At the end of 2018, there were two FCPA enforcement actions, both were announced on December 26th. The first involved Polycom, Inc. (Polycom). The second involved Centrais Elétricas Brasileiras S.A. (Eletrobras).  They both presented several important lessons for the compliance practitioner which will be explored in this paper. 

I. Polycom

Polycom included a settlement with the Securities and Exchange Commission (SEC), via an Administrative Order (Polycom Order) where Polycom agreed to disgorge to the SEC about $10.7 million and pay prejudgment interest of $1.8 million, along with a penalty of $3.8 million. It also received a Declination with Disgorgement from the Department of Justice (DOJ). This Declination featured a disgorgement of $10.15 million to the U.S. Treasury Department and $10.15 million to the U.S. Postal Inspection Service Consumer Fraud Fund, in addition to the disgorgement to the SEC. Polycom disgorged some $31 million in total of ill-gotten gains. 

Polycom came to FCPA grief in China, as have many other US companies. The bribery scheme was long running, occurring from 2006-2014. The entity involved was Polycom Communications Solutions (Beijing) Co., Ltd. (“Polycom China”). The sales distribution method in China was distributors. As noted in the Polycom Order, “Polycom’s Vice President of China at Polycom’s China subsidiary, along with senior managers, provided significant discounts to Polycom’s distributors and/or resellers, knowing and intending that the distributors and/or resellers would use the discounts to make payments to officials at Chinese government agencies and government-owned enterprises in exchange for those officials’ assistance in obtaining orders for Polycom’s products.” From there, “Employees and managers at the China subsidiary recorded the payments in a parallel deal-tracking and email system located in China, outside of Polycom’s company-approved systems. These senior managers at Polycom’s Chinese subsidiary also instructed their sales personnel not to use their Polycom email addresses when discussing sales opportunities with Polycom’s distributors.”

There were multiple variations of this basic bribery scheme listed in the Polycom Order. They included the creation of an off-the books accounting and recordation system for corrupt payments made by or on behalf of Polycom China. While Polycom had a customer relations management (CRM) database, “Polycom China’s senior managers directed Polycom China’s sales personnel to enter details concerning sales opportunities into a separate, parallel sales management system outside of Polycom’s company-approved systems, which was orchestrated by Polycom’s Vice President of China. Polycom personnel outside China were unaware of the existence of this parallel system. Polycom China’s senior managers also directed Polycom China’s sales personnel to use non-Polycom email addresses when discussing deals with Polycom’s distributors.”

The bribery schemes themselves were relatively straight-forward as the Chinese business unit obtained business by offering and making corrupt payments to “government officials who exercised influence over those customers’ purchasing decisions.” The money to fund these bribes came through variations of the basic bribery scheme. There would be a discount between the price reported to Polycom and that paid by the buyer. The Polycom Order stated, “these discounts were not passed on to the end customer, but instead were intended to cover the cost of the payments the distributors made to the Chinese government officials.” In other words, this discount would form the basis of the pot of money to pay the bribe. 

But it got even worse from there as Polycom China actively worked to conceal the bribe payments as “sales employees entered the requested discounts into the non-Polycom sales management system for approval by senior managers at Polycom China, and recorded information about the reason for the payments in the same off-line system.” From there “Polycom’s Vice President of China recorded information regarding these improper payments in excel spreadsheets he maintained.” To further hide these illegal payments, the payments were incorrectly recorded in their CRM system so they did not reflect the discounts. 

The Chinese business unit was equally creative with the reasons for the discounts, which were listed in the CRM. Polycom China usually cited competition with one or more vendors was required to give discounts on pricing. They also claimed that some end-using customers refused to pay full price. However these were all false excuses entered into the CRM to hide the truth from auditors and others charged with reviewing and approving the discounts. 

Even with this clear conduct at the most senior levels of the Chinese business unit Polycom was able to obtain a Declination from the DOJ. Both the DOJ and SEC noted the company had self-disclosed the FCPA violations. The DOJ listed several other factors for the granting of the Declination, including: 

1. Polycom’s identification of the misconduct; 
2. Polycom’s prompt, voluntary self-disclosure of the misconduct; 
3. Polycom’s thorough investigation; 
4. Polycom’s full cooperation in this matter, including providing the Department all facts relating to that misconduct, making employees available for interviews and assisting the Department’s efforts to interview a former employee, translating foreign language documents to English, and identifying unrelated misconduct to the Department for investigation and potential prosecution, and its agreement to continue to cooperate in the Department’s ongoing investigations and/or prosecutions; and 
5. Polycom’s remediation, including the steps that Polycom took to enhance its compliance program and its internal accounting controls, terminating the employment of 8 individuals involved in the misconduct, disciplining 18 other employees, and terminating the Company’s relationship with one of its channel partners.

The Polycom Order specified additional detail on the remediation including, “improving the anticorruption and other related trainings Polycom provides to its China-based employees, hiring additional personnel, including in China, to enhance oversight, supplementing existing third party policies and trainings and third party due diligence procedures, and enhancing existing, as well as adopting additional, policies, procedures and controls designed to detect and prevent improper payments.”

What does all of this mean for the compliance practitioner? First and foremost, you must channel your inner Woodward and Bernstein and follow the money. While many would exclaim “What an order, we cannot go through with it” as the Chinese business unit was obviously actively working to hide their crimes; you must be prepared to dig deeper to uncover bribery and corruption. China is a well-known high-risk jurisdiction and you must aggressively audit and monitor your organization in such well-known high-risk geographic areas. 

