In today’s blog post, I want to look at some of the more unusual bribery schemes from Foreign Corrupt Practices Act (FCPA) enforcement actions in 2019. Some of these schemes were not unusual but they were accomplished with different twists of facts from ways seen in the past. Today I want to introduce these bribery schemes and tomorrow look at some of the compliance program issues they raise, what they mean for the compliance professional and how the government will use these cases to require more effective compliance programs going forward.
I. Discounts to Distributors
The Microsoft Corporation FCPA enforcement action demonstrated a failure around the company’s policy on discounts to distributors and other third-party sellers. The company had a policy for a review of discounts above certain thresholds be approved by Microsoft’s Business Desk. But this approval had certain requirements to garner a discount, including a business justification for the discount. Unfortunately, a cut and paste job was done by the local business unit with the justifications of competition with competitors, customer price sensitivity and the ubiquitous “possibility” of winning other work.
These business justifications were provided with no back up documentation and were approved by the Business Desk. There was but one condition for the discount, that being a time limit expiration on the discounts. Yet there was no follow up by the Business Desk to determine if the discount was revoked or otherwise take off the table. You might think that after multiple requests for discounts from the business unit with the same justifications of competition with competitors, customer price sensitivity and the possibility of winning other work someone on the Business Desk might have at least asked them to cut and paste a different business justification.
II. Joint Ventures
There were multiple bribery schemes employed by Fresenius Medical Care AG & Co. KGaA (FMC). One of these schemes included the setting up of joint ventures (JV) as a mechanism to pay corrupt doctors, employees of state-owned health care enterprises and government officials who were also medical officials. There was one JV in Angola and two in Turkey set up for illicit purposes. In both bribery schemes, 35% of the JV interest was doled out to the corrupt officials. There was no capital contribution required from the employees of state-owned enterprises and government officials. The employees of state-owned enterprises and government officials were all cashed out at some point for values far above their individual values in the JVs.
B. Westport Fuels
Westport Fuels Systems, Inc. (Westport) and a Chinese state-owned enterprise were 50/50 owners in a JV. It was restructured so that a portion of the shares held by Westport and a privately held Hong Kong conglomerate would have to be transferred to the state-owned enterprise and a Chinese private equity fund in which senior Chinese government official held a significant financial interest. The Chinese government official sought and received a low valuation of the JV so he could make a quick turnaround of profitability outside the scrutiny of Chinese regulators. Westport’s Board of Directors authorized Westport’s management to complete the negotiations and execute the share transfer. The final deal agreed upon was a valuation of $70 million for the Chinese JV, with Westport agreeing to transfer its shares to the state-owned enterprise and the private equity fund in exchange for a long-term framework supply agreement.
III. Sham Third-Party Services
In the FCPA enforcement action involving Quad/Graphics Inc., the bribes were paid through the tried and true method of sham third party vendors. While the bribery scheme was about as basic as you could get for “sham-ness” as 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, with the same address and with 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 them performed any such services for the company. Indeed, all these services were performed on site by Quad Peru employees.
The billing by the Sham Vendors and the form of payment to the Sham Vendors was also evidence of their “sham-ness”. Several of the invoices submitted contained red flags, including having the same date and dollar amounts and consecutive invoice numbers. Other red flags included, whole and rounded dollar amounts, large invoice amounts that were disproportionate to the services described, invoices that were consecutively numbered with the same date and invoices without purchase orders or any supporting documentation.
Fresenius used another bribery scheme in Angola. It was the creation of fraudulent storage payments with a shell company owned by the sons of an Angolan government official, a Military Health Officer in charge of purchasing, to provide warehousing space for a warehouse which housed no FMC products. In or around December 2011, FMC Angola paid approximately $560,000 to this shell company for purported “Temporary Storage Services,”. However, no FMC company products were ever stored at the warehouse. When the company’s internal audit function unearthed this scheme, the local business unit simply put a contract in place, executing a written contract with the Shareholder Company to provide temporary storage services for approximately $77,000 per month from January 2012 to January 2013. Once again, no company products were ever stored at the warehouse.
All of these bribery schemes could have been uncovered if anyone had bothered to look. Whether you subscribe to ‘trust but verify’ or auditor scientism, there needs to be more than simply questions posed. There should be verifiable answers found. Tomorrow, we will consider what questions to ask and what some of those answers might look like.
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© Thomas R. Fox, 2020