The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) continued their stunning run of 2016 Foreign Corrupt Practices Act (FCPA) enforcement actions right up to the end of the year with the announcement of the resolution of the General Cable Corporation (General Cable) enforcement action. It was settled with the DOJ via a Non-Prosecution Agreement (NPA) and the SEC via a Cease and Desist Order (General Cable Order). There was also the resolution of a civil charge by the SEC against a former General Cable executive, Karl Zimmer, via a Cease and Desist Order (Zimmer Order).

The fines and penalties paid by General Cable were not insignificant. The company paid a $20MM fine based upon its criminal conduct and paid another $51MM in profit disgorgement. Finally, based upon the conduct laid out by the SEC in the General Cable Order, the company was assessed another $6.5MM for violations of the FCPA’s accounting provisions. The $20MM figure reflects a 50% discount off the bottom of the US Sentencing Guidelines fine range, demonstrating that as bad as the underlying bribery and corruption may have been, the DOJ will give significant credit when the company meets the requirements under the FCPA Pilot Program. As Assistant Attorney General Leslie Caldwell stated in the DOJ Press Release, “General Cable paid bribes to officials in multiple countries in a scheme that involved a high-level executive of the company and resulted in profits of more than $50 million worldwide. But General Cable also voluntarily self-disclosed this misconduct to the government, fully cooperated and remediated. This resolution demonstrates the very real upside to coming in and cooperating with federal prosecutors and investigators. It also reflects our ongoing commitment to transparency.”

Today I will begin a multi-part exploration of the enforcement action to review the underlying facts, consider how General Cable was able to obtain such positive result and the lessons to be garnered by the compliance practitioner.

As for the illegal conduct, one can only say it was wide spread and pervasive throughout several business units in the organization. As stated in the NPA, “General Cable knowingly and willfully failed to implement and maintain an adequate system of internal accounting controls designed to detect and prevent corruption or otherwise illegal payments by its agents. In particular, and as relevant here, General Cable had deficient internal accounting controls that did not require and/or ensure, among other things (a) due diligence for the retention of third party agents and distributors; (b) proof that services had been rendered by third parties before payment could be made to them; (c) oversight of the payment process to ensure that payments were made pursuant to contractual terms or that payments were reasonable and legitimate. General Cable knowingly and willfully failed to address these known weaknesses, in relevant part, to allow the conduct to continue.” The fallout from these illegal schemes were more than $13MM in bribes paid out and $51MM in illegal profits. The bribery schemes involved multiple countries.

Angola

Here General Cable’s Angolan subsidiary made illegal payments to customers who worked for state-owned enterprises. The NPA noted, “(i) between 2003 and 2009, General Cable Celcat and General Cable Condel paid more than $450,000 directly to officials at Angolan State-Owned Enterprise 1, Angolan State-Owned Enterprise 2, and Angolan State-Owned Enterprise 3; (ii) between 2009 and 2013, General Cable Condel paid more than $8.7 million to a sales agent in Angola with knowledge that the sales agent would, and did, pass a portion of those payments to officials at Angolan State-Owned Enterprise 1, Angolan State-Owned Enterprise 2, and Angolan State-Owned Enterprise 3; and (iii) General Cable Condel paid more than $150,000 to another agent with knowledge that the payments would be passed on, in part., to two officials of a state-owned customer.”

These payments were well known within these business units as illegal bribes, with one employee writing in an email, “Everyone knew that [an Angolan State-Owned Enterprise 2 official] was being paid (if not there would be no need for the bills that come from there); when the contract was signed, this was what was agreed had to be paid.” These bribes paid in Angola were funneled through third-party agents. As early as 2012, the General Cable internal audit department picked up evidence of these illegal payments finding that “payments made to the third-party sales far exceeded the amounts required under the contract with the agent”. The NPA noted that the employees “knew” payments made to the agent would be passed on as bribes.

