Failing To Act: Lessons From 2012 FCPA Enforcement


imagesCANAC725FCPA practitioners tend to repeat themselves.  Some of the points we make need to be repeated, and some do not.  Businesses are not able to react as quickly as they should in response to potential risks and possible violations.  Once the Justice Department initiates an inquiry, companies very often try to get their house in order by implementing a comprehensive compliance program.

One of the most significant dangers companies face is a failure to act when presented with significant red flags of ongoing corrupt conduct.  Two of the enforcement actions from last year illustrate the potential problem – Eli Lilly and Allianz SE.

The SEC charged Lilly  with FCPA violations for illegal bribes paid by its subsidiaries in Russia, Brazil, China, and Poland.  In Russia, the  SEC alleged that Lilly’s subsidiary used offshore “marketing agreements” to pay millions of dollars to third parties identified by the government, despite knowing little or nothing about the third parties other than their offshore address and bank account information. These offshore entities did not provide any  services and  were used to funnel money to government officials.  When Lilly became aware of possible FCPA violations in Russia, Lilly did  nothing for five year to terminate the conduct.

Antonia Chin, Associate Director of the SEC Enforcement Division explained, “When a parent company learns tell-tale signs of a bribery scheme involving a subsidiary, it must take immediate action to assure that the FCPA is not being violated.  We strongly caution company officials from averting their eyes from what they do not wish to see.”imagesCAP4QUSI

In a second action, the SEC charged Allianz with FCPA violations for making improper payments for seven years to government officials in Indonesia.  The SEC alleged that from 2001 to 2008, an Allianz subsidiary paid bribes to Indonesian government officials for insurance contracts for government projects.

Two complaints brought the misconduct to Allianz’s attention. The first complaint in 2005 reported unsupported payments to agents, and the second complaint to Allianz’s external auditor in 2009 uncovered that managers were using “special purpose accounts” to make illegal payments to government officials.  Allianz’s misconduct continued in spite of that audit. The SEC contacted Allianz in 2010 after receiving an anonymous complaint of possible FCPA violations.

In both cases, Lilly and Allianz failed to act when presented with facts suggesting that their respective companies were engaged in bribery.  Lilly learned of the improper activities in Russia but did not do anything for five years.  Allianz was aware of facts suggesting potential violations in 2005 and 2009, and did not act until the SEC contacted Allianz in 2010.

imagesCAVH9L47Companies should take heed from these cases – when presented with evidence suggesting that the company may be engaged in bribery, the sooner they act the better.

Launching an investigation does not mean voluntarily disclosing the potential problems to the government.  Instead, companies need to conduct internal reviews, and possibly internal investigations, to respond to the allegations.

An internal investigation will help a company to identify the nature and scope of the problem, if any, and give the company a chance to remediate the problem.  Defining the problem and adopting remedial measures is the most appropriate way for companies to minimize risks and the potential impact of an enforcement action.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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