2016 was certainly one for the FCPA enforcement record books. There were 27 corporate enforcement actions with monetary fines and penalties of nearly $6 billion. This made 2016 the most active year on record. The end of 2016 brought several stunning FCPA enforcement actions including those involving Odebrecht and Teva Pharmaceuticals which largely contributed to this very large penalty amount.
However, there was one in the final week of 2016, involving General Cable Corp. that seemed to me to emphasize the continuity in FCPA compliance and enforcement, both reaching back into the past and portending the future. The General Cable matter was settled with the Justice Department via a non-prosecution agreement (NPA) and the SEC via a cease-and-desist order (General Cable Order). There was also the resolution of a civil charge by the SEC against a former General Cable executive, Karl Zimmer, via a cease-and-desist order (Zimmer Order). I found this case to have aspects from many cases over the past 10 years but also look forward to a different style of FCPA enforcement, following the Justice Department FCPA Pilot Program.
The fines and penalties paid by General Cable were not insignificant. The company paid a $20 million fine based on its criminal conduct and paid another $51 million in profit disgorgement. Finally, based upon the conduct laid out by the SEC in the General Cable Order, the company was assessed another $6.5 million for violations of the FCPA’s accounting provisions. The $20 million figure reflects a 50 percent discount off the bottom of the U.S. Sentencing Guidelines fine range, demonstrating that as bad as the underlying bribery and corruption may have been, the Justice Department will give significant credit when the company meets the requirements under the FCPA Pilot Program. These four prongs include (1) self-disclosure, (2) significant cooperation, (3) extensive remediation, and (4) profit disgorgement.
As for the illegal conduct, it was widespread and pervasive throughout several business units in the organization. As stated in the NPA, “General Cable knowingly and willfully failed to implement and maintain an adequate system of internal accounting controls designed to detect and prevent corruption or otherwise illegal payments by its agents. In particular, and as relevant here, General Cable had deficient internal accounting controls that did not require and/or ensure, among other things (a) due diligence for the retention of third-party agents and distributors; (b) proof that services had been rendered by third parties before payment could be made to them; (c) oversight of the payment process to ensure that payments were made pursuant to contractual terms or that payments were reasonable and legitimate. General Cable knowingly and willfully failed to address these known weaknesses, in relevant part, to allow the conduct to continue.”
2016 was certainly one for the FCPA enforcement record books. There were 27 corporate enforcement actions with monetary fines and penalties of nearly $6 billion. This made 2016 the most active year on record.
It was the use of third parties to facilitate the illegal payments that gave me pause as it demonstrated yet again that the highest risk in FCPA compliance is around third parties. There were more than $13 million in bribes paid out by General Cable and several of its subsidiaries resulting in $51 million in illegal profits. The bribery schemes involved Angola, Bangladesh, Thailand, Indonesia, and China, where several different types of third parties’ bribery schemes were utilized.
In Angola, the company’s subsidiary made illegal payments to customers who worked for state-owned enterprises through third-party sales agents. For almost four years, between 2009 and 2013, General Cable’s Angolan subsidiary paid more than $8.7 million to a sales agent in Angola with knowledge that the sales agent would pass a portion of those payments to officials at Angolan state-owned enterprises. In Bangladesh, the company paid $43,700 to an agent with the explicit understanding that the agent would use the money for corrupt purposes.
In Indonesia, General Cable’s subsidiary paid more than $2 million to two freight forwarders with the understanding that the freight forwarders would use the money for corrupt purposes. In Thailand, the illegal bribe payments were made through a distributor who received excessive rebates which were then used to facilitate the corrupt payments. The company paid more than $1.5 million in rebates to a distributor in Thailand with the understanding that the distributor would use the money for bribery and corruption in association with sales to state-owned businesses in Thailand.
In China the bribery scheme was once again funneled through corrupt distributors. The China business unit, “paid more than $500,000 to China-based agents and distributors, typically in the form of rebates, special discounts, and technical service fees.” As with every other instance of using third parties to pay bribes, General Cable China knew that the third-party agents and distributors would use the money for corrupt purposes.
It has long been known that the greatest FCPA risk is with third parties. Up to 90 percent of all FCPA enforcement actions involve the illegal actions of third parties giving rise to parent corporation exposure involving the use of third parties, including sales agents, distributors, and entities that come into a contractual relationship through a corporation’s supply chain. The General Cable enforcement illustrates once again not only the high risk nature of third parties in anti-corruption compliance but how management can often miss clear signs of bribery and corruption, or at least evidence of misbehavior that merits further investigation.
In the case of General Cable not only were numerous red flags present; there were specific instance of actual knowledge that led the Justice Department to state somewhat wryly that even if senior employees of General Cable were unaware initially that the payments to the distributor were being used for illegal purposes, they “came to the understanding that money being paid to the distributor was being used for illegal purposes and closed their eyes to it being used for bribery.”
In Angola, the payments were well known within these business units as illegal bribes, with one employee writing in an e-mail, “Everyone knew that [an Angolan State-Owned Enterprise 2 official] was being paid (if not there would be no need for the bills that come from there); when the contract was signed, this was what was agreed had to be paid.” These bribes paid in Angola were funneled through third-party agents. As early as 2012, the General Cable internal audit department picked up evidence of these illegal payments finding that “payments made to the third-party sales far exceeded the amounts required under the contract with the agent” The NPA noted that the employees “knew” payments made to the agent would be passed on as bribes.
In Bangladesh, General Cable was aware of red flags in connection with these payments and ultimately became aware of, or at the very least were willfully blind to, certain corrupt payments. In Indonesia General Cable was likewise aware of red flags in connection to certain corrupt payments. Indeed, there were e-mails cited that demonstrated that the bribery scheme was well-known within the business unit, when an “employee wrote an e-mail describing the services of a principal of the two freight forwarders in Indonesia, stating “Mike, I mentioned it before, my agent doesn’t ask for any money upfront. He can afford to pay his way in and out of PLN [Perusahaan Listrik Negara, the Indonesia-state-owned electricity company].”
In Thailand, there were meetings where high-level company executives expressed concerns that payments to the distributor in Thailand were being used for corrupt purposes. Even more amazing were the findings made during an internal tax review in Thailand, where the General Cable team performing the review noted “potential applicability of the U.S. Foreign Corrupt Practices Act for commissions paid to Thai governmental authorities.” When the tax guys pick up illegal bribes, it is pretty clear that lots of folks in the organization knew about it. Finally, in China the NPA also spoke to the actual knowledge of corrupt payments being made on the company’s behalf.
Much like the Back to the Future movie trilogy, in many ways the General Cable FCPA enforcement action looks both forward and back. It looks back to the situation of 10 years ago or so, where companies thought they were safe from FCPA liability by hiding corrupt payments made through third parties. However, the matter also looks to the future as it follows the strictures of the Justice Department’s FCPA Pilot Program by providing significant credit to General Cable for the company’s adherence to those requirements. Even with the conduct and knowledge outlined above, the company received a 50 percent discount off its criminal fine, received a NPA, as opposed to a Deferred Prosecution Agreement or sustaining a criminal plea, and no corporate monitor was required.