If every company voluntarily disclosed that its distant subsidiaries and/or its distant subsidiaries’ joint venture partners provided minor things of value (such as a notebook computer, kitchen appliances, and business suits) to someone deemed a “foreign official” by the enforcement agencies, then instead of 15 to 20 core FCPA enforcement actions per year, there would probably be something like 150 to 200 FCPA enforcement actions per year.

If every issuer voluntarily disclosed that its internal controls were imperfect as to distant subsidiaries or its distant subsidiaries’ joint venture partners, and that such distant entities failed to follow issuer instructions or issuer provided training and guidance, then instead of 15 to 20 core FCPA enforcement actions per year, there would probably be something like 1,500 to 2,000 FCPA enforcement actions per year (recognizing that the FCPA’s books and records and internal control provisions equally apply to domestic operations).

So why did RAE Systems voluntarily disclose such conduct to the DOJ and the SEC? Would it not have been more efficient and cost-effective for the company to effectively remedy these issues internally?

Do the high professional expenses connected with voluntary disclosures (compared to effectively remedying issues internally) have anything to do with the increase in voluntary disclosures? (See here for a prior post on the issue). In RAE Systems annual report for the year ended December 31, 2009 (see here), filed in March 2010, the company disclosed that it had (at that point) incurred $4 million in professional fees in connection with the FCPA investigation.

From an enforcement standpoint, is the Foreign Corrupt Practices Act becoming an all-purpose corporate governance instrument? Should it?

These are some of the questions raised by the odd RAE Systems enforcement action.

Last Friday, the DOJ and SEC announced (see here and here) a joint enforcement against RAE System (a San-Jose, California based company with shares on the New York Stock Exchange) “a leading global provider of rapidly deployable connected, intelligent gas detection systems that enable real-time safety and security threat detection.” (See here for the company website). In September, RAE Systems signed a definitive agreement to be acquired by Battery Ventures. The transaction is expected to close by the end of the first quarter of 2011.

This post summarizes the DOJ and SEC enforcement actions in which RAE Systems agreed to pay approximately $2.95 million in fines and disgorgement.

DOJ

Pursuant to a three-year non-prosecution agreement, RAE Systems acknowledged its “knowing violations of the internal controls and books and records provisions” of the FCPA “arising from and related to improper benefits corruptly paid by employees of two joint ventures majority owned and controlled by RAE Systems to foreign officials of departments, agencies, and instrumentalities” of the Chinese government.” Pursuant to the NPA, RAE Systems agreed to pay a $1.7 million penalty.

According to the NPA, RAE Systems “had significant operations” in China organized “under a holding company called RAE Asia, headquartered in Hong Kong.” RAE Systems “sold products and services in mainland [China] primarily through second-tier subsidiaries organized as joint ventures with local Chinese entities.

One of the joint ventures is RAE-KLH (Beijing) Co., Limited (“RAE-KLH”). RAE Systems acquired a 64% stake in RAE-KLH in 2004 and upped the stake to approximately 96% in 2006. The other joint venture is RAE Coal Mine Safety Instruments (Fushun) Co., Ltd. (“RAE-Fushun”). In 2006, RAE Systems acquired a 70% interest in RAE Fushan.

Both RAE-KLH’s and RAE Fushun’s financial results were included in the consolidated financial statements that RAE Systems filed with the SEC.

According to the NPA, “a significant number of RAE-KLH’s and RAE Fushun’s customers” in China were “government departments and bureaus and large state-owned agencies and instrumentalties.” The NPA states as follows. “The Lanzhous City Honggu Mining Safety Bureau, for example, was a government customer. Other government clients included regional fire departments, emergency response departments, and entities under the supervision of the provincial environmental agency, among others. Accordingly, officers and employees of a significant number of RAE-KLH’s and RAE Fushun’s customers were ‘foreign officials’ within the meaning of the FCPA …”.

The NPA then contains a heading that states, “RAE System’s Knowing Failure to Implement Systems of Effective Internal Controls at RAE-KLH and RAE Fushun Post Closing.”

The NPA then cites various company documents that suggest RAE was aware that KLH sales personnel were making kickbacks or otherwise engaging in questionable sales tactics with its customers. The NPA cites a document from a RAE Systems employee from the United States who met with KLH personnel that stated “we knew this risk all along and have accepted it upon entering the JV deal.”

