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Ashland Oil – The “FCPA’s” First Repeat “Offender”

Thursday, May 23rd, 2013

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

In 1986 the SEC brought this civil injunctive action against Ashland Oil, Inc. (a Kentucky based oil refining company) and its Chairman and CEO Orin Atkins for engaging in conduct in violation of the FCPA’s anti-bribery provisions.

The complaint began by noting that in 1975, prior to the passage of the FCPA, the defendants consented to final judgments of permanent injunction enjoining them from using corporate funds “for unlawful political contributions or other similar unlawful purposes.” As noted in “The Story of the Foreign Corrupt Practices Act” Ashland Oil’s payments to Albert Bernard Bongo, the President of Gabon, were among a group of payments that drew Congressional attention to the foreign corporate payments problem and motivated Congress to pass the FCPA in 1977.

The 1986 Ashland Oil enforcement action is thus notable as the first instance of an “FCPA” repeat “offender.”

As highlighted in more detail below, the enforcement action is also notable for the following reasons: (i) the thing of value consisted of buying a “foreign official’s” interest in a largely worthless mine); (ii) the conduct at issue lead to an FCPA-related civil suit in which two terminated company employees were awarded $70 million in damages; and (iii) there was controversy both as to the DOJ’s and SEC’s handling of the conduct at issue.

In the 1986 action, the SEC alleged that Ashland Oil and Atkins “paid $25 million in principal plus approximately $4 million in interest, and by virtue of the acquisition of an interest in Midlands Chrome [a largely worthless Zimbabwe mine owned by the "foreign official" and his family], gave something of value to James Landon [a British national seconded (detailed) to the government of Oman who served as a special adviser to the Sultan of Oman on Omani intelligence and security matters] … for the purpose of inducing Landon to use his influence with the government of Oman … in order to assist Ashland in obtaining and retaining business with the government of Oman … namely certain business related to crude oil.”

According to the complaint, Atkins was told that Midlands Chrome “could be purchased from persons who could be sympathetic to Ashland’s desire to become a purchaser of crude oil from Oman.” Even though a company lawyer advised that the transaction raised issues under the FCPA, the SEC alleged that the “board of directors of Ashland held a meeting at which Atkins presented for the Board’s approval the acquisition of Midland Chrome.” According to the complaint, Atkins viewed the acquisition as a “high risk project” but one that had “potential of being more than offset by a potential crude oil contract …”. According to the complaint, initial board meeting minutes show that Atkins said “the corporation was interested [in the Midlands Chrome acquisition] for the reason that it might thereby be enabled to obtain a contract to purchase crude oil from Oman” but that “this statement was deleted from the final version of the minutes at Atkins’ direction.”

Based on the above core conduct, in a detailed 35 page complaint, the SEC alleged three substantive FCPA anti-bribery violations.

Atkins resigned as chairman of Ashland in 1981 after an internal investigation into a number of questionable foreign payments. According to media reports, when the 1986 matter was resolved Atkins issued a statement which read as follows. “Although it would be my personal preference to litigate this matter, I have agreed to settle this action so that the company can put this lingering dispute behind it, and because to contest this matter would have involved disproportionate trouble and expense.” For more on the life of Orin Atkins, see here and here.

In media reports, Richard Murphy, an SEC enforcement lawyer, said the Ashland case was significant because it demonstrated that the SEC will go beyond the traditional “cash cases” and scrutinize more complicated transactions to determine if they represent violations.

In 1995, Ashland Oil changed its name to Ashland Inc.

In an interesting side note, former Ashland employees Bill McKay and Harry Williams sued the company for breach of contract and wrongful discharge, asserting that Ashland’s pattern of corrupt practices amounted to a violation of the Racketeer Influenced and Corrupt Organizations law. McKay alleged that he was terminated because he refused to take part in any bribery schemes and that he refused in subsequent investigations to hide Ashland’s conduct from officials at the IRS and SEC. According to a 1989 ABA Journal report, “Williams had not been asked to take part in any foreign payments, but he’d become sympathetic to McKay’s efforts to change Ashland’s policy.” According to the report, Williams “made an anonymous phone call to the SEC and spoke freely about Ashland’s recent actions abroad.” A jury returned a verdict of approximately $70 million. According to the ABA report, McKay was awarded over $44.5 million, and the rest was apportioned to Williams. According to the report, Ashland threatened to appeal and the parties settled for $25 million.

Set forth below, in pertinent part, is an interesting article published in the Washington Post on July 10, 1988. about the DOJ’s and SEC’s handling of the conduct at issue.

“Lawyers for two former executives who won a $ 69.5 million award from Ashland Oil Co. contend that their victory shows the Securities and Exchange Commission pulled its punches in handling charges of overseas bribery and other illegal conduct by Ashland. The two former vice presidents had said in wrongful-dismissal lawsuits and in SEC testimony that Ashland paid tens of millions of dollars in bribes to foreign officials to get scarce crude oil and then tried to cover up the illegal conduct. They said they lost their jobs after refusing to participate in conspiracies, perjury and other crimes. Last month, a U.S. District Court jury in Covington, Ky., awarded Bill E. McKay $ 44.6 million and Harry D. Williams $ 24.9 million after a 35-day trial. The jury said the liability should be shared by Ashland; its former chairman and chief executive, Orin E. Atkins; John R. Hall, who succeeded Atkins in 1981, and Richard W. Spears, senior vice president for human resources and law.”

“The SEC filed a much narrower civil lawsuit in July 1986 charging that Ashland and Atkins had bribed an official of Oman to get oil from the sultanate. The suit was filed in tandem with a consent decree, a final court judgment in which Ashland and Atkins neither admitted nor denied past violations while agreeing to face criminal penalties for future ones.”

“The jury and the SEC each had essentially the same evidence of possible violations of the Foreign Corrupt Practices Act (FCPA) of 1977. The gap between the jury’s verdict and the SEC action shows that the SEC dealt with the matter too lightly, according to John R. McCall and Kenneth M. Robinson, the lawyers for McKay and Williams. ‘I can understand how counsel for McKay and Williams are proud of their achievement, and they certainly have the right to crow about it,’ said SEC enforcement chief Gary G. Lynch. ‘But any criticism of the commission’s investigation, or of the results that we achieved, is simply unwarranted.’”

“Punitive damages accounted for only $ 3 million of the awards to McKay and Williams. Compensatory damages were tripled — to $66.5 million — for conspiring to violate, and for violating, the Racketeer Influenced and Corrupt Organizations Act. RICO makes it unlawful for any person associated with an enterprise affecting commerce to lead or to join in ‘conduct of [the] enterprise’s affairs through a pattern of racketeering activity.’ The jury found that the three individual defendants had all conducted or participated in ‘a pattern of racketeering activity’ principally through multiple violations of the FCPA antibribery section and of a law prohibiting travel for the purpose of violating the section.”

[...]

