After a relative lull in Foreign Corrupt Practices Act ("FCPA") dispositions, the Securities and Exchange Commission ("SEC") announced on April 17, a settlement with Tyco International Ltd. ("Tyco") that resolved FCPA charges and accounting fraud violations arising from activities undertaken during Dennis Kozlowski's tenure as CEO of the company from 1996-2002. Pursuant to the settlement, Tyco, without admitting or denying allegations in the SEC complaint, consented to the entry of a final judgment permanently enjoining it from violating certain provisions of the securities laws, including the FCPA, and agreed to pay a $50 million civil penalty and $1 disgorgement.
With respect to the non-FCPA charges, the SEC complaint alleged that during the Kozlowski era, Tyco utilized improper accounting practices and overstated its financial reports by at least one billion dollars. The FCPA antibribery and recordkeeping charges related to Tyco affiliates' activities in Brazil and South Korea. According to the SEC complaint, after acquiring a Brazilian engineering company -- which Tyco renamed Earth Tech Brasil Ltda. ("Earth Tech") -- in 1998, employees in Brazil, with the knowledge and participation of Earth Tech executives in its corporate office in California, paid money and provided entertainment to various Brazilian officials for the purpose of obtaining business relating to the construction and operation of municipal waste and wastewater treatment systems. The SEC noted that approximately 60% of Earth Tech's total contracts in Brazil involved payments to government officials. Earth Tech also allegedly retained lobbyists to make payments to officials. Earth Tech reportedly disguised the payments using false invoices from companies owned by Earth Tech employees and inflated invoices submitted by the lobbyists. With respect to the activities of Tyco's affiliate in South Korea, Dong Bang Industrial Co. Ltd. ("Dong Bang"), acquired by Tyco in 1999, reportedly made cash payments and provided entertainment to various South Korean officials to obtain contracts on government-controlled projects. The complaint referred to Dong Bang's former president spending $32,000 on entertaining officials in 2001. Allegedly, the payments were facilitated by creating fictitious employees on Dong Bang's books. The complaint stated that payroll disbursements to the fictitious employees were diverted to Dong Bang executives to make cash payments and to entertain South Korean officials.
As with similar enforcement actions, including ABB, Titan, Syncor, and GE-Invision, the Tyco matter highlights the potential FCPA compliance risks related to mergers and acquisitions. With respect to the acquisition of Earth Tech and Dong Bang, the SEC complaint noted that Tyco acquired the companies "notwithstanding that due diligence for the acquisition[s] revealed that illicit payments to government officials were common" in Brazil and South Korea. According to the complaint, employees at Earth Tech and Dong Bang did not receive adequate post-merger instruction regarding compliance with the FCPA. In addition, the SEC alleged that Tyco did not have a "uniform, company-wide FCPA compliance program in place or a system of internal controls sufficient to detect and prevent FCPA misconduct at its globally dispersed business unit."
In the press release announcing the settlement, the SEC noted that the penalty amount was reviewed and approved by the Commission in light of the considerations set forth in the "Statement of the Securities and Exchange Commission Concerning Financial Penalties." The Statement, issued on January 4, 2006 by a unanimous Commission, highlights not only cooperation and remediation as factors for assessing whether to fine companies, but also focuses on the possible effects of large fines on shareholders. As evident from the press release, the high fine assessed against Tyco likely stems from the billion dollar accounting fraud, with the FCPA violations only a contributing factor. Significantly, the settlement did not require Tyco to retain an independent compliance monitor to review its FCPA program and make recommendations. The SEC had required companies to retain such monitors in most of the FCPA settlements in 2004 and 2005. This likely also reflects the limited role of the FCPA in the enforcement action, as well as the large-scale overhaul Tyco has undertaken of its compliance systems since the Kozlowski era ended.
In addition to underscoring the dangers in acquiring companies that present a risk of future FCPA violations and the challenges in imposing an effective compliance program on newly-acquired independent operating companies, Tyco reflects the government's continuing focus on entertainment and hospitality and the risk of vicarious liability for the acts of third parties. Although this is one of the first FCPA cases resolved under the SEC's new guidelines on financial penalties, the mix of FCPA and non-FCPA violations complicates the task of extracting insights on how the guidelines may affect the resolution of future FCPA cases.
Other Recent Dispositions. The Tyco settlement follows recent DOJ activity involving foreign bribery. On March 21, Richard Novak pleaded guilty to conspiracy and violating the FCPA for payments to Liberian diplomats to obtain "accreditations" from Liberia's Board of Education for use in the selling of fake diplomas. Mr. Novak has yet to be sentenced. On March 24, the DOJ announced that an employee of a government contractor working in Iraq had been arrested in the United States and charged with offering to bribe an Iraqi police official in violation of the FCPA. Also in connection with activity in Iraq, the DOJ has successfully prosecuted domestic bribery cases relating to the award of construction contracts. Court documents unsealed on April 18, reveal that Philip H. Bloom pleaded guilty to charges of domestic bribery, conspiracy, and money laundering conspiracy for providing Robert J. Stein, a former U.S. official with the Coalition Provisional Authority, and other U.S. officials with more than $2 million in bribes and gifts in exchange for Iraqi construction contracts worth $8.6 million. In January, Mr. Stein pleaded guilty to conspiracy, bribery, money laundering conspiracy and weapon charges in connection with his role in the scheme.
With dozens of ongoing FCPA investigations at the SEC and DOJ, the Tyco settlement, Novak plea, and prosecutions for bribery in Iraq could signal the beginning of an active summer for FCPA enforcement actions.
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