Following the acquisition, the NPA states that “RAE Systems did provide some FCPA training to RAE-KLH personnel and did tell RAE-KLH personnel to stop paying bribes and providing other improper benefits, but such steps were half-measures.” The NPA states that “RAE Systems did not impose sufficient internal controls or make sufficient changes to high-risk practices.”

As to RAE-Fushun, the NPA states that “RAE Systems did not conduct pre-acquisition corruption due diligence of RAE Fushun” but that “given RAE’s System’s experience with KLH described above, the high-risk nature of the location, and the existence of numerous government customers, pre-acquisition corruption-focused due diligence was merited. The NPA further states “as was later confirmed, improper business practices had occurred at RAE Fushun before the acquisition and continued post-acquisition, as RAE Systems failed to implement an effective system of internal controls at RAE Fushun.”

Based on the above facts, the NPA states that “RAE Systems knowingly failed to implement a system of effective internal accounting controls at RAE-KLH and RAE Fushun…”.

According to the NPA, the “lack of effective internal accounting controls permitted improper payments to continue at RAE-KLH and RAE-Fushun after acquisition.”

As to RAE-KLH, the NPA states that certain sales representatives at RAE-KLH “used cash advances and reimbursements for improper purposes, including the corrupt giving of gifts and paying for entertainment, as well as direct or indirect payments to customers.” According to the NPA, “the gifts included, among other things, a notebook computer for the son of the deputy director of a state-owned chemical plant as part of efforts to obtain business from that entity.” The NPA also states that RAE-KLH made payments under contracts with a purported consultant and that some or all of the payments were funneled to officials of a state-owned enterprise and government departments.

As to RAE Fushun, the NPA likewise statements that certain sales representatives at RAE Fushun “used cash advances and reimbursements for improper purposes including the corrupt giving of gifts and paying for entertainment, as well as making direct or indirect payments, to officers and employees of customers.” According to the NPA, “these gifts to certain officials of state-owned enterprises and government departments included, among other things, a variety of luxury items, such as jade, fur coats, kitchen appliances, business suits, and high-priced liquor.”

The NPA then states that the “lack of effective internal controls and continued improper payments led to inaccurate books and records.”

During the three-year term of the NPA, RAE Systems agreed to undertake a host of compliance reforms and to report to the DOJ on an annual basis.

The DOJ agreed to enter into the NPA “based in part, on the following factors: (a) RAE System’s timely, voluntary, and complete disclosure …; (b) RAE System’s thorough, real-time cooperation with the DOJ and SEC; (c) the extensive remedial efforts already undertaken and to be undertaken by RAE Systems; and (d) RAE System’s commitment to submit periodic monitoring reports to the DOJ.”

SEC

The SEC’s complaint (here) is based on the same core set of facts described above. It charges RAE Systems, not only with FCPA books and records and internal control violations, but anti-bribery violations as well.

The complaint begins by alleging that “from 2004 through 2008″ RAE Systems violated the FCPA “by paying, through two of its joint venture entities in China, approximately $400,000 to third party agents and government officials in China to influence acts or decisions by foreign officials to obtain or retain business for RAE Systems.” According to the complaint, the payments “were made primarily by the direct sales force utilized by RAE Systems” at its two Chinese joint-venture entities: RAE-KLH and RAE-Fushun.

According to the SEC, RAE System’s “illicit payments to government officials and third-party agents generated revenues worth over $3 million and gross margin of $1,147,800.”

The complaint states: “While the payments were made exclusively in China and were conducted by Chinese employees of RAE-KLH and RAE-Fushun, RAE Systems was aware of significant indications of ongoing bribery at RAE-KLH. At the time, RAE Systems failed to effectively investigate these indications, or red flags, and to stop the bribery from continuing. RAE System’s failure to act on these significant red flags allowed, at least in part, bribery to continue at RAE-KLH.”

RAE Systems was held liable for RAE-KLH’s improper payments even though the SEC complaint states that “RAE Systems Instruct[ed] KLH Personnel to Stop Bribery Practices.” According to the SEC, “while RAE Systems communicated these instructions to RAE-KLH personnel, RAE Systems did not impose sufficient internal controls or make any changes to the practice of sales personnel obtaining cash advances.” According to the SEC, RAE System’s CFO visited RAE-KLH’s Chinese facilities and observed that certain cash advances may be used for “grease payments, to supplement sales employees’ incomes and as bribes.” In response, RAE Systems, “implemented FCPA compliance training and required each RAE-KLH employee to certify that he or she did not engage in bribery practices.” However, the SEC alleged “again, however, [RAE Systems] did not impose sufficient internal controls or make changes to the practice of sales personnel obtaining cash advances.”