“The SEC’s 1986 lawsuit, which followed months of negotiations with Ashland’s law firm, Cravath, Swaine & Moore, named only one person paid by the oil company, James T.W. (Tim) Landon of Oman, as a foreign government official under the FCPA’s antibribery provisions. The complaint also alleged only one bribe, described by Ashland as a $ 25 million investment in a Landon-controlled chromium mine in Rhodesia. But the jury found that Ashland, ‘with corrupt intent to bribe,’ had made payments to three figures it said were foreign officials under the FCPA: Landon and Yehia Omar of Oman, and Hassan Y. Yassin of Saudi Arabia (who also has operated a consulting firm in McLean). With the same corrupt intent, the jury said, Ashland had made payments to a fourth recipient, Sadiq Attia, ‘knowing or having reason to know that’ all or a portion of the money — $ 17 million — ‘would be used to bribe a government official of Abu Dhabi.’”

“The SEC complaint and consent decree did not mention Yehia Omar or cite any Abu Dhabi and Saudi Arabia payments. Last December, SEC Chairman David S. Ruder told Senate Banking Committee Chairman William Proxmire (D-Wis.) that the Division of Enforcement ‘concluded that the evidence was … insufficient to support further charges of violations’ of the FCPA. In an interview after the jury verdict, Lynch said ‘there was not sufficient evidence that we felt comfortable we could prevail’ if charges were brought based on Ashland payments to Omar. ‘Even before we sat down to negotiate, we had decided privately to exclude Omar, Abu Dhabi, and Saudi Arabia from the consent decree. ‘It was clear to us that the Landon transaction was the strongest, because we believed we could establish that Landon was a government official at the time the chrome transaction occurred.’ Lynch said. He called a multiple-count complaint unnecessary. ‘We were suing for injunctive relief,’ and ‘we could get it with Landon,’ he said. ‘There was no need to push and take on a litigation risk in a case that was much less certain.’ He extended this argument to the omission of the Abu Dhabi and Saudi Arabia cases.”

“But lawyers McCall and Robinson disagreed. ‘The finest judicial scrutiny our American judicial system can provide has now determined that the earlier government efforts were incomplete,’ McCall said. It’s ‘ridiculous’ for the SEC to claim the evidence was insufficient to convince a jury that bribery far beyond that which it alleged hadn’t occurred, he said.”

“Lynch also defended the SEC’s decision not to ask a federal court to find Ashland and Atkins had violated a 1975 consent decree and to hold them in criminal contempt. ‘We did have a concern about meeting the higher burden of proof in order to prove criminal contempt,’ Lynch said. [...] One difficulty in going the criminal route was that ‘the major thrust’ of the 1975 decrees involved unlawful political contributions, and ‘these were foreign bribes,’ Lynch said.”

“But the lawyers for McKay and Williams dismissed this explanation. They pointed out that the 1975 consent decrees prohibited false or fictitious bookkeeping entries, and said the $ 25 million Oman item that the SEC called a bribe, as well as the Abu Dhabi and Saudi Arabia payments, all were recorded by Ashland as ordinary outlays. ‘It was like shooting ducks in a barrel,’ Robinson said. ‘There was no answer that any Ashland official could give on the stand to explain the fraud that was in the documents that they wrote. And how the SEC could miss that is beyond description.’ ‘The SEC should have seen it. These were indictable offenses … I don’t see the evidence that the SEC even slapped Ashland’s wrist. They just closed the book by executing another consent decree — a promise to pay, which is all that it is.’”

“Arthur F. Mathews, who was an SEC deputy enforcement chief in 1969, said in an interview that ‘in the horse-trading for not litigating,’ Cravath, Swaine ’got the staff to strike Yehia Omar … If I had to guess, they did not include Yehia Omar in their action because they thought it was a toss-up whether you could prove it, and they gave it up in the bargain.’”

“McCall said the SEC staff may well have done all it could have, particularly in light of the Reagan administration’s apparent reluctance to enforce the FCPA’s antibribery provisions.’ The SEC commissioners, for example, voted 3 to 2 to reject the division’s initial recommendation for a lawsuit that named only Landon as the recipient of a bribe. Only after the division reargued its case did the commission reverse itself, allowing Lynch to file the lawsuit. Lynch said the SEC disregarded a report by an outside counsel who concluded that the Oman transactions had not violated the FCPA or the 1975 consent decree. Williams and McKay had challenged the independence of the outsider, Pittsburgh attorney Charles J. Queenan. Queenan is a friend of Cravath, Swaine presiding partner and Ashland director Samuel C. Butler, who submitted the report to the SEC as the work of an independent counsel. ‘We did not accept the conclusion that it was an ‘independent counsel’ report,” Lynch said. The SEC staff ‘did our own very thorough investigation of the matter,’ he said. ‘It is clear that if we had accepted the Queenan report’s findings, we would not have filed an action.”

[...]

“Sen. Proxmire, who monitors FCPA enforcement, also has raised questions about the Justice Department’s role in the Ashland case. The department had full access to the SEC’s files from the start of the SEC staff investigation in May 1983. Last October, after a Washington Post series on Ashland’s payments to overseas consultants, Proxmire asked the department if it had investigated the matter and if ‘it has concluded that violations of the FCPA have taken place.’ If the conclusion was that there’d been no violations, ‘I would like an explanation of the rationale underlying such a judgment,’ Proxmire said. ‘If the department has not investigated these allegations, I request that you do so and let me know the results.’ Assistant Attorney General John R. Bolton said on Jan. 20 that he would respond when he received a report from the fraud section of the Criminal Division. On June 20, Proxmire, having heard nothing more for six months, sent Attorney General Edwin Meese III a news story on the jury verdict in Kentucky and asked ‘whether the Department of Justice will now initiate a criminal action.’ If not, Proxmire said he wanted to know why. A department spokesman said a response is being prepared.”

Ralph Lauren Resolves FCPA Enforcement Action Via Double NPAs Based On Subsidiary Conduct In Argentina

Tuesday, April 23rd, 2013

Yesterday, the DOJ and SEC announced (here) and (here) a Foreign Corrupt Practices Act enforcement action against apparel company Ralph Lauren Corporation (“RLC”). The conduct at issue focused on Argentina custom issues and the actions were resolved via a DOJ NPA (here) and an SEC NPA (here).

Although the DOJ frequently uses NPAs and DPAs in the FCPA context, this is only the second instance the SEC has used an alternative resolution vehicle to resolve an FCPA enforcement action. As noted in this previous post, in May 2011 the SEC used a DPA to resolve an FCPA enforcement action against Tenaris. For more on the SEC’s use of alternative resolution vehicles, see prior posts here and here.

RLC agreed to pay $1.6 million to resolve its FCPA scrutiny – $882,000 pursuant to the DOJ NPA and $700,000 pursuant to the SEC NPA ($593,000 in disgorgement and $141,845 in prejudgment interest).

The gist of the enforcement action is as follows.

RLC has approximately 95 foreign subsidiaries. One subsidiary, PRL S.R.L, an indirectly wholly-owned subsidiary of RLC headquartered and incorporated in Argentina, had a General Manager who conspired with a customs clearance agency to make improper payments “to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection.”

