Today, I continue my four-part series on the above question posed to me recently by a colleague. In Part I, I wrote that only the US government had the wherewithal, tools and will to do so. Yesterday, I focused on corruption on the pitch and how bribery and corruption ‘changes the game’ of soccer (AKA Football). Today is the third of my of my four reasons on why Americans should care about the Department of Justice (DOJ) bringing their indictments against the 14 named defendants who were all associated with the governing body of international soccer, the Fédération Internationale de Football Association (FIFA). Up today is the corruption and US companies.
While there were no US companies specifically identified in the indictments, there were allegations that bribes were paid and pocketed in connection with the sponsorship of the Brazilian national soccer team by “a major U.S. sportswear company.” This company was later determined to be Nike. In an initial statement Nike denied any involvement in the payment of bribes and said they were cooperating with the relevant authorities. However, they later changed this original statement to say, “Like fans everywhere we care passionately about the game and are concerned by the very serious allegations. Nike believes in ethical and fair play in both business and sport and strongly opposes any form of manipulation or bribery. We have been cooperating, and will continue to cooperate, with the authorities.”
Nike is not alone in its World Cup sponsorship as there are numerous other American companies involved, both sportswear manufacturers and other retailers, such as those from the beverage industry. The involvement of US companies and companies subject to the Foreign Corrupt Practices Act (FCPA) brings up the specter of the FCPA for companies involved in FIFA sponsorship and marketing partnerships. I do not see this as an issue so much about level playing fields for business or even the greater benefits that US companies can bring even when they are required to pay bribes. (The latter argument was used by Wal-Mart apologists around the company’s payments of bribes to do business in Mexico as benefiting the people of Mexico. Let us be quite clear-the bribes paid by Wal-Mart benefitted Wal-Mart and its income from its Mexican operations.)
Information in the indictments was quite damning about the involvement of a company identified as ‘sportswear company A or E’. In a Financial Times (FT) article, entitled “Fifa corruption scandal threatens to engulf Nike as sponsors raise pressure”, Joe Leahy and Mark Odell reported one of the cooperating defendants Jose Hawilla, owner of Traffic Group and who has pled guilty, acted as a third party agent for Nike’s landmark 1996 agreement to allow Nike to fit out the Brazilian national soccer team. Moreover, the article noted, “The prosecutors said that additional financial terms between Traffic and the unnamed sportswear company were not reflected in the CBF agreement. Under these terms, the company agreed to pay a Traffic affiliate with a Swiss bank account an additional $30m in ‘base compensation’ on top of the $160m it paid to the CBF. Three days later, the company and Traffic signed a one-page contract saying the CBF had authorized Traffic to invoice Nike directly “for marketing fees earned upon successful negotiation and performance of the agreement”. Anyone see any Red Flags in that scenario?
Beyond the criminal side of the FCPA, there is the civil side enforced by the Securities and Exchange Commission (SEC) through the Accounting Provisions, which consist of the books and records provisions and the internal controls provisions. According to the FCPA Guidance, “The FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting. Company management and investors rely on a company’s financial statements and internal accounting controls to ensure transparency in the financial health of the business, the risks undertaken, and the transactions between the company and its customers and business partners. The accounting provisions are designed to “strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.””
As was made clear with the recent BHP Billiton FCPA enforcement action, violations of the accounting provisions do not apply only to bribery-related violations of the FCPA. The FCPA Guidance states these provisions “stand alone to help investors have assurance that all public companies account for all of their assets and liabilities accurately and in reasonable detail.” For the books and records provisions this means that US public companies must “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” For the internal controls provisions, US public companies must provide a system of internal controls that “provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements.” In other words, the accounting provisions are designed to protect investors in addition to working towards preventing, detecting and remediating bribery and corruption.
In addition to these basic legal requirements, which are all set out in the FCPA and violation thereof could lead to criminal or civil exposure; there will be the costs. The FCPA Professor has identified “three buckets” of costs relating to an alleged FCPA violation. The first is the pre-resolution investigative and remediation costs, the second is the fine and penalty assessment and the third is the post-resolution implementation costs. It is generally recognized that buckets one and three can be up to two to six times the amount of the fine and penalty.
But with the FIFA scandal, there will be another huge factor for companies to consider and that is the negative publicity. This scandal is the largest worldwide corruption case ever brought. It is also the highest profile corruption case ever brought. It will command attention for years to come. If any US companies are linked to bribery and corruption at FIFA, their name will be dragged through the international press ad nauseum. If there are leaks about information on companies before they investigate or get out ahead of any allegations, which may spill into the press, it will certainly not look good.
For a taste of this you can look to the accounting firm KPMG, who is the auditor for FIFA. In a story originally reported by Francine McKenna at the Wall Street Journal (WSJ) and later reported by the New York Times (NYT), KPMG has blessed FIFA’s books since at least 1999. In the NYT piece, entitled “As FIFA case grows, focus turns to its auditors”, Lynnley Browning wrote that the KPMG audits “only heightens the puzzling disconnect between the different pictures that are emerging of FIFA as an organization: riddled with bribes and kickbacks in the view of prosecutors yet spotless according to the outsider most privy to its internal financial dealings.” How well do you think KPMG will come out of this?
The bottom line is that any US company or any other entity subject to the FCPA had better take a close look at its dealings with FIFA, regional soccer federations such as CONCACAF and national soccer federations. A full review is in order starting with who you did business with and how you did business with them. As Mike Brown would say, “follow the money” and see where it went, if you can account for it and if it was properly recorded on your company’s books and records. Finally, now would be a very propitious time to review your internal controls; for even if you had a robust paper system of internal controls like BHP Billiton did, if it is simply a check-the-box exercise or even worse you do not follow the internal compliance controls you have in place, you should begin remediation now.
As to why Americans should care about US companies engaging in corruption, that answer would seem to be straightforward. Companies which engage in bribery and corruption mislead investors and diminish the marketplace of information to base investments upon. If a company is engaging in bribery and corruption, they never report it in their books and records; they always try to hide it so that it cannot be detected. Usually poor internal controls exist, which can allow bribery and corruption to exist or even the possibility of it, once again demeaning the value of a company if that company cannot assure its investors that funds will be paid out with the approval of management. Further, contracts or other business obtained through bribery and corruption presents a false picture of the true financial health of a company as it allows profits obtained through illegal means to be booked as legitimate. Finally, if a company is engaging in bribery and corruption, the financial cost to the company can be astronomic. There is only one Wal-Mart that can sustain hundreds of millions dollars spent to investigate allegations of bribery and corruption and remediate any issues. Avon spent north of $500MM on its pre-resolution investigation and remediation. All of this does not even get to the issue of inflated stock values and the inevitable shareholder derivative litigation. Lastly, there is reputational damage. If a company is willing to engage in bribery and corruption as a part of a business strategy do you want to invest in the organization?
As an American should I care about US companies involved in the FIFA corruption scandal? If the facts reported in the FT are close to correct, I would certainly think so. If monies were paid by a ‘sportswear’ company in the form of marketing fees to Traffic or even a flat $40MM payment to a Traffic affiliates Swiss bank account, this is something which should not be tolerated.