In today’s edition of Daily Compliance News:
· DOJ moving to prevention in white-collar crime. (WSJ)
· Corrupt former Herbalife exec defaults on SEC suit. (WSJ)
· Corruption will ruin your life. (FCPA Blog)
· Is the PGA anti-competitive? The DOJ is asking. (NYT)
Tag: SEC
Categories
EY Fined $100 Million
In a stunning announcement, the SEC announced an enforcement action against the international auditing firm EY. The enforcement action could not have been more directly in the ethical wheelhouse, with significant compliance implications. In its Press Release the SEC stated, it had “charged Ernst & Young LLP (EY) for cheating by its audit professionals on exams required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during the Division’s investigation of the matter.”
Gurbir S. Grewal, Director of the SEC’s Enforcement Division, said in the Press Release, “This action involves breaches of trust by gatekeepers within the gatekeeper entrusted to audit many of our Nation’s public companies. It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things. And it’s equally shocking that Ernst & Young hindered our investigation of this misconduct. This action should serve as a clear message that the SEC will not tolerate integrity failures by independent auditors who choose the easier wrong over the harder right.
In an agreed Order, EY admitted that “over multiple years, a significant number of EY audit professionals cheated on the ethics component of CPA exams and various continuing professional education courses required to maintain CPA licenses, including ones designed to ensure that accountants can properly evaluate whether clients’ financial statements comply with Generally Accepted Accounting Principles.” But EY’s conduct did not stop there as the accounting firm also admitted “during the Enforcement Division’s investigation of potential cheating at the firm, EY made a submission conveying to the Division that EY did not have current issues with cheating when, in fact, the firm had been informed of potential cheating on a CPA ethics exam. EY also admits that it did not correct its submission even after it launched an internal investigation into cheating on CPA ethics and other exams and confirmed there had been cheating, and even after its senior lawyers discussed the matter with members of the firm’s senior management. And as the Order finds, EY did not cooperate in the SEC’s investigation regarding its materially misleading submission.” For all of these actions, EY was fined $100 million.
Why does all this sound so familiar? It is because KPMG was caught engaging in similar conduct back in 2091. I wrote at the time, “How bad was KPMG’s conduct? … the conduct outlined in the Order is so egregious, detailing a culture which is completely unmoored from any ethical foundation, that any company using KPMG as an auditor must ask some very serious questions about not only the quality of the services they have received but also the very foundation of those services.” KPMG was fined $50 million.
Yet the EY fine was double the KPMG fine. Why? One clue comes from the Order which stated, “This case involves Ernst & Young’s failures to act with the integrity required of a public company auditor. Over multiple years, a significant number of EY audit professionals cheated on the ethics component of the Certified Public Accountant (CPA) exam, as well as on a variety of other examinations required to maintain their CPA licenses. As this was ongoing, EY withheld this misconduct from SEC staff conducting an investigation of potential cheating at the firm. EY audit professionals’ repeated cheating on exams and the firm’s misrepresentations to the SEC violated ethics and integrity standards and discredited the accounting profession.” In other words, as bad as cheating on exams is, withholding information from the SEC, while it is conducting an investigation on that issues is equally if not worse conduct.
Regarding this additional misconduct, the Order stated, “EY withheld this misconduct from the SEC during an investigation about cheating at the firm. In June 2019, the SEC’s Division of Enforcement sent EY a formal request for information about complaints the firm had received regarding cheating on training exams. On the same day EY received this request, the firm received a tip that an audit professional had shared an answer key to a CPA ethics exam. EY did not disclose this information to the SEC. To the contrary, its submission indicated that the firm did not have any current issues with cheating. In light of the tip it had received, EY’s June 20 submission was materially misleading. But EY never corrected its submission. Even after the firm began an internal investigation, confirmed there had been cheating, and the matter was discussed among senior lawyers at the firm and with members of the firm’s senior management, EY still did not correct its misleading submission.”
