Brighton Rock is 80 this year. It was the first novel by Graham Greene and for many of us, it was our first introduction into his works. This novel has several different styles and themes intertwined. It is clearly a crime novel but also an underworld thriller. I found it to be almost noir in its atmospherics. The anti-hero, Pinkie, is a sociopath teenager who takes over a local gang through murder then continues his mayhem throughout the book. Along the way, he marries another teenager to prevent her from talking to the local constabulary, thinking there is a marriage privilege. When he finally figures out that strategy will not work, the book becomes an interesting lens to view Catholic ideas on morality, the nature of sin and even suicide. Graham Chainey, writing in TLS, focused on the city of Brighton itself, which he found to be the protagonist. The multiple foci of the story inform today’s blog post on the recent Securities and Exchange Commission (SEC) Foreign Corrupt Practices Act (FCPA) enforcement action involving United Technologies Corporation (UTC).
According to Harry Cassin, writing in the FCPA Blog, “In late 2013 and early 2014, United Technologies self-disclosed to the DOJ, SEC, and the SFO the status of an internal investigation regarding a non-employee sales rep for the sale of jet engines and aftermarket services in China.” This turned out to be one of the smartest moves UTC made as with even some egregious facts and some very high-level subsidiary employee involvement, UTC was able to obtain a relatively mild SEC Ordermandating profit disgorgement of $9 million plus interest of about $919,000 and a penalty of $4 million; for a total fine and penalty of $13.9 million. Earlier in the spring the Department of Justice (DOJ) closed out its investigation without assessing a fine or penalty.
The bribery schemes involved three UTC subsidiaries: Otis Elevator Company (Otis), Pratt & Whitney (PW) and International Aero Engines AG (IAE), a joint venture that became majority owned by PW in 2012. Each subsidiary had its own bribery scheme so the Order is instructive for the compliance professional to study. The bribery schemes lasted from 2009-2015.
Otis Elevator in Azerbaijan
Beginning in 2012 Otis implemented a corruption scheme to bribe local government officials in Baku, Azerbaijan, to purchase its elevator equipment. The municipal entity was named “Liftremont”. The first sale used subcontractors to pay some $790,000 in bribes or at least under a contract where “payments to the subcontractors were made without appropriate documentation of services being provided.”
A second corruption scheme was unveiled in 2013/2014 for more sales. This second scheme involved using distributors to purchase the elevators and then “elevator equipment to the intermediary at one price, knowing that the intermediary would sell the equipment to Liftremont at a significantly higher price. The spread between the prices, at least $11.8 million, was intended in part for Liftremont officials.”
These distributors had no experience in the elevator business, did not go through any background due diligence and in one instance “one of the intermediaries was not a registered entity until February 2014, well after participating in Otis’s transactions with Liftremont in 2013.” Moreover, “The transactions with the intermediaries should have raised significant red flags because Otis Russia already had an approved joint venture (“JV”) partner that was authorized to make the sales in Azerbaijan, and no legitimate business justification was provided for using the four intermediaries instead.”
The scheme by Otis was so brazen that commissions and other illegal payments were made outside the countries of origins of the distributors. Otis provided fraudulent tax and shipping stamps. No other corporate disciplines at Otis could seem to be bothered to perform any reviews or do anything other than rubber stamp the corrupt payments schemes. At one-point Otis even made Liftremont a distributor so corrupt payments could be made to certain Liftremont officials.
Finally, when someone from Otis’ Legal Department in Russia raised a question about one of the intermediaries, he was provided “a letter from the Liftremont Senior Official containing a perfunctory explanation for why Liftremont needed the new intermediary inserted into the contract. Although the Regional lawyer initially challenged the perfunctory explanation, he ultimately approved the contract.” But here’s the kicker, someone else from Otis legal had already approved the contract between the corrupt intermediary and Otis some four months earlier.
IAE and Pratt & Whitney in China
Here the corruption scheme involved the use of an agent. This agent was retained in 2006 and up until that time had been in the toll road construction business. However IAE and PW retained him to help sell aircraft engines in China, which he did in a very big way generating some $55 million in commissions from 2009 to 2013 alone. An ingenious method used to fund the bribes was a request by the China agent for “a commission advance of $2 million purportedly for an office expansion. The agent provided no documentation to support its need for the advance. Moreover, there was little basis to believe that the agent, who mainly arranged introductions and meetings, actually intended a $2 million office expansion.” Nevertheless, “the GM and VP agreed to advance the commissions to the agent.”
Rather amazingly, the next month this agent obtained confidential information of a competitors bid, which IAE used to modify its bid pricing. The next month IAE won the Air China contract. The corrupt agent paid some $960,000 to a corrupt Air China official for this confidential information.
Another bribery scheme used in China advance payments for sponsorship of events for Chinese officials. PW China senior executives paid nearly $100,000 for a two-day golf event. They created a fraudulent agenda which was approved by company legal.
Otis Elevator in China
Otis relied on its distributor model to make corrupt payments in China for the sale of four elevators units to a state-owned bank. A corrupt official approached Otis and apparently told them he would award them the contract for a bribe payment, which turned out to be $98,000. Otis China then appended a corrupt distributor on the deal who marked up the price by the bribe amount. When it was paid it was rebated back to the corrupt official.
UTC and Travel Everywhere
UTC itself was involved in the bribery and corruption through funding of leisure travel for government officials from China, Kuwait, South Korea, Pakistan, Thailand and Indonesia. While such approval required legal department approval, UTC “employees frequently circumvented this requirement by submitting travel for foreign officials for approval without disclosing the leisure and entertainment component. On occasion, the travel was included as a cost component in the contract with the end customer and was therefore not submitted for appropriate approval.”
The travel included locations where UTC did not have any business, manufacturing facilities or products in such places as Orlando (M-I-C-K-E-Y M-O-U-S-E). While some travel was to locations which did have UTC facilities, such as subway systems in NYC, Washington DC, Italy and Greece; no inspections of these facilities were ever recorded. Between 2009 and 2015 UTC recorded some $134,000 in such expenses.
Even with all of the above UTC got a great result. In addition to its self-disclosure, it thoroughly cooperated with the SEC in the investigation. The remediation had several key features including, “termination of employees and third parties responsible for the misconduct and enhancements to its internal accounting controls. UTC strengthened its global compliance organization; enhanced its policies and procedures regarding travel, the due diligence process, and the use of third parties; created positions to address potential risks; and increased training of employees on anti-bribery issues.”
The most superior UTC result makes clear that the DOJ’s new FCPA Corporate Enforcement Policy offers some very strong and real incentives to meet the four prongs. The very low SEC fine and penalty speaks with equal strength. Just as Brighton Rockcan be read from a variety of angles, the UTC FCPA enforcement action should also be so read.
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© Thomas R. Fox, 2018