Earlier this week, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announced a Foreign Corrupt Practices Act (FCPA) enforcement action, involving the waste management company, Stericycle, Inc. (Stericycle). According to the Information and Deferred Prosecution Agreement(DPA), Stericycle entered into a three-year DPA. The company was charged with two counts of conspiracy to violate (1) the anti-bribery provision of the FCPA, and (2) the FCPA’s books and records provision. Under the DPA, Stericycle agreed to a criminal penalty of $52.5 million of which the DOJ agreed to credit up to one-third of the criminal penalty against fines the company pays to authorities in Brazil in related proceedings. According to the SEC Cease and Desist Order (Order), Stericycle violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA and agreed to pay approximately $28.2 million in disgorgement and prejudgment interest. The SEC Order also provided for an offset of up to approximately $4.2 million of any disgorgement paid to Brazilian authorities. In today’s post we will consider the bribery schemes.
The Problem
According to the Order, Stericycle got into FCPA hot water when it initially entered the Latin America market in 1997 and then rapidly expanded through the acquisition of many local businesses in Argentina, Brazil, and Mexico. Stericycle operated through wholly-owned subsidiaries in Brazil (“Stericycle Brazil”), Mexico (“Stericycle Mexico”), and Argentina (“Stericycle Argentina”). The prior local business owners continued to run the operations in each country. Each country had an executive team that reported to, among others, a former Stericycle executive responsible for all of Latin America (the “LatAm Executive”). The LatAm Executive reported directly to executives at Stericycle’s corporate headquarters. If all of this sounds familiar to readers of this blog, it was this similar fact pattern which brought the UK company WPP to FCPA grief as well.
Moreover, as the company grew in Latin America through acquisition, it failed to implement even the most basic internal controls for compliance. The Order noted, “the accounting processes and systems remained mostly decentralized with neither uniformity nor proper oversight, resulting in internal control deficiencies.” To top it all off, “Stericycle had no centralized compliance department and failed to implement its FCPA policies or procedures prior to 2016.” Clearly compliance was not something that was of the least interest to the company and it clearly contributed to an overall culture of corruption as a business practice. Finally, the corporate office, in the form of the LatAm Executive, “signed and transmitted numerous sub-certification letters in which they falsely stated that they were not aware of any actual or potential material event in their region, including any actual or alleged violation of any applicable law.”
The Bribery Schemes
The bribe payments were allegedly hidden through the use of code words for bribery. ‘Little pieces of chocolate in Brazil’, ‘IP’ or incentive payments in Argentina and ‘cookies’ in Mexico. In Brazil, the bribes paid were usually a percentage of the contract value, although occasionally it was a simple fixed fee. The DPA noted, “as part of the scheme, Stericycle Brazil employees agreed upon bribe payments in return for receiving payment priority on certain invoices owed under contracts with government agencies; the bribe payments were typically a percentage of the invoice amount owed or a fixed amount. The entire Brazilian business unit was apparently in on the scam as Stericycle Brazil sales employees, who used the cash to make bribe payments to government officials in different regions.” But it was not the BD folks who were running this bribery, as the “Stericycle Brazil finance employees prepared bank orders in the names of the Stericycle Brazil sales employees, who would retrieve the money from the bank and deliver the cash funds—often through an intermediary—to government officials associated with government customers.”
But it did not even stop there. According to the Order, in 2012, “Stericycle Brazil executives formed a sham third-party vendor that purportedly provided accounts receivable collection services to Stericycle Brazil, which were never provided. Rather, the sham third-party vendor issued false invoices that Stericycle Brazil used to support the bribe payments in its books and records. Each month, Stericycle Brazil finance employees estimated the amount of cash withdrawals attributable to the bribe payments. At the end of the month, Stericycle Brazil finance employees requested false invoices from the sham third-party vendor in the amount of the preceding month’s estimated cash withdrawals used for bribes. These invoices for purported debt collection services concealed the true purpose of the payments. The invoiced amounts were recorded in Stericycle’s general ledger, and the cash withdrawals appeared in company bank statements. In 2015, a Stericycle Brazil executive formed two other sham third-party vendors to continue the same scheme.”
