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Analyzing Allianz

Wednesday, December 19th, 2012

Earlier this week, $12.3 million flowed into the U.S. treasury.

Why?

Because a German company used to have shares and bonds registered with the SEC. The German company had a German subsidiary that invested in an Indonesian joint venture. The Indonesian joint venture made, without any apparent knowledge or approval of the German company, alleged improper payments to employees of state-owned entities in Indonesia between seven to eleven years ago. When the German company learned of suspicious account activity at the Indonesian joint venture seven years ago, it directed the joint venture to close the suspicious account. The joint venture agreed to close the account and stop making the payments, even though it continued to make the payments through 2008.

The above paragraph pretty much explains the SEC’s Foreign Corrupt Practices Act enforcement action earlier this week against Allianz SE , a German company engaged in property and casualty insurance, life and health insurance, and asset management businesses around the world.

From November 2000 to October 2009, Allianz’s American Depositary Shares and bonds were registered with the SEC and it was thus an “issuer” under the Foreign Corrupt Practices Act.

In 1989 PT Asuransi Allianz Utama Indonesia (“Utama”) was formed as a joint venture. JV members included Allianz of Asia-Pacific and Africa GmbH (AZAP - a German company and a wholly-owned subsidiary of Allianz), PT Asuransi Jasa Indonesia (“Jasindo”) (“an Indonesian state-owned entity) and PT Asuransi Wuwungan. According to the SEC, during the relevant time period, AZAP owned 75% of Utama.

In the administrative cease and desist order (here) announced (here) earlier this week, the SEC found improper payments by Utama to employees of state-owned entities in Indonesia in order to obtain or retain business. The order also found that the payments were improperly recorded and that Allianz failed to devise and maintain a sufficient system of internal controls.

The SEC order states, in summary, as follows.

“These proceedings arise out of violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Allianz SE (“Allianz” or the “Company”), through its Indonesian majority-owned subsidiary, PT Asuransi Allianz Utama (“Utama”). Between 2001 and 2008, Utama managers made improper payments to employees of state-owned entities in Indonesia in order to obtain and retain business. Allianz learned of the improper payments from two complaints made several years apart. The first complaint was submitted in 2005 alleging significant misconduct, including unsupported payments to agents. A subsequent audit of Utama’s accounting records uncovered that managers at Utama were using “special purpose accounts” to make illicit payments, many to government officials, in order to secure business in Indonesia. Despite the audit, the conduct continued. The second complaint was lodged in 2009 to Allianz’s external auditors and alleged that Allianz created illicit off-the-books accounts. In response, Allianz began an internal investigation. The Commission staff opened an investigation in April 2010 after receiving an anonymous complaint of possible FCPA violations. The investigation determined that from at least 2001 through December 2008, the Utama managers, with the assistance of others in the Indonesian office, made payments to employees of state-owned entities in Indonesia to procure or retain insurance contracts related to large government projects in Indonesia. As a result of improper payments of approximately $650,626 to agents and employees of state-owned entities and others, Allianz realized $5,315,649 in profits. The payments were improperly recorded as legitimate transaction costs, thereby causing Allianz’s books and records to be inaccurate. Allianz failed to devise and maintain a system of internal controls sufficient to provide reasonable assurances to detect and prevent such payments.”

The order contains the following additional facts.

“In 1989, Allianz established Utama and continued the practice of using special purpose accounts for paying commissions to agents that generated business for Allianz. However, in February 2001, Indonesian Agent, an agent for Utama, Utama CEO 1 [a German citizen who was the Utama CEO from 1998 to 2001] and Utama’s Chief Financial Officer opened a separate, off-the-books account in the Indonesian Agent’s name (the “Agent special purpose account”). The Agent special purpose account was used to make improper payments to employees of Indonesian state-owned entities and others for the purpose of obtaining and retaining insurance contracts. In February 2001, Indonesian Agent and Utama CEO 1 executed a “Paying Agency Agreement” that set up the scheme to make the payments to employees of state-owned entities. This agreement established the off-the-books account that served as a slush fund to make bribe payments to foreign officials and others as instructed by Utama.”

Under the heading “Utama’s 2001-2005 Improper Payments” the order states, in pertinent part, as follows.

“During the period 2001 to 2005, Utama Marketing Manager [an Indonesian citizen] made payments from the Agent special purpose account to account introducers employed by state-owned entities to secure insurance contracts on large government projects in Indonesia. Utama Marketing Manager received approval from Utama management to use the Agent special purpose account for improper purposes. Utama CEO 2, the CEO from 2003-2006, was aware of the Agent special purpose account and the improper payments to foreign officials. [...] The improper payments made to foreign officials were disguised in the Utama insurance contracts as “overriding commissions.” Despite the fact that Allianz has a majority share of Utama and consolidated the subsidiary’s accounts into its own books and records, Utama’s accounting system was maintained in Indonesia and Allianz did not have effective controls over the accounting. Allianz did not have the ability to access Utama’s accounting system and, therefore, did not detect the movement of funds to the Agent special purpose account. In addition, the Agent special purpose account was maintained in the name of the Indonesian Agent to make it appear that all movement of funds to this account was for legitimate commission payments. Likewise, Allianz did not have effective controls over the commission payment request process, which allowed payments to go to the Agent special purpose account without supporting documentation. [...] On December 1, 2005, a whistleblower complaint concerning the special purpose account was submitted to both the Allianz whistleblower hotline and Utama’s joint venture partner Jasindo, and then forwarded to the head of AZAP. The complaint itemized a number of control weaknesses, most notably, the existence of the Agent special purpose account and its lack of transparency. On December 8, 2005, Allianz Group Audit initiated an audit of the Indonesian office; however, the review was limited to embezzlement from the Company. [...] However, no additional steps were taken to determine the nature and purpose of the accounts or to identify the recipients of payments from the accounts. On December 12, 2005, based on the audit findings Allianz directed the Utama management to close the Agent special purpose account. Although the Utama management agreed to close the account and to stop making the payments, it continued making improper payments to secure business for Allianz through 2008.”

