Avon and its Chinese Subsidiary Making Over Compliance Programs as Part of Deferred Prosecution Agreement
This month, Avon Products (China) Co. Ltd. (“Avon China”), a wholly-owned subsidiary of cosmetics and beauty titan Avon Products Inc. (“Avon”), pled guilty to one count of conspiracy to falsify its books and records in order to cover up millions of dollars in bribes paid to Chinese government officials. For its part, parent company Avon entered into a DPA in which it admitted fault for its role in the conspiracy to cover up the improper payments and its failure to implement an internal compliance program to prevent and detect such issues. As we reported in May, Avon and Avon China agreed to pay more than $135 million in criminal and regulatory penalties to the SEC and DOJ to settle FCPA violations involving bribery and improper accounting.
The SEC investigation of Avon China found that the company routinely offered items of value to Chinese officials in order to obtain business benefits, in particular, a lucrative license allowing the company to market its beauty products door-to-door. To secure these benefits, Avon China provided Chinese government officials with cash, luxury designer bags and watches, and non-business related meals, entertainment and international travel expenses. The illicit payments, topping more than $8 million, were conferred on Chinese officials between 2004 and 2008.
Avon and Avon China admitted that they discovered the corrupt payments in 2005 but stymied an internal inquiry into the activity and closed the investigation without taking action to stop the behavior or remedy the abuses. As part of its DPA, Avon agreed to cooperate fully with the government as it continues its investigation, enforces its since-adopted internal compliance program, and works with an independent compliance monitor for no less than 18 months. The company is also paying fines, including $52.85 million in disgorgement.
Aircraft Repair Company to Pay $14 Million to Resolve Illegal Payments in Latin America
On December 10th, the DOJ announced that Dallas Airmotive Inc., a Texas-based aircraft engine maintenance, repair and overhaul services provider, entered a DPA with the DOJ on charges of conspiracy and bribery of government officials in Latin and South America. The company will pay a $14 million penalty as part of the agreement.
Pursuant to the DPA, Dallas Airmotive admitted to bribing members of the Air Force in Brazil and Peru and governors in Brazil and Argentina from 2008 to 2012. Through the bribes, the company secured and retained business contracts with the governments of these countries. The company disguised the corrupt payments as “commissions” or “consulting fees,” which were wired to front companies and third persons connected to the foreign officials, or which were provided as gifts in the form of paid vacations.
According to a company spokesperson, the individuals responsible for the bribes are no longer working with the company. Additionally, new leadership has been appointed for the company’s South American and Brazilian sales teams.
SEC Charges Massachusetts-Based Scientific Instruments Manufacturer With FCPA Violations
On December 15th, a Massachusetts-based life sciences company agreed to pay $2.4 million to resolve foreign bribery charges by the SEC. Bruker Corporation, headquartered in Billerica, Massachusetts, was charged with violating the FCPA in connection with bribes paid by China-based employees to Chinese government officials.
Bruker first announced an investigation into potential bribery in China in August 2011, disclosing that the company had received an anonymous tip that employees of China-based subsidiary Bruker Optics had engaged in improper conduct. In March 2012, Bruker announced that the investigation, conducted by the company’s audit committee and an independent audit firm, determined that employees of Bruker Optics made improper payments to employees and agents of state-owned enterprises in China. The company self-reported its investigative findings to the DOJ and the SEC. Bruker terminated employees determined to be involved with the improper payments, and also announced an expansion of its investigation to address the company’s other China-based subsidiaries.
According to a cease and desist order filed by the SEC earlier this month, the agency's investigation found that employees of Bruker’s China operations paid $230,938 in bribes to Chinese government officials between 2005 and 2011. Some of the payments included compensation for Chinese government officials to tour and sight-see in the United States, the Czech Republic, Norway, Sweden, France, Germany, Switzerland and Italy. Other payments were offered in connection with 12 purported “collaboration agreements” to provide research to support Bruker’s products. The SEC ultimately determined that the agreements lacked any legitimate business purpose. As a result of the improper payments, Bruker earned over $1.5 million in profits, which were recorded in Bruker’s books and records as business and marketing expenses.
The SEC found that Bruker failed to maintain adequate internal controls because the company failed to detect the improper payments recorded in the company’s accounting records. Kara Brockmeyer, chief of the SEC Enforcement Division’s FCPA unit, cited the company’s “lax internal controls” as the cause of the “sham ‘collaboration agreements’” and payments to “send officials on sightseeing trips around the world.”
