S. subsidiary and six foreign-based subsidiaries, offered and paid bribes to government officials in Mexico to obtain and retain business with government owned power companies, and paid kickbacks to Iraq to obtain contracts under the United Nations Oil for Food Program. In all, ABB’s subsidiaries made at least $2.7 million in illicit payments in these schemes to obtain contracts that generated more than $100 million in revenues for ABB.”

The complaint describes numerous payments, including payments to “pay for the Mediteranean cruise vacation for two CFE officials and their wives” and “tuition for the son of a CFE official” at a “private military school in Wisconsin.”

As to the “Mexican bribery scheme”, the SEC alleges that “ABB, which failed to conduct any due diligence on the use or payments to [a Mexican agent] and other companies, improperly recorded the illicit payments on its books as payments for commission and services on the projects.”

As to the OFFP, the complaint alleges that “from approximately 2000 to 2004, ABB participated in the Oil for Food program through six of its subsidiaries” and that the “six subsidiaries developed various schemes to pay secret kickbacks to Iraq in order to obtain contracts. The kickbacks were characterized as after sales service fees but in reality they were nothing more than bribes paid to the Iraqi regime.” According to the SEC, “kickbacks of approximately $810,793 were paid in connection with the subsidiaries’ sales of goods on twenty-seven contracts with promises to pay additional kickbacks of $239,501 on three other contracts. The total revenues on the contracts were approximately $13,577,727 and profits were $3,801,367. ABB improperly disguised the [after sales service fees] on its books and records by mischaracterizing them as legitimate after sales services, consultation costs or commissions.”

Further the SEC alleged as follows:

“as evidenced by the extent and duration of the illicit payments to foreign officials, the large number of ABB subsidiaries involved in these bribery and kickback schemes, ABB’s knowledge from the prior Commission action of illicit payments by other ABB subsidiaries, the improper recording of millions of dollars of illicit payments in ABB’s books and records, ABB’s failure to detect these irregularities, and ABB’s failure to conduct sufficient due diligence on local agents and others, ABB failed to devise and maintain an effective system of internal controls to prevent or detect these anti-bribery and books and records violations.”

In an SEC release (see here) SEC officials stated: “as the sanctions in this case demonstrate, there are significant consequences for public companies that fail to implement strong compliance programs and prevent corrupt payments to government officials” and that “multi-national companies that make illicit payments through layers of subsidiaries will be held accountable.”

Without admitting or denying the SEC’s allegations, ABB Ltd. consented to the entry of a final judgment that permanently enjoins the company from future FCPA violations, orders the company to pay $17,141,474 in disgorgement, $5,662,788 in prejudgment interest, and a $16,510,000 penalty. According to the SEC release, “the order also requires the company to comply with certain undertakings regarding its FCPA compliance program.”

In a press release (here), ABB noted that it “initiated these matters in a voluntary disclosure to the DOJ and SEC beginning in 2005.” The company stated that it “cooperated fully with the DOJ and SEC and has put in place a global comprehensive compliance and integrity program the DOJ has said ‘may become a benchmark for the industry.’”

Laurence Urgenson (here) and others from Kirkland & Ellis LLP represent the ABB entities.