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.”
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.
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.
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%.