Yesterday’s post (here) went long and deep as to the Diebold enforcement action.  Today’s post continues the analysis by highlighting additional notable issues.

Prior China Investigation

It is merely one paragraph in the SEC’s complaint, but it may be perhaps the most notable issue in the Diebold enforcement action (an action based primarily on excessive travel and entertainment payments by subsidiaries – the bulk of which occurred in China).  Para. 28 of the SEC’s complaint states:

“Other executives at Diebold were on notice of potential corruption issues at Diebold China. In 2007, a regional government agency in China, the Chengdu Administration of Industry & Commerce (“CDAIC”), opened an investigation involving, among other issues, leisure trips and gifts Diebold China had provided to bank officials. Company executives in China and the U.S. learned of the investigation after a Diebold field office in Chengdu was raided by authorities. Executives A and B took the lead in responding to the investigation. Diebold was able to settle the matter with no corruption charges filed, by paying CDAIC an administrative penalty of 600,000 RMB (approximately $80,000) for business registration violations. Despite being on notice of potential corruption issues at Diebold China, Diebold failed to effectively investigate and remediate these problems.”

In short, the bulk of the conduct at issue in the $48 million Diebold enforcement action was previously investigated by a foreign law enforcement agency and was resolved without corruption charges.

Repeat Offender

As noted in yesterday’s post, in resolving the SEC enforcement action, Diebold agreed to a permanent injunction prohibiting future FCPA violations.

As noted in this prior post, in July 2010 Diebold previously agreed to a permanent injunction prohibiting future FCPA books and records and internal controls violations in a “non-FCPA FCPA enforcement action.”

In other words, Diebold is a repeat FCPA offender (at least as to books and records and internal controls provisions).  As noted in yesterday’s post, this was the reason why the enforcement agencies imposed a compliance monitor on Diebold notwithstanding its voluntary disclosure and cooperation.

The Diebold action once again raises the issue of whether SEC permanent injunctions represent meaningless settlement language.   (See here and here for prior posts).

Rogue?

Notwithstanding the fact that Diebold is a repeat offender, a separate question ought to be asked – was the Diebold enforcement action the result of rogue employees?

According to its website, Diebold employs 16,000 employees with representation in more than 90 countries worldwide.  The enforcement action primarily focuses on the conduct of two employees – Executive A and Executive B.  The SEC’s complaint specifically states that these executives received FCPA training in 2007, yet still continued their alleged improper practices.  In addition, the SEC specifically states that the “executives took further steps to hide the leisure nature of [the problematic] trips including, on at least one occasion, providing false information to the company’s auditors in China.”

Is it fair for Diebold shareholders to pay $48 million to resolve an enforcement action (let alone many millions more in pre and post enforcement action professional fees and expenses) based on conduct allegedly engaged in primarily by .0001% of its employees, employees who were trained on the FCPA, and employees who took steps to conceal their activity from others in the company?

Typical Chronology

Diebold’s FCPA scrutiny followed a typical pattern as set forth below.

As noted in this prior post, in July 2010, the company voluntarily disclosed to the DOJ and SEC conduct it learned of “while conducting due diligence in connection with a potential acquisition in Russia.”

This original source of scrutiny caused the company to conduct an internal review of its “global FCPA compliance” which resulted, as noted in this prior post, in the company thereafter disclosing as follows.  “In the fourth quarter of 2010, the Company identified certain transactions within its Asia Pacific operation over the past several years which may also potentially implicate the FCPA.”

As noted in this prior post, in August 2013, the company disclosed as follows.

“The company has agreed in principle with the DOJ and the SEC to the terms of a proposed settlement of their inquiries, which terms remain subject to final approval by all parties. These proposed settlement terms include combined payments to the U.S. government of approximately $48.0 million in disgorgement, penalties and prejudgment interest, and the appointment of an independent compliance monitor for a minimum period of 18 months.”

In short, the time period from first instance of public disclosure to actual settlement was approximately 3.25 years.  The time period from disclosure of a settlement in principle to actual settlement was approximately 3 months.