On October 22, 2013, the U.S. Department of Justice (“DOJ”) and the Securities & Exchange Commission (“SEC”) announced their agreements with Diebold Inc. (“Diebold”) regarding probes into alleged bribery of foreign bank officials. The finalized agreements (which were reached in principle in August) require Diebold to pay a total of $48.1 million to the government agencies in order to resolve claims that the company violated multiple provisions of the Foreign Corrupt Practices Act (“FCPA”). Diebold reached a three-year deferred prosecution agreement (“DPA”) with the DOJ to settle the criminal charges. As part of the DPA, the company is required to retain a compliance monitor for at least 18 months.
Diebold is a publicly traded company headquartered in Ohio and markets automated teller machines and bank security systems in over 90 countries across the globe. The DOJ and the SEC charged Diebold with conspiracy to violate the FCPA’s anti-bribery and books and records provisions and substantive FCPA books and records and internal controls violations. The SEC’s complaint and the DOJ’s Information outlined alleged misconduct on the part of three of Diebold’s international subsidiaries in China, Indonesia, and Russia between 2005 and 2010.
This was principally a “business hospitality” case. The SEC alleged in its complaint that Diebold’s agents and subsidiaries “lavished international leisure trips, entertainment, and other improper gifts on foreign officials to obtain and retain lucrative business.” Diebold paid the travel and entertainment expenses for officials of Chinese state-owned banks to visit tourist destinations across the globe, such as Disneyworld and Napa Valley. Diebold also gave dozens of bank officials annual cash gifts ranging in size from less than $100 to over $600. (It is notable that the enforcement authorities continue to cite gifts valued as low as $100 as conduct supporting FCPA charges despite suggesting in last year’s FCPA Guidelines that they were not focused on small gratuities.)
The SEC alleged that executives at Diebold were aware that these improper benefits were being provided to Chinese bankers and at times expressly authorized such expenditures. Between 2005 and 2010, Diebold generated $265 million in revenues from sales to the Chinese state-owned banks whose officials received illicit benefits from Diebold. According to the SEC, Diebold’s Indonesian subsidiary engaged in the same type of malfeasance as its Chinese affiliate, albeit on a smaller scale. The total expenditure by Diebold on these travel and entertainment activities was only $1.75 million – a notably small amount in comparison to the fines and penalties imposed.
Another interesting aspect of this enforcement action is the role of bribes paid to private entities. In Russia between 2005 and 2008, the SEC alleged that Diebold funneled more than $1.2 million in bribes through international distributors to employees at private Russian banks. The payments to distributors were disguised as service contracts, but the only service provided was the transfer of money to private bank employees who made purchasing decisions for their institutions. The SEC alleged that executives within Diebold’s legal and corporate development offices knew about these payments through due diligence reviews conducted in connection with a potential acquisition of one of the distributors. The SEC also alleged that Diebold took no steps to investigate and remediate these issues in Eastern Europe and continued to do business with these same distributors. The SEC cited these payments in support of the violations of the books and records provisions of the FCPA.