In almost every Foreign Corrupt Practices Act (FCPA) enforcement action, there are nuggets to be gleaned for any Chief Compliance Officer (CCO) or compliance practitioner. All one has to do is look for them. Back in 2012, many of us scratched our collective compliance heads when we read and tried to understand the Oracle FCPA enforcement action brought by the Securities and Exchange Commission (SEC). The question which most of us asked was how there could be a FCPA violation with no allegation of bribery.
Since that time the answer has become clear. The Accounting Provisions, including books and records, and internal controls are viewed as the equivalent to strict liability under SEC enforcement theories. The Oracle civil Complaint revealed, “Oracle’s Indian subsidiary Oracle India Private Limited (“Oracle India”) secretly “parked” a portion of the proceeds from certain sales to the Indian government and put the money to unauthorized use, creating the potential for bribery or embezzlement. These Oracle India employees structured more than a dozen transactions so that a total of around $2.2 million was held by the Company’s distributors and kept off Oracle India’s corporate books.” The parent company “failed to accurately record these side funds on the Company’s books and records, and failed to implement or maintain a system of effective internal accounting controls to prevent improper side funds in violation of the FCPA, which requires public companies to keep books and records that accurately reflect their operations.” All of the above led to a penalty with no evidence of a bribe being paid by Oracle or its Indian subsidiary.
Last week brought the Mondelēz FCPA enforcement action, which was settled via a Cease and Desist Order (Order). Mondelēz paid a $13MM fine for the violations. Mondelēz, formerly known as Kraft Foods Inc., has “acquired Cadbury, a U.K.-based confectionary and snack beverage company that had securities registered with the Commission” in 2010. Earlier that year, “Cadbury India Limited (“Cadbury India”), a subsidiary of Cadbury, retained an agent (“Agent No. 1”) to interact with Indian government officials to obtain licenses and approvals for a chocolate factory in Baddi, Himachal Pradesh, India.” It was this Agent No. 1 who laid Mondelēz low with FCPA grief.
There were a few anomalies around this Agent No. 1 and his retention by Cadbury. First there was no substantive due diligence performed on Agent. No. 1, largely at the insistence of Cadbury India employees. He was approved by Cadbury India management without such due diligence. Further, “Other than the invoices from Agent No. 1, which contained a description of the specific licenses or approvals obtained as support for that invoice, Cadbury India did not receive documentary support for Agent No. 1’s services and did not have any written contract with Agent No. 1 when it paid Agent No. 1.”
While the Order ominously notes that Cadbury India employees prepared the required license applications which Agent No. 1 was hired to procure. Added to this was just over $110,000 paid out for six months’ worth of services described as “providing consultation, arrange statutory/government prescribed formats of applications to be filed for the various statutory clearances, documentation, preparation of files and the submission of the same with govt. authorities for specific licenses”. After a tax deduction, Agent No. 1 withdrew “most or all of the funds in cash.” There was no sufficient record of what Agent No. 1 did with the money it withdrew.
While of this was going on with Agent No. 1, Mondelēz acquired Cadbury. The Order noted, “Because of the nature of the acquisition, Mondelēz was unable to conduct complete pre-acquisition due diligence, including anti-corruption due diligence.” Moreover, even though “Mondelēz engaged in substantial, risk-based, post-acquisition compliance-related due diligence reviews of Cadbury’s business”; the “post-acquisition due diligence review did not identify the relationship between Agent No. 1 and Cadbury India.” At some time later in 2010, Mondelēz engaged in an internal investigation of Agent No.1 and “required Cadbury India to end the relationship with Agent No. 1 and no further payments were made.”
Mondelēz was charged by the SEC with violations of both prongs of the Accounting Provisions. Under the books and records component, the company did not keep its accounts “in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer” and the books and records “did not accurately and fairly reflect the nature of the services rendered by Agent No. 1.”
Under the internal controls prong, there was not sufficient due diligence performed on Agent No. 1 (yes due diligence is an internal control) and no control around enlisting Agent No. 1 without an appropriate exception protocol. Additionally, “Cadbury, did not accurately and fairly reflect the nature of the services rendered by Agent No. 1.” Finally, “by failing to devise and maintain internal accounting controls that were sufficient to provide reasonable assurances that access to assets and transactions were executed in accordance with management’s authorization and specifically to detect and prevent payments that may be used for improper or unauthorized purposes. As a result of Mondelēz’s acquisition of Cadbury stock, Mondelēz is also responsible for Cadbury’s violations.”
Unfortunately, there is no information presented as to the basis of the penalty of $13MM. One might engage in a lengthy round of speculation but based upon the public record, it would only be speculation to try and guess the basis of this penalty.
For any CCO or compliance practitioner, there are multiple lessons to be garnered from the Mondelēz FCPA enforcement action. First, and foremost, is to always remember, as we all learned from the Oracle FCPA enforcement action, there is no requirement for the payment of a bribe for there to be a civil enforcement action brought by the SEC. From a compliance program perspective, no third party representative can ever be hired without appropriate due diligence. If there is some level of due diligence that is less than standard, there must be an appropriate level of compliance review, coupled with senior management and, perhaps, even Board oversight. All contracts must be in writing with clearly specified terms. All invoices must be in writing, with sufficient specificity to enable a regulator (or auditor) looking at it years later to determine what services were delivered that were compensated by the company.
Finally, is the area of auditing of third parties as Mondelēz was specifically sanctioned for “not monitoring the activities of” Agent No. 1. Audit rights are specifically set out in the FCPA Guidance as appropriate compliance terms and conditions for every contract with third party representatives. But you must do more than simply secure such rights, you must actually use them to make sure your third party representative is not using the funds you pay them for nefarious purposes.
The Mondelēz FCPA enforcement action provides quite a bit of matter for any CCO or compliance practitioner to consider for their compliance program. Yet the most valuable lesson might well be that having a compliance program is far from doing compliance. If you only draw one lesson from this case, that would be one well worth remembering.
The Mondelēz enforcement action should remind compliance practitioners about strict liability enforcement.Click to tweet
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, 2017