Under the heading “Utama’s Post-2005 Improper Payments” the order states, in pertinent part, as follows.

“Despite the directive to close the account and to stop making payments, Utama Marketing Manager continued to use the Agent special purpose account to make improper payments to foreign officials from 2005 to 2008. [...] Utama CEO 2 approved the continued use of the Agent special purpose account to make payments on the two government insurance contracts at issue. Later, Utama Marketing Manager and his staff expanded the improper payments to numerous other foreign officials on government insurance contracts. From 2005 to 2008, Utama Marketing Manager employed various methods to make payments to foreign officials. In addition to booking payments through the Agent special purpose account, Utama Marketing Manager made payments by either: 1) booking commissions to an agent that was not associated with the account for the government insurance contract and then withdrawing the funds booked to the agent’s account as cash to pay the foreign official; or 2) overstating the amount of a client’s insurance premium, booking the excess amount to an unallocated account and then “reimbursing” the excess funds to the foreign officials, who were responsible for procuring the government insurance contracts. Similar to the Agent special purpose account, Allianz did not have effective controls over the Utama accounting system or the commission payment process, which allowed payments to be made to an agent’s account without supporting documentation. Allianz did not have any controls over the use of the unallocated account that was maintained at Utama. As a result, Utama Marketing Manager was able to take funds from Utama to pay foreign officials without detection. In March 2009, Allianz’s outside auditor received an anonymous complaint alleging that an Allianz executive created or initiated slush funds during his tenure with AZAP. Between December 2005, when the Allianz Executive Vice-President of the Asia-Pacific Division directed Utama to close the Agent special purpose account and the March 2009 Whistleblower complaint, Allianz took no steps to ensure that the Agent special purpose account was closed and that similar improper payments were not being made.”

Under the heading “Investigation and Remediation” the order states, in full, as follows.

“In response to the March 2009 Whistleblower complaint, Allianz convened a Whistleblower Committee to do an internal investigation and retained counsel to conduct an internal investigation of Utama’s payment practices in Indonesia. Allianz did not report the conduct to the Commission staff. In April 2010, the staff opened an investigation after receiving an anonymous complaint of possible FCPA violations. The staff contacted Allianz concerning the allegations. Allianz’s cooperation in the staff’s investigation and the timeliness of its response to the Commission’s requests for documents and information improved over time. Allianz hired new counsel and took steps to further its cooperation and remedial efforts. The staff’s investigation uncovered 295 government insurance contracts that were obtained or retained by improper payments of approximately $650,626 to Indonesian government officials and others from 2001 through 2008. As stated above, in some instances the nature of the improper payments was disguised in invoices as an “overriding commission” or as a commission for an agent that was not associated with the government insurance contract. In other instances the improper payments were structured as an overpayment by the government insurance contract holder, who was later “reimbursed” for the overpayment. The excess funds were then paid to foreign officials, who were responsible for procuring the government insurance contracts. Allianz took various remedial measures, including employment action against several individuals who were involved in the conduct or failed to stop the conduct. Allianz issued new or enhanced FCPA compliance and internal accounting control policies and procedures, including mandating strict scrutiny of payments to third party intermediaries. Allianz also updated the anti-corruption clause in its third-party contracts to specifically refer to the FCPA. Allianz provided enhanced FCPA compliance training to its employees and improved its current global anti-corruption compliance program.”

Under the heading, “FCPA Violations” the order states, in pertinent part, as follows.

“Utama, a majority-owned subsidiary of Allianz, made improper payments to foreign officials to obtain or retain government insurance contracts. Utama improperly recorded the payments as legitimate transaction costs. Utama’s financial statements were consolidated into Allianz’s financial statements. As a result of the conduct described above, Allianz violated Section 13(b)(2)(A) of the Exchange Act, which requires issuers to keep accurate books, records and accounts. Further, as evidenced by the extent and duration of Utama’s improper payments and their improper recordation, and the fact that Allianz was not aware that Utama’s commission payment request process allowed funds to be diverted for improper payments, Allianz failed to recognize the compliance risks posed by Utama. Allianz also failed to devise and maintain an effective system of internal controls sufficient to provide reasonable assurances that improper payments were not being made by its subsidiary. As a result of the conduct described above, Allianz violated Section 13(b)(2)(B) of the Exchange Act, which requires issuers to devise and maintain a sufficient system of internal accounting controls. [...] Section 13(b)(2)(A) of the Exchange Act does not require that the amounts involved be “material,” nor is it necessary to prove “scienter” under its provisions. SEC v. World-Wide Coin Invs. Ltd., 567 F. Supp. 724, 749-51 (N.D. Ga. 1983). Similarly, there is no scienter requirement for establishing a violation of Section 13(b)(2)(B).

