United States: FCPA Insight: Is Another Record Year In Store For Foreign Corrupt Practices Act Enforcement?

Orignally published April 2008

Picking up where they left off last year, when they combined to file a record number of cases, the Securities and Exchange Commission (the "SEC" or the "Commission") and the Department of Justice ("Justice Department") have combined to file three new Foreign Corrupt Practices Act ("FCPA") actions in the first three months of 2008. If the Commission and the Justice Department keep up this pace, another record year is in store for FCPA enforcement.

SEC and DOJ Sue Westinghouse Air Brake Technologies Corporation

In the first FCPA case of 2008, on February 14, 2008, the government charged Westinghouse Air Brake Technologies Corporation ("Wabtec"), a Delaware corporation, headquartered in Pennsylvania, with violating the FCPA in connection with certain improper payments that Wabtec’s Indian subsidiary, Pioneer Friction Limited ("Pioneer"), allegedly made to employees of the government of India in order to obtain or retain business from the Indian national railway system. SEC v. Westinghouse Air Brake Tech. Corp., No. 08-CV-706 (E.D. Pa. filed Feb. 14, 2008), Litigation Release No. 20457 (Feb. 14, 2008). According to the Commission, Pioneer, incorporated and headquartered in India, manufactures low and high friction brake blocks for rail operations. Id. Pioneer’s financial results are reported on a consolidated basis as part of Wabtec’s consolidated financial statements. Id. The Commission charged that, from at least 2001 through 2005, Pioneer made over $137,400 in improper cash payments to employees of the Indian government in order to have its competitive bids for government business granted or considered. Id. As a result of being awarded contracts in 2005, Pioneer realized profits of $259,000. Id. In connection with the improper payments, Wabtec supposedly failed to keep accurate books and records, and failed to devise and maintain effective internal accounting controls. Id. Accordingly, the Commission charged Wabtec with violating Sections 13(b)(2)(A), 13(b)(2)(B) and 30A of the Securities Exchange Act of 1934 ("Exchange Act"). Id. In a departure from one of the Enforcement Division’s internal rules, the Commission bifurcated its enforcement action against Wabtec.

In the first action, the Commission filed a civil action in the United States District Court for the Eastern District of Pennsylvania charging Wabtec with violating the anti-bribery, books and records and internal controls provisions of the FCPA. Id. Interestingly, the Commission did not seek an injunction against Wabtec in the civil case. Id. Wabtec settled the Commission’s action by agreeing to the entry of a final judgment requiring it to pay a civil penalty in the amount of $87,000. Id.

In the second action, the Commission filed and settled an administrative action in which it found that Wabtec violated the same provisions of the FCPA as in the civil action. In the Matter Westinghouse Air Brake Tech. Corp., Exchange Act Release No. 57333 (Feb. 14, 2008). As a result of its violative conduct, the Commission ordered Wabtec to cease and desist from future violations of the FCPA, and to disgorge $259,000, together with $29,351 in prejudgment interest. Id. The Commission also required Wabtec to retain an independent consultant to review and make recommendations concerning its FCPA compliance policies and procedures. Id.

Relatedly, and based largely on the same allegations, Wabtec consented to a non-prosecution agreement with the Justice Department, and agreed to pay a fine of $300,000. United States v. Westinghouse Air Brake Tech. Corp., DOJ Press Release No. 08-116 (Feb. 14, 2008).

Flowserve Corporation Settles Oil for Food-related FCPA Action

In the second case of 2008, released days later, on February 21, 2008, the government charged that, from 2001 through 2003, Flowserve Corporation ("Flowserve"), a Texas-based manufacturer of pumps, valves, seals, and related automation and services to the power, oil, gas, and chemical industries, through two of its subsidiaries, entered into a total of twenty contracts in which $646,488 in kickback payments were made and another $173,758 were authorized in connection with sales of industrial equipment to Iraqi government entities under the Oil for Food Program ("OFFP"). The kickbacks were characterized as after-sales service fees ("ASSF"), but no bona fide services were performed. SEC v. Flowserve Corp., No. 08-CV-00294 (D.D.C. filed Feb. 21, 2008), Litigation Release No. 20461 (Feb. 21, 2008). As described in the ten other civil and criminal cases that were filed last year, the OFFP was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. The OFFP allowed the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The kickbacks paid by Flowserve’s subsidiaries diverted funds out of the escrow account and into an Iraqi slush fund. Id. The contracts submitted to the U.N. did not disclose that the illicit payments were included in the inflated contract prices. Id.

