Since the launch of the FCPA Pilot Program in April 2016, the Justice Department has laid out the key guideposts for securing a declination to prosecute FCPA violations. Those guideposts include self-disclosure, cooperation with the government, disgorgement of illegally gained profits, and a genuine effort to remediate the internal conditions that led to the initial violation.
In the first half of 2017, only two FCPA violations have concluded, but both were declinations that deepen the precedent for declinations as outlines by the FCPA Pilot Program—especially considering that in each case, the companies involved had clearly violated the FCPA for years with prolonged bribery and corruption schemes. To have obtained a declination is a superior result for both companies. For compliance officers looking to the FCPA Pilot Program as a way to better understand how to manage the fallout from an FCPA violation, these two cases provide some valuable background worthy of sharing with internal counsel, chief risk officers, the rest of the C-Suite, and the board. Let’s take a closer look at each case, its background, and the factors that resulted in each company securing a declination.
Case #1: Linde Gas. The first declination involved Linde Gas North America LLC and Linde North America Inc. (collectively “Linde Gas”). Linde Gas is a wholly owned subsidiary of the Linde Group, a German based entity which is listed on multiple stock exchanges in Germany, but not listed in the U.S.
In Linde Gas, the bribery scheme involved an acquired entity Spectra Gases, Inc. (Spectra Gases) which was used post-acquisition to purchase certain assets from the National High Technology Center (NHTC) of the Republic of Georgia. One of the keys to this purchase involved a boron column, a piece of equipment used to produce boron gas. Sales of boron gas after the acquisition helped fund the purchase price of the Spectra acquisition and the payout to Spectra executives who stayed on after Linde purchased Spectra Gases.
For reasons not made clear, Linde did not purchase the boron column outright. Instead, it allowed the former Spectra executives and the corrupt NHTC officials to form two new entities—Spectra Investors LLC (Spectra Investors) and Spectra Gases Georgia, both wholly owned by Spectra Investors—to own and operate the boron column. Spectra Investors was owned 51 percent by the corrupt NHTC officials and 49 percent by the Spectra Gases executives who now worked for Linde. Spectra Gases Georgia was formed as a separate management company, by the NHTC officials, which was claimed to provide services to Spectra Investors for which it would receive recompense. Of course, there was no evidence of services being delivered under this arrangement as it was simply a mechanism to funnel monies to the corrupt officials.
As a result of the ownership structure of Spectra Investors, the corrupt NHTC officials received approximately 75 percent of the profits generated by the boron column, while Spectra Gases received the remaining 25 percent. Even by the standards of bribery and corruption, it was a bad business deal. In January 2010, Linde dissolved Spectra Gases and became its successor-in-interest and at some point, later discovered the illegal conduct. Prior to the time of the dissolution, Spectra Gases had received approximately $6.4 million from the corrupt arrangement. After Linde became the direct owner, it received another $1.4 million from the scheme.
Case #2: CDM Smith. The second declination involved CDM Smith Inc. (CDM Smith) a privately held company, headquartered in Boston MA. As neither company is a U.S. publicly listed entity, neither is subject to jurisdiction of the SEC. Hence both declinations were granted with the notation of declinations with disgorgement. In Linde Gas, the disgorgement amount was $7.8 million and forfeit $3.4 million, for a total of $11.2 million and in the CDM Smith declination the disgorgement amount was $4.037 million.
The first half of 2017 has brought the final resolutions of only two FCPA matters from the new administration, but they were both declinations. Both declinations have significantly strengthened the FCPA Pilot Program as a clear path forward for every company that finds itself in FCPA hot water.
In CDM Smith, the bribery and corruption scheme was much simpler, yet longer-running than the Linde Gas bribery scheme. From 2011 until 2015, CDM’s India operations acted corruptly in paying bribes to employees at the National Highways Authority of India (NHAI), the country’s state-owned highway management agency. The bribe payments were reported to be “2-4% of the contract price and paid through fraudulent subcontractors, who provided no actual services and understood that payments were meant to solely benefit the officials.” In addition to these ongoing payments, the company’s division responsible for India and the Indian subsidiary “paid $25,000 to local officials in the Indian state of Goa in relation to a water project contract.”