Without admitting or denying the SEC’s allegations, RAE Systems agreed to pay $1,147,800 in disgorgement (plus $109,212 in prejudgment interest) and to undertake a host of FCPA compliance measures.

Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated as follows. “RAE Systems develops products to detect harmful emissions, yet it did not have adequate measures in place to detect and root out internal wrongdoing. Companies that fail to respond to red flags can be held liable for the acts of their joint venture partners.”

Carlos Ortiz (a former DOJ attorney now at LeClair Ryan – here) and Roy McDonald (DLA Piper – here) represented RAE Systems.

Yesterday, the DOJ and SEC announced (here and here) that Ohio-based Diebold, Inc. agreed to resolve a Foreign Corrupt Practices Act enforcement action concerning alleged business conduct by its subsidiaries in China, Indonesia and Russia.  The enforcement action has been expected for some time (as noted in this prior post, in August the company disclosed that it had agreed in principle to the settlement announced yesterday).

The enforcement action involved a DOJ criminal information resolved via a deferred prosecution agreement and a SEC settled civil complaint.  Diebold agreed to pay approximately $48.1 million to resolve its alleged FCPA scrutiny ($25.2 million to resolve the DOJ enforcement action and $22.9 million to resolve the SEC enforcement action).

DOJ

The DOJ enforcement action involved a criminal information against Diebold resolved through a deferred prosecution agreement.  (See here for the original source documents).

Information

Under the heading “conduct in China and Indonesia” the information alleges:

“Diebold sold ATMs and provided ATM-related services to banks in China and Indonesia, including state-owned banks such as Bank 1 and Bank 2″

Both Bank 1 and Bank 2 are described as follows.

“[The Banks] were controlled and approximately 70% owned by the [Chinese government] … and were [two] of several state-owned banks in [China] that together maintained a monopoly over the banking system in [China] and provided core support for the government’s projects and economic goals.  The government retained a controlling right in [the Banks], including appointing or nominating a majority of board of directors and top managers at the bank.  [The Banks] were an ‘instrumentality’ of a foreign government [under the FCPA].”

The information then alleges:

“The contracts between Diebold and the banks in China provided that Diebold would train employees from the bank customers with respect to Diebold’s ATMs.”

“In order to secure and retain business with bank customers, including state-owned banks such as Bank 1 and Bank 2, Executive A, Executive B, Employee A, Employee B, and other Diebold employees repeatedly provided things of value, including payments, gifts, and non-business travel for employees of the banks, totaling approximately $1.75 million over a five year period.”

“Executive A, Executive B, Employee A, Employee B, and other Diebold employees attempted to disguise the payments and benefits through various means, including by making payments through third parties designated by the banks and by inaccurately recording leisure trips for banks employees as ‘training.’”

Executive A is described as a “senior executive at Diebold” who “held several positions, initially overseeing Diebold’s operations in the Asia Pacific region and later overseeing Diebold’s international operations.”  [The SEC's complaint refers to an Executive A as being a citizen of Taiwan and a resident of China].

Executive B is described as “a vice president of Diebold’s Asia Pacific division” with responsibilities ”overseeing Diebold’s operations in the Asia Pacific region.”  [The SEC's complaint refers to an Executive A as being a citizen of Taiwan and a resident of China].

Employee A is described as “an employee in Diebold’s Asia Pacific division” who was “involved in sales and customer relations in the Asia Pacific region.”

Employee B is described as “an employee in Diebold’s Asia Pacific division” who was “in the Finance Department responsible for the Asia Pacific region.”

Under the heading “conduct in Russia,” the information alleges that in connection with sales efforts to “privately-owned banks in Russia,” Diebold entered into a distributor agreement with Distributor 2.  According to the information, Diebold, through its employees and agents, “created and entered into false contracts with Distributor 2 for services that Distributor 2 was not performing” and that “Distributor 2, in turn, used the money that Diebold paid to it, to pay bribes to employees of Diebold’s privately-owned bank customers in Russia in order to obtain and retain contracts with those customers.”

The information also alleges that “in connection with due diligence being conduct [by a Diebold employee] and other Diebold employees for a potential acquisition of Distributor 1 in Ukraine, [the employees] learned that Distributor 1 paid bribes to employees of bank customers to secure business.”

Based on the above allegations, the information charges (i) conspiracy to violate the FCPA’s anti-bribery provisions and books and records provisions; and (ii) substantive FCPA books and records violations.

