FCPA regulation is an evolving landscape, fortunately, case studies provide us with a window into the inner workings and past precedents of mergers and acquisitions. Each case study we dive into was based on an important ruling or outcome in different scenarios.
FCPA Case Studies and Examples
Good or bad, any actions we take will have consequences. For instance, if you choose to buy a used vehicle, you should test drive it, have a mechanic look it over, and ask a lot of questions. If you hand cash over to the previous owner without completing these steps, then any issues that arise become your problem. However, if you do a bit of due diligence, and something is not properly disclosed, you may have a case against the individual or dealership you purchased the vehicle from.
In situations involving mergers and acquisitions (M&A), a purchasing company must complete extensive due diligence to protect itself from potential FCPA compliance violations. But, when due diligence is a short-cut, or any potential issues are found but not disclosed in the process, the DOJ is not likely to look the other way.
In this part of my FCPA Compliance in Mergers & Acquisitions series, we’ll be looking at a few of the noteworthy cases that have occurred over the past two decades.
FCPA Case Study #1 Syncor International Corporation
In 2002, allegations of misconduct were made when Cardinal Health, Inc. acquired Syncor International Corporation (Syncor), a radiopharmaceutical company based in California. Between 1997 and 2002, Syncor’s wholly-owned Taiwanese subsidiary made improper commission payments totaling $344,000 to physicians who were employed by state-owned hospitals, to influence the doctors’ decision to buy Syncor products and services. Another $600,000 in corrupt payments was made through Syncor’s foreign subsidiaries in Mexico, Belgium, Luxembourg, and France. All payments were authorized by and with the knowledge and approval of Syncor’s Founder and Chairman.
Pleading guilty to substantive violations of the FCPA’s anti-bribery and books and records provisions, Syncor Taiwan Inc., faced severe penalties. The company was sentenced to three years of supervised probation and ordered to pay a $2 million fine. The company also agreed to pay a $500,000 civil penalty and to cease and desist in future violations and was required to retain an independent consultant to review and make recommendations concerning the company’s compliance policies and procedures. At the time, it was the largest penalty ever obtained by the Securities and Exchange Commission (SEC) in an FCPA case.
This case was the first time the DOJ charged a foreign company under the 1998 amendments, for acts taking place in the US (i.e., Chairman’s approval). Parent liability was established through the foreign subsidiary’s books and records and employees of a state-owned entity are instrumentalities of the government. The acquisition by Cardinal Health could not be completed while the case was being investigated and was further delayed until agreements were made with the government authorities. In the end, Cardinal Health was able to purchase Syncor for a lower price than originally negotiated.
FCPA Case Study #2 Titan Corporation
While the transaction was never completed, another noteworthy case involved the proposed acquisition of Titan Corporation (Titan) by Lockheed Martin Corporation (LMT). In 2005, it was alleged that Titan employed a consultant and paid $3.5 million to a known business advisor of the President of Benin. Of the $3.5 million paid to the advisor, approximately $2 million were indirect contributions to the President’s re-election campaign. At the direction of a Titan senior officer, at least two payments of $500,000 each were wired from Titan’s bank account in San Diego, California, to the agent’s account in Monaco. The remaining payments were made to the agent in cash. Payments were characterized on Titan’s books and records as “social program payments” that were required by its contract with the government, the company also falsified documents to enable its agents to under-report local commission payments in Nepal, Bangladesh, and Sri Lanka. Finally, Titan falsely reported to the US government commission payments on equipment exported to Sri Lanka, France, and Japan.
Titan pled guilty to substantive violations of the FCPA’s anti-bribery and books and records provisions, as well as a tax violation, and faced substantial penalties including three years of supervised probation and a $13 million fine. Additional allegations by the SEC for violating the FCPA’s anti-bribery and books and records provisions resulted in Titan agreeing to pay the SEC an additional $15.5 million in disgorgement and prejudgment interest penalties and a $13 million penalty, which was satisfied by payment of the criminal fines. Titan was required to retain an independent consultant to review its compliance procedures and adopt its recommendations. Finally, the SEC issued a 21(a) Report criticizing Titan’s proxy statement for incorporating what it deemed false FCPA representations and warranties. Most importantly for Titan, its acquisition by LMT ultimately failed.
An important key takeaway from this case is that a few of the basic tenets of a compliance program were laid out in this enforcement action. They included: a company must conduct meaningful due diligence with respect to foreign agents and consultants and must ensure that the services alleged to be performed are provided. Internal controls must be designed to detect “red flags,” such as offshore payments and inconsistent invoices. From the M&A perspective, representations and warranties in a merger agreement must be accurate (or qualified) when included in a proxy statement. There can be a risk of additional prosecution under the International Traffic in Arms Regulations (ITAR) and possible suspension of export privileges, potential US and foreign tax exposure, and possible contractor debarment issues by the Department of Defense.
Ultimately, and most importantly from the business perspective, the merger failed when Titan was unable to meet the contractual agreement to settle with the US government by a certain time.
FCPA Case Study #3 Latin Node Inc.
