This week we are exploring the recent Securities and Exchange Commission (SEC) Cease and Desist Order (Order) entered into last week with WPP plc, the world’s largest advertising group, for paying bribes to Indian government officials and participating in other “illicit schemes” in China, Brazil and Peru. WPP agreed to pay $11 million+ in disgorgement and interest and penalty of $8 million for a total amount of just over $19 million. Today we consider the bribery schemes involved in some detail.
M&A
WPP’s road to Foreign Corrupt Practices Act (FCPA) ruin began with an ambitious expansion program in the past decade. To grow the firm, WPP bought extensively across the globe. As stated in the Order, “Following this growth strategy, WPP operated in 112 countries and employed approximately 100,000 people over 3,000 locations during the relevant period. WPP sourced 86% of its revenue from 10 companies and 88% of its revenue was from operations in 20 countries.” It is clear from some of the acquisitions reported in the Order, WPP did not dig very deeply into their targets.
It is clear that the persons who sold their agencies to WPP certainly did not have compliance in the front, back or anywhere else in their minds. In China, the agency purchased engaged in tax evasion so egregious that WPP was informed by a whistleblower that “China Subsidiary management could face criminal charges for its tax avoidance schemes.” In India, where “approximately half of India Subsidiary’s revenue was attributable to the Indian States of Telangana and Andhra Pradesh’s Departments of Information and Public Relations (“DIPR”), which were responsible for retaining media agencies to conduct advertising and public relations campaigns for their respective state governments”; the acquired unit was engaging in bribery and corruption almost immediately after acquisition.
Not simply best practices but any compliance practices mandate both pre-acquisition investigation and due diligence AND post-acquisition integration, training and full forensic audit. Does it sound like any of these were done by WPP? If such steps were taken, they are not outlined in the Order.
But there was another key issue identified in the Order which also contributed to the WPP bribery and corruption. It is a feature of many M&A transactions where the seller is kept on to run the new unit or stays in management of it, a so-called ‘earn-out provision’. This turned into a perverse incentive. As stated in the Order, “WPP often structured these acquisitions to include an earn-out provision. Under these earn-out provisions, the parties agreed to defer a portion of the purchasing price until the agency’s founder met future financial goals. In some cases, WPP agreed that the agency’s founder would continue as the Chief Executive Officer of the WPP controlled entity (hereinafter Founder-in-Control or “FIC” entities). WPP placed the FIC entities within a WPP Network and consolidated the FIC entities’ financial statements into WPP’s financial statements.”
There is nothing inherently wrong with an earn-out provision going forward as part of an acquisition, just as there is nothing inherently wrong with sales incentives, but when you couple suboptimal M&A compliance processes, with lack luster internal controls and no corporate compliance function, the recipe for compliance violations is self-evident. This is yet another demonstration on the inter-locking nature of compliance controls. If there is one deficient area, there may not be systemic compliance failure but when there are systemic deficiencies, you see the risks inherent in the entire enterprise.
Whistleblower Reports and Missed or Ignored Red Flags
The bribery schemes may appear to have been rather pedestrian but that is the very heart of the compliance lessons from the WPP FCPA enforcement action. It was the fact they were so blatant that in India there were seven internal whistleblower reports. As stated in the Order, “From July 7, 2015 through September 2, 2017, WPP received seven anonymous complaints alleging – with increasing specificity – two bribery schemes related to India Subsidiary’s work for DIPR. The first scheme involved the use of a third-party agency (“Vendor A”) that India Subsidiary used to purchase media for DIPR to create an off-the-books fund. The second scheme involved India Subsidiary fabricating an entire advertising campaign in order to create an off-the-books fund at a third-party agency (“Vendor B”) that was used to compensate DIPR officials for awarding campaigns to India Subsidiary and for the personal benefit of CEO A.”
Indeed, in India, things were so severe that WPP ordered an audit of the business unit. Yet here, WPP so hamstrung the international accounting firm “ostensibly” hired to investigate the allegations and review India Subsidiary’s processes regarding government contracts and transactions involving government clients, it found “no conclusions related to the bribery allegations.” However, the investigative firm relied on information provided by India business unit Chief Executive Officer (CEO) and Chief Financial Officer (CFO) “did not contact third parties, and ultimately provided a report to WPP, which contained no conclusions related to the bribery allegations.” The investigative firm did find “several red flags regarding Vendor A, such as the India Subsidiary failing to obtain comparative quotes from other vendors or properly vetting Vendor A.” Yet even with this information, “WPP allowed India Subsidiary to continue routing DIPR’s media purchases through Vendor A.”
In China, the story was similar. Here “an internal audit in 2017 determined that China Subsidiary was employing tax avoidance schemes and other significant violations of WPP’s internal accounting controls resulting from” the business unit CEO’s actions. Next a China Subsidiary employee informed WPP “that [the] China Subsidiary was in the midst of a tax audit and China Subsidiary management could face criminal charges for its tax avoidance schemes.” Finally, a WPP China Tax Director was told the CEO was “comb[ing] through a lot of [his] personal social connections,” in an attempt to control the direction of the tax audit. Once again WPP took no steps further to terminate recalcitrant employees or remediate the corruption.
The bottom line was that even though these known and reported corruption risks were present, WPP lacked sufficient internal accounting controls to prevent the corruption. As stated in the Order, “WPP had no compliance department during the relevant period, and it lacked meaningful coordination between its legal and internal audit departments” and management. Even when WPP charged its subsidiary management with remediating deficiencies identified by WPP’s legal and internal audit departments, “neither WPP nor the Networks provided adequate oversight” of the entities to ensure that the entities implemented WPP’s internal accounting controls and compliance policies.