DPA

The above charges against Diebold were resolved via a DPA in which Diebold admitted, accepted, and acknowledged that it was responsible for the acts of its officers, employees, agents as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states:

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and Diebold.  Among the facts considered were the following:  (a) following discovery of the FCPA violations during the course of acquisition-related due diligence, Diebhold initiated an internal investigation and voluntarily disclosed to the DOJ the misconduct …; (b) Diebold cooperated fully and conducted an extensive internal investigation; (c) Diebold has committed to continue to enhance its compliance program and internal controls …; and (d) Diebold has agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of the company and its officers, directors, employees, agents, and consultants.

The DPA specifically mentions a previous accounting fraud enforcement action by the SEC (see here for the prior post) and states:  “the DOJ believes that the Company’s remediation is not sufficient to address and reduce the risk of recurrence of the company’s misconduct and warrants the retention of an independent corporate monitor …”.

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $36 million to $72 million.  The DPA states that the monetary penalty of $25.2 million “is appropriate given the facts and circumstances of this case, including the nature and extent of the Company’s voluntary disclosure and cooperation.”

Pursuant to the DPA, Diebold agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA and other applicable anti-corruption laws.   The specifics are detailed in Attachment C to the DPA.  The DPA also requires Diebold to engage a corporate compliance monitor for ”a period of not less than 18 months from the date the monitor is selected.”  The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA.  As is common in FCPA corporate enforcement actions, the DPA contains a “muzzle clause” prohibiting Diebold or anyone on its behalf “contradicting the acceptance of responsibility by the company” as set forth in the DPA.

In the DOJ’s release, Acting Assistant Attorney General Mythili Raman stated:

“In China, Indonesia and Russia, Diebold chose to pay bribes for business and falsify documents to cover its tracks.  Through its corrupt business practices, Diebold undermined the sense of fair play that is critical for the rule of law to prevail.  Today’s action – which holds Diebold accountable for its criminal conduct, while also recognizing its cooperation and voluntary disclosure to the government of its conduct – underscores that fighting global corruption is and will remain a mainstay of the Criminal Division’s mission.”

In the same release, Steven Dettelbach (U.S. Attorney for the N.D. of Ohio) stated:

“Companies that pay bribes to public officials, whether those officials are in Cleveland, in Ohio or overseas, violate the law.  Corporate earnings cannot be placed above the rule of law, and today’s penalties – nearly $50 million in all – send the message again, loud and clear, that such conduct is unacceptable.  We hope that Diebold will use this opportunity, including the internal controls and compliance monitor required by today’s agreement, to turn the page to a newer and more ethical corporate culture.”

SEC

The SEC’s complaint (here) is based on the same core set of facts alleged in the above DOJ action.

In summary fashion, the complaint alleges:

“This matter concerns violations of the anti-bribery, books and records, and internal control provisions of the FCPA by Diebold [...]  From 2005 through 2010, Diebold, through its agents and subsidiaries, lavished international leisure trips, entertainment, and other improper gifts on foreign officials to obtain and retain lucrative business with government owned banks in China and Indonesia. During that same period, Diebold, through its Russian subsidiary, paid bribes in connection with the sale of ATMs to private banks in Russia.  In all, Diebold made approximately $3 million in illicit payments in China, Russia, and Indonesia.”

“From 2005 through 2010, through its subsidiary Diebold Financial Equipment Company (China), Ltd. (“Diebold China”), Diebold provided international leisure trips and entertainment to officials of government owned banks in China. This included trips to Europe, with stays in Paris, Amsterdam, Florence, Rome, and other European cities, and trips to the United States, with travel to the Grand Canyon, Napa Valley, Disneyland, Las Vegas, and other popular tourist destinations. Diebold spent approximately $1.6 million on leisure trips, entertainment, and other improper gifts for government bank officials in China. During this same time period, through its subsidiary P.T. Diebold Indonesia (“Diebold Indonesia”), Diebold spent over $147,000 on leisure trips and entertainment for officials of government owned banks in Indonesia. Diebold executives in charge of the company’s operations in Asia knew of these improper practices.  The illicit payments were falsely recorded in Diebold’s books and records as training or other legitimate business expenses.”

“From 2005 through 2008, through its subsidiary Diebold Self-Service Ltd. (“Diebold Russia”), Diebold also paid bribes on the sale of ATMs to private banks in Russia. These bribes, which totaled approximately $1.2 million, were funneled through a Diebold distributor in Russia. Diebold Russia executed phony service contracts with its distributor to hide and falsely record the payments as legitimate business expenses.’