According to the SEC release, “without admitting or denying the findings, Allianz agreed to cease and desist from further violations and pay disgorgement of $5,315,649, prejudgment interest of $1,765,125, and a penalty of $5,315,649 for a total of $12,396,423.”

See here for a prior guest post discussing the Dodd-Frank provision granting the SEC authority to impose civil monetary penalties in administrative proceedings such as the Allianz matter.

There is much to analyze in the nine-page cease and desist order.

For starters, the SEC required disgorgement even though no FCPA anti-bribery violations were alleged or asserted. This prior post highlighted an article concerning ”no-charged bribery disgorgement” by various Debevoise & Plimpton attorneys, including Paul Berger (here) a former Associate Director of the SEC Division of Enforcement. The article concluded that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” The article noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”

Your first reaction might be – the SEC could have charged Allianz with FCPA anti-bribery violations given the findings of the cease and desist order, but choose not to. If that is your reaction, based on the information in the cease and desist order, you are wrong.

Contrary to popular misperception, the FCPA’s anti-bribery provisions apply to foreign issuers only to the extent “mails or any means or instrumentality of interstate commerce” are used in connection with the improper payments. The SEC’s order does not contain any findings concerning any U.S. nexus in regards to the payments at issue.

The above paragraph, in addition to the notion that the SEC’s order does not contain any findings to suggest willful violations of the FCPA’s books and records or internal control provisions, helps explain the lack of DOJ involvement in the matter. Nevertheless, some (see here) used the “d” word (as in declination) in describing the DOJ’s decision not to bring charges against Allianz. However, for the reasons explained above, there appears to have been no criminal charges to bring against Allianz. This is not a declination.

In this regard, the Allianz enforcement action is similar to the 2011 enforcement action against Diageo (see here for the prior post).

According to this Wall Street Journal Corruption Currents post, “Claudius Sokenu of Arnold & Porter LLP conducted the company’s internal investigation and Joel Cohen of Gibson Dunn & Crutcher LLP was brought in subsequently to assist as the company neared a resolution.”

Friday Roundup

Friday, July 20th, 2012

Burma with conditions, the SEC lawyer heading up the Wal-Mart inquiry, connections between foreign environmental crimes and corruption, FCPA Inc. marketing, adding to the Haiti Teleco Roundup, and a new entrant to the FCPA space. It’s all here in the Friday roundup.

Burma With Conditions

Yesterday Miller Chevalier released this informative alert concerning business opportunities in Burma. As noted in the alert, the U.S. Government recently “enacted measures that dramatically ease the Burmese Sanctions Regulations (“BSR”) that has been in place for over 15 years. On July 11, 2012, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) authorized new investments and the exportation of U.S. financial services into Burma for the first time since 1997 and 2003 respectively through the issuance of two new general licenses.”

As noted in the alert, on the same day that OFAC released the two new general licenses, the State Department published draft reporting requirements [here] relating to investment in Burma.” Pursuant to the draft reporting requirements, “any U.S. person whose aggregate investment in Burma exceeds $500,000″ must provide information regarding, among other things, its policies and procedures as they relate to its operations and supply chain in Burma concerning, among other things, “policies and procedures on anti-corruption in Burma.” The State Department document specifically references the OECD Guidelines, Section VII. Combating Bribery, Bribe Solicitation and Extortion [here], and the OECD Good Practice Guidance on Internal Controls, Ethics, and Compliance.” [here].

It’s a bit ironic isn’t it. A company seeking to do business in Burma can obtain the necessary U.S. government licenses by disclosing its pre-existing FCPA compliance policies and procedures consistent with best practices guidance, but if any employee in its organization acts inconsistent with those policies and procedures without management or senior executive knowledge, the U.S. government may criminally prosecute the organization subject only to the non-reviewable, opaque, internal discretion of DOJ enforcement attorneys. See here for “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”

SEC Attorney Sees “The Spotlight As An Opportunity”

This recent Texas Lawbook article profiles Michael King (Assistant Director of Enforcement with the SEC’s Forth Worth office) reportedly heading up the SEC’s Wal-Mart inquiry. King is quoted in the article as saying he views “the spotlight as an opportunity.” Other lawyers quoted in the article stated as follows. “I think King is under tremendous pressure to make Wal-Mart the poster child for what happens when corporations violate [the] Foreign Corrupt Practices Act and then don’t self report.”

Am I the only one alarmed when a government enforcement attorney uses the word ”spotlight” and “opportunity” in the same sentence?

An interesting tidbit discussed in the article is that King also headed up the SEC’s enforcement actions against Panalpina and Pride International (see here and here for prior posts). These enforcement actions, as well as others in the so-called CustomsGate actions, reached the outer bounds of the FCPA (and likely involved conduct Congress did not seek to capture in passing the FCPA) and it is likely the same result will occur in any Wal-Mart action as I discussed in this previous post.

