Earlier this week, the Securities and Exchange Commission (SEC) announced resolution of a Foreign Corrupt Practices Act (FCPA) enforcement action involving the 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. Procedurally the SEC filed a Compliant in the federal district court in Washington DC, seeking a Cease and Desist order against Hitachi, which the company did not contest but neither admitted or denied the allegations against it. Hitachi did agree to a penalty of $19MM in a separate and also uncontested final judgment.
Perhaps the most interesting aspect of the Hitachi matter is that it involved bribery of a political party, the African National Congress (ANC). The SEC Press Release stated, “Hitachi sold a 25-percent stake in a South African subsidiary to a company serving as a front for the ANC. This arrangement gave the front company and the ANC the ability to share in the profits from any power station contracts that Hitachi secured. Hitachi was ultimately awarded two contracts to build power stations in South Africa and paid the ANC’s front company approximately $5 million in “dividends” based on profits derived from the contracts. Through a separate, undisclosed arrangement, Hitachi paid the front company an additional $1 million in “success fee”.”
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 FCPA Guidance states: “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.
Also of interest is the jurisdictional basis of the enforcement action. Hitachi is a Japanese corporation. Yet, according to the Compliant “At the time of the violations, and from at least January 1, 2005 until April 26, 2012, Hitachi’s American Depositary Shares (“ADSs”) – representing shares of common stock – were registered with the Commission under Section 12(b) of the Exchange Act [15 U.S.C. § 781] and were listed and traded on the New York Stock Exchange. Hitachi was an issuer of securities in the United States and filed reports on Form 20-F with the Commission pursuant to Section 13(a) of the Exchange Act [15 U.S.C. § 78m].” Thereafter Hitachi delisted its ADRs from registration. This jurisdictional prong once again emphasizes the breadth and scope of FCPA enforcement. Further, many foreign companies may be inadvertently subjecting themselves to US jurisdiction through such registrations.
The bribery schemes themselves were notable only for their blantantness. Andrew J. Ceresney, Director of the SEC’s Enforcement Division, said in the SEC Press Release “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 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.
Listed at the end of the SEC Press Release were the groups that assisted the SEC in investigating and bring the enforcement action. They included, “the Justice Department’s Fraud Section, the Federal Bureau of Investigation, the Integrity and Anti-Corruption Department of the African Development Bank, and the South African Financial Services Board.” Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit, also singled out the “assistance we [the SEC] received from the African Development Bank’s Integrity and Anti-Corruption Department and hope this is the first in a series of collaborations.”
I was intrigued by the reference to the African Development Bank’s Integrity and Anti-Corruption Department. According to its website its Investigation Division, “conducts investigations into allegations of fraud, corruption and other sanctionable practices within the Bank Group and in operations financed by the Bank Group. These include projects financed by the Bank, misconduct involving staff with regard to operations financed by the Bank Group, administrative budgets and misuse of Bank resources. In addition, the Division monitors compliance with policies, procedures and guidelines that relate to integrity and ethics; as well as reviews transactions and other operational material to ensure compliance with the Bank’s policies and applicable international conventions.”
From my review of the website, it would appear this organization would only investigate matters which involved funding granted through the Africa Development Bank. This must mean that either Hitachi or the ANP front group was somehow using African Development Bank funds as a part of its bribery and corruption scheme. The African Development Bank itself can debar contractors or otherwise provide sanctions for those entities that engage in bribery and corruption using the Bank’s funds.
Also note the assistance of the South African Financial Services Board. The assistance of both of these organizations is certainly a welcomed addition to the burgeoning fight against bribery and corruption in Africa. It can only help to fight not only the rampant corruption but also the perception that the continent can protect itself from such acts.
The enforcement action does point up the oft-times difficulty in providing corporate social responsibility and distinguishing it from outright corruption in certain countries. As noted in an article in the Financial Times entitled, “Hitachi reaches deal over S Africa ‘payments’” 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 $5MM in “dividends” and another $1MM in a “success fee” for contracts to Hitachi worth “about $5.6bn.”
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. For foreign companies that have subjected themselves to FCPA jurisdiction, intentionally or otherwise, the message is even starker. The SEC (and Department of Justice) will leave no stone unturned to root out bribery and corruption, even if done by non-US subsidiaries, with no apparent ties to the US.
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© Thomas R. Fox, 2015