Last week the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) jointly announced the conclusion of a Foreign Corrupt Practices Act (FCPA) enforcement action against Hewlett-Packard Company (HP). In the settlement, HP agreed to pay $108MM in fines, penalties and disgorgements for criminal and civil acts. To say that it was one of the more perplexing FCPA settlements would seem to be an understatement. While some will read the settlement documents and see conduct which did not merit such a high total amount of fines and penalties, I am not from that camp.
The tale of this sordid affair of bribery and corruption occurred over 3 continents with multiple countries involved, evidencing an entire breakdown in company internal controls and a complete lack of a culture of compliance. Yet the settlement documents make great pains to emphasize that few employees were actually involved in the nefarious conduct. How bad was the conduct? Think right up there with BizJet because we had bags of cash delivered to a Polish government official. (But unlike BizJet, the Board of Directors did not approve the bribery scheme and it was not taken across the border.) For the Russian deal, it was shopped through several countries with multiple levels of company review, which did not seem to work or care much about anything except getting the deal done. For Mexico, they just seemed to get a free pass where the contract description for the agent who paid the bribe was "influencer fee".
Finally, as most readers might remember, HP did not self-report this misconduct to the DOJ or SEC. Apparently, the story of HP's bribery by its German subsidiary to gain a contract in Russia was broken by the Wall Street Journal (WSJ) article in April 15, 2010. The next day, the DOJ and SEC announced they were investigating the allegations of bribery. However, HP was made aware of the allegations by its German subsidiary in December 2009, when German authorities raided HP's offices in Munich and arrested one HP Germany executive and two former employees. Yet HP never self-reported. Not exactly the poster child for self-disclosure for any company going forward.
Of course HP's public response at the time indicated its attitude, when a HP spokesperson was quoted in the WSJ article as saying "This is an investigation of alleged conduct that occurred almost seven years ago, largely by employees no longer with HP. We are cooperating fully with the German and Russian authorities and will continue to conduct our own internal investigation."
More befuddlement comes from the reported facts around HP Germany. As noted by the WSJ report, one, then current, HP executive was arrested and two former employees were arrested in connection with the investigation by German authorities. There is no mention of them in any of the settlement documents. The WSJ article also reported that investigation-related documents submitted to a German court showed that German prosecutors were "looking into whether H-P executives funneled the suspected bribes through a network of shell companies and accounts in places including Britain, Austria, Switzerland, the British Virgin Islands, Belize, New Zealand, the Baltic nations of Latvia and Lithuania, and the states of Delaware and Wyoming". While some of these countries were mentioned in the settlement documents there was no mentions of DOJ or SEC investigations into Wyoming, Belize, the British Virgin Islands or New Zealand.
What are we to make of the criminal fines levied against the Russian and Polish subsidiaries of HP? The Polish subsidiary pled guilty to a two count Criminal Information consisting of (1) violating the FCPA's internal control provisions; (2) violating the FCPA's books and records provisions. The US Sentencing Guidelines suggested a fine range of $19MM to $38MM, the final fine was $15,450,244.
For the Russia deal, the Russian subsidiary pled guilty to a four count Criminal Information consisting of (1) conspiracy to violate the books and records provisions of the FCPA; (2) violating the FCPA's anti-bribery provisions; (3) violating the FCPA's internal control provisions; (4) violating the FCPA's books and records provisions. The US Sentencing Guidelines suggested a fine range of $87MM to $174MM, yet the final fine was $58,772,250.
Finally, in Mexico HP's subsidiary, according the to the SEC Press Release, "paid a consultant to help the company win a public IT contract worth approximately $6 million. At least $125,000 was funneled to a government official at the state-owned petroleum company with whom the consultant had connections. Although the consultant was not an approved deal partner and had not been subjected to the due diligence required under company policy, HP Mexico sales managers used a pass-through entity to pay inflated commissions to the consultant." This was internally referred to by HP as an "influencer fee." Pretty clear evidence of what it was to be used for, wouldn't you say? Yet the DOJ did not to criminally prosecute the company's Mexican subsidiary and entered into a Non-Prosecution Agreement (NPA), HP agreed to pay forfeiture in the amount of $2,527,750.