FCPA Inc. Marketing

“Firms face increasing exposure to anti-bribery and corruption laws and regulations. Laws such as the Foreign Corrupt Practices Act (FCPA) have been in place in the U.S. for 35 years. Despite this length of time, each year shows increasing non-compliance and growing fines, penalties and judgments by the U.S. Department of Justice. [...] The financial impact is more significant than the fine alone. Investigation and litigation costs can easily equal the cost of the fine itself. The firm must then also bear the weight of interaction with a corporate monitor to validate its compliance program for the next 10 to 20 years [really, show me an FCPA monitor or FCPA NPA or DPA that has a 10 to 20 year term] and report to the Federal government. Not to mention the reputation and brand impact that bribery and corruption has upon the firm. If the FCPA is not enough, the United Kingdom approved the U.K. Bribery Act (UKBA) legislation in 2010, which went into force in July 2011. This anti-corruption law brings broader scope and implications to anti-corruption compliance. [...] This is the era of the corporate bounty hunter. Government is increasingly turning to insiders (e.g., employees), incenting them to report wrongdoing and non-compliance. [...] In an era of increased scrutiny and judgments for anti-corruption, this is a significant concern that keeps executives, the board, legal and compliance professionals up at night.”

So writes AccuitySolutions in a recent white paper titled “Addressing Anti-Bribery and Corruption Compliance.”

The solution, why of course ComplianceMAX and the Anti-Bribery and Corruption Solution “a flexible compliance management platform. The Solution eases the compliance burden by delivering operational effectiveness, human and financial efficiency and agility to compliance processes. The solution enables a firm to manage anti-bribery and corruption programs including monitoring and enforcing policy through workflow management; screening and tracking of high-risk entities and relationships; reporting and communicating compliance issues; and ensuring a state of readiness for inspections and audits.”

Next.

“The US FCPA and UK Bribery Act are far-reaching acts; they reach deep into the organization, leaving almost no part of the business untouched. The acts are taken very seriously both by governments, as well as by the general public. There is little empathy to bribes in the general public. This makes non-compliance, more than many other acts, a reputational risk in itself.”

So writes BWise in a recent white paper titled “US FCPA and UK Bribery Act.”

The solution, why of course The BWise GRC [Governance, Risk and Compliance] Platform “with a best-in-class method to address corruption and bribery, and achieve company-wide compliance and transparency.” (See here).

Next.

Another entrant into the FCPA insurance market (see here and here for previous posts).

Navigators recently announced (here) that “its Navigators Pro division has introduced “Side A Global InNAVation,” a directors and officers (D&O) liability policy to address emerging global risks. This new policy offers dedicated excess coverage for individual directors and officers for specific non-indemnifiable claims, including where the company they serve is insolvent. The policy provides coverage for civil fines and penalties, where insurable by law, when they are assessed pursuant to Section 308 of the Sarbanes Oxley Act of 2002, the Foreign Corrupt Practices Act, the U.K. Bribery Act or similar laws.”

Finally, an informative white paper (here) by FTI Consulting Technology titled “E-Discovery Strategies for International Anti-Bribery Investigations.” The paper discusses the “complexity of issues that may arise during an international anti-bribery investigation” such as data privacy laws, blocking statutes, secrecy laws and ill-defined privilege rules” that are a ”common feature of an FCPA investigation.” And by the way “FTI Technology helps clients manage the risk and complexity of e-discovery” and collaborates with clients to develop and implement defensible e-discovery strategies with keen focus on the productivity of document review.”

It truly is an FCPA world.

The Lacey Act Meets the FCPA

The Lacey Act prohibits trafficking in wildlife and plant products in violation of foreign law.

Arnold & Porter attorneys Marcus Asner, Samuel Witten, and Jacklyn DeMar write in “The Foreign Corrupt Practices Act and Overseas Environmental Crimes: How Did We Get Here and What Happens Next?” (Bloomberg Law – see here) as follows.

“Environmental regulation by any country creates a series of touch points between the private sector and government authorities, any one of which may provide an opportunity and a temptation for an unscrupulous employee or agent of a company to seek to corruptly influence a government official. Opportunities for corruption occur, for example, from the moment officials decide how to regulate local natural resources through laws and regulations; how and when they decide who may harvest resources and in what amounts; how permit requests are reviewed; and how local laws are actually enforced in practice. Each point of contact creates an opportunity for offering or making bribes or otherwise seeking improper influence.”

The authors further state as follows. “Though there is no explicit statutory link between the Lacey Act and the FCPA, the possibilities are endless: Potential bribe takers in forestry and fishery schemes could run the gamut from the police, to forestry and fishery officials, to guards, to regulators, to customs and export officials, and even to officials at state-owned companies. All of these are government officials within the meaning of the Foreign Corrupt Practices Act. While there has been no public case charging both Lacey Act and FCPA violations thus far, we believe such investigations may well be just around the corner, and, in any event, responsible companies should do what it takes to protect themselves from the risks.”

Haiti Teleco Roundup

This recent post summarizing the expansive Haiti Teleco related enforcement actions has been updated to reflect Patrick Jospeh’s recent 366 day sentence. Joseph, an alleged “foreign official” at Haiti Teleco previously pleaded guilty to money laundering conspiracy in connection with the bribery scheme. As noted in this recent Wall Street Journal Corruption Currents post by Chris Matthews, Joseph was also ordered to forfeit nearly $1 million.

