This week I will be considering the recent spate of Foreign Corrupt Practices Act (FCPA) enforcement actions brought by the Securities and Exchange Commission (SEC) at the close of its fiscal year. Last week saw several interesting FCPA enforcement actions with some significant lessons to be garnered by the compliance professional. I will be exploring them this week. Today we consider the enforcement actions involved Quad/Graphics Inc., a Wisconsin-based digital and print marketing provider and its Peruvian subsidiary, Quad/Graphics Peru S.A. The matter was resolved via a Cease and Desist Order (Order). In it, the company agreed to pay $6,936,174 in disgorgement, $959,160 in prejudgment interest, and a $2 million civil penalty, for total monetary relief of nearly $10 million.
According to the SEC Press Release, Quad/Graphics’ Peruvian subsidiary, from at least 2011 to January 2016, repeatedly paid or promised bribes to Peruvian government officials to win sales contracts and avoid penalties and improperly attempted to influence the judicial outcome of a dispute with the Peruvian tax authority. The subsidiary also created false records to conceal transactions with a state-controlled Cuban telecommunications company in violation US sanctions and export controls laws. Finally, Quad/Graphics’ China-based subsidiary, Quad/Tech Shanghai Trading Company, Ltd., from 2010-2015, used sham sales agents to make and promise improper payments to employees of private and governmental customers to secure business.
Quad/Graphics is a prime example of a company which expanded through merger and found itself in foreign market which significantly increased its risk profile, all the while with the corporate office blissfully unaware of the increased corruption risk the company had bitten off. The Order noted, “Prior to 2010, Quad was a privately held printing company headquartered in Sussex, Wisconsin, with a focus on domestic sales. With the July 2010 acquisition of World Color Press, Inc. (“World Color”), a Canadian printing company, Quad quickly became a public company with a major international presence. Quad acquired over 16,000 World Color employees, several subsidiaries, and multiple plants throughout Latin America, and its common shares began trading on the NYSE.”
Non-Existent Compliance Program and No-Experienced CCO
Unfortunately, the company did not take steps to either assess or address its new risk profile. While the company’s compliance program was “almost non-existent in 2010”; after the merger it did no better with the company appointing its first Director of Compliance, only in 2011. Even this appointment did nothing to help ameliorate the problem as the company hired an “individual with no compliance experience or training and an information technology background”. Moreover, the company also “failed to implement sufficient internal accounting controls or anti-corruption policies and procedures and failed to conduct meaningful due diligence on third parties. Likewise, internal audit had no visible role in anti-corruption testing and the company failed to conduct broad FCPA or ethics training until approximately 2012.”
The Sham-ness of it all
The bribes were paid through the tried and true method of sham third party vendors or as the Order called them “Sham Vendors”. However, here the bribery scheme was about as basic as you could get for “sham-ness” as the Order noted that the third party vendors were all owned by the same individual, their basic corporate information was all the same as they “were all registered in Lima, Peru, three with the same address, and had no real business operations.” Needless to same Quad failed to perform any due diligence on them. The services performed by the Sham Vendors of course contributed to their “sham-ness” as while the Sham Vendors submitted invoices allegedly for “pre-press, modulation and/or packaging services, “none of the Sham Vendors performed any such services for Quad Peru. Instead, pre-press, modulation and packaging services were performed on site by Quad Peru employees or by unrelated external third parties.”
The billing by the Sham Vendors and the form of payment to the Sham Vendors was also evidence of their ‘sham-ness’. Regarding the billing, the Order stated, “two concerned managers in Peru approached him [Finance Director] about several suspicious invoices that had recently been submitted by two of the Sham Vendors. Several of the invoices contained red flags, including having the same date and dollar amounts, and consecutive invoice numbers. Upon review, the new Senior Finance Manager agreed the invoices were problematic and declined to approve them.” Other red flags from the Sham Vendors invoices included, “vendor invoices with rounded dollar amounts, large invoice amounts that were disproportionate to the services described, invoices that were consecutively numbered (sometimes with the same date) and invoices without purchase orders or other supporting documentation.” On the payment side, although there were some wire transfers to the Sham Vendors bank accounts, a large number of invoices were paid “by checks that were hand delivered to the Sham Vendor’s principal or the Sham Vendor’s accountant in Peru.”
The bribery scheme towards the Peruvian judges who were hearing a massive tax suit involving the company also bear consideration. The company had a law firm on retainer to assist it, with nominal billings at $1,000 per month or so. This changed when the law firm was involved in a bribery scheme aimed at the trial judge for $20,000. This worked for some short period as the corrupt judge ruled in Quad/Graphics favor. However, the tax authority appealed, won and began to seize company assets and cash on hand in the country.
This led the company to ramp up its bribery efforts through the law firm. In late December 2012, the corrupt law firm issued an invoice to Quad Peru for $50,504 describing its services as “advice during the coercive execution process and in obtaining a precautionary measure.” It was signed off on the invoice and paid it the same day. The Order noted, “Quad’s documents and internal emails also referred to the bribe payments as “extraordinary fees.” This fee and later fees called “extraordinary” were in addition to the normal monthly payments made to the law firm.” Some three months later the law firm billed an amount of over $407,000 and then two days later billed the company another $200,000. These amounts were not paid out of the company’s legal budget but were rather paid out of “Quad Peru’s Miami, Florida bank account, an account typically used to pay for supplies, not attorney’s fees. Quad’s Finance Executive told the Senior Finance Manager how to account for the payment in Quad Peru’s books and records due to his concern about it appearing in variance reports.” In other words to hide the payment.
While there were other parts of the Quad/Graphics FCPA and export control saga, these points bear consideration by the compliance professional. The “sham-ness” of the third parties makes clear what you should look for in suspicious invoices, how to do so and why. The bribery and corruption involving the judges in the tax case point up the need to not simply “follow the money” but to do when the money comes to or from another or anomolous source; such a payment of legal invoices out of an account normally used to pay supplies.
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, 2019