Yesterday we celebrated the hard-nosed playing style of Anthony Mason, who recently passed away. Today we honor a true pioneer in professional baseball, Minnie Minoso, or Mr. White Sox. Minoso was the first black Cuban to play in Major League Baseball (MLB) when he debuted for the Cleveland Indians in 1949. In 1951, he was traded to the Chicago White Sox and he became a southside fixture for the rest of the decade. While his numbers were less than 2000 hits and 200 home runs, he was a fearless and speedy base runner and a nine-time All Star. Similarly to Mr. Cub, Ernie Banks, the Chicago White Sox erected a statue in tribute to Mr. White Sox outside their ballpark. Even President Obama was moved to release a statement about Minoso saying in part, “Minnie may have been passed over by the Baseball Hall of Fame during his lifetime, but for me and for generations of black and Latino young people, Minnie’s quintessentially American story embodies far more than a plaque ever could.”
The contribution of Minoso in the exorable march of MLB towards integration informed part of my reading of the recent Goodyear Tire & Rubber Company (Goodyear) Foreign Corrupt Practices Act (FCPA) enforcement strategy of the Securities and Exchange Commission (SEC). This enforcement action was a solo effort by the SEC; there was no corresponding Department of Justice (DOJ) criminal enforcement action. So following this past fall’s triumvirate of SEC enforcement actions involving Smith & Wesson, Layne Christenen and Bio-Rad, the SEC continues to bring enforcement actions based upon the books and records and internal controls civil requirements of the FCPA. Therefore the Goodyear enforcement action is one which provides many lessons to be learned by the Chief Compliance Officer (CCO) or compliance practitioner going forward and should be studied quite carefully by anyone in the compliance field.
The Bribery Schemes
As set out in the SEC Cease and Desist Order (the Order), Goodyear used several different bribery schemes in different countries, all violating the FCPA. In Kenya, Goodyear became a minority owner in a locally owned business which apparently paid bribes the old-fashioned way, in cash to the tune of over $1.5MM, yet falsely recorded the cash bribe payments as “promotional expenses.” In Angola, a wholly-owned subsidiary of the company paid approximately $1.6MM in bribes by falsely marking up invoices with “phony freight and customs clearing costs.” The subsidiary made the payments in cash and through wire transfers to various government officials. Finally, the subsidiary apparently cross-referenced the bribes it paid as follows, “As bribes were paid, the amounts were debited from the balance sheet account, and falsely recorded as payments to vendors for freight and clearing costs.” In other words a complete, total and utter failure of internal controls to forestall any of the foregoing.
Internal Controls Violations
The Order set out the section of the FCPA that the company violated. Regarding the internal controls, the Order stated, “Under Section 13(b)(2)(B) of the Exchange Act issuers are required to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.”
Equally important for the CCO or compliance practitioner are the specific steps that Goodyear took to remediate the situation it found itself in through these illegal payments. When the company received the initial reports about “the bribes, Goodyear promptly halted the improper payments and reported the matter to Commission staff.” Moreover, the company also cooperated extensively with the SEC. As noted in the Order, “Goodyear also provided significant cooperation with the Commission’s investigation. This included voluntarily producing documents and reports and other information from the company’s internal investigation, and promptly responding to Commission staff’s requests for information and documents. These efforts assisted the Commission in efficiently collecting evidence including information that may not have been otherwise available to the staff.”
In the area of internal remediation, regarding the entity in Kenya, where Goodyear was a minority owner in a local business, the company got rid of its from its corrupt partners by divesting its interest and ceasing all business dealings with the company. Goodyear is also divesting itself of its Angolan subsidiary. The Order also noted that Goodyear had lost its largest customer in Angola when it halted its illegal payment scheme. The company also took decisive disciplinary action against company employees “including executives of its Europe, Middle East and Africa region who had oversight responsibility, for failing to ensure adequate FCPA compliance training and controls were in place at the company’s subsidiaries in sub-Saharan Africa.”
Finally, in a long paragraph, the SEC detailed some of the more specific steps Goodyear took in the area of remediation. These steps included:
- Improvements to the company’s compliance function not only in sub-Saharan Africa but also world-wide;
- In Africa, both online and in person training was beefed up for “subsidiary management, sales and finance personnel”;
- Regular audits were instituted by the company’s internal audit function, which “specifically focused on corruption risks”;
- Quarterly self-assessment questionnaires were required of each subsidiary regarding business with government-affiliated customers;
- For each subsidiary, there were management certifications required on a quarterly basis that required, “among other things controls over financial reporting; and annual testing of internal controls”;
- Goodyear put in a “new regional management structure, and added new compliance, accounting, and audit positions”;
- The company made technological improvements to allow the company to “electronically link subsidiaries in sub-Saharan Africa to its global network”;
However these changes were not limited to improvement of Goodyear’s compliance function in Africa only. At the corporate headquarters, Goodyear created the new position of “Vice President of Compliance and Ethics, which further elevated the compliance function within the company”. There was expanded online and in-person training at the corporate headquarters and other company subsidiaries. Finally, the company instituted a new “Integrity Hotline Web Portal, which enhanced users’ ability to file anonymous online reports to its hotline system. With that system, Goodyear is also implementing a new case management system for legal, compliance and internal audit to document and track complaints, investigations and remediation.”
The specific listing of the compliance initiatives or enhancements that Goodyear pushed after its illegal conduct came to light is certainly a welcomed addition to SEC advice about what it might consider some of the best practices a company may engage in around its compliance function. Moreover, this specific information can provide audit and information to the compliance practitioner of strategies that he or she might use to measure a company’s compliance program going forward. The continued message of cooperation and remediation as a way to lessen your overall fine and penalty continues to resonate from the SEC. Finally, just as Minoso helped move forward the integration of baseball and civil rights in general, the Goodyear FCPA enforcement action demonstrates that the SEC will continue to prosecute cases around the failure of or lack of internal controls. The clear import is that a company must have an appropriate compliance internal control regime in place. We are moving towards a strict liability standard under the FCPA around internal controls, which I will have much more to say about later but for now – you have been warned.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at email@example.com.
© Thomas R. Fox, 2015