FCPA Monitor

Rajat Soni recently launched FCPA Monitor (here). FCPA Monitor examines news and cases about the Foreign Corrupt Practices Act and the UK Bribery Act of 2010. Soni is an attorney with several years of experience conducting global internal investigations related to the FCPA. He has worked on large FCPA investigations including those arising from the UN Oil-for-Food Program and Siemens AG.

*****

A good weekend to all.

A Q&A Regarding FCPA Insurance

Tuesday, April 10th, 2012

Previous posts (here and here) have discussed FCPA insurance. One of the industry participants offering this new product is Marsh (see here for its FCPA Corporate Response).

In this Q&A, Machua Millett (Senior Vice President and General Partner Liability Product Leader at Marsh) answers questions about FCPA Corporate Response as well as other issues presented by FCPA insurance. Prior to joining Marsh, Millett practiced law at Skadden Arps, Bingham McCutchen and Edwards Angell Palmer & Dodge.

Why is FCPA insurance needed? What was your “ah-ha” moment in developing this product?

FCPA investigation costs insurance is needed because existing insurance products were leaving companies and their employees largely unprotected against one of their major potential liabilities in conducting international business. Our “ah-ha” moment came after one too many clients had come to us seeking an insurance solution, and we had to tell them that no comprehensive FCPA investigation costs insurance product existed. So we collaborated with an A-rated insurance company to create and launch a solution.

Describe in detail the product Marsh is offering.

The product, exclusively available through Marsh, is called FCPA Corporate Response. It is an insurance policy that funds investigation costs resulting from any regulatory investigation by any regulator in the world concerning alleged bribery of a government official.

The four main pillars of the policy are the definitions of Investigation Costs, Claim, Insured, and Wrongful Act.

Investigation Costs includes all fees and expenses of attorneys, experts, consultants, accountants, auditors, and any other professionals a company typically hires in the course of conducting or defending itself against an anti-corruption investigation. This definition is significantly broader than most directors and officers liability (D&O) policies, which generally cover only attorneys’ fees. This is not by accident. In our experience, companies caught up in an FCPA investigation incur significant accounting and consulting fees in addition to legal fees, and we wanted all such investigation costs covered by this policy. It is important to note, however, that this policy only covers investigation costs. It does not cover settlements, judgments, damages, wages/salaries, fees of directors/officers/employees, costs of compliance/remedial measures or fines and penalties, (most of which would de deemed uninsurable by insurers, regardless).

Claim includes any civil, criminal, administrative and/or regulatory investigation or inquiry brought by any U.S. or foreign regulator, with the trigger broadly defined to include any written notice of such investigation or inquiry. In addition to this broad claim trigger, the policy also provides pre-claim inquiry coverage for internal investigations. This means that any investigation costs incurred as part of a company’s internal investigation prior to regulatory involvement is covered on a retroactive basis when a company self-reports or a regulatory investigation or inquiry is otherwise initiated.

Insured includes all entities and individuals that might be implicated as part of an FCPA investigation of a company, including all subsidiaries, affiliates, directors, officers, employees, foreign equivalents, consultants, agents and independent contractors. These last three categories are of particular importance, as nearly 80 percent of FCPA investigations arise from the activities of such third-party agents and independent contractors, who are often not treated as insureds under standard D&O policies.

Wrongful Act means: any actual or alleged violation of the FCPA, including criminal bribery allegations and civil recordkeeping allegations; and any actual or alleged violation of any other law, treaty, regulation or act that, but for geography, would also constitute a violation of the FCPA. The definition of Wrongful Act is quite broad in terms of geography, potentially-implicated conduct, and potentially relevant laws. However, it is important to note that the policy’s coverage does not extend to aspects of foreign corruption laws like the U.K. Bribery Act that are broader than the U.S. FCPA. In the case of the UKBA, the two most relevant examples would be the UKBA’s prohibition of commercial bribery and lack of an exception for facilitation payments. Where an investigation under a foreign statute involves both FCPA-type allegations (bribery of a government official) and non-FCPA-type allegations (say commercial bribery), investigation costs would have to be allocated between covered and uncovered aspects of the investigation.

The policy contains only two exclusions, both of which are directed toward the simple idea that a company cannot buy insurance for a burning building. The first exclusion bars coverage for a prior or pending investigation and the second exclusion bars coverage for any matter that was known at a truly corporate level — by the general counsel of the Named Insured — at the time of application for the policy and later develops into a regulatory investigation or inquiry. It is also relevant in this regard to note that just as a company may not buy insurance for a burning building, it may not purchase a burning building and expect coverage under the policy. Although the policy provides automatic coverage for new subsidiaries, coverage only applies to wrongful acts that occurred after the acquisition. Transactional risk insurance products do exist that can be used to mitigate acquisition risks around FCPA issues.

The FCPA contains both anti-bribery provisions and books and records / internal controls provisions. The latter provisions are generic in scope and don’t require foreign conduct to be implicated. Does the product cover the range of circumstances in which the FCPA books and records and internal controls can be implicated?

