United States: Settlements In Brief: Cases Show Need For Independent Auditor And Highlight FCPA's Long Arm

Criminal and supervisory authorities regularly settle enforcement actions. In light of these developments, companies are advised to take appropriate measures. This month we highlight recent settlements with three companies in the US. For the first time, the Securities Exchange Commission took enforcement action against an accountancy firm, Ernst & Young, in connection with auditor independence failures due to close personal relationships. Another settlement involved hedge-fund Och-Ziff, which was alleged to have bribed government officials in several African countries. It was the fourth biggest settlement under the U.S. Foreign Corrupt Practices Act: USD 412 million. The last settlement, with GSK, stemmed from charges that the company had violated the FCPA by allegedly making irregular payments to health care professionals in China.

In September 2016, the SEC announced that the public accounting firm EY had agreed to settle charges related to the fact that two of its audit partners had developed a too close personal relationship with audit clients. The Director of the SEC Enforcement Division stated, "Ernst & Young did not do enough to detect or prevent these partners from getting too close to their clients and compromising their roles as independent auditors." Neither EY nor the individuals involved admitted or denied the findings of the SEC.

The first set of charges concerned a senior audit partner who developed an improperly close friendship with the client's CFO.  Although certain EY partners, for example, became aware of the partner's excessive entertainment expenses, the company did not take any measures to investigate the nature of the expenses. The accounting firm agreed to settle for an amount of USD 4.975 million. The partner himself had to pay USD 45,000 and received a suspension for three years.

The second incident of an improper relationship by an EY partner, according to the SEC, involved the romantic relationship between an audit partner and the audit client's Chief Accounting Officer (CAO). This violation of auditor independence worsened according to the SEC, when the supervising partner did not act on signs of an improper relationship. EY agreed to a settlement amount of USD 4.366 million. The romantically involved individuals each agreed to pay USD 25,000, and the CAO was suspended for one year. The EY auditing partner was also suspended, for three years.

Och-Ziff: FCPA enforcement by DoJ and SEC

The SEC has set an enforcement record by entering into a recent settlement with New York-based hedge fund Och-Ziff Capital Management Group LLC. The SEC announced the settlement on 29 September 2016 and it became the SEC's 19th FCPA enforcement action this year, rivalling the total number of enforcement actions in 2007. The USD 412 million settlement is also the fourth biggest FCPA enforcement action ever, and includes both civil and criminal charges. Och-Ziff paid USD 199 million in disgorgements to the SEC, and USD 213 million to the DoJ as part of a deferred prosecution agreement.

Och-Ziff was charged with several counts of bribery to secure deals, including investments and mining contracts, in several African countries. The alleged bribes included improper transactions with members of the Gadhafi regime in Libya and officials representing Mugabe in Zimbabwe. In Libya for example, Och-Ziff employees were allegedly aware that fees paid to their agent would be used for bribes. On other counts, funds transferred to Och-Ziff's South-African partner were allegedly used for bribes, for illicit payments to middlemen, for the personal benefit of business partners, and for expenditures unrelated to the business.

According to the SEC order:

  • Och-Ziff did not impose sufficient measures to prevent corruption, despite being aware of high-corruption risks.
  • The company was aware of the close connections between its business partners and government officials.
  • Och-Ziff failed to conduct proper due diligence in transactions with its government-affiliated business partners. Instead of acting cautiously, the company chose partners on the basis of these close connections.
  • Due to insufficient controls, Och-Ziff continued to allow its business partners to develop improper relationships with government officials.
  • The company was allegedly aware of high-corruption risks, but did not do anything to prevent the corrupt or criminal activity of its partners.

Och-Ziff was charged with violating the books and records and internal controls provisions of the FCPA. According to the authorities, Och-Ziff's CEO also gave his personal approval to transactions with business partners in the Democratic Republic of the Congo (DRC) in which country bribes were allegedly paid. The CEO received a report on the business partner in the DRC. In this report, the Och-Ziff attorney discouraged doing any further business due to the significant corruption risk. The CEO instructed his team to move forward on potential transactions with the DRC Partner unless new information was uncovered. In the settlement, the CEO was charged with recordkeeping violations and was ordered to pay nearly USD 2.2 million, of which USD 1.9 million constituted disgorgements.

According to the SEC order, both the SFO and the CEO "were aware of the high risk of corruption in transactions with Och-Ziff's DRC partner in light of his reputation and connections to high level DRC government officials." Although the risks could have been calculated and they both had no knowledge of the alleged bribes, both individuals had approved and authorised these transactions. The CFO has been charged with violating FCPA books and record provisions. His settlement agreement has yet to be finalised.

The SEC stated that "senior executives cannot turn a blind eye to the acts of their employees or agents when they become aware of suspicious transactions with high-risk partners in foreign countries." The SEC stressed that "firms will be held accountable for their misconduct no matter how they might structure complex transactions or attempt to insulate themselves from the conduct of their employees or agents."

GSK:  bribery by subsidiaries in China

The SEC announced on 30 September 2016 that it had settled with the UK-based pharmaceuticals company, GSK. The settlement relates to charges that the company violated the FCPA by allegedly engaging in the widespread bribery of health care professionals in China. GSK agreed to pay USD 20 million to settle the charges, without admitting or denying the findings.

According to the SEC order, between 2010 and 2013, GSK's subsidiary and a joint venture partially owned by GSK and based in China, engaged in widespread illegal transactions in valuables with health care professionals in order to boost the sale of pharmaceutical products. These valuables consisted of gifts, improper travel and cash. This was partially facilitated by the use of third party vendors, such as travel agents. Investigations revealed that 44% of the invoices under investigation were inflated, and that 12% of the invoices concerned events that never occurred. Another mechanism used for bribery was a marketing programme intended to supply health clinics with proper equipment. This programme was, however, used to cover for the supply of high-tech electronics, such as laptops, to health care professionals for personal use.

During this period, local auditing allegedly revealed irregularities and defects in the controls mechanisms, including false bank statements and invoices, and poor compliance training. Additionally, corrupt conduct was fostered by compensating sales agents based mainly on commission. This provided an incentive to illegally inflate sales figures. These issues, however, were not regarded as systematic violations, but as isolated incidents.

The SEC took the following mitigating aspects into consideration:

  • GSK cooperated in a timely manner with the investigation and reported on its own internal investigation.
  • GSK made global changes to its business, such as changing the compensation structure for sales agents.
  • GSK put an end to most payments made to doctors.
  • GSK enhanced its compliance programme and strengthened its monitoring tools.

As part of the settlement, GSK committed to periodically report to the SEC, and describe its efforts to comply with anti-corruption regulation.

This settlement follows prosecution by the Chinese government in 2014, when GSK was convicted for bribery. The resulting penalty amounted to a USD 400 million fine. This settlement shows that enforcement by local government does not preclude further prosecution under the FCPA.

These recent cases highlight the extensive extra-territorial scope of the FCPA. An important aspect is the monitoring of compliance by subsidiaries abroad.

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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