Action Item: The Securities and Exchange Commission's enforcement action against Goodyear Tire & Rubber Company and its investigation of Mondelēz International provide key lessons to U.S. companies seeking to acquire foreign entities. To avoid FCPA exposure, companies must conduct comprehensive due diligence before an acquisition's closing to ensure that the target company is fully compliant with the requirements of the FCPA. They must also ensure that firm internal controls are in place to prevent and detect illicit payments by foreign subsidiaries. In the event that misconduct is uncovered after an acquisition has closed, the acquiring company will be well-served by engaging in immediate and significant remediation activities, which may include a voluntary disclosure.
On February 24, 2015, the Securities and Exchange Commission ("SEC") issued an Order (the "Order") settling an administrative proceeding that charged Goodyear Tire & Rubber Company ("Goodyear") with violating the Foreign Corrupt Practices Act (the "FCPA"). The charges resulted from bribes that Goodyear subsidiaries paid in connection with tire sales in Kenya and Angola. Also, in its 2014 annual report to the SEC, Mondelēz International, Inc., (formerly Kraft Foods), elaborated on a previous disclosure that it is the subject of an ongoing FCPA investigation. The investigation, which has been undertaken by the SEC, concerns potential FCPA violations related to the company's acquisition of Cadbury in February 2010.
Both of these enforcement actions underscore the need for U.S. companies seeking to acquire foreign entities to ensure FCPA compliance by conducting comprehensive due diligence prior to the close of an acquisition and by implementing firm internal control measures to detect improper payments. The Goodyear action in particular also highlights how a company's immediate response to allegations of bribery payments is critical to mitigating the potential imposition of monetary penalties.
Goodyear
According to the Order, from 2007 until 2011, Goodyear failed to "prevent or detect" the payment of approximately $3.2 million in bribes to police, city council officials and employees of government-owned entities, and private companies in Kenya and Angola. In Kenya, the Order alleged that bribes were paid through a retail tire distributor acquired by Goodyear in 2006. Illicit payments were apparently a routine part of the tire distributor's business practices prior to the acquisition. The Order further alleged that a wholly-owned subsidiary of Goodyear that was incorporated in 2007 paid bribes in Angola during the relevant time period.
The Order charged that violations of the FCPA occurred because all of the improper bribery payments were falsely recorded as legitimate business expenses in the books and records of the Goodyear subsidiaries. Moreover, Goodyear violated the FCPA because it did not "prevent or detect" these improper payments by implementing adequate FCPA compliance controls.
Notably, the Order provided a detailed reporting of the remedial steps that Goodyear undertook in the immediate aftermath of becoming aware of the alleged FCPA violations. According to the Order, Goodyear "promptly halted" the illicit payments and reported them to the SEC. Goodyear then engaged in significant cooperation with the SEC's investigation by producing documents and reports from its own internal investigation and by responding promptly to requests for information and documents. Moreover, Goodyear divested its ownership interest in the Kenyan tire company and, at the time the Order was issued, was working to divest its Angolan subsidiary. The SEC said Goodyear has disciplined certain employees, "including executives of its Europe, Middle East and Africa region who had oversight responsibility, for failing to ensure adequate FCPA compliance training and controls were in place at the company's subsidiaries in sub-Saharan Africa."
With respect to Goodyear's compliance program, the Order pointed out that the company had implemented significant improvements. For instance, Goodyear expanded its anti-corruption training in Africa, implemented technology improvements to link subsidiaries in sub-Saharan Africa to its global network, instituted regular internal audits focused on corruption risks, and required each of its subsidiaries to submit quarterly self-assessment questionnaires concerning business with government-affiliated customers. The company further created a new senior position of vice president of compliance and ethics.
Without admitting or denying the SEC's findings, Goodyear settled the SEC's charges by agreeing to pay disgorgement of more than $14 million of the company's profits in Kenya and Angola, plus prejudgment interest of approximately $2 million. Goodyear also agreed to report its FCPA remediation efforts to the SEC for a three-year period. Owing to its prompt disclosure and the remedial measures that the company undertook, the Order stated that a civil fine would not be imposed on the company "based upon its cooperation in a Commission investigation and related enforcement action."
Mondelēz International
In its annual report to the SEC for the fiscal year ending December 31, 2014, Mondelēz International disclosed that after the company acquired Cadbury in February 2010, it began "reviewing and adjusting, as needed, Cadbury's operations in light of applicable standards as well as our policies and practices." The company initially determined that Cadbury's "overall state of compliance was sound"; however, in February 2011, the company received a subpoena from the SEC related to an FCPA investigation into a Cadbury facility in India. According to Mondelēz International's annual report, the subpoena "primarily requests information regarding dealings with Indian governmental agencies and officials to obtain approvals related to the operation of that facility." The company further disclosed that it was engaging in meetings with the U.S. government to discuss a resolution of the investigation.
Key Takeaways from the Goodyear and Mondelēz International Enforcement Actions
For U.S. companies seeking to acquire foreign entities, the recently resolved enforcement action against Goodyear and the ongoing investigation into Mondelēz International's acquisition of Cadbury offer a number of important lessons.
- Comprehensive due diligence is critical to minimizing FCPA exposure for companies seeking to acquire foreign entities. U.S. companies seeking to acquire foreign entities face many potential risks as epitomized by the SEC's investigation into the Cadbury facility in India and Goodyear's purported failure to uncover its Kenyan tire distributor's practice of making bribery payments. However, such risks can be avoided, or at least minimized, by conducting comprehensive due diligence in advance of an acquisition. This level of due diligence includes, but is not limited to, conducting thorough risk-based FCPA and anti-corruption analysis and conducting an FCPA-specific audit of the acquired entity as quickly as practicable.
- Companies can be held liable for failing to "prevent and detect" FCPA violations through internal controls even though such a standard is not expressly provided for under the FCPA statute. Section 13(b)(2)(B) of the Securities Exchange Act of 1934 requires public companies to maintain a system of internal accounting controls sufficient to provide "reasonable assurances" that financial statements are accurate. The SEC's enforcement action against Goodyear serves as notice to public companies seeking to acquire international entities that the SEC views this standard as requiring companies to implement internal controls sufficient to prevent and detect illicit payments. The Order does not elaborate upon what precise level of controls is acceptable; however, the U.S. Department of Justice's Resource Guide to the U.S. Foreign Corrupt Practices Act offers some useful insight into this issue. Specifically, the Guide explains that reasonable internal controls should include, among other things, risk assessments and activities that cover policies and procedures designed to ensure that management directives are carried out.
- If FCPA violations are found to have occurred post-acquisition, an acquiring company may mitigate the potential penalty that will be imposed by undertaking prompt and thorough remedial action. As the Order explained, Goodyear successfully avoided the imposition of a civil penalty due to its cooperation with the SEC's investigation and extensive remediation efforts. The SEC's decision to refrain from imposing a civil penalty sends a clear message to companies who have become aware of potential FCPA violations occurring post-acquisition that they will receive a significant benefit if they undertake aggressive remediation activities and disclose their findings to the SEC.
Conclusion
The enforcement actions against Goodyear and Mondelēz International serve as a reminder to U.S. companies seeking to acquire foreign entities of the need to conduct comprehensive anti-corruption due diligence prior to the close of an acquisition. The actions further demonstrate the need for implementing firm internal control measures post-acquisition to detect improper payments. As demonstrated by the Goodyear settlement, such measures will likely have a substantial impact on the level of monetary penalties that may be imposed in the event that the company discovers improper payments made post-acquisition.
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