How Did We Get Here? Early M&A Cases Involving FCPA Enforcement

Thomas Fox - Compliance Evangelist

In the summer of 2018, the Department of Justice (DOJ) modified the Foreign Corrupt Practices Act (FCPA) Corporate Enforcement Policy regarding mergers and acquisitions (M&A). Deputy Assistant Attorney General Matthew Miner announced in a speech, a change to the FCPA Corporate Enforcement Policy. This change said that a company would have a presumption of a declination if the company voluntarily disclosed wrongdoing to the DOJ, cooperated with the government investigation and implemented extensive remedial measures. By offering a presumption of a declination, DOJ is encouraging companies with more robust compliance programs to acquire through corporate takeovers problematic companies and to implement strong compliance practices quickly after acquiring another company.

This step was in many ways the culmination of a long road the DOJ has taken in FCPA enforcement actions in the FCPA context. I thought it would be good to look back at some of the key FCPA enforcement actions involving M&A. These cases and the 2012 FCPA Guidance demonstrate vigorous prosecution of companies which allowed bribery and corruption to continue after a merger or purchase occurred. The key point to remember is that if a company was engaging in bribery and corruption before it was acquired and continued to do so after the transaction was completed, it is now youwho have engaged in bribery and corruption, not them.

Syncor International Corporation (2002)

Allegations – Cardinal Health, Inc. acquired Syncor International Corporation (Syncor), a radiopharmaceutical company based in California. Between 1997 and 2002, Syncor’s Taiwanese subsidiary made improper commissions payments totaling $344,000, to physicians who were employed by state-owned hospitals to influence the doctors’ decision to buy Syncor products and services. Another $600,000 in corrupt payments were made through Syncor’s foreign subsidiaries in Mexico, Belgium, Luxembourg, and France. All payments were authorized by and with the knowledge and approval of Syncor’s Founder and Chairman.

Penalties – Syncor Taiwan Inc., a wholly owned subsidiary of Syncor, pled guilty to substantive violations of the FCPA’s anti-bribery and books and records provisions, was sentenced to 3 years of supervised probation and ordered to pay a $2 million fine. The company also agreed to pay a $500,000 civil penalty and to cease and desist in future violations and was required to retain an independent consultant to review and make recommendations concerning the company’s compliance policies and procedures. At the time, it was the largest penalty ever obtained by the Securities and Exchange Commission (SEC) in a FCPA case.

Key Lessons Learned – This was the first time the DOJ charged a foreign company under the 1998 amendments, for acts taking place in the US (i.e., Chairman’s approval). Parent liability was established through the foreign subsidiary’s books and records and employees of a state-owned entity are instrumentalities of the government. This case also demonstrated how a government investigation can slow the closing of an acquisition as the acquisition by Cardinal Health, Inc. was delayed until the investigation was concluded and agreements were struck with the DOJ and SEC. The acquirer brought Syncor for a lower price than originally negotiated.

Titan Corporation (2005)

Allegations – This case involved the acquisition of Titan Corporation (Titan) by Lockheed Martin Corporation (LMT) but perhaps, most importantly, the acquisition ultimately failed. Titan employed a consultant and paid $3.5 million to a known business advisor of the President of Benin. Of the $3.5 million paid to the advisor, approximately $2 million were indirect contributions to the President’s re-election campaign. At the direction of a Titan senior officer, at least two payments of $500,000 each were wired from Titan’s bank account in San Diego, California, to the agent’s account in Monaco. The remaining payments were made to the agent in cash. Payments were characterized on Titan’s books and records as “social program payments” that were required by its contract with the government, the company also falsified documents to enable its agents to under-report local commission payments in Nepal, Bangladesh and Sri Lanka. Finally, Titan falsely reported to the US government commission payments on equipment exported to Sri Lanka, France and Japan.

Penalties – Titan pled guilty to substantive violations of the FCPA’s anti-bribery and books and records provisions, as well as a tax violation, was sentenced to 3 years of supervised probation and ordered to pay a $13 million fine. SEC alleged violations of the FCPA’s anti-bribery and books and records provisions; Titan agreed to pay the SEC an additional $15.5 million in disgorgement and prejudgment interest penalties and a $13 million penalty, which was satisfied by payment of the criminal fines. Titan was required to retain an independent consultant to review its compliance procedures and to adopt its recommendations. Finally, the SEC issued a 21(a) Report criticizing Titan’s proxy statement for incorporating what it deemed false FCPA representations and warranties. Most importantly for Titan, its acquisition by LMT ultimately failed.

Key Lessons Learned – Some of the basic tenets of a compliance program were laid out in this enforcement action. They included: a company must conduct meaningful due diligence with respect to foreign agents and consultants and must ensure that the services alleged to be performed are provided. Internal controls must be designed to detect “red flags,” such as offshore payments and inconsistent invoices. From the M&A perspective, representations and warranties in a merger agreement must be accurate (or qualified) when included in a proxy statement. There can be a risk of additional prosecution under the International Traffic in Arms Regulations (ITAR) and possible suspension of export privileges, potential US and foreign tax exposure and possible contractor debarment issues by the Department of Defense. Ultimately, and most importantly from the business perspective, the merger failed when Titan was unable to meet contractual agreement to settle with the US government by a certain time.

Latin Node Inc. (2009)

Allegations – In June 2007, eLandia International, Inc. (eLandia) acquired Latin Node Inc. (Latin Node), which provided wholesale telecommunications services to several developing countries by leasing lines from local phone companies in Latin America for $20 million. In August 2007, during a post-acquisition financial integration review, eLandia discovered evidence that Latin Node had paid approximately $2.25 million in bribes to Honduran and Yemeni government officials between March 2004 and June 2007. Subsequently, eLandia voluntarily reported the payments to DOJ, eventually paying a $2 million fine and placing Latin Node into bankruptcy and thereby losing its entire investment.

Penalties – Latin Node pled guilty to a one-count criminal information as part of a plea agreement with the government. Under the agreement, Latin Node agreed to pay a $2 million criminal fine, a special assessment and agreed to continue its cooperation with the government. Four Latin Node executives were charged with criminal conduct for their actions. They were Jorge Granados, 54, the company’s former Chief Executive Officer (CEO); Manuel Caceres, 64, a former vice president; and Juan Pablo Vasquez, the Chief Commercial Officer; and Manual Salvoch, the company’s former Chief Financial Officer (CFO). All four pled guilty.

Key Lessons Learned – This was the first FCPA enforcement action based entirely on pre-acquisition conduct that was unknown to the buyer when the transaction closed. The purchaser’s entire $22+ million investment in Latin Node was wiped out due to inflated acquisition price of the corrupt company and investigation costs. All of this demonstrated the need for rigorous pre-acquisition due diligence in addition to the post-acquisition integration. It also exposed individuals to the real possibility of jail time for their actions.

There have been several M&A other cases since these three but they set the model for the DOJ’s prosecution going forward. Every compliance practitioner should be aware of these cases and communicate to management that one of the most well settled areas of FCPA enforcement is around M&A. While the new change in creating a written safe harborin the M&A context, if you do not engage in appropriate pre-acquisition due diligence and there continues to be ongoing bribery and corruption after you acquire an entity, your company may well bear the brunt of any prosecution.

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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.

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