There is no allegation or suggestion that RLC was aware of, or participated in, the alleged conduct. The resolution documents merely say that “in the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L.”

The simplistic inference would seem to be that General Manager A would not have engaged in the improper conduct had RLC had an anti-corruption program and provided anti-corruption training. However, this notion would seem to be undermined by reference to RLC’s worldwide FCPA compliance review which ”identified no further violations.”

DOJ NPA

The NPA states that the DOJ “will not criminally prosecute RLC … related to violations of the anti-bribery provisions of the FCPA … arising from and related to improper payments in Argentina …”.

The NPA next states as follows. “The DOJ enters into this Non-Prosecution Agreement based, in part, on the following factors:

(a) the Company’s timely, voluntary, and complete disclosure of the conduct;

(b) the Company’s extensive, thorough, and real-time cooperation with the Department, including conducting an internal investigation, voluntarily making employees available for interviews, making voluntary document disclosures, conducting a world-wide risk assessment, and making multiple presentations to the Department on the status and findings of the internal investigation and the risk assessment;

(c) the Company’s early and extensive remedial efforts already undertaken – including conducting extensive FCPA training for employees world-wide, enhancing the Company’s existing FCPA policy, implementing an enhanced gift policy as well as other enhanced compliance, control and anti-corruption policies and procedures, enhancing its due diligence protocol for third-party agents, terminating culpable employees and a third-party agent, instituting a whistleblower hotline, and hiring a designated corporate compliance attorney – and to be undertaken, including enhancements to its compliance program as described in [the compliance features of the NPA); and

(d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures, as described in [the compliance features of the NPA).

In the NPA, which has a term of two years, RLC admitted, accepted and acknowledged responsibility for the conduct set forth in the statement of facts contained in the NPA, and further agreed to a "muzzle" clause in connection with the conduct at issue (see here for the prior post describing such a clause).

The conduct at issue focused on PRL S.R.L "an indirect wholly-owned subsidiary of RLC headquartered and incorporated in Argentina." According to the NPA, "PRL S.R.L. marketed and sold RLC merchandise, including merchandise that was shipped from outside Argentina." According to RLC's most recent annual report PRL S.R.L. is one RLC's approximate 95 subsidiaries.

More specifically, the conduct at issue focused on "General Manager A" described as a "dual U.S. and Argentine citizen ... hired by RLC to manage the business of PRL S.R.L. from 2003 until 2009" and "Agent 1" described as a "customs clearance agency that was retained by PRL S.R.L. to assist with customs clearance issues in Argentina."

According to the NPA, from 2004 to 2009 "PRL S.R.L. and its employees, including General Manager A, together with Agent 1 and others, conspired to make unlawful payments to foreign officials to use the officials' influence with foreign government agencies and instrumentalities in order to assist PRL S.R.L. in obtaining and retaining business for and with, and directing business to PRL S.R.L."

According to the NPA, the improper payments were "to assist in improperly obtaining paperwork necessary for goods to clear customs, to permit clearance of items without the necessary paperwork, to permit the clearance of prohibited items, and to avoid inspection." The NPA states that "these payments were not for routine government action."

According to the NPA, the improper payments were "disguised" by "having Agent 1 include the payments in Agent 1's invoice as 'Loading and Delivery Expenses' and 'stamp tax/label tax." The NPA states that "General Manager A and others at PRL S.R.L. knew of the true purpose of these expenses and nonetheless approved reimbursement to Agent 1."

The NPA next states as follows.

"In the five years that General Manager A, Agent 1, and others at PRL S.R.L carried out this scheme, RLC did not have an anti-corruption program and did not provide any anti-corruption training or oversight with respect to PRL S.R.L."

The approximate three-page NPA concludes as follows. "In total, General Manager A and PRL S.R.L. paid roughly $580,000 to Agent 1 for the purpose of paying bribes to customs officials in order to obtain improper customs clearance of merchandise."

Pursuant to the NPA and based on the above statement of facts, RLC agreed to pay a penalty of $882,000. There is no indication in the NPA as to how this figure was calculated or what it is based on.

SEC NPA

The SEC's NPA is based on the core set of conduct set forth in the DOJ's NPA.

The short 2.5 page document does however contain the following additional paragraph.

"In addition to paying bribes to Argentina customs officials, RLC Argentina's general manager directly provided or authorized several gifts to be made to Argentine government officials to improperly secure the importation of RLC's products into Argentina. The gifts provided to three different government officials between approximately 2005 through approximately 2009 included perfume, dresses and handbags value at between $400 and$14,000 each."

[As to this "statement of fact," I noted in"Grading the FCPA Guidance" that one of the utilities of the FCPA Guidance issued in November 2012 would be to serve as a useful measuring stick for future FCPA enforcement activity. As noted in this prior post, this is yet again another FCPA enforcement action based, in part, on such items as perfume, dresses and handbags - in the RLC action - allegedly paid by one employee at one of RLC's approximate 95 subsidiaries.]

Under the heading “RLC’s Inadequate Internal Controls and Inaccurate Books and Records,” the NPA states as follows.

“As evidenced by the improper payments to Argentine customs officials and gifts to other government officials, the failure to ensure that proper and effective due diligence was conducted on the customs broker and Customs Broker A, and the failure of the review process for authorization or approval of reimbursement payments to Customs Broker A to detect a single improper payment, between 2005 and 2009, RLC failed to devise and maintain a system of internal controls at RLC Argentina sufficient to provide reasonable assurances that (i) transactions were executed in accordance with management’s general or specific authorization; (ii) transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements; (iii) transactions were recorded as necessary to maintain accountability for assets; and (iv) that access to assets was permitted only in accordance with management’s general or specific authorization. RLC’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time of the misconduct warranted further strengthening to ensure effective compliance with the related laws.

Between 2005 and 2009, certain RLC Argentina employees and agents paid bribes which were inaccurately recorded in RLC Argentina’s books, records and accounts, which were consolidated into the books and records of RLC.”

Under the heading “RLC’s Self Report,” the NPA states as follows.

“In or about February 201 0, RLC’ s Board of Directors adopted a new FCPA policy and shortly thereafter the policy was disseminated through RLC’s intranet site. In approximately Spring or Summer 2010 RLC Argentina employees reviewed the FCPA policy and raised concerns about the company’s customs broker in Argentina. As a result, RLC conducted an internal investigation of the allegations and discovered the improper payments to the customs officials and gifts to Argentine government officials. Within two weeks of uncovering the payments and gifts, RLC self-reported its preliminary findings to the both the SEC and the Department of Justice.”

Under the heading “Remedial Measures and Cooperation,” the NPA states as follows.