In a "no admit, no deny" settlement, Bruker agreed to pay $2.4 million to resolve the charges, including approximately $1.7 million in disgorgement, approximately $310,000 in prejudgment interest and a $375,000 penalty.
UK Company Admits to Bribery and Corruption in Kazakhstan
On December 17th, Scottish company International Tubular Services Limited (ITS) agreed to pay a £170,000 fine ($267,000) after admitting that it had benefited from corrupt payments made to a Kazakhstan customer to secure additional business dealings.
ITS, which supplies equipment for petroleum and natural gas extraction, discovered the corrupt payments in 2013 in connection with the company’s acquisition by Houston, Texas-based Parker Drilling Company. ITS disclosed the corrupt payments to the Scottish Crown Office and Procurator Fiscal Service (COPFS) in November 2013 under a self-reporting initiative.
The £170,000 fine paid by ITS represents the total profits earned from the company’s corrupt dealings in Kazakhstan. Linda Hamilton, Head of the Civil Recovery Unit of the COPFS, commented on the resolution of the ITS case, explaining that “[i]n appropriate circumstances, the self-reporting initiative allows for companies to accept their involvement in corrupt practices, put in place effective systems to prevent it from recurring, and repay the illegitimate profits.” Hamilton also noted that the recouped funds “will be transferred to the Scottish government to be reinvested back into Scottish communities.”
Parker Drilling Company has also grappled with bribery allegations. In 2013, the company paid nearly $16 million to the DOJ and the SEC to resolve FCPA charges related to bribery of Nigerian officials through an agent to circumvent customs and tax law. To learn more about that settlement, see the February 2013 Red Notice coverage.
SEC Settles FCPA Charges With Two Former Tech Firm Employees
On November 17th, two employees of Oregon-based technology firm, FLIR Systems Inc., agreed to pay a financial sanction to settle an internal SEC FCPA enforcement action. Without admitting or denying the findings, Stephen Timms and Yasser Ramahi, executives in the firm’s Dubai office, agreed to settle the SEC charges related to the provision of a “world tour” and luxury watches given to Saudi government officials in exchange for multi-million dollar contracts involving the sale of thermal binoculars and security cameras to the Saudi government.
In 2008, FLIR Systems entered into a $12.9 million agreement to provide thermal binoculars to the Saudi Arabian government. In 2009, Timms and Ramahi travelled to Saudi Arabia to discuss future business opportunities, including a potential $17.4 million deal to provide FLIR security cameras to the Saudi Arabian government. During the visit, Timms and Ramahi provided Saudi officials involved in the negotiations with expensive luxury watches. A few months later, Timms and Ramahi arranged for several Saudi government officials to take a company-funded 20-night “world tour.” According to the SEC, “[t]he officials traveled for 10 nights with stops in Casablanca, Paris, Dubai, Beirut and New York City. There was no business purpose for the stops outside of Boston, and the airfare and hotel accommodations were paid for by FLIR.”
Timms and Ramahi submitted false invoices to FLIR’s finance department to conceal the watch and “world-tour” expenses, and engaged the assistance of third parties to provide misinformation to the finance department regarding the true extent of the costs. Timms and Ramahi also attempted to cover the “world tour” costs by suggesting that FLIR’s payment for the travel accommodations was a “billing mistake” by the company’s travel agent.
The SEC found that both Timms and Ramahi violated antibribery and books and records provisions of the Securities and Exchange Act of 1934. Timms and Ramahi are both U.S. citizens living abroad. Timms, a resident of Thailand, was ordered to pay a financial penalty of $50,000 and Ramahi, a resident of the United Arab Emirates (UAE), agreed to pay a penalty of $20,000.
Andrew Ceresney, director of the SEC Enforcement Division, cautioned that “[t]his case shows we will pursue employees of public companies who think it is acceptable to buy foreign officials’ loyalty with lavish gifts and travel. By making illegal payments and causing them to be recorded improperly, employees expose not only their firms, but themselves, to an enforcement action.”
SFO Gains its First Convictions Under New U.K. Bribery Law
The SFO secured its first convictions under the U.K.’s Bribery Act this month when three former executives and directors of a U.K.-based eco-investment shop were convicted in connection with a biofuel investment scam perpetrated against U.K. investors.
Three former executives and directors of Sustainable AgroEnergy (SAE) were convicted in London’s Southwark Crown Court for violations of the Bribery Act and related offenses for their roles in an investment fraud scheme centered on environmentally-conscious investors. The SFO contended that the bio-energy company touted investment products linked to sustainability projects in the Cambodian jungle, promising investors returns of up to 25 percent per year. In particular, the SFO argued that the defendants solicited investments to fund Jatropha tree plantations in Cambodia, citing the trees’ oil as a source of environmentally-safe soap and fuel.
