Why it matters: In a settlement announced on February 24, 2015, the SEC found Goodyear to be in violation of the FCPA in connection with bribes paid by two foreign subsidiaries, one of which came into Goodyear’s ownership through acquisition. Simply put, Goodyear had an anticorruption program in place, the bribes came to its attention arguably due to the operation of that program, and Goodyear promptly undertook comprehensive remedial actions and voluntarily disclosed the improprieties to the government. Yet, because Goodyear had allegedly failed to perform adequate due diligence during the acquisition of one of the subsidiaries and to adequately create, or ensure adherence to, FCPA-compliant programs at either subsidiary, it agreed to disgorge over $16 million for “failing to prevent or detect” the bribes.
Detailed discussion: The Goodyear Tire & Rubber Company (Goodyear), headquartered in Akron, Ohio, is a publicly traded company with subsidiaries operating in 22 countries. It is the company’s subsidiaries operating in Kenya and Angola that are the subject of this settlement.
Goodyear purchased a minority stake in a Kenyan joint venture, Treadsetters Tyres Ltd. (Treadsetters) in 2002. By 2006, Goodyear had acquired a majority stake in Treadsetters and, during the time in question, Treadsetters was an indirect subsidiary of Goodyear. After the acquisition, the day-to-day operations of Treadsetters continued to be run by Treadsetters’ founders and the local general manager. From 2007 through 2011, in a “routine” practice that “appears to have been in place prior to Goodyear’s acquisition of Treadsetters,” bribes of over $1.5 million were paid to employees of local government-owned businesses and to police, tax and other local authorities for the purpose of making tire sales. Goodyear disclosed in its 2012 10-K that these bribes were brought to its attention in June 2011 through an anonymous tip left on a confidential ethics hotline. In the settlement order, which made no mention of the ethics hotline or any compliance program in place at Treadsetters of which it may have been a part, the SEC found that “Goodyear did not detect or prevent these improper payments because it failed to conduct adequate due diligence when it acquired Treadsetters, and failed to implement adequate FCPA compliance training and controls after the acquisition.”
During the time in question, the Angolan company, Trentyre Angola Lda. (Trentyre), was a wholly owned subsidiary of Goodyear. The day-to-day operations of Trentyre were handled by a local general manager. From 2007 through 2011, Trentyre similarly paid over $1.6 million in bribes to employees of local government-owned businesses and to police, tax and other local authorities for the purpose of making tire sales. Goodyear disclosed in its 2012 10-K that these bribes were brought to its attention in July 2011 by a local Trentyre employee. Again, without referencing any compliance program in place at Trentyre that the local employee may have been following in making his disclosure, the SEC found that “Goodyear did not prevent or detect these improper payments because it failed to implement adequate FCPA compliance training and controls at this subsidiary.”
The bribery payments were found to have been falsely recorded in the books and records of Treadsetters and Trentyre as legitimate business expenses, which were then consolidated into Goodyear’s books and records in violation of Sections 13(b)(2)(A) (failure to make and keep accurate books and records) and 13(b)(2)(B) (failure to devise and maintain sufficient accounting controls) of the ’34 Act (Goodyear was not charged under the FCPA antibribery provisions). Goodyear, which did not admit to or deny the SEC’s findings, consented to disgorge over $16 million (consisting of an aggregate $14 million in illicit profits plus interest) and report over a three-year period on its FCPA and anticorruption remediation efforts and implementations.
The SEC acknowledged Goodyear’s prompt voluntary disclosure and “significant” cooperation in not imposing a civil penalty. The SEC also acknowledged Goodyear’s comprehensive remedial measures, such as promptly halting the bribes and disciplining those responsible (including executives from Europe, the Middle East and Africa that had oversight responsibility); making improvements in its compliance programs in sub-Saharan Africa and globally in terms of training, audit and oversight, including updating policies regarding third-party agents/vendors and implementing new third-party due diligence software; creating a new senior oversight position at the parent company (V.P. of Compliance and Ethics); and selling the two subsidiaries (the sale of Treadsetters was completed in 2013, and the sale of Trentyre is pending).
According to the DOJ and the SEC, the FCPA requires companies to have compliance programs in place that are designed to prevent, detect and correct bribery. In this situation, although the facts are unclear about the existence of or adherence to compliance programs that may have been in place at the subsidiaries, the bribery was, in fact, detected and corrected—Goodyear learned about the bribes through an ethics hotline in Kenya and a local employee in Angola. So, what is the FCPA takeaway from this settlement? First and foremost is the reminder that, when acquiring a foreign entity, as Goodyear did in Kenya, thorough due diligence be performed so as to expose and put a stop to any “routine” corrupt payments that the existing local management made in the ordinary course. Where due diligence is not possible and the country and/or business is “high risk,” consider putting new management in place. Second, once in place, compliance programs should be vetted, revised and improved upon on an ongoing basis to keep abreast of evolving business practices and changing mores of the local territory. It must be noted, however, that not even the most diligent good faith attempts to adhere to FCPA requirements will ultimately prevent companies from having an employee engage in an FCPA violation. There is no mitigating “good faith” defense under the FCPA, nor is there a defense of having a robust compliance program in effect as there is under the U.K. Bribery Act. Given the language used in the Goodyear consent order, maybe the time is ripe to revisit the ongoing debate within Congress and the business and legal communities as to whether the FCPA should be amended to include such a defense.
Click here to read the SEC consent order In the Matter of The Goodyear Tire & Rubber Company (2/24/15).
For more on this matter, refer to the SEC press release issued on 2/24/15.