“Upon discovering the bribes, RLC took steps to end the misconduct, including terminating its customs broker. RLC also thoroughly reviewed its pre-existing compliance program and undertook steps to further update and enhance its compliance program, and successfully implemented those new enhancements. These steps included, in part, adoption of: (1) an amended anticorruption policy and translation of the policy into eight languages, (2) enhanced due diligence procedures for third parties, (3) an enhanced commissions policy, (4) an amended gift policy, and (5) in-person anticorruption training for certain employees. RLC also ceased retail operations in Argentina and is in the process of formally winding down all operations there.

RLC provided extensive, thorough, real-time cooperation with the staff of the Division and the Department of Justice, including: voluntary and complete production of documents and disclosure of information to the staff, including the facts described above; voluntarily providing accurate translations of documents; voluntarily making witnesses available for interviews; and conducting a risk assessment of certain other world-wide operations of the company. The worldwide review included its operations in Italy, Hong Kong and Japan, and identified no further violations. In fact, the revised compliance policies appear to be working, as the world-wide review identified one instance of a bribe solicitation being rejected by the company’s employees after adoption of the company’s revised FCPA policy in 2010.”

Without admitting or denying liability, RLC agreed to enter into the NPA. At the same time, the NPA states as follows. “This agreement should not … be deemed exoneration of RLC or to be construed as a finding by the Commission that no violations of the federal securities laws have occurred.” At the same time, the NPA states that the “facts set forth are made pursuant to settlement negotiations and are not binding against RLC or its directors, officers or employees, or any other person or entity in any other legal proceeding.”

Like the DOJ NPA, the SEC NPA also contains a “muzzle” clause.

The SEC’s release (here) states as follows.

“The SEC has determined not to charge Ralph Lauren Corporation with violations of the Foreign Corrupt Practices Act (FCPA) due to the company’s prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC’s investigation. Ralph Lauren Corporation’s cooperation saved the agency substantial time and resources ordinarily consumed in investigations of comparable conduct.”

Of course, these are not distinguishing factors.

Many SEC FCPA enforcement actions are the result of corporate voluntary disclosures where companies are likewise commended on the information and cooperation provided. In the Tenaris DPA action, the SEC (see here) said substantively the same thing. In the recent Philips SEC enforcement action, the SEC (see here) said substantively the same thing.

The SEC release further states as follows.

“According to the NPA, Ralph Lauren Corporation’s cooperation included:

Reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts.
Voluntarily and expeditiously producing documents.
Providing English language translations of documents to the staff.
Summarizing witness interviews that the company’s investigators conducted overseas.
Making overseas witnesses available for staff interviews and bringing witnesses to the U.S

“The SEC took into account the significant remedial measures undertaken by Ralph Lauren Corporation, including a comprehensive new compliance program throughout its operations. Among Ralph Lauren Corporation’s remedial measures have been new compliance training, termination of employment and business arrangements with all individuals involved in the wrongdoing, and strengthening its internal controls and its procedures for third party due diligence. Ralph Lauren Corporation also conducted a risk assessment of its major operations worldwide to identify any other compliance problems. Ralph Lauren Corporation has ceased operations in Argentina.”

Thomas Hanusik (Crowell & Moring - and a former DOJ and SEC enforcement official) represented RLC.

*****

Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have led to a world-wide risk assessment by RLC? (See here for the prior post on the “Where Else” question).

Should conduct at one of RLC’s approximate 95 foreign subsidiaries (which per the government’s own allegations appears to have been isolated in scope) have lead to RLC having a reporting obligation to the DOJ and SEC during the two-year term of the NPA? (See here for the prior post “A Government Mandated Transfer of Shareholder Wealth to FCPA Inc.?)

*****

It is tempting, based on the SEC’s statements that “Ralph Lauren Corporation has ceased operations in Argentina” and “is in the process of formally winding down all operations there” to make the causal inference that RLC did this because of the FCPA enforcement action and/or risk associated with the FCPA.

However, that would appear to be wrong conclusion. As noted here and here, when RLC made the decision in August 2012 to suspend and wind-down its Argentine operations, the decision appeared to be based on import controls put on foreign companies and associated foreign currency controls intended to control one of highest rates of inflation in the world. As noted in the above-linked CNN article, the economic measures caused tourism in Argentina to drop. Indeed, RLC was one of several luxury brands – such as Ermenegildo Zegna, Escada, Calvin Klein Underwear, Cartier, Yves Saint Laurent, Hermes, and Louis Vuitton – to have abandoned or are considering leaving Argentina.

*****

The RLC enforcement action is just the latest to involve customs and related issues in Argentina.

See here for the Ball Corp. enforcement action, here for the Helmerich & Payne enforcement action, here for the BJ Services enforcement action.

*****

The RLC enforcement action was a rare instance of an issuer not previously disclosing its FCPA scrutiny. Subject to materiality thresholds (which are rarely triggered in cases of FCPA scrutiny), there is no disclosure obligation, yet most issuers choose to disclose FCPA scrutiny. Thus, yesterday appeared to be the first instance of public disclosure of RLC’s scrutiny. The company’s stock closed at $165.93, down 1.9%.

Friday Roundup

Friday, April 19th, 2013

Docket exploration in this Friday roundup.

SEC v. Jackson & Ruehlen

My first post concerning the SEC’s enforcement action against Mark Jackson and James Ruehlen asked – will the SEC be put to its burden of proof? I noted that the case would be most interesting to follow as the SEC is rarely put to its burden of proof in Foreign Corrupt Practices Act enforcement actions and I highlighted, at the time, how the last time that happened (in 2002) the SEC lost.

As time would demonstrate, Jackson and Ruehlen indeed did put the SEC to its burden of proof and in December 2012 Judge Keith Ellison (S.D. of Tex.) granted Defendants’ motion to dismiss the SEC’s claims that sought monetary damages while denying the motion to dismiss as to claims seeking injunctive relief. (See here for the prior post). Even though Judge Ellison granted the motion as to SEC monetary damage claims, the dismissal was without prejudice meaning that the SEC was allowed to file an amended complaint. As noted in this prior post, that is indeed what happened next, and as noted here a second round of briefing began anew.

In the Defendant’s renewed motion to dismiss (filed Feb. 22nd) they argued that the SEC could not rely on the fraudulent concealment or continuing violations doctrine to extend the limitations period to cover certain claims that accrued before May 12, 2006. A week later the Supreme Court issued its unanimous decision in SEC v. Gabelli (see here for the prior post) and soon thereafter on March 11th the Defendants filed a notice of supplemental authority with the court arguing that Gabelli “bolstered” their position.

On March 22nd, the same day the SEC’s opposition brief was due, the parties jointly notified the court “that in lieu of opposing the [motion to dismiss] the SEC intends to file a Second Amended Complaint.” The filing noted that the then proposed Second Amended Complaint “moots the relief sought in the [the motion to dismiss] because it clarifies that, among the violations alleged, the SEC seeks civil penalties … only to the extent such violations accrued on or before May 12, 2006.

