Last week, on April 22, 2013, Ralph Lauren Corporation agreed to pay more than $1.6 million to the US government to settle charges that it violated the FCPA by bribing customs officials in Argentina. According to the allegations, Ralph Lauren’s subsidiary in Argentina paid approximately USD 568,000 to a customs broker who in turn paid bribes to customs officials to secure the importation of Ralph Lauren products into Argentina between 2005 and 2009. The subsidiary also allegedly approved gifts of, perfume, handbags and dresses, to three customs officials during the same time period. Ralph Lauren is not the first company to uncover improper conduct by third parties. More than 90 percent of FCPA cases involve third parties and third party due diligence remains the number one anti-bribery compliance challenge for multinational companies. As the DOJ and the SEC explain in the Resource Guide to the FCPA, a “[b]ribe [that] is paid by a third party does not eliminate the potential for criminal or civil FCPA liability.” While agents and intermediaries in foreign countries may provide valuable know-how and advice regarding local laws, customs and procedures, and may even be a requisite party to carry on business in some jurisdictions, working with them may also carry substantial risks. Today, we provide several examples of how liability may arise through third parties – joint ventures, distributors, consultants, subcontractors and resellers.
Daimler faced enforcement actions in the US, Russia, Nigeria and Latvia for improper payments the company and its subsidiaries allegedly made between 1998 and 2008 to foreign officials in several countries including Turkey. In Turkey, the problem arose from the joint venture it formed with other Turkish companies. The joint venture, namely Mercedes-Benz Turk (MB Turk), was engaged in exporting vehicles to government customers in many jurisdictions. In 2006, Daimler’s audit department found out that the joint venture made improper payments and gifts to foreign government officials amounting to approximately EUR 6 million. The revenue from these transactions, on the other hand, totaled approximately USD 93.6 million. As a result of the investigations in the United States, Daimler entered into deferred prosecution agreement and paid USD 95 million with its three subsidiaries.
Invision, the California based company that is engaged in manufacturing and selling airport security screening devices, accepted liability for its distributor’s improper conduct in 2004. In this case, the distributor resold Invision machines at a much higher price than its purchase price. According to the DOJ and SEC, Invision executives were aware of the high probability that its agents or distributors had paid or had offered to make payments to government officials using some of its margin. According to the allegations, through the bribery scheme, distributors sold Invision products to the government controlled airports in China, Philippines and Thailand.
Unreasonably large discounts that a distributor may make to win business for the company may also raise liability as discounts may be used to conceal transactions. In one of the investigations within the healthcare industry, distributor of Pfizer Russia allegedly made cash payments to hospital officials for the purchase of Pfizer products and called it “discounts”. As a result of the investigation, without admitting or denying the charges, Pfizer paid a USD 15 million penalty and approximately USD 26 million in forgone profits.
Businesses have also tried to conceal improper payments through entering into consulting agreements and made payments for phony invoices without having any kind of legitimate services in return. In the record breaking case of Siemens, the company allegedly entered into consultancy agreements to funnel bribes amounting to approximately USD 211 million to government officials in multiple jurisdictions. Similarly, Alcatel, the global provider of telecommunications equipment and services, hired a number of consultants in Costa Rica, Honduras, Taiwan and Malaysia to obtain business in these countries. For instance in Honduras, Alcatel hired a consultant chosen by the brother of a Honduras government official, and allegations indicate that the executives in Alcatel knew a certain portion of payments would be funneled to the government officials. As expected, the investigations resulted in settlement agreements with the authorities, and Alcatel, together with its three subsidiaries, agreed to pay a USD 92 million criminal fine.
Companies should take all precautions when working with subcontractors as well. In IBM Argentina , IBM’s subsidiary in Argentina contracted with a local corporation, and through that relationship, IBM Argentina was awarded one of the largest contracts of the company. Argentinian authorities allegedly found out that some of the payments IBM Argentina made to the subcontractor were transferred to officials of Banco de la Nacion Argentina, the Argentinian Bank owned by Argentine government. As a result of the investigation, in December 2000, without admitting or denying the allegations, IBM entered into a cease-and-desist order and agreed to pay a civil penalty amounting to USD 300,000.
Liability through resellers usually arises when the reseller of the company offers or makes improper payments to a government official to secure contracts for the company. Veraz Networks, California multimedia communication services provider, sold products to the Vietnamese state-controlled communications company in 2007 and 2008. The SEC alleged that the sale of products was related to the conduct of Veraz Networks’s employee, who provided and offered improper payments to the CEO of the state-controlled Vietnamese company through a reseller in Singapore. In June 2010, without admitting or denying the allegations, Veraz Networks entered into final judgment with the SEC permanently enjoining the company from future violations of the FCPA’s books and records provisions and agreed to pay a civil penalty amounting to USD 300,000.