The DOJ and SEC Close 2010 with an FCPA Bang!
The Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) closed another Foreign Corrupt Practices Act record setting year — 75 FCPA enforcement actions resolved — with a bang. In late December, the U.S. enforcement agencies, Alcatel-Lucent S.A. and several of its subsidiaries resolved the agencies’ investigations into conduct that occurred prior to Alcatel’s 2006 merger with Lucent Technologies Inc. This post summarizes the conduct underlying the enforcement actions, subsequent penalties, and provides noteworthy takeaways from the Alcatel-Lucent S.A. et al. enforcement actions.
- Alcatel-Lucent S.A. (“Alcatel-Lucent”), and several subsidiaries, resolved DOJ and SEC investigations into the worldwide business practices of Alcatel S.A. (“Alcatel”) and its subsidiaries that occurred prior to Alcatel’s 2006 merger with Lucent Technologies Inc. The DOJ filed a criminal information alleging Alcatel-Lucent violated the books and records and internal controls provisions of the FCPA. The SEC’s complaint alleged Alcatel-Lucent violated the FCPA’s antibribery, books and records, and internal controls provision. Both agencies’ enforcement actions related to the hiring and conduct of third party agents in several countries. The DOJ also filed a one count criminal information charging Alcatel-Lucent France S.A., (f/k/a Alcatel CIT S.A.) (“Alcatel CIT”), Alcatel-Lucent Trade International, A.G. (f/k/a Alcatel Standard A.G.) (“Alcatel Standard”), and Alcatel Centroamerica (f/k/a Alcatel de Costa Rica S.A.) (“Alcatel Costa Rica”) with conspiring to violate the FCPA’s antibribery, books and records, and internal controls provisions.
- Allegedly, the three subsidiaries paid millions of dollars in bribes to foreign officials in Costa Rica, Honduras, Malaysia, and Taiwan to obtain, retain, or secure improper advantages in violation of the FCPA. Examples of the alleged conduct included:
- Alcatel CIT wiring more than $18 million to two consultants in Costa Rica which had been retained by Alcatel Standard. The consultants gave more than half of these monies to various Costa Rican officials for assisting Alcatel CIT and Alcatel Costa Rica with obtaining and retaining business. Senior Alcatel executives approved the consultants’ retention and payments despite the obvious indications the consultants were performing little or no legitimate services.
- Alcatel Standard retaining a Honduran man who had no telecommunications industry experience. The man was retained after being personally selected by the brother of a senior Honduran government official. Alcatel CIT executives knew a significant portion of the money paid to this individual would be shared with the family of the senior Honduran government official to secure favorable treatment for Alcatel CIT.
- Alcatel Standard retaining two consultants with close ties to legislators in the Taiwanese government on behalf of Alcatel SEL A.G. (“Alcatel SEL”) (now known as Alcatel-Lucent Deutschland) to assist in re-drafting a public tender’s technical requirements to improve Alcatel SEL’s chances of winning and secure support for its bid. The consultants were paid nearly $1 million despite neither having any industry experience.
- Alcatel Network Systems Malaysia Sdn. Bhd. (“Alcatel Malaysia”), making illegal payments to Malaysian government officials to secure non-public, confidential information relating to a public tender that Alcatel Malaysia ultimately won.
- Alcatel failed to maintain accurate books and records when the payments (described above) were recorded in ways that obscured their purpose and ultimate recipients. None of the payments were properly documented or recorded in the books and records of Alcatel’s subsidiaries, which rolled into Alcatel’s books and records. For example:
- Alcatel subsidiaries made payments pursuant to consulting agreements that inaccurately described the services provided.
- Alcatel subsidiaries created false invoices to justify payments.
- Alcatel distributed funds in cash without accurate documentation.
- Alcatel recorded illegal payments as payments for legitimate services.
- Alcatel subsidiaries entered into consulting agreements retroactively.
- Alcatel established and used a system of intermediaries to obscure the source and destination of funds.
- Alcatel knowingly failed to establish or maintain an adequate system of internal controls to prevent or detect such payments. For example:
- Alcatel failed to detect or investigate several red flags that suggested third parties, at the direction of certain Alcatel employees, were likely bribing foreign officials. The heads of several Alcatel subsidiaries and geographical regions, some of which reported directly to Alcatel’s executive committee, authorized extremely high commission payments under circumstances in which they failed to determine whether such payments were, in part, to be funneled to foreign officials. These Alcatel officials either knew or were extremely reckless in not knowing such conduct occurred.
