United States: Alstom's FCPA Guilty Plea And Fine Of $772 Million Offer Compelling Lessons

Behind the Headlines

The December 23, 2014, announcement by the U.S. Department of Justice (DOJ) that Alstom, S.A., a French power and transportation company, pled guilty to two Foreign Corrupt Practices Act (FCPA) charges and agreed to pay $772 million in fines generated headlines for the record-breaking size of the fine and scope of Alstom's scheme to pay bribes to officials in several countries, including the Middle East, Asia, and the Caribbean. Choices made by the prosecution team provide powerful instruction on what the DOJ expects public companies to do to prevent and detect FCPA violations and, emphatically, what not to do regarding their obligations when it comes to books and records and accounting controls. The prosecution illustrates that merely having FCPA policies and due diligence protocols — without effective enforcement — not only is insufficient protection, but may actually be used as evidence against the company.

Summary of the DOJ's Charges

The DOJ alleged widespread payoffs, reliance on consultants as conduits to pay bribes, and an extensive, behind-the-scenes cover-up at Alstom. The Deputy Attorney General characterized the decade-long scheme as "astounding in its breadth, its brazenness and its worldwide consequences": more than $75 million paid for $4 billion in projects that generated a profit of approximately $300 million. Yet the multinational conglomerate did not plead guilty to the anti-bribery provision of the FCPA statute. Rather, under the plea agreement, Alstom pled guilty to two counts of violating the FCPA's accounting controls provisions: falsifying the company's books and records, and failing to implement adequate internal controls.

Separately, Alstom's Swiss subsidiary pled guilty to conspiracy to violate the anti-bribery provisions of the FCPA, and two U.S. subsidiaries entered into deferred prosecution agreements (in which they acknowledged they had conspired to violate the anti-bribery provisions of the FCPA). In addition, three company executives pled guilty to FCPA charges, a member of the Indonesian parliament was convicted of accepting bribes from Alstom, and one Alstom executive awaits trial.

Use of Consultants to Pay Bribes

At the heart of the scheme's modus operandi, as Alstom acknowledged in the 41-page statement of facts, was the company and its subsidiaries' extensive use of "consultants" to help win public projects. Alston conceded, however, that the consultants' primary purpose was not to provide legitimate services for bidding on and executing projects, but to bribe government officials to obtain power and transportation contracts from state-owned agencies and related businesses.

For example, consultants were retained in Indonesia to pay bribes to a member of Parliament and to an executive at the state-owned electricity company agency that was awarding the contract. Similar arrangements with consultants retained to influence foreign officials in awarding public contracts, through bribe payments, were allegedly carried out in Saudi Arabia (as part of a joint venture), Egypt, Taiwan, and the Bahamas. The bribe payments came in the usual flavors, such as gifts and cash, as well as hiring family members and contributing to a charity associated with a foreign official — in this case, more than $2 million.

Use of Company Books and Records to Further the Bribery Scheme

Particularly noteworthy and cautionary were the false record entries and ineffective accounting controls that the plea agreement identified. To prevent detection, employees instructed others to create false invoices and supporting documentation to reflect legitimate services. Euphemistic record entries for bribe payments were viewed as criminal mischaracterizations and evidence of concealment. For example, bribe payments were entered into company books as "commissions" or "consultancy fees," and consultancy agreements with provisions prohibiting unlawful payments were acknowledged to be instruments of concealment.

As part of its guilty plea, Alstom admitted that it knowingly and falsely had recorded the bribes in company books and records by calling them "donations," "consultation" expenses, and other legitimate expenses in its books. Alstom also made false statements outside of its internal records by falsely certifying to regulators that it had not used consultants on particular projects or made unlawful payments in connection with the projects.

"Red Flags" and Disregarded Internal Policies

In addition to books and records issues, examples of suspicious conduct were disregarded, notwithstanding Alstom's own internal policies prohibiting unlawful payments to foreign officials, including through consultants. The "red flags" identified in the Alstom plea agreement present all-too-common risks for many companies that rely on third-party representatives to assist in their operations abroad. In this case, the consultants:

  • Had no prior experience or expertise in the relevant industry for the project
  • Resided in countries different from where the project was located
  • Requested payment in a currency or bank account outside of where they or the project was located
  • Requested front-loaded payments (in this case, such payments were in violation of company internal policies as well as the original terms of the contract)

In several examples, Alstom hired multiple consultants on the same project, presumably to perform the identical services. Companies subject to FCPA jurisdiction would be well advised to be on the lookout for red flags involving consultants.

In this case, the DOJ took aim not at the company's policies, but at its enforcement — or, in the DOJ's view, the lack thereof. Indeed, the DOJ characterized the violation of the company's own policies as evidence of criminal activity. Due diligence failures were viewed as the handiwork of enabling supervising managers: "executives who had the ability to ensure appropriate controls surrounding the due diligence process themselves knew, or knowingly failed to take action that would have allowed them to discover that the purpose of hiring the consultant was to conceal payments to foreign officials" in order to win public projects and other benefits.

Factors Affecting the Terms of the Plea Agreement, Including the Amount of the Fine

The penalty of $772 million payable to the DOJ is the largest in an FCPA case, and is second only to Siemens's total of $800 million, which included a $350 million payment to the SEC. In this case, the DOJ identified a host of aggravating factors that contributed to its insistence on this enormous fine: Alstom's failure to voluntarily disclose the conduct even though it was aware of related misconduct by a U.S. subsidiary; its initial failure to cooperate, which was viewed as impeding the DOJ's investigation of individuals, and subsequent cooperation only after several company executives and employees had been publicly charged; the sophistication, duration, and scope of the FCPA scheme (covering bribery, books and records and accounting controls provisions), spanning several countries and business lines; prior similar criminal misconduct of its subsidiaries; and, perhaps most significant here, an ineffective compliance program.

Lessons for the Future

Painfully clear are the harsh criminal, civil, financial, and reputational consequences that can wreak havoc on companies and, increasingly, individual executives when even explicit and well-intended compliance policies are circumvented and controls are lax or nonexistent. Carefully identifying and evaluating compliance risks — including looking at how and where business operations are conducted — are first steps in assessing the effectiveness of existing company policies. Taking reasonable measures to ensure that the policies are being enforced and are, in fact, effective requires reviewing and then testing existing due diligence protocols for consultants and agents, transactional parties, and business partners. Appropriate risk-based modifications should then be implemented and also tested repeatedly. Doing these things should go a long way to help protect companies, their executives and employees, and company assets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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