*****

Speaking of statute of limitations, a recent article highlights how the DOJ is “testing a novel argument” to extend statute of limitations in certain cases. The theory. We are at war … in Afghanistan … and regardless of whether the conduct at issue has anything to do with that war in Afghanistan, the 1948 Wartime Suspension of Limitations Act gives prosecutors unlimited time to go after alleged fraud during times of war.

No this article was not in the Onion, it was in the Wall Street Journal (see here).

Former Siemens Executive Sharef Settles 2011 SEC Enforcement Action

The SEC announced earlier this week (here) that Uriel Sharef, ”a former officer and board member of Siemens” agreed to settle – as had long been expected – the SEC’s action against him. As noted in this previous post, Sharef, along with others was charged (both by the DOJ and SEC) in December 2011 in connection with an Argentine bribery scheme that was also the focus, in part, of the 2008 Siemens corporate enforcement action.

As noted in the SEC’s release, without admitting or denying the SEC’s allegations, Sharef consented to entry of a final judgment prohibiting future FCPA violations and he agreed to pay a $275,000 civil penalty – a penalty the SEC called “the second highest penalty assessed against an individual in an FCPA case.”

[In connection with the Innospec FCPA enforcement action, in August 2010, Ousama Naaman resolved an SEC enforcement action by agreeing to disgorge $810,076, pay prejudgment interest of $67,020 and pay a civil penalty of $438,038. See here for the prior post].

The burning question of course is whether the SEC would have prevailed against Sharef if he put the SEC to its burden of proof. As highlighted in this previous post, Sharef’s co-defendant, Herbert Steffen, did just that and in February Judge Shira Scheindlin dismissed the SEC’s complaint against Steffen finding that personal jurisdiction over Steffen exceeded the limits of due process.

The SEC’s allegations against Sharef mention the phone call Sharef placed in the U.S. to Steffen. As to this call, Judge Scheindlin stated as follows in the Steffen decision.

“Neither Sharef’s call to Steffen from the United States nor the fact that a portion of the bribery payments were deposited in a New York bank provide sufficient evidence of conduct directed towards the United States to establish minimum contacts. First, Steffen did not place the calls to Sharef. Further, Steffen did not direct that the funds be routed through a New York bank. [...] His conduct was focused solely on ensuring the continuation of the Siemens contract in Argentina.”

The SEC complaint did however state the following additional as to Sharef.

“Sharef met in New York, NY [in January 2003] with payment intermediaries and agreed to pay $27 million in bribes to Argentine officials in connection with the [contract at issue].

Obstruction Charges Filed Against French Citizen in Connection With FCPA Investigation

The DOJ announced (here) earlier this week that “Frederic Cilins a French citizen, has been arrested and accused of attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”

The Criminal Complaint charges Cilins with one count of tampering with a witness, victim, or informant; one count of obstruction of a criminal investigation; and one count of destruction, alteration, and falsification of records in a federal investigation.

Under the heading “Overview of the Defendant’s Crimes” the complaint states, in pertinent part, as follows.

“Cilins … has made repeated efforts to obstruct an ongoing federal grand jury investigation … concerning potential money laundering violations and potential violations of the Foreign Corrupt Practices Act, including such violations by a domestic concern as defined by the FCPA, relating to bribes to officials of a former government of the country of Guinea for the purpose of obtaining valuable mining concessions in Guinea. During monitored and recorded phone calls and face-to-face meetings with a cooperating witness “CW” [identified as the former wife of a now deceased high-ranking official in the Government of Guinea who is cooperating with the government "in the hopes of obtaining immunity for her own potential criminal conduct"] assisting in this investigation, Cilins, among other things, agreed to pay large sums of money to the cooperating witness to induce the cooperating witness to: (1) provide to Cilins, for destruction, documents Cilins knew had been requested from the cooperating witness by special agents of the FBI and which were to be produced before a federal grand jury; and (2) sign an affidavit containing numerous false statements regarding matters within the scope of the grand jury investigation. Cilins repeatedly told the cooperating witness that the documents needed to be destroyed ‘urgently’ and that Cilins needed to be present to personally witness the documents being burned.”

Various reports (see here for instance) have linked Cilins to Guernsey-based BSG Resources Ltd and the Criminal Complaint would seem to reference this company as a “particular business entity not based in the United States engaged in the mining industry” (the “Entity”). The Criminal Complaint sketches a bribery scheme and states, in pertinent part, as follows.

“CW was visited by several individuals including Cilins who identified themselves as representatives of the Entity. According to the CW, these individuals told the CW, on behalf of the Entity, that they wished to invest in mines in Guinea and asked the CW for help with the Guinean Official, who was then CW’s spouse. Cilins offered the CW $12 million, to be distributed to the CW and ministers or officials within the Government of Guinea who might be needed to secure the mining rights if all went well after their introduction to the Guinean Official.”

The Criminal Complaint further states that “some of the money paid to the CW by the Entity and its affiliates or agents was wired to a bank account in Florida controlled by the CW.”

It would appear from the Criminal Complaint that BSG Resources is not the sole focus of the U.S. investigation. Indeed, BSG Resources does not fit the description of a “domestic concern” as referenced in the Criminal Complaint which further states that “subjects of the grand jury investigation include one or more “domestic concerns” within the meaning of the FCPA …”.

Contrary to this assertion, obstruction charges were not first used in the FCPA enforcement against Hong Carson. Prior to Carson (in which the charge was ultimately dropped) obstruction charges have been used in several FCPA enforcement actions since the FCPA’s first-mega case in 1982 (see here for the prior post). Although not always successful prosecuted, the following FCPA defendants were nevertheless also charged with various obstruction charges: Gerald Green, David Kay and Douglas Murphy, Leo Winston Smith and John O’Shea

TJGEM, LLC Complaint

In another example of the noticeable trend of increasing “offensive” use of the FCPA, in late March, Missouri-based TJGEM, LLC filed this civil complaint in U.S. District Court for the District of Columbia alleging a variety of claims, including RICO, against various Ghana officials and New Jersey-based Conti Construction Co. Inc. in connection with a sewer project. AllAfrica reports here as follows.

”TJGEM is claiming that [a Ghanian official] inflated the contract sum for the construction of the sewer system, which has now been awarded to Conti Construction, also an American company, by $10 million … According to [the complaint] because TJGEM’s representatives, who were negotiating with [the official] for the contract, were totally non-receptive and unresponsive to the [official's] corrupt practices and solicitations, and refused to neither entertain nor accede to same, but instead, rejected said corrupt practices, the contract was taken away from them. [TJGEM] argues that the selection of a company whose price for the reconstruction of the sewer project was some $10,000,000 in excess of the price fixed by TJGEM, leads to a reasonable inference that the [official] inflated the price of the sewer project, in order to receive said $10,000,000 as a bribe and kickback in the award of the sewer project contract to his own use and benefit, and to the use and benefit of other Ghanaian public officials with whom he is acting in concert in the said criminal enterprise.”

*****

A good weekend to all.

Parker Drilling Resolves FCPA Enforcement Action Involving Conduct In Nigeria

Wednesday, April 17th, 2013

It’s been quite a week on the FCPA enforcement front.

