We now have our second Foreign Corrupt Practices Act (FCPA) corporate enforcement action in 2021. The Securities and Exchange Commission (SEC) entered into a Cease and Desist Order (Order) last week with WPP plc, the world’s largest advertising group, for the paying bribes to Indian government officials and participating in other “illicit schemes” in China, Brazil and Peru. WPP agreed to pay $11 million+ in disgorgement and interest and penalty of $8 million for a total amount of just over $19 million.
All I can say is that the WPP enforcement action is quite a doozy. Not from the amount of the fine and penalty perspective but from a variety of other angles that are instructive from the compliance perspective. These compliance angles include tone at the top, culture, whistleblowers and internal reporting, internal investigations, mergers and acquisitions (M&A), missed red flags, conscious indifference and financial incentives. It is also interesting from what is not in the record regarding self-disclosure, the Department of Justice (DOJ), the UK Serious Fraud Office (SFO) and the lack of a monitor. In other words, there is much to parse from this enforcement action, and I do not know how many posts I will pen about it. Today we begin with the background.
What They Said
According to the SEC Press Release, “WPP implemented an aggressive business growth strategy that included acquiring majority interests in many localized advertising agencies in high-risk markets. The order finds that WPP failed to ensure that these subsidiaries implemented WPP’s internal accounting controls and compliance policies, instead allowing the founders and CEOs of the acquired entities to exercise wide autonomy and outsized influence. The order also finds that, because of structural deficiencies, WPP failed to promptly or adequately respond to repeated warning signs of corruption or control failures at certain subsidiaries. For example, according to the order, a subsidiary in India continued to bribe Indian government officials in return for advertising contracts even though WPP had received seven anonymous complaints touching on the conduct. The order also documents other schemes and internal accounting control deficiencies related to WPP’s subsidiaries in China, Brazil, and Peru.”
In the same Press Release Charles Cain, the SEC’s FCPA Unit Chief, noted, “A company cannot allow a focus on profitability or market share to come at the expense of appropriate controls. Further, it is essential for companies to identify the root cause of problems when red flags emerge to prevent a pattern of corrupt behavior from taking hold.”
Perhaps more interesting were the comments from WPP and its former chairman. According to the Financial Times, WPP said in a statement, “the findings related “to control issues as well as the acquisition and integration of companies in high-risk markets until 2018”. The company had “fundamentally changed its approach to acquisitions, co-operated fully with the commission and terminated those involved in misconduct”.” According to Bloomberg, WPP said in an emailed statement, “WPP’s new leadership has put in place robust new compliance measures and controls, fundamentally changed its approach to acquisitions, cooperated fully with the Commission and terminated those involved in misconduct.”
Sir Martin Sorrell, who led the firm up until 2018 (and right during the time bribery was alleged to have occurred), said, “I had no part or involvement in the settlement between the SEC and WPP. My personal commitment to compliance and controls during almost 50 years of value creation has been rigorous and remains so. I note there have been terminations of only certain senior executives and other employees at WPP involved in the misconduct as a consequence. I left WPP as a good leaver as its statement of April 14, 2018 made clear.”
The Bribery Schemes
According to the Wall Street Journal (WSJ), WPP grew largely through acquisitions, buying up agencies around the world. Many of these acquisitions had a financial provision that gave “top executives bonuses for meeting certain financial goals. Those types of deals could motivate executives at the acquired firms to increase their profits any way they could, said Doug Wood, senior counsel at law firm Reed Smith LLP and general counsel to the Association of National Advertisers.” Here you being to see the problem, skewed incentives.
The WSJ reported, “an Indian subsidiary of WPP paid as much as $1 million in bribes to Indian officials through intermediaries to obtain and retain government business, resulting in about $5.7 million in additional profits between 2015 and 2017. The bribes continued even though WPP had received seven anonymous complaints over that period referring to the conduct.” In China there was a criminal tax investigation under way during and immediately after the acquisition of an agency in that high-risk jurisdiction. The “subsidiary in the midst of a tax audit avoided paying more than $3 million in taxes to a Chinese tax authority by giving $2,000 worth of gifts and entertainment to tax officials and making more than $100,000 in payments to a vendor recommended by tax officials ahead of the audit’s completion.” Finally, the WSJ noted, “a WPP subsidiary in Brazil made improper payments to vendors in connection to securing government contracts, while a WPP subsidiary in Peru agreed to be a conduit for a construction company’s bribes to the mayor of Lima’s political campaign.”
As noted, one of the unanswered questions is why there was no monitor required under the Order. According to the Order, WPP did not even have a compliance function during the “period in question”. Although that time frame was not specifically identified in the Order, the events listed in the Order occurred right up until 2019. Clearly a culture of compliance was not high on the list for WPP. Yet the Order credited WPP for the following, “WPP’s remediation includes (i) terminating senior executives and other employees involved in the misconduct and separating from employees with supervisory responsibilities over the misconduct; (ii) strengthening and expanding its global compliance, internal investigations, risk and controls functions, including the creation of 36 new positions globally; (iii) enhancing its internal audit function; (iv) creating Network risk committees to prevent, detect, and remediate corruption risk, among other risks; (v) conducting global, annual compliance risk assessments; (vi) conducting proactive reviews of remaining FIC entities in Brazil, China, and India; (vii) streamlining businesses and back-office functions, including that three of the Networks in which the subsidiaries in this Order were incorporated have since been merged with other networks; (viii) enhancing the procedures for engagement of third parties; and (ix) enhancing training provided to employees regarding anti-corruption, controls, and other compliance issues.”
Some of the questions I will explore over this series include:
- How was the SEC made aware of WPP’s bribery and corruption?
- Is there a parallel DOJ enforcement action?
- Where is the SFO?
- How did WPP avoid a monitor?
I am sure there are others that will arise but if you have any questions you want to explore in this series, please let me know and I will see what I can do.