- In many instances, personnel whose responsibility it was to review due diligence reports concerning prospective third parties did not have the skills necessary to do so (e.g., they could not read the language in which the reports were prepared).
- Alcatel employees also entered into agreements retroactively and obscured amounts paid to third parties by splitting the payments among separate agreements.
- Alcatel Standard’s due diligence on third parties was “inadequate” and Alcatel CIT often paid third parties without proof of services rendered.
- A former high-level employee and the president of Alcatel Standard trained country senior officials how to “paper” third party agreements so Alcatel-Standard would authorize them.
- Alcatel-Lucent agreed to pay more than $137 million in penalties, fines, disgorged profits and prejudgment interest, and enter into enhanced compliance agreements with U.S. enforcement authorities to resolve their respective investigations.
- To resolve the DOJ action, Alcatel-Lucent entered into a Deferred Prosecution Agreement (“DPA”) with the DOJ while Alcatel-Lucent France, Alcatel-Lucent Trade, and Alcatel-Lucent Costa Rica agreed to plead guilty to the criminal information’s charge. The corporate parent and three subsidiaries will pay a $92 million criminal penalty and implement rigorous compliance enhancements pursuant to their respective DPA and guilty pleas. Pursuant to the DPA, the DOJ will dismiss the Alcatel-Lucent criminal information if it complies with the DPA.
- To resolve the SEC action, Alcatel-Lucent agreed to disgorge more than $45 million in ill gotten gains and prejudgment interest.
- Alcatel-Lucent further agreed with the DOJ and SEC to retain an independent compliance monitor for three years to oversee the implementation and maintenance of an enhance FCPA compliance program and to submit yearly reports to the DOJ and SEC.
- Previously, in January 2010, Alcatel agreed to pay a $10 million penalty to resolve an investigation by Costa Rican authorities into the Costa Rican bribery scheme.
- In March 2007, the DOJ charged Christian Sapsizian, a French citizen and former Alcatel CIT executive, and Edgar Valverde Acosta, a Costa Rican citizen and former president of Alcatel Costa Rica, with a litany of FCPA-related violations concerning the conduct described above. Sapsizian pleaded guilty and was sentenced. Valverde Acosta is considered fugitive and his whereabouts unknown.
- In public documents the DOJ noted after Alcatel and Lucent merged Alcatel-Lucent substantially improved its cooperation with the DOJ. The DOJ commended Alcatel-Lucent with deciding “on its own initiative and at a substantial financial cost,” with “making an unprecedented pledge to stop using third party sales and marketing agents in its worldwide business.” These significant changes to Alcatel-Lucent’s behavior and business practices may have contributed to the parent company being offered a DPA, notwithstanding the egregiousness of the pre-merger conduct.
- The Alcatel-Lucent et al. enforcement actions demonstrate that failing to conduct adequate anticorruption due diligent pre-merger, may result in significant successor liability for the post-merger entity. Public documents indicate Alcatel used Alcatel Standard to conduct “very limited due diligence on business consultants.” Upon obtaining the necessary approvals, based on the “due diligence,” Alcatel Standard entered into an agreement with the third party usually requiring the third party to perform “vaguely-described marketing services.”
- The Alcatel-Lucent et al. enforcement actions also demonstrates the need to conduct adequate due diligence prior to retaining third parties as their actions (and liabilities for their actions) may be imputed to the corporate entity that retained them.
- Finally, the Alcatel-Lucent et al. enforcement actions demonstrate the U.S. enforcement authorities’ continued collaborative efforts. Both the DOJ and SEC acknowledged the assistance provided by Costa Rican and France authorities, in addition to that of a variety of U.S. law enforcement agencies. French authorities, reportedly, continue to investigate the matter.
- The SEC’s litigation release and complaint are available here and here, respectively. While the DOJ has not posted on its FCPA website the public documents referenced in this post, links to the Alcatel-Lucent criminal information, DPA, and criminal information filed against the three subsidiaries are available here and here, courtesy of the FCPA Blog and FCPA Professor.