To top it all off, all of the above was documented in company books and records. The finance employees “maintained spreadsheets which identified the government customers receiving bribes and the corresponding amount (either a set percentage of revenue or fixed amount), and the Stericycle Brazil employee responsible for retrieving the cash and delivering the bribe payments either directly or through a third-party intermediary. The spreadsheets contained entries, organized by month and region, of both the total amount of bribes paid and the amounts of the fake invoices used to provide cover for cash withdrawals. The Stericycle Brazil finance employees stored these spreadsheets on Stericycle’s servers, and the Stericycle Brazil executives and the LatAm Executive had knowledge of the payments by, among other things, receiving one or more copies of these spreadsheets.”
Just to reiterate, the finance team was preparing fraudulent money orders for employees to cash to create a pot of money to pay a bribe. Additionally, business unit executive themselves created a sham vendor to generate false invoices to also create pots of money to pay bribes, all of which was documented in the company’s books and records. This is not some pedestrian bribery scheme. This is a business unit which has systematized bribery as a business process.
In Mexico, this same basic format was used but with a twist. There was not a sham vendor or vendors. Here the corrupt LatAm Executive formed a joint venture (JV) which the company entered into to form Stericycle Mexico. It was all documented by spreadsheets which “identified invoices from approximately 45 third-party vendors which purported to provide otherwise undocumented consulting and market research services. The spreadsheets linked invoices to payments to government officials, including the name of the customer and calculation of the bribe as a fixed amount or percentage of the customer’s invoice value. Some spreadsheets also detailed the recipient of the bribe and method of delivery (cash versus wire transfer). These spreadsheets were sent to, among others, the LatAm Executive and a Stericycle Mexico executive on Stericycle’s servers.”
In Argentina, the specific method of how the cash was generated to pay the bribes was not report. The DPA noted, the “Argentina Country Management calculated and approved bribe payments, which were typically paid in cash by Stericycle Argentina sales employees. For example, on occasions when a bribe needed to be paid, a Stericycle Argentina sales employee emailed an estimate of the bribe payment, which was typically a percentage of the underlying contract payment. Upon approval of the payment, the Stericycle Argentina sales employee obtained cash from the Stericycle Argentina office in Buenos Aires and subsequently delivered the bribe payment to the foreign official.” These payments were called “alfa” and “alfajores”, a traditional cookie popular in Argentina.
Join us tomorrow where we look at the fallout and then the comeback.
Tag: bribery
The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announced a Foreign Corrupt Practices Act (FCPA) enforcement action. To say that the respondent company, Stericycle, Inc. (Stericycle) had a culture of non-compliance throughout its entire Latin American (LATAM) business unit belies those companies which only have a dysfunctional culture. Stericycle had a culture of corruption burned into the DNA of the LATAM business unit which was so thorough that it was documented via bribery spreadsheets and analysis of revenue based on payments of bribes in LATAM.
Yet even with this corrupt culture, Stericycle also demonstrated how a company can take advantage of the discounts available under the FCPA Corporate Enforcement Policy by extensive cooperation and remediation during the pendency of the FCPA investigation, as the criminal penalty reflects a 25% reduction off the bottom of the applicable US Sentencing Guidelines fine range.
The Stericycle enforcement action also provides insights into how the DOJ will implement the remarks made by Lisa Monaco last October on their new approach to FCPA enforcement. Finally, Stericycle agreed to a two-year corporate monitor under both the DOJ and SEC settlements. In short, there is much to unpack from this enforcement action which I will do so over the next few blog posts.
According to the Information and Deferred Prosecution Agreement (DPA), Stericycle entered into a three-year DPA. Stericycle agreed to a criminal Information, which charged the company with two counts of conspiracy to violate (1) the anti-bribery provision of the FCPA, and (2) the FCPA’s books and records provision. Stericycle agreed to a criminal penalty of $52.5 million. According to the DOJ Press Release, the DOJ agreed to credit up to one-third of the criminal penalty against fines the company pays to authorities in Brazil in related proceedings, including an amount of approximately $9.3 million to resolve investigations by the Controladoria-Geral da União (CGU) and the Advocacia-Geral de União (Attorney General’s Office). According to the SEC Press Release, Stericycle consented to the SEC’s cease-and-desist order that it violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA, and agreed to pay approximately $28.2 million in disgorgement and prejudgment interest. The SEC’s order provides for an offset of up to approximately $4.2 million of any disgorgement paid to Brazilian authorities.
