On December 17, 2012, the Securities and Exchange Commission ("SEC") announced that Allianz SE ("Allianz"), a German-based insurance and asset management company, had agreed to pay approximately $12.3 million to settle allegations that it violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act ("FCPA").1
Although the Allianz settlement does not represent one of the largest settlements in the history of FCPA enforcement, it is a noteworthy case in that it highlights the increasingly important role of whistleblowers in FCPA investigations as well as the SEC's practice of seeking disgorgement for books and records violations without showing that the profits were earned as a result of the charged misconduct.
The SEC alleged that between 2001 and 2008 Allianz's Indonesian subsidiary PT Asuransi Allianz Utama ("Utama") made approximately $650,000 in improper payments to employees of state-owned entities in Indonesia. Utama allegedly disguised these payments as specific commissions related to the insurance contracts or as overpayments by the government insurance contract holders while utilizing an off-the-books "special purpose account" to funnel bribes to government employees. According to the SEC, these payments enabled Utama to obtain or retain 295 insurance contracts related to large government projects, which resulted in profits of over $5.3 million. The SEC determined that the improper payments were incorporated in Allianz's financial statements while Allianz's shares and bonds were registered with the SEC and traded on the New York Stock Exchange, thereby violating Section 13(b)(2)(A) of the Securities Exchange Act of 1934 ("Exchange Act").2
The SEC further alleged that Allianz violated Section 13(b)(2)(B) of the Exchange Act by failing to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were properly recorded. According to the SEC, Allianz was unable to access Utama's accounting system in Indonesia and, therefore, could not detect the transfer of funds to the special purpose account. Similarly, Allianz did not implement controls over the commission payment request process, which allowed the agent to request and make payments without providing any supporting documentation.3 In order to settle both of these allegations, Allianz agreed to pay disgorgement of $5.3 million, prejudgment interest of approximately $1.7 million and a civil penalty of $5.3 million.
Role of Whistleblowers
The SEC's Cease-and-Desist Order highlighted Allianz's failure to effectively respond to internal reports of improper payments at Utama. In 2005, Allianz received a complaint about unsupported payments and conducted an internal audit. Although the audit corroborated the complaint and Allianz directed Utama to close the special account and stop making payments, the alleged misconduct continued through 2008. In 2009, a second complaint submitted to Allianz's external auditors prompted the Company to retain counsel and initiate an internal investigation, but the Company did not disclose the potential FCPA violations to any regulatory or enforcement agency. In 2010, a third complaint, this time to the SEC, led the agency to initiate its own investigation, at which time Allianz retained new counsel and cooperated with the SEC.4 The pivotal role of the whistleblowers in alerting both Allianz and the SEC to potential FCPA violations in Indonesia underlines the importance of evaluating and addressing any and all internal complaints. Furthermore, the SEC's active whistleblower program, which received 115 FCPA complaints in 2012 alone, only increases the likelihood that whistleblowers will complain to regulatory agencies.5 It is, therefore, more important than ever for companies to consider the risks of failing to disclose possible FCPA violations.
The Allianz settlement also represents another example of the SEC obtaining disgorgement without alleging a violation of the FCPA's anti-bribery provisions.6 Courts have routinely recognized that disgorgement is an equitable remedy that must be supported by a causal connection between the misconduct and the alleged unjust enrichment and should not be used punitively.7 While the SEC's Cease-and-Desist Order indicates that Allianz realized approximately $5.3 million in profits "as a result of the improper payments" it shows no link between the charged accounting violations or lack of internal controls and any profits of the subsidiary.
Nexus with the United States
The Allianz settlement again illustrates that the SEC will pursue a foreign issuer and seek to obtain fines and disgorgement for bribery activities that did not violate the FCPA's anti-bribery provisions because they lacked a connection to the United States. Allianz voluntarily delisted its shares from the New York Stock Exchange in October 2009 and, earlier this year, the Department of Justice ("DOJ") closed its investigation into Allianz's conduct in Indonesia without filing any charges. According to the SEC, however, Utama made improper payments while Allianz's shares were traded on the New York Stock Exchange and the Company was an "issuer."
The editors would like to thank Samantha Dreilinger for her contributions to this article.
1 SEC Press Release, December 17, 2012, "SEC Charges Germany-Based Allianz SE with FCPA Violations," available at www.sec.gov/news/press/2012/2012-266.htm.
2 SEC Release No. 68448, December 17, 2012, available at www.sec.gov/litigation/admin/2012/34-68448.pdf.
5 U.S. Securities and Exchange Commissions, Annual Report on the Dodd-Frank Whistleblower Program, at Appendix A (Nov. 2012).
6 See e.g. In re Diageo plc, Admin. Pro. No. 3-14490, Order Instituting Cease-And-Desist Proceedings (July 27, 2011) (obtaining disgorgement while charging only violations of the FCPA's books and records and internal control provisions).
7 SEC v. First City Fin. Corp., 890 F.2d 1215 (D.D.C. 1989).