As mentioned before, FCPA Corporate Response does provide investigation costs coverage for both anti-bribery and books and records and internal controls. Anything that is a violation of the FCPA, or would be but for geography, will trigger the policy’s definition of wrongful act.

One of the reasons for the increase in FCPA enforcement is the increase in corporate voluntary disclosures, an event which often prolongs FCPA scrutiny for many years and results in lucrative professional fees for those involved in the investigation and disclosure. Will FCPA insurance increase the number of corporate voluntary disclosures on the theory that the downside of corporate voluntary disclosures (longer period of scrutiny which leads to higher professional fees) will be covered?

We have had some people comment that the policy seems to create an incentive to self-report, both generally because the company has the investigation costs insurance, but more specifically to trigger coverage for internal investigation costs. While this may be, I find it somewhat hard to believe that the existence of the policy will prevail over other considerations; after all, the policy does not cover FCPA fines, penalties, or remedial measures. However, the policy certainly doesn’t create any disincentive against self-reporting.

Will FCPA insurance lead to more aggressive business conduct in foreign markets?

I don’t think so. Again, the policy does not cover fines and penalties and other costs that we have seen reach the hundreds of million of dollars. The policy covers investigation costs. FCPA Corporate Response is most certainly not meant to be a replacement for a robust FCPA compliance program at a company, but instead is meant to be a compliment or backstop to such a program based on the realization that no compliance program, no matter how robust, can prevent the rogue activities of one employee or independent agent

The FCPA Meets Insurance – Aon Resolves Enforcement Action

Wednesday, December 21st, 2011

This post analyzes the DOJ and SEC enforcement actions against Aon Corporation (one of the largest insurance brokerage firms in the world) announced yesterday. Total fines and penalties are approximately $16.3 million ($1.8 million via a DOJ non-prosecution agreement and $14.5 million via a settled SEC civil complaint).

DOJ

The NPA (here) begins as follows. The DOJ will not criminally prosecute Aon Corporation or its subsidiaries for any crimes “related to Aon’s knowing violation of the anti-bribery, books and records, and internal controls provisions of the FCPA .. arising from and related to the making of improper payments to government officials in Consta Rica in order to assist Aon in obtaining and retaining business” or “for the conduct related to improper payments and associated recordkeeping [...] relating to Aon’s improper payments in Bangladesh, Bulgaria, Egypt, Indonesia, Myanmar, Panama, the United Arab Emirates, and Vietnam that it discovered during its thorough investigation of its global operations.”

The NPA has a term of two years. As is typical in FCPA NPAs or DPAs, Aon agreed “not to make any public statement” contradicting the below facts.

According to the NPA, the DOJ agreed to resolve the action via an NPA based, in part, on the following factors:

(a) Aon’s extraordinary cooperation with the DOJ and SEC;

(b) Aon’s timely and complete disclosure of facts relating to the above payments; [unlike many corporate FCPA enforcement actions, the Aon action does not appear to be the result of a voluntary disclosure; as stated in Aon's most recent quarterly SEC filing, "following inquiries from regulators, the Company commenced an internal review of its compliance with certain U.S. and non-U.S. anti-corruption laws, including the U.S. Foreign Corrupt Practices Act."]

(c) the early and extensive remedial efforts undertaken by Aon, including the substantial improvements the company has made to its anti-corruption compliance procedures;

(d) the prior financial penalty of 5.25 million paid to the U.K. Financial Services Authority (“FSA”) [see here] by Aon Limited, a U.K. subsidiary of Aon, in 2009 concerning certain of the conduct at issue; and

(e) the FSA’s close and continuous supervisory oversight over Aon Limited.

The NPA’s Statement of Facts begin by detailing the business of reinsurance – that is insurance for insurance companies. Specifically, the NPA states as follows. “Reinsurance involves the transfer of all or part of the risk of paying claims under a policy from the insurance company that issued the policy to a reinsurance company. A reinsurance broker arranges this transfer of risk, which takes place under a contract of reinsurance. The insurance company is the reinsurance broker’s client and the broker acts on behalf of the insurance company. The broker collects the premium due from the insurance company under the contract of reinsurance, and is typically paid for its services by retaining a portion of the premium for its own account. The portion of premium retained by the broker is known as ‘brokerage.’”

The conduct at issue focuses on the Instituto Nacional De Deguros (“INS”), Costa Rica’s state-owned insurance company” (here) that “had a monopoly over the Costa Rican insurance industry.” The NPA states as follows. “INS was created by Act No. 12 of October 30, 1924, with the aim of meeting the protection needs of Costa Rican society. All insurance agreements in Costa Rica, including the reinsurance contracts that Aon Limited [a subsidiary of Aon Corporation based in and organized under U.K. law that "reported financially through a series of intermediary entities into its U.S.-based issuer parent] assisted in obtaining to insure Costa Rican entities, were required to be issued through INS. The head of INS was appointed by the President of Costa Rica.”

According to the NPA, a company Aon Limited acquired established a “Training and Education Fund” or “Brokerage Fund” for the benefit of INS “to sponsor training and education trips for INS officials.” The NPA states that the “Brokerage Fund eventually became used for a wide variety of purported ‘training’ purposes, as well as to pay for client renewal trips to European insurers.” The NPA also states that a second training account (the so-called 3% Fund) was funded by premiums to reinsurers and that “INS required that Aon Limited manage the fund, handle the paperwork, and provide reimbursement for the expenses incurred by INS officials.”