At trial, the SFO argued that in fact the investment shop was operating a pyramid scheme, applying new investments to repay previous investments. In addition, the SFO alleged that Gary Lloyd West, the company’s former chief commercial officer, and Stuart John Stone, one of the company’s agents, misappropriated investors’ funds to purchase luxury cars, including Aston Martins and Bentleys. The SFO claimed that Stone siphoned the money from SAE’s accounts by bribing West to create false invoices and then concealed the funds in a network of foreign bank accounts and offshore companies. The scheme involved over 250 investors and resulted in losses of over ₤23 million ($36 million).
West was sentenced to 13 years for violations of the Bribery Act, fraudulent trading and conspiracy to provide false information. Stone received a sentence of six years for violations of the Bribery Act. Both West and Stone were also disqualified from serving as corporate directors for periods of 15 years and 10 years, respectively. James Brunel Whale, the company’s former chief executive officer and chairman, was also found guilty of fraud in connection with the investment scam. Although the SFO alleged that the company’s accountant, Fung Fong Wong, was aware of the fraudulent scheme, the jury acquitted Wong on all charges.
David Green, the Director of the SFO, celebrated the convictions of “three individuals who preyed on investors, many of whom were duped into investing life savings and pension funds,” lamenting that as a result of the sham investments, “many lost life-changing amounts of money.” Several other U.K. agencies are pursuing Bribery Act charges against other former company employees.
British Printing Firm and Two Executives Convicted Under UK Bribery Act
Following its first successful individual convictions under the newly revamped U.K. Bribery Act in early December, the SFO earned its first corporate bribery conviction on December 22nd in London’s Southwark Crown Court. After a three-year investigation and a nearly month-long trial, the England-based printing firm Smith and Ouzman Ltd. ("S&O Ltd.") and two of its executives were convicted of making corrupt payments to public officials in Kenya and Mauritania in order to garner business.
The SFO alleged that the defendants paid a total of over ₤395,000 ($615,000) to public officials in the African nations between 2006 and 2010. After several weeks of trial, the jury convicted S&O Ltd. of three counts of corruptly agreeing to make payments. The jury also convicted Christopher John Smith, S&O Ltd.'s former chairman, and Nicholas Charles Smith, a former sales and marketing director, of two and three counts, respectively, of corruptly agreeing to make payments. Two other employees were acquitted following trial. The convicted defendants are scheduled to be sentenced by the Southwark Crown Court on February 12, 2015.
David Green, the director of the SFO, praised the agency’s results, commenting that “[s]uch criminality, whether involving companies large or small, severely damages the UK’s commercial reputation and feeds corrupt governance in the developing world.”
The SFO first began investigating the printing firm in 2010, and received assistance from authorities in Kenya, Ghana and Switzerland to support its prosecution. The SFO pursued the convictions under the U.K.’s Prevention of Corruption Act of 1906. The SFO has yet to convict a company under the new Bribery Act, which was enacted in 2011 to amend and enhance the Prevention of Corruption Act.
German Defense Contractor Fined $46 Million for Greek Armament Deal
This month, German defense contractor Rheinmetall AG announced that it has agreed to pay €37 million ($46 million) to settle bribery allegations against one of its subsidiaries related to arms deals in Greece. The fine, imposed by German federal prosecutors in Bremen, marks the first bribery fine levied against a German arms dealer.
German prosecutors first announced the criminal investigation in April 2014, alleging that an officer of Rheinmetall Defence Electronics GmbH (RDE) made unauthorized payments to Greek officials to secure a €150 million air defense system deal. The German investigation was bolstered by an admission from a former Greek marine officer who acknowledged that he served as a middle-man to distribute bribe payments from RDE to Greek officials. The middle-man claimed that RDE paid him €20 million to facilitate the lucrative defense system deal and pressured him to provide approximately €10 million to Greek ministerial and military officials as regular bribe payments between 1998 and 2011.
Earlier this month, German officials accused the company of “failing to detect and prevent suspicious payments to sales partners due to inadequate internal controls.” The underlying investigation leading to the allegations was part of a wide-ranging corruption inquiry into arms procurement in Greece. One of Rheinmetall’s competitors, Atlas Elektronik GmbH, was also a target of the investigation.
RDE continues to conduct business with the Greek military and announced a new defense product deal in August. The deal, valued at €52 million ($65 million), provides for RDE to supply the Greek military with ammunition for the country’s fleet of Leopard 2 battle tanks, armed with Rheinmetall guns.