On Monday, the DOJ announced (here) criminal obstruction of justice charges against “Frederic Cilins a French citizen [for] attempting to obstruct an ongoing investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”

Yesterday, it was reported (here) that former Siemens executive Uriel Sharef had, as expected, settled the SEC enforcement action against him by agreeing, without admitting or denying the SEC’s allegations, to pay a $275,000 penalty. (See here for the prior post discussing the DOJ’s and SEC’s December 2011 charges against Sharef and others).

Yesterday, the DOJ announced (here) that criminal charges “have been unsealed against one current and one former executive of the U.S. subsidiary of a French power and transportation company for their alleged participation in a scheme to pay bribes to foreign government officials.” The individuals are:

Frederic Pierucci (“a current company executive who previously held the position of vice president of global sales for the Connecticut-based U.S. subsidiary) “who was charged in an indictment unsealed in the District of Connecticut with conspiring to violate the Foreign Corrupt Practices Act (FCPA) and to launder money, as well as substantive charges of violating the FCPA and money laundering.” According to the DOJ, Pierucci, a French national, was arrested Sunday night at John F. Kennedy International Airport.

David Rothschild (“a former vice president of sales for the Connecticut-based U.S. subsidiary”) who pleaded guilty on Nov. 2, 2012, to a criminal information charging one count of conspiracy to violate the FCPA. The charges against Rothschild and his guilty plea were recently unsealed.

Future posts will explore in more detail each of the above developments.

Today’s post is about yesterday’s other FCPA development - the announcement of the long-expected enforcement action against Parker Drilling (a Houston-based oil drilling services company) for conduct in Nigeria.

As indicated in this DOJ release, the Parker Drilling action “stemmed from the DOJ’s Panalpina-related investigations.”

As detailed in this prior post, in November 2010, the DOJ and SEC announced coordinated FCPA enforcement actions against Swiss-based freight forwarder Panalpina and six oil and gas companies that utilized its services in connection with business in Nigeria. The November 2010 enforcement action resulted in approximately $237 million in combined DOJ/SEC settlement amounts. (For additional reading on these actions, please visit the CustomsGate tab under the search feature of this site or see here where all the prior actions are linked). As noted in this prior statistical post, Panalpina-related enforcement actions are one, of just a few unique events, that have given rise to the majority of FCPA enforcements since 2007, and Panalpina-related enforcement actions significantly contributed to the “spike” in FCPA enforcement actions in 2010.

Total fines and penalties in the Parker Drilling enforcement action were approximately $15.9 million (approximately $11.8 million in the DOJ enforcement action and approximately $4.1 million in the SEC enforcement action).

This post summarizes the DOJ’s and SEC’s allegations and resolution documents.

DOJ

The DOJ enforcement action involved a criminal information (here) against Parker Drilling resolved through a deferred prosecution agreement (here)

Criminal Information

Parker Drilling operated oil-drilling rigs in Nigeria owned by Parker Drilling (Nigeria Limited), a Nigerian entity and wholly-owned subsidiary of Parker Drilling Offshore International, Inc., (a Cayman Islands corporation wholly-owned by Parker Drilling). According to the information, “Parker Drilling ceased drilling operations in Nigeria in 2006″ and the conduct at issues focused on two issues or events that occurred between 8 to 12 years ago.

First, the information, like the prior Panalpina-related enforcement actions, alleged conduct in connection with obtaining temporary importation permits (TIPs) in Nigeria for oil-drilling rigs. The information alleges that in 2001, Parker Drilling retained Panalpina to “obtain TIPs and TIP extensions on Parker Drilling’s behalf. According to the information, between 2001 and 2002:

“Panalpina obtained new TIPs for Parker Drilling’s rigs by submitting false paperwork on Parker Drilling’s behalf to avoid the time, cost, and risk associated with exporting the rigs and re-importing them into Nigerian waters (a process that Panalpina referred to as the ‘paper process’ or ‘recycling.’). Panalpina created and caused to be presented to Nigerian officials documents that reflected that the rigs had been physically exported and re-imported. In reality, the drilling rigs never left Nigerian waters.”

Second, and more significant in terms of the conduct alleged in the information, the DOJ alleges conduct in relation to the Nigerian ”Panel of Inquiry for the Investigation of All Cases of Temporary Import Permits Issued Between 1984 to Year 2000″ (the “TI Panel”). According to the information, the TI Panel was “presidentially appointed, operated under the auspices of the Nigerian President’s Office, and possessed the power to issue subpoenas and levy fines” in connection with certain duties and tariffs that the Nigerian Customs Service (“NCS”) collected or failed to collect between 1984 and 2000.

As to the TI Panel, the information alleges that beginning in 2002 the TI Panel began reviewing Parker Drilling. According to the information, thereafter Parker Drilling engaged Nigeria Outside Counsel (a Nigerian citizen based in Nigeria who advised Parker Drilling on customs and other matters in Nigeria) and a Nigeria Agent (a Nigerian and British citizen based in the U.K. to assist Parker Drilling in connection with customs matters in Nigeria) who represented Parker Drilling before the TI Panel.

The information alleges that in 2004 “the TI Panel concluded that Parker Drilling had violated [Nigerian law] with respect to several of its TIPS” and that the “TI Panel assessed a fine of $3.8 million against Parker Drilling.” The information then outlines a “bribery scheme,” that resulted in the TI Panel reducing Parking Drilling’s fine ”to just $750,000.”

In connection with this ”bribery scheme,” the information alleges conduct as to Employee A (a U.S. citizen based in Nigeria who, during the relevant time period, was the General Manager of Parker Drilling’s operations in Nigeria); Employee B (a U.S. citizen based in Nigeria who also was a General Manager of Parker Drilling’s Operations in Nigeria); Executive A (a U.S. citizen based in Houston who performed financial and compliance functions for Parker Drilling between 2002 through 2005); Executive B (a U.S. citizen based in Houston who performed a legal function for Parker Drilling); U.S. Outside Counsel (a U.S. citizen and partner in a U.S. law firm who served as Parker Drilling’s outside counsel who provided legal and business advice to Parker Drilling on customs and other issues in Nigeria).

Specifically, the information alleges that U.S Outside Counsel suggested that Parker Drilling retain the Nigeria Agent to resolve its Nigerian customs issues even though Nigeria Agent’s “resume, which U.S. Outside Counsel provided to Parker Drilling, did not reflect any past experience in Nigeria or handling customs issues.” According to the information, Parker Drilling “conducted no additional due diligence into Nigeria Agent’s qualifications.”

The information alleges that “with one exception, Parking Drilling paid Nigeria agent indirectly through the U.S.-based law firm” and that “Executives A and B paid and caused to be paid all of Nigeria Agent’s expenses without receiving any invoices particularly describing the expenditures’ purposes.” According to the information, many of expenses related to food, entertainment, social events and the like and the information alleges various meetings the Nigeria Agent had with various Nigerian foreign officials.

