In 2015, the SEC announced resolution of a FCPA enforcement action involving Hitachi Ltd (Hitachi). There were several interesting aspects to this enforcement action and plenty of lessons to be learned by the compliance practitioner going forward. This enforcement action also presented a clear case for keeping track of current events for continuous improvement.
Keeping track of current events for continuous improvements a part of the mandates found in the 2019 Guidance. The DOJ clearly expects companies to update its risk assessment, policies, procedures and practices in light of changing circumstances. This means that if a third-party changes characteristics, so that it becomes subject to FCPA scrutiny, a company must be able to evaluate and react appropriately to such change.
Perhaps the most interesting aspect of the Hitachi matter is that it involved bribery of a political party, the African National Congress (ANC). This portion of the enforcement action stands as a stark reminder that political parties are covered by the FCPA just the same as government officials. The 2012 FCPA Guidance stated:
The FCPA’s anti-bribery provisions apply to corrupt payments made to (1) “any foreign official”; (2) “any foreign political party or official thereof ”; (3) “any candidate for foreign political office”; or (4) any person, while knowing that all or a portion of the payment will be offered, given, or promised to an individual falling within one of these three categories.
Although the statute distinguishes between a “foreign official”, “foreign political party or official thereof” and “candidate for foreign political office” the term “foreign official” in this guide generally refers to an individual falling within any of these three categories.
The bribery schemes themselves were notable only for how blatant they were. Andrew J. Ceresney, former Director of the SEC’s Enforcement Division, said in a 2015 SEC Press Release that “Hitachi’s lax internal control environment enabled its subsidiary to pay millions of dollars to a politically-connected front company for the ANC to win contracts with the South African government. Hitachi then unlawfully mischaracterized those payments in its books and records as consulting fees and other legitimate payments.”
Moreover, according to the SEC Complaint:
- Hitachi was aware that Chancellor House Holdings (Pty) Ltd.was a funding vehicle for the ANC during the bidding process.
- Hitachi nevertheless continued to partner with Chancellor and encourage the company to use its political influence to help obtain government contracts from Eskom Holdings SOC Ltd., a public utility owned and operated by the South African government.
- Hitachi paid “success fees” to Chancellor for its exertion of influence during the Eskom tender process pursuant to a separate, unsigned side-arrangement.
The enforcement action does point to the oft-times difficulty in providing corporate social responsibility and distinguishing it from outright corruption in certain countries. A Wall Street Journal article, entitled “Hitachi Reaches $19 Million Settlement With SEC Tied to South Africa Contracts”, noted that businesses “operating in South Africa are encouraged to take on black business partners under the ANC’s policy of black economic empowerment (BEE), intended to redress economic imbalances created by apartheid.” Yet, critics claim that there is a “blurred line between business and politics in the awarding of state tenders” in South Africa. However, the ANC front group was charged “only approximately $190,819 stake which returned to it over $5 million in “dividends” and another $1 million in a “success fee” for contracts to Hitachi worth “about $5.6 billion.”
This case demonstrates the need for a CCO to keep track of current events. It does not mean you must read the newspapers on a daily basis, although that certainly would help. You must rely on your business folks on the ground to keep track of personnel changes in JVs or other local partnerships. Moreover, there are several automated due diligence services which literally provide daily updates on a wide variety of persons and individuals who might change positions in a government or move from the public sector to the private sector or back.
In many under-developed countries, there is a relatively small group of well-educated technocrats who move back and forth between the government to the private sector. They are also often involved in political parties. Today’s private citizen might be tomorrow’s PEP or indeed may have been yesterday’s PEP who still has close government connections. This requires you to navigate carefully as these are most usually jurisdictions which are high-risk for corruption.
For the compliance practitioner, the Hitachi SEC enforcement action provides a valuable reminder that the FCPA covers more than foreign government officials and officials of state-owned enterprises. Political parties are also covered so that if part of your corporate social responsibility includes payments to political party front groups, your company could get into FCPA hot water. Yet it also means you will need to keep abreast of just who your counter-parties are during the entire course of your commercial relationship. This means that keeping up with current events is a must and can facilitate continuous improvement.
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© Thomas R. Fox, 2020