Know Your Third Party: How Your Business Partners Can Get You in Trouble Reply

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.

Joint Ventures

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.


KPMG ‘Insider Trading’ Case Highlights Dangers of Commercial Bribery 1

Bribes truly can happen in the most unsuspecting of places.  A few weeks ago, Scott London, partner at the accounting firm KPMG, met up with his longtime friend Bryan Shaw at an unassuming Starbucks in the San Fernando Valley, outside of Los Angeles.  Over a cup of coffee and some pleasantries, Shaw handed London an unmarked envelope containing $5,000 in cash.  Unbeknown to either of them, FBI agents were snapping pictures of the whole thing.

KPMGUntil last week, London, worked at one of the biggest accounting firms in the world.  A 29-year veteran at KPMG, he was reportedly in charge of the firm’s entire southern California audit practice and managed more than 900 workers.  Shaw, a local jewelry store owner, was London’s golfing buddy and the two often played together at the North Ranch Country Club in Westlake Village, California.  But over the course of their relationship, London and Shaw shared more than just golfing tips.  In exchange for  “about $25,000 in cash, a new Rolex watch and fancy dinners” as well as free concert tickets, London gave Shaw insider information regarding public companies, including nutritional supplement maker Herbalife and footwear company Skechers – two of KPMG’s clients.

What London has since described as a “lapse in judgment”, has landed him in a lot of trouble with authorities and has caused huge embarrassment for KPMG.  The firm fired London last week and has since resigned as the outside auditor for Herbalife and Sketchers.  Trading in stocks of the two companies also had to be temporarily suspended as KPMG withdrew its certification for the companies’ financial statements for the last few years.   More…

Treasure Island! Trove of New Documents Detail World of Offshore Tax Havens Reply

(Courtesy of Google Maps)

(Courtesy of Google Maps)

The International Consortium of Investigative Journalists (ICIJ) reported this week that it has concluded a 15-month investigation uncovering 2.5 million files of offshore holdings of people and companies in more than 170 countries and territories.  Together, 86 journalists from 46 countries used high-tech data crunching technology to conduct the investigation, unveiling more than 120,000 offshore companies and trusts.  The investigation reportedly began via a hard drive sent to Australian journalist Gerard Ryle, who now heads the ICIJ.  The sheer amount of data exposed as a result of the investigation (260 gigabytes) is the biggest offshore stockpile ever obtained by the media and “has the potential to cause a seismic shock worldwide to the booming offshore trade” writes the UK’s Guardian newspaper.   More…

The DOJ and SEC issue FCPA Guidance, Clarify Concepts such as Facilitation Payments Reply

Photo: Coolcaesar

In simultaneous statements released today by the SEC and the DOJ, the U.S. Government announced the publication of a new 120-page guide to the enforcement agencies’ approach to the FCPA. As noted by Assistant Attorney General Lanny Breuer, “The Guide is an important illustration of our transparency and a useful reference for companies and individuals who wish to act responsibly and in compliance with the law.”

Although FCPA, A Resource Guide to the U.S. Foreign Corrupt Practices Act  contains information useful to businesses of all sizes, its major purpose is to reassure investors that “the economic performance of public companies reflects lawful considerations of markets, price, and product rather than a mirage resulting from bribery and corruption” (quoting Robert Khuzami, Director of the SEC’s Enforcement Division).

Chapter 1 of the Guide provides an historical background and litany of the costs of corruption. The available tools for enforcement in the U.S and internationally are set forth, including an explanation of how the various legislative provisions and enforcement agencies work together – for example, the Departments of Justice, State and Commerce and the Securities and Exchange Commission.

Chapters 2 and 3 contain a word-by-word analysis of the provisions of the FCPA, including the accounting provisions. Some of the definitions offered in these chapters – for example, the meaning of “corruptly,” are new.

Chapter 2 is particularly informative. It is replete with examples from real cases investigated and prosecuted by the SEC and DOJ; it also offers hypotheticals to clarify nearly every definition. The hypotheticals support the authorities’ emphasis on corrupt intent. Thus, for example, if a large engineering company gives snacks and small promotional items to foreign officials visiting a trade show, or even takes them out in the evening for drinks, the company has not acted in violation of the FCPA. Nor would a company violate the FCPA by giving a modest wedding gift to a recently married public official with which a company has a long term relationship.

Although the Guide takes a reasonably permissive stance on business gifts and hospitality, it narrowly defines the word “knowing” in the prohibition against payments to any person while “knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly.” The Guide is explicit on this count, attributing to Congress an intention not to allow a defense involving a “head-in-the-sand” attitude or a conscious disregard of the situation.

The Guide goes a long way to clarify one of the most ill-defined, little interpreted and poorly understood concepts addressed by the FCPA: facilitation payments. In a two-part hypothetical posited by the government, a mining company allows its agent to pay a one-time facilitation payment to a foreign government clerk in order to accelerate the permitting process for the road intended to be constructed by the mining company. The low-level government clerk has no decision-making power as to issuance of the permit; he just stamps and files the application expeditiously once given the requested “grease” payment. Under the circumstance, says the Guide, “the payment to the clerk would qualify as a facilitating payment, since it is a one-time, small payment to obtain a routine, non-discretionary governmental service that [the company] is entitled to receive.” But the payment might violate local laws, and if not accurately recorded, it could violate the books and records provision of the FCPA.

While Chapter 4 consists of a brief statement of other laws applicable to corruption cases, Chapter 5 offers guiding principles of FCPA enforcement. These principles will be addressed in detail in future posts on TRACEblog. Likewise, Chapters 6, 7 and 8, on penalties, resolutions and whistleblower provisions, will be addressed in later posts. The Guide, like the Department of Justice website, encourages companies and individuals to make use of the Opinion Procedure Release option (Chapter 9).

In conclusion, the DOJ and SEC re-emphasize the government’s business-friendly stance, and its goal to maximize businesses’ “ability to comply with the FCPA in the most effective and efficient way suitable to their business and the markets in which they operate.” The government reiterates its commitment to carrying out the congressional intent to “provide a fair playing field for those honest companies trying to win business based on quality and price rather than bribes.”