Assistant Attorney General Kenneth A. Polite, Jr. of the Justice Department’s Criminal Division said in the DOJ Press Release, “Stericycle today accepted responsibility for its corrupt business practices in paying millions of dollars in bribes to foreign officials in multiple countries. The company also maintained false books and records to conceal corrupt and improper payments made by its subsidiaries in Brazil, Mexico, and Argentina. Today’s resolution demonstrates the Department of Justice’s continuing commitment to combating corruption and protecting the international marketplace.”
Assistant Director Luis Quesada of the FBI’s Criminal Investigative Division said, “Today’s resolution with Stericycle shows that the FBI and our international law enforcement partners will not allow corruption to permeate domestic or international markets. The consequences of violating the FCPA are clear: Companies that bribe foreign officials for business advantage will be held accountable.” Finally, Eric I. Bustillo, Director of the SEC’s Miami Regional Office, said in the SEC Press Release, “Stericycle rapidly expanded in Latin America without any meaningful oversight or compliance measures, as evidenced by widespread bribery schemes lasting for many years in most of its Latin America operations. Companies in pursuit of global expansion cannot disregard the need for appropriate controls.” Damning words all but they had lessons for the compliance professional from this matter.
As part of the DPA, Stericycle has agreed to continue to cooperate with the department in any ongoing or future criminal investigations relating to this conduct. This could well mean additional criminal charges may be brought against any number of individuals known to the DOJ, as identified in the Information. In Brazil, the following persons, Stericycle LATAM Executives 1 & 2, Stericycle Brazilian Executives 1-3, and Stericycle Argentina Executive 1 were named in the Information. Also interesting was the active assistance of sister anti-corruption enforcement groups in Brazil and Mexico, which were both identified by the DOJ and SEC as helping.
It was also interesting to note that under the DOJ Press Release, it noted that while “Stericycle has taken extensive remedial measures, it has not fully implemented or tested its enhanced compliance program, necessitating the imposition of an independent compliance monitor for a term of two years. Stericycle agreed to continue to enhance its compliance program and to retain an independent compliance monitor for two years, followed by self-reporting to the department for the remainder of the term.”
Regarding the final settlements with the DOJ and SEC; they both agreed to their respective resolutions with Stericycle based on several factors, including, among others, the company’s failure to voluntarily and timely disclose the conduct that triggered the investigation and the nature, seriousness, and pervasiveness of the offense. Although Stericycle did not self-disclose their illegal conduct to the DOJ or SEC, they did receive full credit for cooperation with both the agency investigations and engaged in extensive remedial measures. As noted above, this led to a 25% discount off the range suggested under the Sentencing Guidelines, saving Stericycle between $25 million to $30 million from their final criminal fine.
Finally, the Stericycle FCPA enforcement action is notable for the company’s use of code words to discuss bribery in its routine emails and other business correspondence. While chocolates and incentive payments (IPs) have been used before by other companies, cookies are now added to the bribery lexicon as a moniker for payment bribes.
Join us in our next blog where we consider the bribery schemes.
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Bribery in Defense Industry
A CEO of a major US government defense contractor is charged with bribery. The Kitchen reviews the DOJ release – drop in for more.
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 and the lessons they present for the compliance professional.
Due Diligence
Before we get to the bribery schemes, a word (yet again) about due diligence. Clearly WPP was deficient in performing the most rudimentary level of due diligence. This is true whether or not it was a potential business partner acquired through acquisition or a vendor hired to assist in WPP sales efforts. Due diligence is one of the most basic functions in any compliance program. Obviously one function of due diligence is to determine if you are going into business with bad actors who have engaged in bribery and corruption previously. But the next level of inquiry is perhaps even more important. Are you going into business with persons who want to and will do business ethically and in compliance with anti-corruption programs? This requires more than simply a Level 1 search of social media and the relevant bad guy lists. It requires understanding the person or entity you are going to do business with going forward. This means you have to sit down (or Zoom) and talk to people and get a sense of their values and their ethics. A simple computer search is not going to give you such insights.
