The FCPA Blog

General Electric Company, whose compliance program is among the most respected and admired in the world, has settled civil violations of the Foreign Corrupt Practices Act with the Securities and Exchange Commission.

The company today agreed to pay $23.4 million to resolve claims that arose from a $3.6 million kickback scheme by four GE subsidiaries -- two of which were acquired after the offenses occurred. The kickbacks were paid under the United Nation's oil-for-food program. The GE subsidiaries were selling medical and water purification equipment to the Iraqi government.

The SEC charged GE and two subsidiaries -- Ionics Inc. and Amersham plc -- with civil violations of the books and records and internal controls provisions of the FCPA.

The kickbacks were paid from 2000 to 2003 and were not properly accounted for. They consisted of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Oil Ministry. GE acquired two of the subsidiaries in 2004 and 2005 and became liable for their securities law violations, including FCPA offenses.

Cheryl J. Scarboro, the head of the SEC's FCPA unit, said: "GE failed to maintain adequate internal controls to detect and prevent these illicit payments by its two subsidiaries to win oil for food contracts, and it failed to properly record the true nature of the payments in its accounting records. Furthermore, corporate acquisitions do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved."

In the SEC settlement, GE was ordered to disgorge $18,397,949 of profits and pay $4,080,665 in prejudgment interest and a penalty of $1 million. GE and subsidiaries Ionics Inc. and Amersham plc agreed not to violate Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.

The SEC said it has taken 15 FCPA enforcement actions against companies involved in the now discredited U.N. oil for food program and has recovered more than $204 million. The program was intended to provide humanitarian relief for the Iraqi population, which faced hardship under international trade sanctions. It allowed the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The Iraqi government instructed vendors to use middlemen and to inflate prices to fund the kickbacks.

In addition to GE, other companies charged under the oil-for-food program include Chevron, Total SA, AB Volvo, Innospec, Ingersoll-Rand, Akzo-Nobel, and Fiat.

The DOJ did not join the enforcement action against GE or the subsidiaries. It usually prosecutes criminal antibribery offenses under the FCPA, which require payments to foreign officials. In GE's case, the kickbacks apparently went directly to Iraqi ministries and not to government officials.

The SEC said that in settling the case, it "considered remedial acts promptly undertaken by GE and the cooperation the company afforded the Commission staff in its investigation."

View the SEC's July 27, 2010 press release here.

View the SEC's Litigation Release No. 21602 and Accounting and Auditing Enforcement Release No. 3159 (both dated July 27, 2010) in Securities and Exchange Commission v. General Electric Company; Ionics, Inc.; and Amersham plc, Civil Action No. 1:10-CV-01258 (D.D.C.)(RWR) here.

View the SEC civil complaint against GE, Ionics, and Amersham here.

The Securities and Exchange Commission kicked off the FCPA-enforcement year this week with civil books and records and internal controls charges against Texas-based oil and gas services firm NATCO Group Inc. The company admitted that its wholly owned subsidiary, TEST Automation & Controls, Inc., "created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan."

NATCO agreed to pay a $65,000 civil penalty. In settling with the SEC in federal court in Houston, NATCO admitted that its "system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO's consolidated books and records did not accurately reflect these payments." It also consented to an administrative cease and desist order against future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.

The case confirms that civil FCPA charges can result from paying blackmail money to protect the welfare of employees overseas. Many companies are faced with extortionate demands from foreign police, bureaucrats and regulators, who threaten to hold, expel or even harm employees if ransoms aren't paid. There have always been questions whether those involuntary payments can violate the FCPA.

In criminal antibribery cases --  where intent is an element of the FCPA offense -- extortion is a defense. The issue came up in last year's criminal trial of Frederic Bourke for conspiracy to violate the FCPA. When he asked for a jury instruction on "true extortion," Judge Shira Scheindlin said evidence of extortion would go to the issue of whether Bourke possessed a corrupt intent in making alleged illegal payments. She explained that the government must prove beyond a reasonable doubt that a defendant had an improper motive or purpose for a payment intended to induce the recipient to misuse his official position in discharging an official act. On the other hand, she said, evidence of extortion can show the defendant acted without a corrupt intent. See our post here.

But unlike criminal cases, civil books and records and internal controls charges don't require mens rea or corrupt intent. So extortion isn't a defense. In NATCO's case, the SEC acknowledged the extortion. It said TEST's employees were threatened with fines, jail or deportation, and they believed the threats to be genuine. NATCO's violations, however, occurred not in paying the ransom but in mischaracterizing the payments to cover them up.

Here, from the SEC's complaint, is more of what happened:

In February and September 2007, Kazakh immigration prosecutors conducted audits and claimed that TEST expatriate workers lacked proper immigration documents. The prosecutors threatened to fine, jail or deport the workers if TEST did not pay cash fines. The TEST employees believed the prosecutor’s threats to be genuine. They sought guidance from TEST’s senior management in Harvey, Louisiana, who authorized the payments.

