The Securities and Exchange Commission (SEC) announced on September 28, 2015 that Tokyo-based Hitachi Ltd. (Hitachi) agreed to pay $19m to settle charges that it violated the accounting provisions of the Foreign Corrupt Practices Act (FCPA). This marks the first FCPA settlement for violations that have taken place entirely in South Africa, a country where companies had until now not experienced the scope of the extra-territorial jurisdiction of the FCPA.

Introduction

The Securities and Exchange Commission (SEC) announced on September 28, 2015 that Tokyo-based Hitachi Ltd. (Hitachi) agreed to pay $19m to settle charges that it violated the accounting provisions of the Foreign Corrupt Practices Act (FCPA). The SEC alleged that Hitachi’s South African subsidiary inaccurately recorded payments made to an allegedly politically-connected company in connection with two government energy sector contracts amounting to $5.6bn.1

Hitachi did not admit nor deny the SEC’s allegations.

This marks the first FCPA settlement for violations that have taken place entirely in South Africa, a country where companies had until now not experienced the scope of the extra-territorial jurisdiction of the FCPA.

Background to South Africa’s first significant FCPA enforcement action

Seeking to enter the South African market, Hitachi established a South African subsidiary in 2005. The SEC contended that the company’s mandate was to pursue lucrative public and private contracts. That same year Hitachi sold 25 percent of the South African subsidiary’s shares to a company called Chancellor House Holdings (Pty) Ltd (Chancellor House), a South African investment company that was formed by the African National Congress (ANC), the country’s dominant political party, which controls the national government.

The transaction between Hitachi and Chancellor House was designed to ensure that Hitachi complied with South Africa’s unique Black Economic Empowerment (BEE) laws, which were devised with the intention of redressing the inequalities borne by apartheid. At the time, companies doing business in South Africa had to be at least 25 percent owned by black South Africans in order to be awarded government contracts.2

In the complaint filed in the US District Court for the District of Columbia, the SEC avers that Hitachi had Chancellor House’s political influence in mind when choosing their South African BEE shareholders. The SEC cited an email from a Hitachi executive in South Africa to senior Hitachi executives in Japan which stated that Chancellor House’s ANC influence was taken into account when seeking a BEE partner and Hitachi still felt that it was the right decision to partner with Chancellor House.

According to the complaint, the connections between the shareholders of Chancellor House and the South African government were extensive, as were the connections between Chancellor House and Eskom SOC Ltd (Eskom), the state-owned energy provider, which would go on to award Hitachi two of the largest infrastructure contracts in the country’s history.

Hitachi was ultimately awarded two government contracts in late 2007 for the provision of boilers for two power stations that were to be constructed by Eskom.

Hitachi’s SEC settlement and the underlying events

Nearly a decade after the underlying events, the SEC has penalized Hitachi for the manner in which it recorded payments that it made to Chancellor House.

The SEC alleged three types of improperly recorded payments by Hitachi:

  1. Hitachi paid Chancellor House approximately $1.1m in 2008 related to two invoices that Chancellor House referred to as “tender support fees,” which were recorded as “consulting fees” in Hitachi’s expense accounts;
  2. in June 2012, Hitachi paid Chancellor House approximately $5m as “dividends” for its 25 percent shareholding in the company; and
  3. in 2014, Hitachi repurchased the 25 percent shareholding it had sold to Chancellor House in 2005. Chancellor House had acquired its stake for $190,819 and sold the shares back to Hitachi for $4.4m.

In all, the SEC alleged that payments of approximately $10.5m from Hitachi resulted in a return in excess of 5,000 percent for Chancellor House.

The SEC chided Hitachi for a “lax control environment” that was alleged to have violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. These provisions require issuers and businesses covered by the FCPA to make and keep books, records and accounts that fairly and accurately reflect the issuer’s transactions and dispositions of assets. Issuers are also required to devise and maintain systems of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded and accounted for and properly authorized.

Future focus on South Africa

In the last three years the SEC has increased its interest in the conduct of companies operating in South Africa. Two previous FCPA investigations by the SEC against major South African companies, Net 1 UEPS Technologies, Inc. (2012) and Gold Fields Limited (2013), were dropped earlier this year.3

In announcing the Hitachi settlement, the SEC thanked the Fraud Section of the US Department of Justice, the Federal Bureau of Investigation, the African Development Bank, and the South African Financial Services Board. This case represented “the first” collaboration between the SEC and the African Development Bank, which only recently established its anti-corruption group. 

The SEC has spent a substantial amount of time and resources on South Africa in the past few years, and it has hailed the Hitachi case as a success. It remains to be seen whether the SEC’s first enforcement in South Africa will lead to further FCPA cases involving that country

What does this case mean for business in Africa?

Multinational companies operating in jurisdictions that are seemingly far-removed from the United States would be remiss to ignore the risks of failing to implement robust anti-bribery and corruption processes in their businesses. Where the SEC faces challenges concerning either jurisdictional complications or the ability to prove that bribery occurred, the Hitachi settlement illustrates the SEC’s willingness to pursue broad enforcement of the FCPA through its use of the statute’s accounting provisions.

Past transgressions may also be problematic, as was the case for Hitachi, which has not been an issuer since 2012 and was no longer subject to the accounting provisions of the FCPA at the time of the settlement. This case is evidence of the SEC’s ability and preparedness to initiate enforcement action even where companies have ceased to be issuers but the violations took place at a time when the company was subject to the FCPA