This was a situation of substantive involvement at the management level, according to the declination statement. “All senior management at CDM India (who also acted as employees and agents of CDM Smith and signed contracts on behalf of CDM Smith, including CDM India’s country manager) were aware of the bribes for CDM Smith and CDM India contracts, and approved or participated in the misconduct,” it said.
The comebacks. Neither case presented information on how the bribery and corruption schemes were detected. Both companies, however, met the four prongs of requirements under the FCPA Pilot Program. In the Linde Gas matter, the decision to decline to prosecute was based on: (1) Linde’s timely self-disclosure; (2) a thorough, comprehensive, and proactive investigation; (3) Linde’s full cooperation and meeting the Yates Memo requirement for disclosing all known relevant facts about the individuals involved in or responsible for the misconduct; (4) full profit disgorgement; (5) Linde’s enhancement of its compliance program and internal controls; and (6) Linde’s full remediation, including termination or discipline of the three Spectra executives and lower-level employees involved in the misconduct; termination of the fraudulent management contract between the corrupt NHTC officials and Spectra Investors; and termination of the earn-out payment due to the former Spectra executives who became Linde employees.
In the CDM Smith matter, the declination was based on: 1) CDM timely and voluntarily self-disclosed the matter; 2) CDM engaged in a “thorough and comprehensive investigation”; 3) CDM cooperated fully with the DOJ in the investigation of this matter; 4) CDM agreed to disgorge all profits it made from its illegal conduct; 5) the remediation engaged in by CDM, including enhancements to its compliance program and internal controls regime; and 6) CDM’s termination of the executives and employees who were involved in or directed the illegal conduct.
In both cases, the companies ceded their rights to seek favorable tax treatments for the amounts paid out in disgorgement and/or forfeiture. Interestingly, CDM Smith also waived its right to seek reimbursement or indemnification from “any source with regard to the Disgorgement Amount.”
Lessons learned. In the case of Linde Gas, we have yet another FCPA action where a company performed insufficient due diligence in the acquisition phase. The timing of the Linde purchase of Spectra Gases and Spectra Gases’ purchase of the income-producing assets is too close in time to be a coincidence. It would certainly appear that Linde Gas purchased Spectra Gases to facilitate its acquisition of the boron column and other assets. If your company is going to make such a multistep acquisition, you must perform due diligence on all the actors and the assets involved.
The convoluted (at best) corporate structure created for the ownership of the boron column, its operation and management contract are clear red flags that any CCO should sniff out immediately. While the internal corporate excuse for this clear ruse was probably the old saw of “tax considerations,” every such transaction should be reviewed by compliance. Any time there is more than one entity to accomplish one task, there is the possibility of fraud. Further, it is not clear how Linde could not have been aware of the ownership interests of a company it ultimately controlled. The company did not even make any inquiry.
In the case of CDM Smith, while CDM’s conduct did not reach the invidious level present at Linde, it was clear that plenty of company employees were aware of, or engaged in, illegal conduct. It was not limited to the company’s Indian subsidiary alone, as both employees and agents of the CDM in the U.S. corporate office signed the contracts that were obtained through bribery and corruption. Also, the conduct occurred over a five-year period, which certainly raises questions about oversight by the U.S. parent. There was no information presented about when or how the illegal conduct came to the U.S. parent’s attention, only that the company did timely disclose this matter in a voluntary manner.
For the compliance practitioner, both the Linde and CDM cases emphasize that the Justice Department has sent a clear message that it will reward companies that meet the four pillars under the FCPA Pilot Program: self-disclosure, extraordinary cooperation, full remediation, and profit disgorgement. Interestingly, the profit disgorgement in this case would appear to have been beyond the five year of limitations for profit disgorgement under the recent Kokesh Supreme Court decision.
The first half of 2017 has brought the final resolutions of only two FCPA matters from the new administration, but they were both declinations. Both declinations have significantly strengthened the FCPA Pilot Program as a clear path forward for every company that finds itself in FCPA hot water. The requirements to be eligible for the Pilot Program are sufficiently laid out, and there is now a body of six declinations in total to demonstrate the benefits of meeting the Pilot Program elements.