The SEC complaint alleges as follows concerning “international leisure trips that Diebold provided to government bank officials in China.”

“In 2005, Diebold paid for a fifteen-day leisure trip to the U.S. for two officials from Bank A, a bank owned and controlled by the government of China. This trip included travel to Universal Studios and Disneyland in Los Angeles, Las Vegas, the Grand Canyon, Washington, DC, New York City, San Francisco, and Hawaii.”

“In 2006, Diebold paid for a twelve-day trip to Europe for eight officials from Bank B, a bank owned and controlled by the government of China. This was a leisure and sightseeing trip to Rome, Italy, and Stockholm, Sweden.”

“Also in 2006, Diebold paid for a two-week leisure trip to Australia and New Zealand for five officials from Bank C, a bank owned and controlled by the government of China.”

“In 2007, Diebold paid for a two-week trip to France for thirteen Bank A employees. While purportedly for training at Diebold’s offices, the primary purpose of the trip was leisure.”

“In 2008, Diebold paid for a two-week leisure trip to Europe for eight officials of Bank D, a bank owned and controlled by the government of China. The trip included travel to Paris, Brussels, Amsterdam, Cologne, Frankfurt, Munich, Salzburg, Vienna, Klagenfurt, Venice, Florence, and Rome.”

“Also in 2008, Diebold paid for a two-week leisure trip to the U.S. for three officials from Bank E, a bank owned and controlled by the government of China.”

“Also in 2008, Diebold paid for a two-week leisure trip for ten employees of Bank F, a bank owned and controlled by the government of China. This trip included travel to Hong Kong, Singapore, Malaysia, and Bali.”

“In 2009, Diebold paid for a two-week trip to the U.S. for twenty-four Bank A employees that included travel to Chicago; to Las Vegas for sightseeing, a dance show, and tour of the Grand Canyon; to Los Angeles for a tour of Universal Studios; to San Diego and San Francisco, which included a tour of Napa Valley.”

The SEC further alleges that “many of the government bank employees who received these leisure trips and other improper gifts were senior officials who had the ability to influence purchasing decisions by the banks.”

As to internal controls, the complaint alleges that “Diebold lacked sufficient internal controls to detect and prevent these illicit payments, many of which were paid to third-parties in China” and that “all of the illicit payments were falsely recorded in the company’s books and records as training or other legitimate business expenses.”

As to Executive A and B, the SEC complaint states that “even after these Diebold executives received FCPA training administered by the company in 2007, they took no action to halt these improper practices.  Instead, these executives took further steps to hide the leisure nature of these trips including, on at least one occasion, providing false information to the company’s auditors in China.”

The complaint further states:

“Other executives at Diebold were on notice of potential corruption issues at Diebold China. In 2007, a regional government agency in China, the Chengdu Administration of Industry & Commerce (“CDAIC”), opened an investigation involving, among other issues, leisure trips and gifts Diebold China had provided to bank officials. Company executives in China and the U.S. learned of the investigation after a Diebold field office in Chengdu was raided by authorities. Executives A and B took the lead in responding to the investigation. Diebold was able to settle the matter with no corruption charges filed, by paying CDAIC an administrative penalty of 600,000 RMB (approximately $80,000) for business registration violations. Despite being on notice of potential corruption issues at Diebold China, Diebold failed to effectively investigate and remediate these problems.”

Based on the above conduct, the SEC’s complaint charges violations of the FCPA’s anti-bribery provisions and books and records and internal controls provisions.

As noted in the SEC release, Diebold agreed to pay $22.9 million in disgorgement and prejudgment interest, appoint an independent compliance monitor, and consent to a final judgment permanently enjoining the company from violating the FCPA’s anti-bribery and books and records and internal controls provisions.  In the release, Scott Friestad (Associate Director of Enforcement) stated:

“A bribe is a bribe, whether it’s a stack of cash or an all-expense paid trip to Europe.  Public companies must be held accountable when they break the law to influence government officials with improper payments or gifts.”

Jonathan Leiken (Jones Day) represented Diebold.

This Law360 article states:

“Mike Jacobsen, a spokesman for [...] Diebold, called the settlement ‘an important step for the company moving forward.’  ‘It’s imperative for Diebold to recognize these issues head on, acknowledge responsibility, put the FCPA investigation period behind it and get on with the business of managing the company,’ Jacobsen said in a statement. ‘Given the experience the company has gained and its continued focus on global ethics and compliance, Diebold is confident in its ability to manage ethics-related issues as they arise.’”