According to the NPA, “the supposed purpose of both the Brokerage Fund and the 3% Fund was to provide education and training for INS officials.” However, the NPA states, “Aon Limited used a significant portion of the funds to reimburse for non-training related activity or for uses that could not be determined from Aon’s books and records.”

The NPA cites an e-mail from a former Aon Limited executive which stated as follows. “INS started telling [another brokerage company] how [various reinsurers] were inviting their managers to seminars and were contributing positively to INS’s technological improvement with all expenses paid by the reinsurers. The message was clear to both [the other brokerage company] and ourselves that unless we did the same we would see the gradual process of disintermediation and a continued erosion of our orders.”

The NPA then states as follows. “Aon Limited disbursed nearly all of the $215,000 in the Brokerage Fund from 1997 until 2002, approximately $650,000 of the money in the 3% Fund from 1999 until 2002, and made a small number of additional disbursements from these funds between 2003 and 2005 to pay for the third-party services used by INS officials. These services often included travel related expenses, such as airfare and hotel accommodations, as well as conference fees, meals, and other related expenses for INS officials and their relatives. It was common for INS to hire a
travel agency or tourism company to arrange for the particulars of the travel and educational conferences attended by its officials. The majority of the money paid from the two funds was disbursed to a tourism company in Costa Rica. The director of INS’ reinsurance department, who played an active role in setting up the training funds, served on the board of directors of tourism company. The director of INS’ reinsurance department himself took fourteen trips from 1996 to 2001 with expenses totaling approximately $44,000 that Aon Limited paid from the two funds. The funds also covered the official’s wife’s attendance on at least five of the trips. On several occasions, Aon Limited reimbursed the official directly for expenses that were invoiced for his various trips, sometimes with cash payments. The director of INS took six trips from 1998-2001 with expenses totaling approximately $20,000 that Aon Limited paid from the two funds. The director’s spouse accompanied him on four of these trips. The director of INS, the director of reinsurance at INS, their wives, and another INS official and her husband traveled to Europe in 1998 and charged their expenses of approximately $15,160 to the Brokerage Fund. While these trips had a small business-related component, a significant portion of the funds expended on the trips were used for the personal benefit of the officials and their wives. A substantial number of the trips taken by INS offcials were in connection with conferences and seminars in tourist destinations, including London, Paris, Monte Carlo, Zurich, Munich, Cologne, and Cairo. Many of the invoices and other records for these trips do not provide the business purpose of the expenditures, if any, or showed that the expenses were clearly not related to a legitimate business purpose. In addition, the subject matters of some of the better documented conferences and trainings, such as a literary conference and a Mexican information technology conference, had no logical connection to the insurance industry. INS officials traveled to the United States for approximately twenty-five training events. Aon Limited paid approximately $115,000 out of the funds in connection with these events in the United States. In some instances, Aon Limited paid third parties at INS’s direction where the business purpose of the travel or expenses could not be discerned from the documentation, or where the purpose of the travel and expenses appeared to be improper, such as those pertaining to literary conferences, holiday expenses, and pure entertainment. Aon Limited paid large expenses for hotels, without any indication that the stays were business related. Aon Limited’s employees did not question the requests for payment or reimbursement from the funds. While virtually all payments made in connection with the funds originated in London, Aon Limited made at least forty payments via, or that terminated in, the United States. From 1995 to 2002, Aon Limited [and the company it acquired] earned profits of approximately $1.840,200 in connection with reinsurance brokerage business with INS.”

As to statute of limitation issues, Aon’s recent quarterly filing states as follows. Aon “has agreed with the U.S. agencies to toll any applicable statute of limitations pending completion of the investigations.”

Under the heading “Books and Records/Internal Controls,” the NPA states as follows. “The books and records of Aon Limited were consolidated into those of Aon Corporation. With respect to the Costa Rican training funds, although Aon Limited maintained accounting records for the payments that it made from both the Brokerage Fund and the 3% Fund, these records did not accurately and fairly reflect, in reasonable detail, the purpose for which the expenses were incurred. A significant portion of the records associated with payments made through tourist agencies gave the name of the tourist agency with only generic descriptions such as “various airfares and hotel.” Additionally, to the extent that the accounting records did provide the location or purported educational seminar associated with travel expenses, in many instances they did not disclose or itemize the disproportionate amount of leisure and non-business related activities that were also included in the costs. As a result, during the relevant time period, Aon failed to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflected the transactions and disposition of its assets and failed to devise and maintain an adequate system of internal accounting controls with respect to foreign sales activities sufficient to ensure compliance with the FCPA.”

Pursuant to the NPA, “Aon admits, and accepts and acknowledges responsibility” for the above conduct; however, there is no suggestion or implication in the NPA that anyone at Aon Corporation knew of, participated in, or authorized the conduct at issue.

See here for the DOJ’s release.