The information further alleges that Parker Drilling’s treasurer informed Executive B “that the lack of invoices could raise an issue in Parker Drilling’s ongoing Sarbanes Oxley audit.” Thereafter, the information alleges, the Nigeria Agent sent an invoice and that Executive B “accepted the invoice and retained it in Parker Drilling’s files, knowing that the invoice did not accurately reflect the true purpose of Parker’s Drillings” prior payments to the Nigeria Agent.

The information then states as follows. “All told, Parker Drilling transferred and caused to be transferred to Nigeria Agent approximately $1.25 million to address Parker Drilling’s TI Panel issues” and that “Nigeria Agent succeeded in reducing Parker Drilling’s TI Panel Fines.”

Based on the above conduct, the information charges one count of violating the FCPA’s anti-bribery provisions. Although the above Panalpina-related allegations are incorporated by reference into the paragraphs charging the FCPA violation, the information specifically identifies only the TI Panel conduct and states as follows. “Parker Drilling made and cause to be made from the United States … a series of payments totaling approximately $1.25 million to Nigeria Agent, knowing that all or a portion of those payments would be given or used to procure goods and services that were to be given to a foreign government official in return for the diminution of a lawfully assessed fine.”

Deferred Prosecution Agreement

The above charge against Parker Drilling was resolved via a DPA in which Parker Drilling admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees and agents as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states as follows.

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and the Company. Among the facts considered were the following: (a) the Company’s cooperation, including conducting an extensive internal investigation and collecting, analyzing, and organizing voluminous evidence and information for the Department; (b) the Company has engaged in extensive remediation, including ending its business relationships with officers, employees or agents primarily responsible for the corrupt payments, enhancing its due diligence protocol for third-party agents and consultants, increasing training and testing requirements, and instituting heightened review of proposals and other transactional documents for all the Company’s contracts; (c) the Company has retained a full-time Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee, as well as staff to assist the Chief Compliance Officer and Counsel; (d) the Company has already significantly enhanced and is committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth [elsewhere in the DPA]; (e) the Company has implemented a compliance-awareness improvement initiative and program that includes issuance of periodic anti-bribery compliance alerts; (f) the Company has already implemented many of the elements described [elsewhere in the DPA]; and (g) the Company has agreed to continue to cooperate with the Department in any ongoing investigation …”.

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $14.7 million to $29.4 million. The DPA then states as follows.

“The Company agrees to pay a monetary penalty in the amount of $11,760,000, an approximately 20% reduction off the bottom of the fine range [...]. The Company and the Department agree that this fine is appropriate given the facts and circumstances of this case, including the Company’s cooperation, extensive remediation, committment to continue to enhance its compliance program, and culpability relative to other companies examined in this investigation.”

During the period of the DPA, Parker Drilling will have annual reporting obligations to the DOJ concerning its remediation and implementation of various compliance measures. As is typical in FCPA DPAs, Parker Drilling also agreed to a ”muzzle clause” (see this prior post for more information).

SEC

In a related enforcement action based on the same core conduct, the SEC brought a civil complaint (here) against Parking Drilling.

The introductory paragraph of the complaint states as follows.

“This matter involves violations of the Foreign Corrupt Practices Act (“FCPA”) by Defendant Parker Drilling Company. In 2004, through its outside counsel, Parker Drilling retained a Nigerian agent to assist the company with customs disputes related to the importation of its drilling rigs into Nigeria. During the course of the agent’s work, two Parker Drilling executives knowingly paid the agent large sums of money through its outside counsel for, among other things, the “entertainment” of Nigerian foreign officials in an effort to obtain their influence in resolving the customs disputes.”

The SEC complaint also contains a paragraph with the same general Panalpina-related allegations as alleged in the DOJ’s criminal information.

Under the heading “Remedial Efforts” the complaint states as follows.

“Parker Drilling demonstrated significant cooperation and conducted an extensive internal investigation. Since the time of the conduct noted in this Complaint, Parker Drilling has made significant enhancements to its global anti-corruption compliance program, including: retaining a full-time Chief Compliance Officer and Counsel who reports to the Chief Executive Officer and Audit Committee and full-time staff to assist him; enhancing anti-corruption due diligence requirements for relationships with third parties; increasing compliance monitoring and corporate auditing specifically tailored to anti-corruption; implementing a compliance awareness initiative that includes issuance of periodic anti-bribery compliance alerts; enhancing financial controls and governance; and expanding anti-corruption training throughout the organization.”

Based on the above conduct, the SEC charged an FCPA anti-bribery violation and an FCPA books and records and internal controls violation. Other than restating the language of the books and records and internal controls provisions, the SEC complaint does not contain any specific allegations concerning these charges.

As noted in this SEC release, Parker Drilling agreed to pay disgorgement of 3,050,00 plus pre-judgment interest of $1,040,818, and consented to the entry of a final judgment permanently enjoining it from future FCPA violations.

Mitchell Ettinger, Saul Pilchen and Stephanie Cherny (Skadden, Arps) represented Parker Drilling.

Parker Drilling in this release stated as follows.

“After an extensive investigation, with which we fully cooperated, we are pleased to have reached agreement with the DOJ and the SEC, and we will continue to maintain a vigorous FCPA compliance program, to emphasize the importance of compliance and ethical business conduct, and to enhance our compliance efforts.”

Parker Drilling had previously disclosed that the DOJ and SEC’s investigations concerned “certain of our operations relating to countries in which we currently operate or formerly operated, including Kazakhstan and Nigeria.”

Philips Resolves First Corporate FCPA Enforcement Action Of The Year

Wednesday, April 10th, 2013

A Netherlands-based company with shares listed on the New York Stock Exchange is the parent of a group of companies including a Polish subsidiary that sells medical equipment to Polish healthcare facilities. Between six and fourteen years ago “in at least 30 transactions” employees of the Polish subsidiary, without any mention of parent company knowledge or approval, ”made improper payments to public officials of Polish healthcare facilities to increase the likelihood that public tenders for the sale of medical equipment would be awarded” to the subsidiary.

The end result?

Why of course $4,515,178 to the U.S. treasury.

Recently the SEC issued (here) an administrative cease and desist order against Koninklijke Philips Electronics N.V. (“Philips”). The action is the first corporate FCPA enforcement action of 2013.

The SEC Order states, in pertinent part, as follows.

“This matter concerns violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Philips. The violations took place through Philips’s operations in Poland from at least 1999 through 2007. The violations relate to improper payments made by employees of Philips’s Polish subsidiary, Philips Polska sp. z o.o. (“Philips Poland”) to healthcare officials in Poland regarding public tenders proffered by Polish healthcare facilities to purchase medical equipment.”

[...]

“Since at least 1999, Philips has participated in public tenders to sell medical equipment to Polish healthcare facilities. From 1999 through 2007, in at least 30 transactions, employees of Philips Poland made improper payments to public officials of Polish healthcare facilities to increase the likelihood that public tenders for the sale of medical equipment would be awarded to Philips.”