The Polycom Order noted that when certain discount thresholds were reached, more senior company employees were required to approve the discounts. These higher-ranking employees were in Singapore and appear not to have looked behind the façade of reasons presented to them by the Chinese business unit of competition and pricing concerns of customers. This enforcement makes clear that simply because some type of compliance oversight is difficult or requires extra effort, it is no excuse not to monitor. 

Finally, always remember that the money to fund a bribe must come from somewhere. Distributor discounts are an obvious mechanism and there have been several enforcement actions in 2018 involving distributors. If this is your sales model, you need to understand what discounts are given, why and how. Even if it takes some digging. 

II. Eletrobras

The second matter involved Eletrobras. This the second FCPA enforcement action involving a Brazilian state-owned enterprise, Petrobras being the first. The matter was resolved with a Cease and Desist Order (Eletrobras Order) issued by the Securities and Exchange Commission (SEC). The company paid a fine of only $2.5 million, probably for reasons similar to why Petrobras sustained only a Non-Prosecution Agreement (NPA) for one of the greatest bribery scandals ever. 

While you might wonder what the SEC is doing sanctioning a Brazilian power generation, transmission and distribution company based in Rio de Janeiro, it is because “Eletrobras’s common and preferred shares are registered with the Commission pursuant to Section 12(b) of the Exchange Act and trade on the New York Stock Exchange.” Additionally, “Eletrobras files periodic reports with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.”

The illegal actions of the company, as stated in the Eletrobras Order, were that “former officers at Eletrobras Termonuclear S.A (“Eletronuclear”), Eletrobras’s majority-owned (over 99%) nuclear power generation subsidiary, engaged in an illicit bid-rigging and bribery scheme involving the construction of a nuclear power plant (“UTN Angra III”) from approximately 2009 until 2015. These officers used their influence at Eletronuclear in favor of a bid-rigging scheme among certain private Brazilian construction companies. The officers also misused their official positions in authorizing unnecessary contractors and inflating the cost of Eletronuclear’s infrastructure project. In return, the construction companies involved in the scheme agreed to pay, and did pay, the former Eletronuclear officers approximately $9 million.”

The UTN Angra III was a huge nuclear power and transmission plant, with bid letting at over $5.7 billion in both 2009 and 2014. The massive number of contracts let for this project were used to fund bribery payments to former Brazilian government officials and Brazilian political parties, the former President of Eletrobras and other company officials. The bribe amounts were huge with 2% alone going to “officials associated with two of Brazil’s largest political parties.” The company President got a paltry $4.1 million and senior company officials split another $4.9 million. 

The corruption clearly emanated from the top and perforated the entire organization. Regarding its anti-corruption compliance program, including policies and procedures and internal controls, the Eletrobras Order noted they were “general or boilerplate prohibitions that did not apply to all employees or were ignored. For example, Eletrobras adopted a code of ethics in 2005 to ensure that competitiveness and profitability did not override ethical behavior.” Moreover, Eletrobras’ code of ethics only applied to the holding company and not to any of the 13 regional subsidiaries, 175 special purpose entities or 25 other entities the company held controlling interests in during the time in question.

In 2010 the company began anti-corruption compliance training but for only “a small part of its workforce.” It also implemented internal controls “designed to promote these ethical principles, such as certain contractual measurement criteria requiring that payments to suppliers be proportional to the worked performed, were ignored or circumvented.” 

Obviously when you have corruption on such a massive scale there follows significant material weaknesses in controls and financial reporting. The Eletrobras Order stated, “from 2009 through 2015 Eletrobras disclosed in its annual reports material weaknesses related to its ability to maintain an effective control environment, adequately perform risk assessments, and effectively maintain and operate controls with respect to its accounting for property, plant and equipment. Many of these material weaknesses, including the failure to maintain effective controls to ensure the completeness, accuracy, validity, and valuation over the purchase and payments of goods and services, contributed to the bribery scheme flourishing undetected for years.”

Finally, the company’s numerous subsidiaries were able “to ignore prohibitions against direct payments to subcontractors and allow the payment of upfront costs for work not performed. This occurred against a backdrop where Eletrobras’s compliance policies and procedures were not specifically tailored to the inherent risks associated with Eletrobras’s business operations.”

In addition to all of the above and most importantly for the compliance practitioner is the mechanism used to fund the bribery and corruption. Just as we saw in the Polycom FCPA enforcement action, the customer was in on the scheme to create the pot of money to fund the bribes. The Eletrobras Order stated, “Pursuant to this scheme, the construction companies overcharged Eletronuclear under construction contracts and contracts to provide goods and services, and used the overpayment to fund the bribes to the executives and political parties. From about 2009 until 2015, the former Eletronuclear officers caused Eletronuclear to approve and pay invoices from contractors involved in the bid-rigging and bribery scheme relating the UTN Angra III project. At least 28 invoices were from a contractor used as a conduit for the bribes paid to the former Eletronuclear president.” 

With Polycom and Eletrobras enforcement actions coming out together, it drives home the message that compliance professionals must be cognizant of contracting processes and pricing to help detect and prevent bribery and corruption. This means a set of robust internal controls that would not only review contract pricing but also work to oversee legitimate business reasons for both discounts and overcharges.