Allegedly, Flowserve’s French subsidiary, Flowserve Pompes, entered into fifteen OFFP contracts involving kickback payments of $604,651. Id. Flowserve Pompes agreed to, but did not ultimately make, an additional$173,758 in improper ASSF payments under four additional contracts. Id. Delivery under these four contracts had not been completed by the time of the U.S. invasion of Iraq in March 2003. Id. Senior officials at Flowserve Pompes, including its president, developed two different false cover stories to conceal the ASSF kickback payments. Flowserve Pompes’ internal accounting records falsely indicated that it paid a Jordanian agent a ten percent fee on each contract to cover the cost of installing and commissioning the equipment. In reality, the agent provided no such services. Id. The contract documents that Flowserve Pompes sent to the U.N. for approval painted a different, but equally false, picture. Id. These documents omitted any reference to after-sales services or related installation fees. Id. Instead, to cover the cost of the illicit ASSF payments, the company’s U.N. contracts inflated the unit price of each piece of equipment without disclosing the price increases, or the reason for them, to the U.N. Id. Flowserve Pompes also signed a side letter to the Iraqi ministry to pay the ten percent, and failed to disclose the letter to the U.N. Id. Knowing that the kickback payments had to be received before the goods would be allowed across the border, Flowserve Pompes paid its agent immediately. Id. The agent then made the kickback payment by depositing cash into an Iraqi-controlled account in Jordan.

Similarly, Flowserve’s Dutch subsidiary, Flowserve B.V., entered into one contract involving an ASSF kickback payment of $41,836. Id. The contract was for the supply of water pump spare parts to the Iraqi government-owned South Gas Company. Id. In August 2001, Flowserve B.V.’s officers met with Flowserve B.V.’s agent and were advised that the agent would have to pay a ten percent kickback on the transaction on Flowserve B.V.’s behalf, for which the agent would need reimbursement. Id. Flowserve B.V.’s controller chose to conceal the payment by increasing the cost of the purchase order by ten percent and passing the difference back to the agent. Id. In September 2001, Flowserve B.V. agreed to pay a supplemental commission – euphemistically labeled a "special project discount" – to the agent to cover the amount of the kickback. Id. Upon receiving its supplemental commission payment, the agent paid the ten percent kickback to the South Gas Company on Flowserve B.V.’s behalf. Id.

Supposedly, Flowserve either knew or was reckless in not knowing that illicit payments were either offered or paid in connection with these transactions. Id. Flowserve failed to maintain an adequate system of internal controls to detect and prevent the payments. Id. Moreover, Flowserve’s accounting for these transactions failed to properly record the nature of the company’s payments. Id. Flowserve’s books falsely characterized the ASSF payments either as payments for services actually performed or as agent commissions. Id.

Based on the conduct described above, Flowserve, without admitting or denying the allegations in the Commission’s complaint, consented to the entry of a final judgment permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Additionally, Flowserve agreed to disgorge $2,720,861 in profits, plus $853,364 in prejudgment interest, and to pay a civil penalty of $3,000,000. Id.

On the criminal side, Flowserve agreed to pay a $4,000,000 fine pursuant to a deferred prosecution agreement with the Justice Department. United States v. Flowserve Corp., DOJ Press Release 08-132 (Feb. 21, 2008).

AB Volvo and Two Subsidiaries Charged with OFFP-Related Violations

On March 21, 2008, AB Volvo, a Swedish-based company with American Depository Receipts, agreed to settle OFFP-related charges with the Commission. Simultaneously, AB Volvo entered into a deferred prosecution agreement with the Justice Department to resolve similar charges. Additionally, two of AB Volvo’s subsidiaries, Renault Trucks SAS ("Renault") and Volvo Construction Equipment AB ("VCE"), a successor company to Volvo Construction Equipment International ("VCEI"), were charged with engaging in separate conspiracies to commit wire fraud and to violate the books and records provisions of the FCPA.

The Commission’s complaint alleges that from 1999 through 2003, two of AB Volvo’s subsidiaries and their agents and distributors made approximately $6,206,331 in kickback payments, and authorized additional payments of $2,388,419 in connection with their sales of humanitarian goods to Iraq under the OFFP. SEC v. AB Volvo, No. 08-CV-00473 (D.D.C. filed Mar. 21, 2008), Litigation Release No. 20504 (Mar. 20, 2008).