The SEC’s ire was reflected in the remedy which mandated not one but three oversight roles on an ongoing basis. The EY oversight requires EY to evaluate the sufficiency and adequacy of its quality controls, policies, and procedures relevant to ethics and integrity and to responding to Information Request to determine whether they are designed and implemented in a manner that provides reasonable assurance of compliance with all professional standards, including those relating to ethics and integrity applicable to accountants and attorneys, in the following areas:
- The adequacy and sufficiency of ethics and integrity training and guidance,
- Whether EY’s culture is supportive of ethical and compliant conduct and maintaining integrity,
- Whether EY has designed and implemented appropriate policies and procedures relating to responding to Information Requests, and
- Whether EY has designed and implemented appropriate policies and procedures and deploys proper resources and oversight to comply with all professional standards relating to (i) monitoring to detect non- compliance; (ii) having appropriate reporting lines, compensation, and rewards; (iii) assigning responsibility for overseeing compliance to senior executives and managers with access to relevant information and personnel; and (iv) ensuring consistent discipline.
Even more damning is the requirement for two external monitors (called Independent Consultants). The first is review EY Policies and Procedures and issue a detailed written report: (i) summarizing its work; (ii) making recommendations, as the Policies and Procedures IC deems appropriate, reasonably designed to ensure that EY’s Policies and Procedures are adequate and sufficient to provide reasonable assurance of compliance with all professional standards. The second Independent Consultant is to review EY’s conduct relating to the Commission staff’s June 2019 Information Request, including whether any member of EY’s executive team, General Counsel’s Office, compliance staff, or other EY employees contributed to the firm’s failure to correct its misleading submission. They are to recommend discipline. Does that sound like the SEC trust EY to follow through with its obligations about now?
EY, like KPMG before it, acted as gatekeepers in the eyes of the law and the SEC. To see this level of fraud and then hiding of it is extremely disconcerting. Perhaps it is no wonder EY is about to split into two different entities: auditing and consulting. I wonder how many EY audits will be reviewed through the eyes of this Order.
The SEC announced another FCPA settlement in 2022. FCPA enforcement, in general, is picking up. Tenaris, a global supplier of steel pipes and related services for the energy industry, agreed to pay the SEC $78 million to resolve FCPA violations in Brazil. The US Department of Justice closed its investigation without bringing charges. In this episode, Michael Volkov reviews the SEC settlement.
Categories
Recidivist Tenaris FCPA Resolution
Yet another Foreign Corrupt Practices Act (FCPA) recidivist was announced last week as the Securities and Exchange Commission (SEC) announced that Tenaris SA would pay more than $78 million to resolve charges of FCPA violations in connection with a bribery scheme involving its Brazilian subsidiary. Back in 2011, Tenaris entered into a Non-Prosecution Agreement (NPA) with the Department of Justice (DOJ) and a Deferred Prosecution Agreement (DPA) with the SEC as a result of alleged bribes the company paid to obtain business from a state-owned entity in Uzbekistan. Interestingly even though the company had received sanction from both the DOJ and SEC, there was nothing in the Cease and Desist Order (Order) which indicated that Ternaris self-disclosed this additional FCPA violation nor anything to indicate why it was not uncovered until many years after the bribery scheme was implemented and executed.
Background
According to the SEC Press Release, “the resolution with Tenaris is the result of an alleged bribe scheme involving agents and employees of its Brazilian subsidiary to obtain and retain business from the Brazil state-owned entity Petrobras. Specifically, the order finds that between 2008 and 2013, approximately $10.4 million in bribes was paid to a Brazilian government official in connection with the bidding process at Petrobras. The bribes were funded on behalf of Tenaris’ Brazilian subsidiary by companies affiliated with Tenaris’ controlling shareholder.”
Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit, said of the resolution, “Tenaris failed for many years to implement sufficient internal accounting controls throughout its business operations despite known corruptions risks. This failure created the environment in which bribes were facilitated through a constellation of companies associated with its controlling shareholder.”
The Bribery Scheme
The bribery scheme was created to create a business opportunity for Tenaris’ operating subsidiary in Brazil, Confab Industrial S.A. (Confab). The bribery scheme was created with a corrupt Petrobras official who “would use his authority to influence Petrobras to forgo an international tender process for certain contracts for pipes and tubes, thereby favoring Confab, by continuing its status as the only domestic supplier, and allowing direct negotiations with it. Confab would benefit through the elimination of international competitors which may have submitted lower bids and forced Confab to lower its price, if not lose the contract altogether.” In exchange the corrupt Petrobras official received “approximately 0.5% of Confab’s revenue from these contracts” which amounted to some $10 million in illegal payments.