In June 2007, eLandia International, Inc. (eLandia) acquired Latin Node Inc. (Latin Node), which provided wholesale telecommunications services to several developing countries by leasing lines from local phone companies in Latin America for $20 million. Allegedly, in August 2007, during a post-acquisition financial integration review, eLandia discovered evidence that Latin Node had paid approximately $2.25 million in bribes to Honduran and Yemeni government officials between March 2004 and June 2007. Subsequently, eLandia voluntarily reported the payments to DOJ, eventually paying a $2 million fine and placing Latin Node into bankruptcy and thereby losing its entire investment.
Latin Node pled guilty to a one-count criminal information as part of a plea agreement with the government. Under the agreement, Latin Node agreed to pay a $2 million criminal fine, a special assessment, and agreed to continue its cooperation with the government. Four Latin Node executives, including the former CEO, CFO, a vice president, and the Chief Commercial Officer pled guilty and were charged with criminal conduct for their actions.
This was the first FCPA enforcement action based entirely on pre-acquisition conduct that was unknown to the buyer when the transaction closed. The purchaser’s entire $22+ million investment in Latin Node was wiped out due to inflated acquisition price of the corrupt company and investigation costs. All of this demonstrated the need for rigorous pre-acquisition due diligence in addition to post-acquisition integration. It also exposed individuals to the real possibility of jail time for their actions.
These three cases set the model for the DOJ’s prosecution going forward and indicate how well-settled FCPA enforcement is around M&A. An acquiring company can face the brunt of any prosecution if they do not complete thorough pre-acquisition due diligence and bribery and corruption continue after the entity is acquired.
FCPA Case #4 Data Systems & Solutions LLC
In 2012, it was alleged that Data Systems & Solutions LLC (DS&S), a company based in Reston, Va., that provides design, installation, maintenance, and other services at nuclear and fossil fuel power plants, paid bribes to officials employed by the Ignalina Nuclear Power Plant, a state-owned nuclear power plant in Lithuania, to secure contracts to perform services for the plant. To disguise the scheme, the bribes were funneled through several subcontractors located in the United States and abroad. The subcontractors, in turn, made repeated payments to high-level officials at Ignalina via check or wire transfer.
The DOJ filed a deferred prosecution agreement with DS&S in which the department agreed to defer prosecution of DS&S for two years. In addition to paying a substantial monetary penalty of $8.82 million to resolve violations of the FCPA, DS&S agreed to cooperate with the department, to report periodically to the department concerning DS&S’s compliance efforts, and to continue to implement an enhanced compliance program and internal controls designed to prevent and detect FCPA violations. If DS&S successfully abided by the terms of the deferred prosecution agreement, the department agreed to dismiss the criminal information when the agreement’s term expired.
The agreement acknowledges DS&S’s extraordinary cooperation, including conducting an extensive, thorough, and swift internal investigation; providing to the department extensive information and evidence; and responding promptly and fully to the department’s requests. In addition, DS&S has engaged in extensive remediation, including terminating the officers and employees responsible for the corrupt payments; instituting a more rigorous compliance program; enhancing its due diligence protocol for third-party agents and subcontractors; strengthening its ethics policies; providing FCPA training for all agents and subcontractors; and establishing a heightened review of most foreign transactions.
The DS&S case set a new standard for enforcement actions to include language that the acquiring company takes the required steps “as quickly as practicable,” in contrast to the stricter deadlines set in the Halliburton situation.
FCPA Case Impact Summary:
Each of these cases has in some way impacted today’s FCPA guidelines. Referring to these and the other hundreds of cases filed since 1977 will give organizations a clear picture of what can happen if they don’t complete thorough due diligence or try to hide any potential violations from government authorities.
In other words, what you don’t know can at times hurt you, but as you have seen above, the risk of pain significantly increases when you do know but don’t take steps to fix the inherited problems.
Syncor, Titan, Latin Node - https://www.jdsupra.com/legalnews/how-did-we-get-here-early-m-a-cases-29805/
Data Systems & Solutions - https://www.justice.gov/criminal-fraud/case/united-states-v-data-systems-solutions-llc-court-docket-number-12-cr-262-lo
The Foreign Corrupt Practices Act (FCPA), enacted in 1977, generally prohibits the payment of bribes to foreign officials to assist in obtaining or retaining business. The FCPA can apply to prohibited conduct anywhere in the world and extends to publicly traded companies and their officers, directors, employees, stockholders, and agents. Agents can include third-party agents, consultants, distributors, joint-venture partners, and others.
The FCPA also requires issuers to maintain accurate books and records and have a system of internal controls sufficient to, among other things, provide reasonable assurances that transactions are executed, and assets are accessed and accounted for in accordance with management's authorization.
The sanctions for FCPA violations can be significant. The SEC may bring civil enforcement actions against issuers and their officers, directors, employees, stockholders, and agents for violations of the anti-bribery or accounting provisions of the FCPA. Companies and individuals that have committed violations of the FCPA may have to disgorge their ill-gotten gains plus pay prejudgment interest and substantial civil penalties. Companies may also be subject to oversight by an independent consultant.
The SEC and the Department of Justice are jointly responsible for enforcing the FCPA. The SEC's Enforcement Division has created a specialized unit to further enhance its enforcement of the FCPA.