The TEST employees in Kazakhstan used personal funds to pay the prosecutors $25,000 in February and $20,000 in September, and then obtained reimbursement from TEST.

For the February 2007 payment, TEST made a $25,000 wire transfer to the affected employee. TEST inaccurately described it in an email as “an advance against his [the paying employee's] bonus payable in March.” As further camouflage, the email noted the bonus would be “substantial.” And in TEST’s letter to the bank providing wire instructions, the company inaccurately described the payment as a “Payroll Advance.” TEST then falsely recorded the payment in its books and records as a salary advance.

The SEC said TEST Kazakhstan used consultants to help obtain immigration documentation for its expatriate employees. It said,

One of these consultants did not have a license to perform visa services, but maintained close ties to an employee working at the Kazakh Ministry of Labor, the entity issuing the visas. On two instances, the consultant requested cash from TEST Kazakhstan to help him obtain the visas. . . . [T]he consultant provided TEST Kazakhstan bogus invoices for “cable” from third-party entities he controlled. TEST Kazakhstan knew these invoices were false, but nonetheless presented them to Kazakh banks to withdraw the requested cash. TEST Kazakhstan later submitted the false invoices – which totaled in excess of $80,000 – to TEST for reimbursement. TEST reimbursed these requests despite knowing the invoices mischaracterized the true purpose of the services rendered.

When the violations occurred, NATCO was an issuer. Its common stock was registered with the SEC under Section 12(b) of the Exchange Act and listed on the New York Stock Exchange. In November 2009, NATCO became a subsidiary of Cameron International Corporation, a publicly held reporting corporation listed on the NYSE, and the registration of NATCO’s common stock and its listing on the NYSE ended.

View the Securities and Exchange Commission's Litigation Release No. 21374 and Accounting and Auditing Enforcement Release No. 3102  (both dated January 11, 2010) in Securities and Exchange Commission v. NATCO Group Inc., Civil Action No. 4:10-CV-98 (S.D. Tex.) here.

Download the SEC's civil complaint here.

Download the federal court's final judgment here.

Download NATCO's consent to the final judgment here.

Download the order instituting cease-and-desist proceedings here.

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Special thanks to Marc Bohn in the District of Columbia for help with this post.

In what may be the first case of its kind, a U.S. company that has no securities traded on an exchange but files periodic reports with the Securities and Exchange Commission has disclosed an internal investigation into possible Foreign Corrupt Practices Act violations.

In a December 30, 2009 SEC filing (here), Tampa-based PBSJ Corporation said it will miss the filing deadline for its Annual Report on Form 10-K for the year ended September 30, 2009 "due to an internal investigation being conducted by the Audit Committee of the Board of Directors." The company said the purpose of the internal investigation "is to determine whether any laws have been violated, including the Foreign Corrupt Practices Act, in connection with certain projects undertaken by PBS&J International, Inc., one of the Company’s subsidiaries, in certain foreign countries."

The FCPA's antibribery provisions apply to "domestic concerns," which include all U.S. companies; the books and records and internal controls provisions apply only to "issuers" -- corporations that have issued securities that have been registered in the United States or who are required to file periodic reports with the SEC. See 15 U.S.C. §§ 78c(a)(8), 78dd-1(a) and our post here.

PBSJ Corporation is a "domestic concern" subject to the anti-bribery provisions. It has no publicly traded securities. But because it has so many shareholders -- about 4,000 mainly current and former employees  -- it must file periodic reports with the SEC. That makes it an "issuer" subject to the books and records and internal controls provisions.

The Company said it self-reported to the SEC and Justice Department "the circumstances surrounding this internal investigation. Should the SEC or DOJ decide to conduct its own investigation, the Company will cooperate fully."

PBSJ provides engineering and construction management for government agencies worldwide, usually for road-building projects. It has 80 offices and 3,900 employees.

The company has had other compliance problems and internal controls lapses. The Tampa Business Journal said in March 2005 PBSJ discovered "what eventually was determined to be a $36.6 million embezzlement scheme by the former CFO and two other workers. Discovery of the scheme triggered a series of events, including repayments to clients that had been overbilled in an effort to cover the missing funds and a restatement of financial information for several years."

The company was also investigated by the Federal Election Commission. The FEC said for years PBSJ hid  campaign contributions to political candidates. It also encouraged employees to contribute to campaigns, then secretly reimbursed them for their payments, which violates the law.

Millipore's announcement last week was unusual. The Massachusetts-based life science firm said in its 10-Q that the SEC won't bring an enforcement action for potential Foreign Corrupt Practices Act violations the company self-reported in 2006. "By its letter on May 14, 2009," Millipore said, "the Securities and Exchange Commission notified us that its investigation has been completed and it will not pursue any enforcement action on this matter."

