The circle is now complete. Beginning with the Yates Memo last September to the metrics laid out by Assistant Attorney General Leslie Caldwell in November through to the comments by the new Justice Department Compliance Counsel Hui Chen in December, all culminating in the announcement of the Justice Department Pilot Program in March—enforcement of the Foreign Corrupt Practices Act (FCPA) has taken a dramatic turn. And, the results from three recent enforcement actions demonstrate that if companies follow the requisites of the Pilot Program, they will sustain real and tangible benefits for their FCPA violations.
It all began with the Yates Memo, which mandated that companies self-disclose and turn over information on individuals who may have been complicit in conduct that violated the FCPA. While many commentators placed new emphasis on individuals, most missed the additional key factor of early self-disclosure. The result, noted U.S. Deputy Attorney General Sally Yates in a May speech at a white-collar crime conference hosted by the New York City Bar Association, is that companies are self-disclosing even before their investigations are complete to present factual evidence to the Justice Department.
In early June there were two related enforcement actions, Akamai Technologies Inc. and Nortek Inc. FCPA resolutions. Akamai agreed to profit disgorgement in the amount of $652,452, while Nortek agreed to profit disgorgement in the amount of $291,403. In addition to these extraordinarily low fines and penalties, the Justice Department declined to prosecute both companies. In both cases the new deputy chief of the Justice Department Criminal Division Fraud Section and head of the FCPA Unit, Daniel Kahn, issued letters to both, declining to prosecute them for their admitted FCPA violations and detailing the reasons why the declinations were issued.
The key factors were four-fold:
Self-disclosure. Nortek self-disclosed, even before completing its internal investigation and promptly self-reported its preliminary findings to both the Securities and Exchange Commission and the DoJ. Akamai also promptly self-reported its actions and conducted a timely and thorough investigation.
Extensive cooperation during investigation. Both companies engaged in extension cooperation during the pendency of their investigations.
Extensive remediation of their compliance programs. Both companies extensively remediated their compliance programs during the investigations. Akamai terminated both the Regional Manager (RM) involved in the conduct as well as the channel partner. Nortek terminated the employees at Linear China after they were interviewed for the internal investigation.
Profit disgorgement. Both companies disgorged the profits they generated from their FCPA-violative conduct. In both of the resolutions with the SEC the Orders stated, “to pay disgorgement obtained or retained as a result of the violations discovered during the investigation.” This language, however, does not provide any insight into how the amount was calculated or what transactions this profit disgorgement was based upon.
Later in June came the Analogic Corp. FCPA enforcement action. This matter was notable because of the egregious nature of the conduct that occurred at the C-Suite level of the company’s Danish subsidiary.
Enforcement of the Foreign Corrupt Practices Act (FCPA) has taken a dramatic turn. And, the results from three recent enforcement actions demonstrate that if companies follow the requisites of the Pilot Program, they will sustain real and tangible benefits for their FCPA violations.
There were four key areas of conduct engaged in by Analogic and/or BK Medical that demonstrated the character of this endeavor. The first was that the accounting failures were at the highest level of the subsidiary, the chief financial officer level. In the corporate world, it does not get much higher than this stratum. Moreover, the CFO went on to submit multiple false quarterly SOX 404 sub-certifications to Analogic. This was in addition to the false contracts requested by the distributor, despite his responsibility of completing quarterly checklists designed to identify unusual transactions for Analogic’s controller. The second was the payment to unknown third parties that were made to numerous money laundering and tax haven jurisdictions.
The third was the bribery scheme, which was in reality an entire bribery program. The SEC Order gave exacting detail on how the illegal payments were created and funded. “The first step involved the creation of one or more fictitious documents reflecting an inflated purchase price for the product or products BK Medical was selling to the Russian distributor.” From there, the Order said, “the Russian distributor would request that BK Medical create a fictitious, second invoice at an inflated price. The Russian distributor would send BK Medical a template invoice with the inflated price, which was regularly well in excess of 100 percent of the original, agreed-upon price. BK Medical’s distributor sales staff understood the inflated price to reflect the price the ultimate end user would pay to the distributor.”
BK Medical would then “cut and paste BK Medical’s logo onto the template invoice and complete other pertinent fields, such as an invoice number. These steps were taken outside BK Medical’s standard invoice-generation system, in violation of BK Medical’s internal accounting controls. The fictitious, second invoice would subsequently accompany the ultrasound products when they were shipped to Russia. An invoice prepared by BK Medical’s standard invoice generation system reflecting the agreed-upon, actual price would also be sent to the Russian distributor” and the illegal payments were made to the unknown third parties.
The fourth, and final, point was that red flags were raised not once but twice to both Analogic and BK Medical, as the blatant conduct did not pass unnoticed. As early as 2004, BK Medical’s vice president of sales asked the purpose of the payments. He was told “Russian market conditions.” Moreover, in 2008, Analogic recognized the potential for FCPA violations by BK Medical. The parent corporation provided training to BK Medical—but it stopped there and did not inquire further into the Russian agent. So while red flags were identified and raised, there was no follow-up action by the corporate parent.
Yet, even with these issues of serious misconduct, the Non-Prosecution Agreement provided that the fine levied on BK Medical was 30 percent below the minimum suggested under the U.S. Sentencing Guidelines. The factors listed were the self-disclosure, the extensive remediation, and the profit disgorgement by the parent, Analogic. It is certainly worth noting the discount was only 30 percent, because BK Medical was expressly found not to have engaged in extensive cooperation. The NPA stated, “the company did not receive full cooperation credit because, in the view of the Offices, the company’s cooperation subsequent to its self-disclosure did not include disclosure of all relevant facts that it learned during the course of its internal investigation; specifically, the company did not disclose information that was known to the company and Analogic about the identities of a number of the state-owned entity end-users of the company’s products, and about certain statements given by employees in the course of the internal investigation.”
With the stated credit available in the Pilot Program and now the language from the Justice Department in its declinations and from the SEC, companies may now see the benefits of coming forward and self-disclosing. Any company that makes the decision to not self-disclose most probably investigated and remediated, so those costs will be incurred under such a scenario. If companies, however, see the benefit of such self-disclosure, both in terms of not only a positive result but also a quick and efficient process, that calculus will most likely change. It is also worth noting that the straight line from the Yates Memo to the hiring of the new Justice Department compliance counsel to the Pilot Program may well need to be extended to these enforcement actions to demonstrate the change in the enforcement strategy.
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