Bribery Schemes
India
As laid out in the Order, the Vendor A bribery scheme worked with the customer DIPR awarding WPP India a contract under which WPP India developed advertisements and then purchased space in newspapers to display the advertisement. The customer set the fee to media agencies for purchasing advertisement space. WPP-India CEO A negotiated rates with the newspapers that were significantly less than the fee and utilized the difference between the approved fee and the actual price paid to the newspapers to create a pot of money to pay bribes to the government officials. WPP-India hid this arrangement by agreeing to pay Vendor A to purchase the advertising space. The Vendor A paid the newspapers, took a cut and forwarded the difference on as bribe to government officials.
The next scheme involved Vendor B, which once again involved WPP-India bribing government officials through an intermediary. Here the customer paid WPP-India Subsidiary $1.5 million to create and run a media campaign to celebrate the formation of the Indian state of Telangana in June 2015. But there was never any such campaign. There were fake records created at the behest of the WPP-India CFO, by Vendor B falsify that the campaign occurred. Vendor B then paid $1+ million to another 3rd party who made the bribe payments. All the recalcitrant parties split the rest of the money.
China
Here WPP-China avoided paying $3,2 million in taxes to a tax authority by making corrupt payments to a vendor selected by corrupt tax officials. WPP-China paid approximately $107,000 to the corrupt vendor in the two months before a tax audit finalized. The vendor kept a cut of the bribe payment and distributed the bulk of the monies as bribes. But it did not end there as the WPP-China books and records were doctored to show the vendor performed services for a client. There was also $2,000 of gifts and entertainment to tax officials during the same time period. Finally, WPP uncovered an off-the-books account maintained by China Subsidiary reflecting the payments to the vendor recommended by the tax officials.
Brazil
WPP acquired a majority interest in a public relations agency in São Paulo, Brazil, with the acquired entity’s minority owner serving as CEO of WPP-Brazil going forward. WPP-Brazil made improper payments to vendors in connection to obtain government. As Mike Volkov has noted, “These payments were made in circumstances in which there was a high probability that a portion of the payments may have been passed to the government officials with the authority to award the contracts. To disguise the fact that Brazil Subsidiary’s payments to the vendors related to obtaining or retaining government contracts, Brazil Subsidiary falsified its books and records to reflect that the vendors performed bona fide services, such as marketing or IT services.”
Peru
This was perhaps the most sophisticated bribery scheme for its complexity. Once again, it began with WPP obtaining a majority interest in an entity headquartered in Lima, Peru, with the acquired entity’s founder staying on as CDO of WPP-Peru. The bribery scheme involved a construction company funding the mayor of Lima’s political campaigns in exchange for contract awards. WPP-Peru was a conduit for the construction company’s bribe to the mayor of Lima. However, WPP-Peru disguised the corrupt source of the funds by channeling the construction company’s payments through WPP subsidiaries in Colombia and Chile. WPP-Chile and WPP-Colombia then falsely recorded that they received money in return for services performed for the construction company, and WPP-Peru maintained no records that the construction company paid for a portion of the mayor of Lima’s political campaigns.
There are multiple lessons for every compliance professional of a multi-national organization about the selection, use and management of third parties in high-risk environments. You have to know the folks you are doing business with. Equally important is the quality of their character and commitment to doing business ethically. CEOs and/or CFOs who are willing to create advertising campaigns out of thin air did not wake up one morning with that idea. They were committed to getting business anyway possible. Moreover, all procedures must have appropriate oversight or a second set of eyes. Finally, when reports of misconduct come in, they must be thoroughly investigated.
In today’s edition of Daily Compliance News:
· Petrofac to plead guilty in UK to bribery charges. (WSJ)
· WPP in FCPA enforcement action. (SEC Press Release)
· JPMorgan to face bribery probe in Brazil. (Bloomberg)
· FinCEN seeks comments on art AML regs. (WSJ)