Yesterday Diebold’s stock was up approximately .7%.

Yesterday, the DOJ and SEC announced (here and here) that Ohio-based Diebold, Inc. agreed to resolve a Foreign Corrupt Practices Act enforcement action concerning alleged business conduct by its subsidiaries in China, Indonesia and Russia.  The enforcement action has been expected for some time (as noted in this prior post, in August the company disclosed that it had agreed in principle to the settlement announced yesterday).

The enforcement action involved a DOJ criminal information resolved via a deferred prosecution agreement and a SEC settled civil complaint.  Diebold agreed to pay approximately $48.1 million to resolve its alleged FCPA scrutiny ($25.2 million to resolve the DOJ enforcement action and $22.9 million to resolve the SEC enforcement action).

DOJ

The DOJ enforcement action involved a criminal information against Diebold resolved through a deferred prosecution agreement.  (See here for the original source documents).

Information

Under the heading “conduct in China and Indonesia” the information alleges:

“Diebold sold ATMs and provided ATM-related services to banks in China and Indonesia, including state-owned banks such as Bank 1 and Bank 2”

Both Bank 1 and Bank 2 are described as follows.

“[The Banks] were controlled and approximately 70% owned by the [Chinese government] … and were [two] of several state-owned banks in [China] that together maintained a monopoly over the banking system in [China] and provided core support for the government’s projects and economic goals.  The government retained a controlling right in [the Banks], including appointing or nominating a majority of board of directors and top managers at the bank.  [The Banks] were an ‘instrumentality’ of a foreign government [under the FCPA].”

The information then alleges:

“The contracts between Diebold and the banks in China provided that Diebold would train employees from the bank customers with respect to Diebold’s ATMs.”

“In order to secure and retain business with bank customers, including state-owned banks such as Bank 1 and Bank 2, Executive A, Executive B, Employee A, Employee B, and other Diebold employees repeatedly provided things of value, including payments, gifts, and non-business travel for employees of the banks, totaling approximately $1.75 million over a five year period.”

“Executive A, Executive B, Employee A, Employee B, and other Diebold employees attempted to disguise the payments and benefits through various means, including by making payments through third parties designated by the banks and by inaccurately recording leisure trips for banks employees as ‘training.'”

Executive A is described as a “senior executive at Diebold” who “held several positions, initially overseeing Diebold’s operations in the Asia Pacific region and later overseeing Diebold’s international operations.”  [The SEC’s complaint refers to an Executive A as being a citizen of Taiwan and a resident of China].

Executive B is described as “a vice president of Diebold’s Asia Pacific division” with responsibilities “overseeing Diebold’s operations in the Asia Pacific region.”  [The SEC’s complaint refers to an Executive A as being a citizen of Taiwan and a resident of China].

Employee A is described as “an employee in Diebold’s Asia Pacific division” who was “involved in sales and customer relations in the Asia Pacific region.”

Employee B is described as “an employee in Diebold’s Asia Pacific division” who was “in the Finance Department responsible for the Asia Pacific region.”

Under the heading “conduct in Russia,” the information alleges that in connection with sales efforts to “privately-owned banks in Russia,” Diebold entered into a distributor agreement with Distributor 2.  According to the information, Diebold, through its employees and agents, “created and entered into false contracts with Distributor 2 for services that Distributor 2 was not performing” and that “Distributor 2, in turn, used the money that Diebold paid to it, to pay bribes to employees of Diebold’s privately-owned bank customers in Russia in order to obtain and retain contracts with those customers.”

The information also alleges that “in connection with due diligence being conduct [by a Diebold employee] and other Diebold employees for a potential acquisition of Distributor 1 in Ukraine, [the employees] learned that Distributor 1 paid bribes to employees of bank customers to secure business.”

Based on the above allegations, the information charges (i) conspiracy to violate the FCPA’s anti-bribery provisions and books and records provisions; and (ii) substantive FCPA books and records violations.

DPA

The above charges against Diebold were resolved via a DPA in which Diebold admitted, accepted, and acknowledged that it was responsible for the acts of its officers, employees, agents as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states:

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and Diebold.  Among the facts considered were the following:  (a) following discovery of the FCPA violations during the course of acquisition-related due diligence, Diebhold initiated an internal investigation and voluntarily disclosed to the DOJ the misconduct …; (b) Diebold cooperated fully and conducted an extensive internal investigation; (c) Diebold has committed to continue to enhance its compliance program and internal controls …; and (d) Diebold has agreed to continue to cooperate with the DOJ in any ongoing investigation of the conduct of the company and its officers, directors, employees, agents, and consultants.