Allegedly, between November 2000 and July 2001, Renault entered into at least 18 contracts under the OFFP to supply trucks to the Iraqi government. Id. Renault then subcontracted with truck builders to tailor the trucks to the Iraqi ministries’ specifications. Certain of the bribe payments were disguised by having the truck builders add the cost of the ASSF to their costs and submitting the improperly inflated amount to Renault for payment. In reality, however, no bona fide services were provided. Id. The truck builders then passed the payments to Iraq. Id. According to the SEC, AB Volvo’s internal documents discuss the fact that had Renault made the payments in its own name, "we would have been caught red-handed." Id. Allegedly, one builder signed side letters agreeing to the ten percent ASSF on Renault’s behalf, and agreed to send Renault an invoice for the ten percent to provide Renault with the necessary paperwork to cover the illicit payment. Id. Renault made $5,103,941 in purportedly illicit payments and authorized another $1,255,922. Id.

Separately, from October 1999 to July 2000, and prior to the introduction of ASSF, VCEI entered into four contracts under the OFFP in which more than $103,000 in kickbacks were paid to Iraqi ministries. Id. On two contracts, VCEI internal documents indicate that illegal payments between five percent and 11.27 percent of the contract value were paid. Id. An internal VCEI document discussed the extra trips VCEI staff had to make to Iraq in order to make the payments, and the possibility of having to make more payments. Id. On one contract, VCEI’s internal documents indicate that VCEI gave its Jordanian agent a total of $15,950 as "the commitment to the third party whom [sic] support us and VOLVO to gain orders in the said ministry." Id. Moreover, VCEI’s internal documents show that $19,000 was given to the Jordanian agent to purchase a car for the Ministry of Interior. VCEI did not disclose the payments or the car to the United Nations. Id.

After Iraq began imposing ASSFs, VCEI or its distributors entered into five additional contracts. Id. VCEI employees learned of the demands for ASSF payments when VCEI employees visited Iraq in November 2000. In an internal memorandum discussing the trip, the employees noted that the ASSF demand "appears to be a clear violation of the UN Embargo Rules that we are expected to participate in." Id. In an e-mail, VCEI personnel discussed the need for handling the ASSF payments with "utmost discretion." Id. Allegedly, VCEI inflated the OFFP contract price by ten percent, but did not disclose the ASSF payments. VCEI then purportedly entered into a backdated agency agreement with its Jordanian Agent, who invoiced VCEI for its commission on the sale, including reimbursement of the ASSF payment. Id. Presumably understanding the illicit nature of the ASSF payment, VCEI changed its method of doing business for future contracts in an effort to distance itself from the ASSF payments. Id. To accomplish this goal, VCEI made the Jordanian agent its distributor, which allowed the Jordanian agent to purchase vehicles directly from VCEI, and in turn sell directly under the OFFP at inflated prices. Id. Thus, VCEI was no longer the party named on the U.N. contracts, but rather, the Jordanian agent was the named party. Id. With VCEI’s knowledge, however, the Jordanian agent made ASSF payments on these contracts. Allegedly, VCEI sold its products at a price that ensured the Jordanian agent would have enough "spread" to enable the Jordanian agent to make the ASSF payments. Id. VCEI also used a Tunisian distributor to facilitate additional sales of its products to Iraq, and reduced its prices to the distributor to enable the distributor to make the ASSF payments. Id. In total, VCEI or its distributors authorized more than $2.2 million in ASSF payments. Id.

Based on the conduct described above, Renaultand VCE were charged with conspiracy to commit wire fraud and to violate the books and records provisions of the FCPA. DOJ Press Release 08-220 (Mar. 21, 2008). See also United States v. Volvo Constr. Equip., AB (D.D.C. filed Mar. 21, 2008); United States v. Renault Trucks SAS (D.D.C. filed Mar. 21, 2008). Presumably, the government asserted jurisdiction over Renault and VCE based on Renault’s and VCE’s transmission of wire communications to and from the United States to (i) provide notice to the U.N. that goods had been shipped to, and inspected in, Iraq, and (ii) transmit notice that the U.N. was authorizing payments. Id.

AB Volvo’s settlement with the SEC includes an agreement permanently enjoining AB Volvo from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, disgorgement of $7,299,208 in profits, plus $1,303,441 in pre-judgment interest, and a civil penalty of $4,000,000. SEC Litigation Release No. 20504 (Mar. 20, 2008). Additionally, AB Volvo will pay a criminal fine of $7,000,000 pursuant to a three-year, deferred prosecution agreement with the Justice Department. DOJ Press Release 08-220. The agreements also provide for improved internal compliance programs at AB Volvo and its subsidiaries.

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