The bribery scheme was effectuated through the formation of Uruguayan-domiciled shell company and creation of a bank account in its name, where bribery payments were deposited. During the relevant period, the bribes were paid into Uruguayan Company’s bank account for the benefit of Government Official. The funding for the bribes came from another Tenaris affiliated company, San Faustin SA, which had bank accounts in the US and elsewhere which funded the bribe. To hide the payments in the Tenaris books and records, fake contracts were executed between Uruguayan Company and the shell company in which payments were made to the Uruguayan Company “for purported past and future consultancy and advisory services that Uruguayan Company performed.” All of this was done with the knowledge of “a senior Confab employee about the bribe scheme including about the timing of bribe payments being deposited into the Uruguayan Company bank account.”
Thoughts
This matter really is a head scratcher. The first thing that jumps out is the time of the bribery scheme, which was 2008-2013. This overlaps the time frame from the 2011 NPA and DPA, which was for conduct from 2007-2010. Although the conduct at issues in those resolutions was centered on bribery and corruption in Central Asia and not Brazil and South America. It is more than difficult to understand how this bribery scheme was not uncovered when the company went through an allegedly comprehensive FCPA investigation for those resolutions.
Even more troubling is that the company continued engaging in bribery and corruption right through the signing of those settlements and the reporting periods set out in both; for two years under both the DPA and NPA. Under both agreements, Tenaris was to turn over evidence of any additional FCPA violations. Obviously Tenaris did not uncover the additional illegal actions, it certainly appears they did not look very diligently either.
Perhaps one answer is found in the undertakings section of the Order which states “During a two-year term as set forth below, Respondent shall report to the Commission staff periodically, at no less than six-month intervals, the status of its remediation and implementation of compliance measures related to the effectiveness of the anti-corruption policies, procedures, practices, internal accounting controls, recordkeeping, and financing reporting processes particularly as to preventing the use of unaccounted funds for illicit purposes to benefit Tenaris, including the use of funds available to Tenaris’ officers, directors, employees and/or agents as a result of their dual affiliation with Tenaris and San Faustin and related entities.” [emphasis supplied]
This sounds suspiciously like a slush fund was operating which allowed Tenaris’ officers, directors, employees and/or agents to make payments across different (but related) entities. Such payments could be easy to disguise and hard to trace. This might be a reason why Tenaris itself did not uncover the illegal payments and why it did not self-disclose to the SEC. This is also something that every Chief Compliance Officer (CCO) needs be on the lookout for your organization.
Tenaris is required to provide two separate follow-up reviews to the SEC. These reviews are to incorporate “comments provided by the Commission staff on the previous report, to further monitor and assess whether the policies and procedures of Respondent are reasonably designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws (the Follow-up Reports).” Additionally, Tenaris is required to “undertake a final review to further monitor and assess the operation of its FCPA and anti-corruption compliance program and whether Respondent’s policies and procedures are reasonably designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws.” One can only hope Tenaris will be more thorough under this requirement in the Order than it was under the prior NPA or DPA.
Where did the information which led to this recidivist Order derive? Obviously Brazilian prosecutors is one good guess. Another clue is found in the SEC Press Release which stated, “The SEC appreciates the assistance of the Superintendencia del Mercado de Valores (SMV) in Panama, the Brazilian Federal Prosecution Service, and the Procura della Repubblica presso il Tribunale di Milano, Italy.” Panama makes sense as a home of one of the Ternaris family of shell companies. but note the inclusion of prosecutors from Italy as well.
We can only hope that Tenaris does not become the first three time recipient of a FCPA enforcement action.
In today’s edition of Daily Compliance News:
- Law firms add behavioral scientists, data experts, journalists and cops. (WSJ)
- Corruption Glencore execs walked away with billions. (Bloomberg)
- SEC goes after greenwashing. (Reuters)
- When do firms have to disclose SEC investigations? (Reuters)