Pursuant to the NPA, Aon agreed to pay a monetary penalty in the amount of $1.76 million. The NPA states as follows. “This substantially reduced monetary penalty reflects the Department’s determination to credit meaningfully Aon for its extraordinary cooperation with the Department, including its thorough investigation of its global operations and complete disclosure of facts to the Department, and its early and extensive remediation. In agreeing to this monetary penalty, the Department also took into account the penalty paid to the FSA relating to Aon Limited’s systems and controls in countries other than Costa Rica.” Pursuant to the NPA, Aon also agreed to “continue to strengthen its compliance, bookkeeping, and internal controls standards and procedures” as set forth in “Corporate Compliance Program” appendix to the NPA.

SEC

The SEC’s settled civil complaint (here) begins as follows. “From as early as 1983 until as recent as 2007, subsidiaries of Aon Corporation in numerous countries made improper payments to various parties as a means of obtaining or retaining insurance business in those countries. During this period, over $3.6 million in such payments were made, including some directly or indirectly to foreign government officials who could award business directly to Aon subsidiaries, who were in position to influence others who could award business to Aon subsidiaries, or who could otherwise provide favorable business treatment for the Company’s interest. These payments were not accurately reflected in Aon’s books and records. During this period, Aon failed to maintain an adequate internal control system reasonably designed to detect and prevent these payments.”

According to the SEC complaint, “the improper payments made by Aon’s subsidiaries fall into two general categories: (i) training, travel and entertainment provided to employees of foreign-government owned clients and third parties and (ii) payments made to third-party facilitators.”

As to the first category of payments, the SEC complaint is largely focused on the same Costa Rica / INS payments described in the DOJ’s NPA. Additional payments concern Egypt and the complaint alleges that from 1983 to 2009 Aon (or its predecessor) “served as insurance broker for an Egyptian government-owned company, the Egyptian Armament Authority (“EAA”), and its U.S. arm, the Egyptian Procurement Office (“EPO”). According to the complaint, delegation trips for EAA and EPO officials to various U.S. destinations “had some business component” but also “included a disproportionate amount of leisure activities and lasted longer than the business component would justify.” According to the SEC, the company’s “books and records did not fairly and accurately reflect the true nature of the payments made in connection with the delegation trips.”

As to the second category of payments, under the heading “Payments to Third-Party Facilitators” the complaint alleges as follows. “Aon’s subsidiaries also made payments to third parties that were retained to assist in obtaining accounts in several countries. In some instances, the subsidiaries made payments to the third parties without taking steps to assure that they would not be passed to foreign government officials. The subsidiaries made some payments under circumstances in which the third parties appeared to have performed no legitimate services relating to the prospective accounts, thereby suggesting that they were simply conduits for improper payments to government officials in order to obtain or retain business for Aon.”

In Vietnam, the complaint alleges that “Aon Limited served as a co-broker on an insurance policy for Vietnam Airlines, a Vietnamese government-owned entity, since 2003.” According to the complaint, a third-party facilitator assisted in securing the account and “company record indicate that the third-party facilitator did not provide legitimate services, but instead transferred some of the money that Aon Limited paid under its consultancy agreement to unidentified individuals referred to as ‘related people.’”

In Indonesia, the complaint alleges that “Aon Limited served as a broker on reinsurance contracts with BP Migas and Pertamina, two Indonesian state-owned entities in the oil and gas industry.” The complaint alleges that “several former Aon Limited employees authorized improper payments to government officials in Indonesia to secure the Pertamina and BP Migas accounts for Aon Limited.”

In the United Arab Emirates, the complaint alleges that “Aon Limited provided brokerage services to a privately-held insurance company” and that payments were made “to the general manager of the insurance company as inducements to secure and retain the account for Aon Limited.”

In Myanmar, the complaint alleges that “Aon Limited retained an introducer in Myanmar to assist Aon Limited in connection with its account with Myanmar Airways and Myanmar Insurance, two government-owned entities.” According to the complaint, “company records indicate that the introducer likely used a portion of his commission to improperly influence a government official on Aon Limited’s behalf in connection with the Myanmar account.”

In Bangladesh, the complaint alleges that “Aon Limited made approximately $1.07 million in payments to secure its account with Biman Bangladesh Airways and Sudharan Bima Corporation, two government-owned entities.”

Based on the above allegations, the SEC complaint alleges FCPA books and records and internal controls violations – but not FCPA anti-bribery violations – notwithstanding the fact that the DOJ’s NPA refers to “Aon’s knowing violation of the anti-bribery, books and records, and internal controls.”

As stated in the SEC’s release (here), without admitting or denying the allegations in the SEC’s complaint, Aon consented to entry of a final judgment permanently enjoining it from future FCPA books and records and internal controls violations and ordering the company to pay “disgorgement of $11,416,814 in profits together with prejudgement interest thereon of $3,128,206 for a total of $14,545,020.”

In a release (here) Aon stated as follows. “Since beginning an internal review of these issues in 2007, Aon has put in place a comprehensive, global and robust anti-corruption program designed to prevent and detect improper conduct.” Greg Case, Aon’s President and Chief Executive Officer stated as follows. “Acting with integrity is Aon’s core value and we embody this in our commitment to the highest professional standards for our clients, markets and colleagues. Aon has invested a significant amount of time and resources in anti-corruption compliance and transparency to greatly enhance our controls and processes.”

Kirkland & Ellis attorneys Laurence Urgenson (here) and Craig Primis (here) represented Aon.