Bangladesh

General Cable conducted business in Bangladesh, Thailand and Indonesia through a subsidiary, Phelps Dodge International (Thailand) Ltd. (PDTL). In Bangladesh, the company paid $43,700 to an agent “with the understanding that the agent would use the money, in part, for corrupt purposes. General Cable was aware of red flags in connection with these payments and ultimately became aware of, or at the very least were willfully blind to, certain of the corrupt payments.” There was also evidence of specific knowledge in PDTL that payments to the agent were being “shared by decision makers in customer, concerned higher ups in Ministry and some top executives at bidder.”

Indonesia

In Indonesia, PDTL paid “more than $2 million to two freight forwarders in Indonesia with the understanding-that the freight forwarders would use the money, in part, for corrupt purposes.” Once again, “General Cable was aware of red flags in connection with these payments and ultimately became aware of, or at the very least were willfully blind to, certain of the corrupt payments.” Indeed, there were emails cited which demonstrated the bribery scheme was well-known within the business unit, when an “employee wrote an e-mail describing the services of a principal of the two freight forwarders in Indonesia, stating “Mike I mention it before, my agent doesn’t ask for any money upfront. He can afford to pay his way in and out of PLN [Perusahaan Listrik Negara, the Indonesia-state-owned electricity company].””

Thailand

In Thailand the illegal bribe payments were made through a distributor who received excessive rebates which were then used to facilitate the corrupt payments. The NPA stated, “more than $1.5 million in rebates to a distributor in Thailand with the understanding that the distributor would use the money, in part, for corrupt purposes in association with PDTL’s sales to state-owned customers in Thailand, including sales to: (i) the Provincial Electricity Authority, a state-owned electricity supplier in Thailand; (ii) the Metropolitan Electricity Authority, a state-owned electricity supplier in Thailand; and (iii) TOT Public Company Limited, a state-owned telecommunications company.”

All this was in the face of clear red flags being raised regarding the distributor. In one reported instance, “In or about 2011, Executive A met with a high-level executive at General Cable with responsibility for overseeing international operations and expressed concerns that payments to the distributor in Thailand were being used for corrupt purposes. Despite this conversation, the corrupt payments did not stop, nor was an investigation conducted.” Even more troubling were the findings made during a tax review in Thailand, which noted “”potential applicability of the US Foreign Corrupt Practices Act (‘FCPA’) for commissions paid to Thai governmental authorities.” Another email from a General Cable employee with responsibility for corporate taxes stated: “[s]ince this is a legal matter rather than tax, no need to do anything further for me. I will leave it up to you as to whether you want to look into any further.” General Cable took no further action and did not take any steps to implement adequate internal accounting controls. The corrupt payments made through intermediary companies in Thailand” continued.

All of this led the DOJ to note wryly in the NPA, “Thus, even if senior employees of General Cable were unaware initially that the payments to the distributor were being used for illegal purposes, employees at PDTL (Phelps Dodge) and General Cable, including Executive A, came to the understanding that money being paid to the distributor was being used for illegal purposes, and closed their eyes to it being used for bribery.”

China

In China the bribery scheme was once again funneled through corrupt distributors. The China business unit, “paid more than $500,000 to China-based agents and distributors, typically in the form of rebates, special discounts, and technical service fees.” Once again, “General Cable China knew that the third-party agents and distributors would use the money, in part, for corrupt purposes.” Emails presented in the NPA noted, “The General Cable China employee emailed the supervisor and justified the corrupt payment, stating that “a few key players at [the state-owned customer] are our internal contacts and charge a certain amount of fees. If we are looking to have long-term cooperation with them, charges for this is rather inevitable.””

The various bribery schemes are summarized in the Bribery Box Score

I have laid out these bribery schemes in some detail as they continue to provide significant information to the compliance practitioner about the different ways to fund bribery schemes and how routine oversight can detect them. (Hint – follow the money.) Of course, even if you detect such illegal schemes, there must be a corporate will to stop the illegal conduct and then remediate the conduct. Apparently for some significant period of time, such was not the case at General Cable. Yet as noted early in this blog post, the company made a stunning comeback and actually received a 50% discount off the low range of the suggested penalty under the US Sentencing Guidelines. Tomorrow I will consider what the company did to obtain such a result.

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