The DPA specifically mentions a previous accounting fraud enforcement action by the SEC (see here for the prior post) and states:  “the DOJ believes that the Company’s remediation is not sufficient to address and reduce the risk of recurrence of the company’s misconduct and warrants the retention of an independent corporate monitor …”.

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $36 million to $72 million.  The DPA states that the monetary penalty of $25.2 million “is appropriate given the facts and circumstances of this case, including the nature and extent of the Company’s voluntary disclosure and cooperation.”

Pursuant to the DPA, Diebold agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA and other applicable anti-corruption laws.   The specifics are detailed in Attachment C to the DPA.  The DPA also requires Diebold to engage a corporate compliance monitor for “a period of not less than 18 months from the date the monitor is selected.”  The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA.  As is common in FCPA corporate enforcement actions, the DPA contains a “muzzle clause” prohibiting Diebold or anyone on its behalf “contradicting the acceptance of responsibility by the company” as set forth in the DPA.

In the DOJ’s release, Acting Assistant Attorney General Mythili Raman stated:

“In China, Indonesia and Russia, Diebold chose to pay bribes for business and falsify documents to cover its tracks.  Through its corrupt business practices, Diebold undermined the sense of fair play that is critical for the rule of law to prevail.  Today’s action – which holds Diebold accountable for its criminal conduct, while also recognizing its cooperation and voluntary disclosure to the government of its conduct – underscores that fighting global corruption is and will remain a mainstay of the Criminal Division’s mission.”

In the same release, Steven Dettelbach (U.S. Attorney for the N.D. of Ohio) stated:

“Companies that pay bribes to public officials, whether those officials are in Cleveland, in Ohio or overseas, violate the law.  Corporate earnings cannot be placed above the rule of law, and today’s penalties – nearly $50 million in all – send the message again, loud and clear, that such conduct is unacceptable.  We hope that Diebold will use this opportunity, including the internal controls and compliance monitor required by today’s agreement, to turn the page to a newer and more ethical corporate culture.”

SEC

The SEC’s complaint (here) is based on the same core set of facts alleged in the above DOJ action.

In summary fashion, the complaint alleges:

“This matter concerns violations of the anti-bribery, books and records, and internal control provisions of the FCPA by Diebold […]  From 2005 through 2010, Diebold, through its agents and subsidiaries, lavished international leisure trips, entertainment, and other improper gifts on foreign officials to obtain and retain lucrative business with government owned banks in China and Indonesia. During that same period, Diebold, through its Russian subsidiary, paid bribes in connection with the sale of ATMs to private banks in Russia.  In all, Diebold made approximately $3 million in illicit payments in China, Russia, and Indonesia.”

“From 2005 through 2010, through its subsidiary Diebold Financial Equipment Company (China), Ltd. (“Diebold China”), Diebold provided international leisure trips and entertainment to officials of government owned banks in China. This included trips to Europe, with stays in Paris, Amsterdam, Florence, Rome, and other European cities, and trips to the United States, with travel to the Grand Canyon, Napa Valley, Disneyland, Las Vegas, and other popular tourist destinations. Diebold spent approximately $1.6 million on leisure trips, entertainment, and other improper gifts for government bank officials in China. During this same time period, through its subsidiary P.T. Diebold Indonesia (“Diebold Indonesia”), Diebold spent over $147,000 on leisure trips and entertainment for officials of government owned banks in Indonesia. Diebold executives in charge of the company’s operations in Asia knew of these improper practices.  The illicit payments were falsely recorded in Diebold’s books and records as training or other legitimate business expenses.”

“From 2005 through 2008, through its subsidiary Diebold Self-Service Ltd. (“Diebold Russia”), Diebold also paid bribes on the sale of ATMs to private banks in Russia. These bribes, which totaled approximately $1.2 million, were funneled through a Diebold distributor in Russia. Diebold Russia executed phony service contracts with its distributor to hide and falsely record the payments as legitimate business expenses.’

The SEC complaint alleges as follows concerning “international leisure trips that Diebold provided to government bank officials in China.”