How did HP accomplish all of this? In a Press Release HP Executive Vice President and General Counsel John Schultz said, "The misconduct described in the settlement was limited to a small number of people who are no longer employed by the company. HP fully cooperated with both the Department of Justice and the Securities and Exchange Commission in the investigation of these matters and will continue to provide customers around the world with top quality products and services without interruption."
As reported by the FCPA Professor, in his blog post entitled "HP And Related Entities Resolve $108 Million FCPA Enforcement Action", the HP Russian subsidiary Plea Agreement gave the following factors for the reduction in the fine from the Sentencing Guideline range:
"(a) monetary assessments that HP has agreed to pay to the SEC and is expected to pay to law enforcement authorities in Germany relating to the same conduct at issue .; (b) HP Russia's and HP's cooperation has been, on the whole, extraordinary, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (c) HP Russia and HP have engaged in extensive remediation, including by taking appropriate disciplinary action against culpable employees of HP and enhancing their internal accounting, reporting, and compliance functions; (d) HP has committed to continue enhancing its compliance program and internal accounting controls . (e) the misconduct identified . was largely undertaken by employees associated with HP Russia, which employed a small fraction of HP global workforce during the relevant period; (f) neither HP nor HP Russia has previously been subject of any criminal enforcement action by the Department or law enforcement authority in Russia or elsewhere; (g) HP Russia and HP have agreed to continue to cooperate with the Department and other U.S. and foreign law enforcement authorities, if requested by the Department ."
In the same blog post, the Professor reported the following reasons were stated for reduction in the final fine by HP's Polish subsidiary's:
"(a) HP Poland's cooperation with the Department's investigation; (b) HP Poland's ultimate parent corporation, HP, has committed to maintain and continue enhancing its compliance program and internal accounting controls .; and (c) HP Poland and HP have agreed to continue with the Department and other U.S. and foreign law enforcement authorities in any ongoing investigation ."
We have witnessed companies, which have engaged in 'extraordinary cooperation' with the DOJ during the pendency of their FCPA investigations. BizJet is certainly one that comes to mind. Further, there are clear examples of companies, which extensively remediated during the pendancies of their FCPA investigations, from which they clearly benefited. Two prime examples are Parker Drilling, which not only received a financial penalty below the suggested range but also was not required to have a corporate monitor, while they had C-Suite involvement in its bribery scheme. Weatherford seeming came back from the brink during mid-investigation when they hired Billy Jacobson and turned around not only their attitude towards cooperation with the DOJ but also their efforts toward remediation.
Both of these companies are headquartered in Houston and both have been quite active on the conference circuit talking about their compliance programs so most compliance practitioners are aware that these companies are on the forefront of best practices. Perhaps HP is on some circuit doing that, somewhere. If so, kudos to them. If their remediation work led to a best practices compliance program for the company and their extraordinary cooperation led to the astonishing reduction in penalties to their entities, I certainly tip my cap to them. If their lawyers were great negotiators and made great presentations to the DOJ and SEC, all of which led to or contributed to the final results, a tip of the cap to them as well.
So what is the lesson to be learned for the compliance practitioner? Other than befuddlement, I am not sure. Congratulating HP and its counsel is not a lesson it is an action. If HP now has a best practices compliance program, I hope they will provide the compliance community with the lessons that they learned and incorporated into their compliance program, which allowed them to obtain the fines below the minimum suggested range. If they have incorporated some enhanced compliance components into their program I hope they will share those enhancements too.
Filed under: Best Practices,compliance programs,Culture,Department of Justice,Enforcement Actions,Ethical Leadership,Ethics,FCPA,FCPA Professor,HP,SEC - tfoxlaw @ 12:01 am
Tags: compliance, compliance programs, Department of Justice, DOJ, FCPA, FCPA Professor, Foreign Corrupt Practices Act, Hewlett-Packard, HP, SEC
© Thomas R. Fox, 2014