No one needs to be reminded about the importance of anti-corruption compliance. For global companies, anti-corruption risks are amongst the top 3 risks identified by corporate leaders.
Global companies face a growing network of international anti-corruption law enforcement agents and prosecutors who are coordinating and sharing intelligence. The globalization of anti-corruption enforcement has increased significantly the risk of detection and prosecution. While the Justice Department and the SEC continue to drive global enforcement, other countries are increasing their enforcement efforts.
Just to remind every one of the threat of enforcement, the SEC announced its first enforcement action against Elbit Imaging, an Israeli company. Elbit agreed to a $500,000 civil penalty and an SEC administrative settlement.
The SEC’s enforcement action is an important reminder of the importance of adhering to internal controls, conducting third-party due diligence, following accounts payable controls, and contracting/payment authorizations. The SEC’s ability to hold companies accountable for circumventing internal controls is a powerful enforcement tool, and the Elbit Engineering case is yet another example of the SEC’s use of this tool against global companies.
The SEC’s Order does not allege that Elbit paid bribes to a foreign official. To the contrary, the SEC’s discussion of the facts concludes with the fact that the undocumented and unverified payments may have been used for bribery payments to Romanian government officials.
The facts of the case are instructive. Elbit’s shares trade on NASDQ. Plaza Centers is an indirect subsidiary based in the Netherlands. Plaza is an international real estate developer of shopping and entertainment centers.
The enforcement action centers on the activities of the former CEO of Elbit and Executive Director of Plaza, and a large real estate development project in Bucharest, Romania, the Casa Radio Project. Going back to 2006, Plaza retained a consultant to value the development project and learned that the project was very lucrative. Five years later, at the direction of the former Elbit CEO, Plaza retained a consultant to assist Plaza in securing approvals to construct the project and to increase its ownership interest in the project with the Romanian government. Plaza performed no due diligence on either the 2006 or the 2011 consultants.
Plaza had no documentation or evidence that the two consultants performed any work to assist in the project. Neither consultant attended any meetings or provided any reports relating to their consulting engagements. Nonetheless, between 2007 to 2012, Plaza paid the consultants approximately $14 million. Plaza’s top officers approved the payments to these consultants without securing appropriate documentation of the services provided.
In October 2011, a joint venture, including Elbit and Plaza, which owned approximately 45 percent of the joint venture, sought to sell a portfolio of shopping centers. Elibit and Plaza entered into a sales agency agreement (Agent A) to sell the portfolio. Again, no due diligence was conducted of Agent A. Elbit’s former CEO did not execute the contract in accordance with Elbit’s authorization policies. Sales Agent A was to receive a 0.9 percent commission. Unknown to Elibit and Regency, Sales Agent A retained a sub-Agent B, which was beneficially owned by the former Elbit CEO, and was to be paid a 0.88 percent commission. The former CEO never disclosed his indirect beneficial ownership interest.
Months before entering the sales agent A contract, the joint venture retained a financial institution to provide virtually the same services as Sales Agent A was supposed to provide. Sales Agent A and Agent B provided no financial services pursuant to their respective contracts.
On June 21, 2012, Elbit announced the sale of the real estate portfolio for $1.428 billion. Sales Agent A was paid $13 million for no documented services. Agent A then paid $12.75 million to Agent B, which was owned by the former Elbit CEO.
In total, Elbit paid a total of $27 million to the 2006 consultant, the 2011 consultant and Sales Agent A, notwithstanding the fact that there was no documentation of any services provided by these consultants.
The SEC settlement cites several specific failures in Elbit’s internal controls: (1) the absence of any documentation or records relating to the accounts payable process; (2) the legal department’s limited involvement and supervision of the contracts; (3) absence of policies and procedures to detect corruption risks; and (4) inadequate training to employees on anti-corruption issues.