“In 2005, Diebold paid for a fifteen-day leisure trip to the U.S. for two officials from Bank A, a bank owned and controlled by the government of China. This trip included travel to Universal Studios and Disneyland in Los Angeles, Las Vegas, the Grand Canyon, Washington, DC, New York City, San Francisco, and Hawaii.”

“In 2006, Diebold paid for a twelve-day trip to Europe for eight officials from Bank B, a bank owned and controlled by the government of China. This was a leisure and sightseeing trip to Rome, Italy, and Stockholm, Sweden.”

“Also in 2006, Diebold paid for a two-week leisure trip to Australia and New Zealand for five officials from Bank C, a bank owned and controlled by the government of China.”

“In 2007, Diebold paid for a two-week trip to France for thirteen Bank A employees. While purportedly for training at Diebold’s offices, the primary purpose of the trip was leisure.”

“In 2008, Diebold paid for a two-week leisure trip to Europe for eight officials of Bank D, a bank owned and controlled by the government of China. The trip included travel to Paris, Brussels, Amsterdam, Cologne, Frankfurt, Munich, Salzburg, Vienna, Klagenfurt, Venice, Florence, and Rome.”

“Also in 2008, Diebold paid for a two-week leisure trip to the U.S. for three officials from Bank E, a bank owned and controlled by the government of China.”

“Also in 2008, Diebold paid for a two-week leisure trip for ten employees of Bank F, a bank owned and controlled by the government of China. This trip included travel to Hong Kong, Singapore, Malaysia, and Bali.”

“In 2009, Diebold paid for a two-week trip to the U.S. for twenty-four Bank A employees that included travel to Chicago; to Las Vegas for sightseeing, a dance show, and tour of the Grand Canyon; to Los Angeles for a tour of Universal Studios; to San Diego and San Francisco, which included a tour of Napa Valley.”

The SEC further alleges that “many of the government bank employees who received these leisure trips and other improper gifts were senior officials who had the ability to influence purchasing decisions by the banks.”

As to internal controls, the complaint alleges that “Diebold lacked sufficient internal controls to detect and prevent these illicit payments, many of which were paid to third-parties in China” and that “all of the illicit payments were falsely recorded in the company’s books and records as training or other legitimate business expenses.”

As to Executive A and B, the SEC complaint states that “even after these Diebold executives received FCPA training administered by the company in 2007, they took no action to halt these improper practices.  Instead, these executives took further steps to hide the leisure nature of these trips including, on at least one occasion, providing false information to the company’s auditors in China.”

The complaint further states:

“Other executives at Diebold were on notice of potential corruption issues at Diebold China. In 2007, a regional government agency in China, the Chengdu Administration of Industry & Commerce (“CDAIC”), opened an investigation involving, among other issues, leisure trips and gifts Diebold China had provided to bank officials. Company executives in China and the U.S. learned of the investigation after a Diebold field office in Chengdu was raided by authorities. Executives A and B took the lead in responding to the investigation. Diebold was able to settle the matter with no corruption charges filed, by paying CDAIC an administrative penalty of 600,000 RMB (approximately $80,000) for business registration violations. Despite being on notice of potential corruption issues at Diebold China, Diebold failed to effectively investigate and remediate these problems.”

Based on the above conduct, the SEC’s complaint charges violations of the FCPA’s anti-bribery provisions and books and records and internal controls provisions.

As noted in the SEC release, Diebold agreed to pay $22.9 million in disgorgement and prejudgment interest, appoint an independent compliance monitor, and consent to a final judgment permanently enjoining the company from violating the FCPA’s anti-bribery and books and records and internal controls provisions.  In the release, Scott Friestad (Associate Director of Enforcement) stated:

“A bribe is a bribe, whether it’s a stack of cash or an all-expense paid trip to Europe.  Public companies must be held accountable when they break the law to influence government officials with improper payments or gifts.”

Jonathan Leiken (Jones Day) represented Diebold.

This Law360 article states:

“Mike Jacobsen, a spokesman for […] Diebold, called the settlement ‘an important step for the company moving forward.’  ‘It’s imperative for Diebold to recognize these issues head on, acknowledge responsibility, put the FCPA investigation period behind it and get on with the business of managing the company,’ Jacobsen said in a statement. ‘Given the experience the company has gained and its continued focus on global ethics and compliance, Diebold is confident in its ability to manage ethics-related issues as they arise.'”

Yesterday Diebold’s stock was up approximately .7%.

The post Diebold Resolves $48 Million FCPA Enforcement Action Based Primarily On Excessive Travel And Entertainment Payments By Subsidiaries appeared first on FCPA Professor.