“Representatives of Philips Poland entered into arrangements with officials of various Polish healthcare facilities whereby Philips submitted the technical specifications of its medical equipment to officials drafting the tenders who incorporated the specifications of Philips’ equipment into the contracts. Incorporating the specifications of Philips’ equipment in the tenders’ requirements greatly increased the likelihood that Philips would be awarded the bids.”

“Certain of the healthcare officials involved in the arrangements with Philips also decided whom to award the tenders, and when Philips was awarded the contracts, the officials were paid the improper payments by employees of Philips Poland.”

“The improper payments made by employees of Philips Poland to the Polish healthcare officials usually amounted to 3% to 8% of the contracts’ net value.”

“At times, Philips Poland employees also kept a portion of the improper payments as a “commission.” The Philips Poland employees involved in the improper payments often utilized a third party agent to assist with the improper arrangements and payments to Polish healthcare officials.”

“The improper payments made by employees of Philips Poland to Polish healthcare officials were falsely characterized and accounted for in Philips’s books and records as legitimate expenses. At times those expenses were supported by false documentation created by Philips Poland employees and/or third parties. Philips Poland’s financial statements are consolidated into Philips’ books and records.”

Under the heading “Discovery, Internal Investigation and Self Report,” the Order states as follows.

“Philips became aware of misconduct by Philips Poland employees in August 2007, when Polish officials conducted searches of three of Philips’ offices in Poland and arrested two Philips Poland employees.”

“In response to the search of Philips’ offices and arrests of its employees, Philips conducted an internal audit in 2007. Philips failed to discover the improper payments to Polish healthcare officials in its internal audit, but terminated and disciplined several Philips Poland employees and made substantial changes to Philips Poland’s management and significant revisions to the company’s internal controls.”

“In December 2009, the Prosecutor’s Office in Poznan, Poland, indicted 23 individuals, including three former Philips Poland employees and 16 healthcare officials, for violating laws related to public tenders for the purchase of medical equipment. That indictment described the improper payments discussed in this Order.”

“In response to the Polish authorities’ indictment, Philips conducted an internal investigation. The findings of the investigation supported the allegations of the 2009 indictment and revealed that Philips Poland employees had made unlawful payments to Polish healthcare officials, that its books, records and accounts failed to accurately account for the improper payments and that its internal controls failed to ensure that transactions were properly recorded by Philips in its books and records.”

“In early 2010, Philips self-reported its internal investigation to the staff of the Commission and to the Department of Justice. As the internal investigation progressed, Philips shared the results of the investigation with the staff and undertook significant remedial measures.”

Under the heading “Remedial Measures,” the Order states as follows.

“In response to its internal audit and investigation, Philips terminated and disciplined several Philips Poland employees and installed new management at Philips Poland, as stated above. Philips also retained three law firms and two auditing firms to conduct the investigation and design remedial measures to address weaknesses in its internal controls. Included in changes to internal controls, Philips established strict due diligence procedures related to the retention of third parties, formalized and centralized its contract administration system and enhanced its contract review process, and established a broad-based verification process related to contract payments. In addition, Philips has made significant revisions to its Global Business Principles policies and continually revises the policies to keep them current and relevant. Philips also established and enhanced an anti-corruption training program that includes a certification process and a variety of training applications to ensure broad-based reach and effectiveness.”

Based on the above conduct, the SEC found that Philips violated the FCPA’s books and records and internal control provisions. The Order states as follows.

“Employees of Philips Poland made improper payments to healthcare officials in Poland to increase the likelihood that Philips would be awarded public tenders to sell medical equipment to Polish healthcare facilities. The payments were improperly recorded in Philip’s books and records as legitimate expenses. Philips Poland employees also utilized falsified records to support the false accounting entries. Accordingly, as a result of its misconduct, Philips failed to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected its transactions and the disposition of its assets …”

“Philips Poland’s improper payments to healthcare officials in Poland related to at least 30 public tenders over a period of eight years. Philips’s internal controls failed to detect or prevent the improper payments and false recordings of those transactions during that time. As a result, Philips failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were properly recorded by Philips in its books and records. Philips also failed to implement an FCPA compliance and training program commensurate with the extent of its international operations. Accordingly, Philips violated [the internal control provisions].”

Without admitting or denying the SEC’s findings, Philips consented to entry of the Order prohibiting future FCPA violations and agreed to pay disgorgement of $3,120,597 and prejudgment interest of $1,394,581. The Order further states that Philips “acknowledges that the Commission is not imposing a civil penalty based upon its cooperation in a Commission investigation and related enforcement action.”

A few random comments regarding the Philips FCPA enforcement action.

As noted in the SEC Order, Philips retained “three law firms and two auditing firms to conduct the investigation and design remedial measures.” Wow. There is a reason I call it FCPA Inc. and the business of bribery.

Just what does the SEC mean when it says that Philips failed to implement an FCPA compliance and training program “commensurate with the extent of its international operations.” As noted in this prior post discussing how the November 2012 FCPA Guidance can be used as a useful measuring stick for future enforcement activity, I highlighted the following statements from the Guidance.

“The ‘in reasonable detail’ qualification [of the FCPA’s books and records provisions] was adopted by Congress ‘in light of the concern that such a standard, if unqualified, might connote a degree of exactitude and precision which is unrealistic.’ [...] The term ‘reasonable detail’ is defined in the statute as the level of detail that would ‘satisfy prudent officials in the conduct of their own affairs.’ Thus, as Congress noted when it adopted this definition, ‘[t]he concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.’” (Pg. 39)

“Like the ‘reasonable detail’ requirement in the books and records provision, the [FCPA’s internal control provisions] defines ‘reasonable assurances’ as ‘such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.’ The Act does not specify a particular set of controls that companies are required to implement. Rather, the internal controls provisions gives companies the flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.” (Pg. 40)

The Philips enforcement action involved Polish healthcare officials. As noted in this prior post, in 2012, 50% of corporate FCPA enforcement actions involved, in whole or in part, foreign health care providers.

The Philips enforcement action is similar to prior SEC administrative actions against foreign issuers Allianz and Diageo (see here and here for prior posts). As noted in the previous posts, 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 in the Philips action does not contain any findings concerning any U.S. nexus in regards to the payments at issue.

Despite the absence of FCPA anti-bribery charges or findings, the SEC still sought a disgorgement remedy. The Philips enforcement action is thus another example of “no-charged bribery disgorgement.” See here for criticism of such actions 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.”

Because the conduct at issue in the Philips enforcement action occurred between six to fourteen years ago, you may be wondering about statute of limitations issues given the Supreme Court’s recent Gabelli decision. As noted in this prior post, from the perspective of SEC FCPA enforcement against corporations, the Gabelli case is, unfortunately, unlikely to have much impact. Cooperation will continue to be the name of the game and corporations facing FCPA scrutiny will likely continue to waive statute of limitations arguments or otherwise toll statute of limitations as evidence of their cooperation.