Not many companies hear that sort of good news, so why did Millipore?

The company said it decided in January 2006 to consolidate the results of its 40 percent-owned India joint venture. It learned then through its own internal controls "that certain payment and commission practices at the India JV [raised] issues of compliance." There was an internal investigation, self-reporting to the SEC and DOJ, and "certain corrective actions." That's all we know.

But the key to the SEC's no-enforcement decision is probably Millipore's ownership of only 40 percent of the India JV. Under the FCPA's internal controls provisions, an issuer holding 50 percent or less of the voting power in another firm is required to use its influence in good faith -- to the extent reasonable under the circumstances -- to cause the other firm to devise and maintain a system of acceptable accounting controls. (Section 13(b)(6) of the Securities Exchange Act of 1934) That provision, part of the FCPA's 1988 Amendments, was meant "to recognize that it is unrealistic to expect a minority owner to exert a disproportionate degree of influence over the accounting practices of a subsidiary." (H.Rept. 100-576, at 917)

Section 13(b)(6) also says that an "issuer which demonstrates good faith efforts to use such influence shall be conclusively presumed to have complied" with its internal controls obligations. Conclusively presumed to have complied. So the test is whether Millipore acted in good faith to cause the India JV to devise and maintain acceptable accounting controls. Not whether the JV did so or not.

Is it time to celebrate? Not quite. Although now cleared by the SEC on the internal controls side, what about antibribery aspects? Did any of Millipore's employees know about or help the India joint venture make questionable payments? If so, the Justice Department could still come calling. But if no one at Millipore knew anything (which seems likely, given the SEC's no-action), then the company couldn't have acted "knowingly" to help the JV make corrupt payments to foreign officials in violation of the FCPA.

The DOJ rarely tells companies formally that they're in the clear. For Millipore, the FCPA's five-year statute of limitations will be up in 2011, assuming the company didn't waive the time bar after it self-reported the India JV's potential compliance problems.

Millipore Corp. trades on the New York Stock Exchange under the symbol MIL.

Millipore's Form 10-Q filed August 12, 2009 for the period ending July 04, 2009 can be downloaded here.

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From U.S. v. Green. The AP reported here that the Los Angeles trial of Hollywood producers Gerald and Patricia Green has been delayed for at least a week. "A spokesman for the U.S. attorney's office in Los Angeles, said Tuesday that the delay was due to the availability of a prosecution witness. Jury selection is slated to begin Aug. 25." The Greens are charged with violating the FCPA and other laws by paying $1.8 million in bribes to Thai officials in exchange for $14 million in contracts. The movies they produced include Salvador, Rescue Dawn, and Diamonds.
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The head of the SEC's Division of Enforcement, Robert Khuzamii, said last week the agency will put more attention on the Foreign Corrupt Practices Act. Among five specialized enforcement units to be created will be one devoted to the FCPA. He said:

The Foreign Corrupt Practices Act unit will focus on new and proactive approaches to identifying violations of the Foreign Corrupt Practice Act, which prohibits U.S. companies from bribing foreign officials for government contracts and other business. While we have been active in this area, more needs to be done, including being more proactive in investigations, working more closely with our foreign counterparts, and taking a more global approach to these violations.

His agency, he said, will be coming up with new standards to evaluate cooperation by companies and individuals. And to encourage cooperation, the SEC will expedite processing of witness-immunity requests and start using DOJ-like deferred prosecution agreements -- subject to full cooperation, a waiver of statutes of limitations, and compliance with ongoing undertakings. It all points to more FCPA enforcement pressure on public companies.

On a historical note, the SEC hasn't said much about cooperation standards since its so-called Seaboard Report in 2001. That release identified these measures of a company’s compliance:

· Self-policing prior to the discovery of the misconduct, including establishing effective compliance procedures and an appropriate tone at the top;

· Self-reporting of misconduct when it is discovered, including conducting a thorough review of the nature, extent, origins and consequences of the misconduct, and promptly, completely, and effectively disclosing the misconduct to the public, to regulators, and to self- regulators;

· Remediation, including dismissing or appropriately disciplining wrongdoers, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, and appropriately compensating those adversely affected; and

· Cooperation with law enforcement authorities, including providing the SEC with all information relevant to the underlying violations and the company’s remedial efforts.

View the August 5, 2009 speech by Robert Khuzamii, the SEC's Director of the Division of Enforcement, to the New York City Bar: "My First 100 Days as Director of Enforcement" here.

View the SEC's "Seaboard Report," Release No. 44969 and Accounting and Auditing Enforcement Release No. 1470 (both dated October 23, 2001) Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions here.
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