On December 22, 2008, the Department of Justice (the “Department”) and the Securities and Exchange Commission (the “SEC”) announced the latest settlement in their ongoing investigations of, among other things, illegal kickbacks and violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) in connection with contracts awarded under the United Nations (“UN”) Oil for Food Program (the “OFF Program”).1 Under the terms of the settlement, more fully discussed below, Italian auto manufacturer Fiat S.p.A (“Fiat”) and three of its subsidiaries, Iveco S.p.A. (“Iveco”), CNH Italia S.p.A. (“CNH Italia”) and CNH France S.A. (“CNH France”), agreed to pay a criminal fine of $7 million and enter into a Deferred Prosecution Agreement with the Department for a duration of three years. Fiat and another of its subsidiaries, CNH Global N.V. (“CNH Global”), also agreed to pay over $10 million to the SEC, representing disgorgement of profits in an amount over $5.3 million, pre-judgment interest of almost $1.9 million, and a civil penalty of $3.6 million. To date, ten companies have settled actions with the U.S. government in connection with their conduct under the OFF Program, and more settlements are anticipated in 2009.
The OFF Program was implemented in 1996 when restrictions on direct financial transactions with the Iraqi government were in place.2 The program created an exception to the Iraq sanctions regime in that it authorized the government of Iraq to sell its oil so long as the proceeds were used to purchase UN-approved humanitarian goods. In order to enforce the program, proceeds from oil sales were required to be placed into a UNcontrolled escrow account. Funds from this account were then used to pay suppliers that had been awarded humanitarian goods contracts by the Iraqi government so long as the contracts had been reviewed and approved by the UN. According to the Department, beginning in 2000, the Iraqi government began requiring the suppliers of humanitarian goods to pay a kickback, usually amounting to a percentage of the contract price, to the government as a condition of the award of a contract.3 These kickbacks, often disguised as “after sales services fees,” were typically included by suppliers in the contract price to permit them to avoid paying the 10% out of their profits. The suppliers also regularly concealed the illicit payments in their books and records by mischaracterizing the nature of the payments, inserting fictitious line items in contracts, and/or inflating the overall contract price.
Department of Justice Charges and SEC Complaint
The Department filed three separate criminal Informations in the case. Iveco and CNH Italia were each charged with one count of conspiring to commit wire fraud and to violate the books and records provisions of the FCPA. CNH France was charged with conspiracy to commit wire fraud.4 All of the charges were held in abeyance pursuant to the Deferred Prosecution Agreement. The SEC complaint charged Fiat and CNH Global with violations of the books and records and internal controls provisions of the FCPA in connection with their activities, as well as those of the entities charged by the Department, under the OFF Program. Without admitting or denying the SEC’s allegations, Fiat and CNH Global consented to the entry of a permanent injunction against future violations of the FCPA.
According to the court documents filed by the Department and the SEC, Fiat was an automotive- focused industrial group based in Turin, Italy. Until August 23, 2007, its shares were traded in the United States in the form of American Depository Receipts listed on the New York Stock Exchange, and, thus, Fiat was an “issuer” under the FCPA. Iveco, a wholly owned Italian subsidiary of Fiat, was a manufacturer and supplier of commercial trucks, parts and diesel engines. CNH Italia, an Italian company, and CNH France, a French company, were both wholly owned subsidiaries of the Dutch entity, CNH Global, an international manufacturer of agricultural and construction equipment that was majority-owned by Fiat.
According to the Department’s pleadings, from in or about October 2000 through in or about June 2001, Iveco engaged in a scheme to pay kickbacks to the Iraqi government, both on contracts that it entered into directly with the government, as well as through “Company X,” a Lebanese company that acted as its agent and distributor.5 Sixteen contracts to supply trucks and parts under the OFF Program, worth approximately €31.9 million, were allegedly awarded to Iveco and Company X as a result of the payment of approximately €3.1 million in kickbacks to the Iraqi government. The funds for the illicit payments were generated by artificially inflating the price of the contracts by approximately 10-15% before presenting the contracts to the UN for approval. On behalf of Iveco, Company X either paid the funds to the Iraqi government directly or used “Company Y,” a United Arab Emirates company, as a conduit for the illicit payments. The kickbacks were all improperly characterized in Iveco’s records, which were incorporated into the books and records of Fiat, as “service and commission payments” to Company X.
The Department’s pleadings alleged that from December 2000 through in or about January 2002, CNH Italia, together with its agent and distributor, “Company Z,” a Jordanian company, also engaged in a scheme to pay kickbacks to the Iraqi government, in this case, to secure agricultural equipment contracts awarded under the OFF Program.6 Four contracts, worth approximately €12 million, were awarded to CNH Italia in exchange for the payment of approximately $1 million in kickbacks. Similar to Iveco, the illicit funds, obtained by inflating the contract value, were paid to the Iraqi government by the agent. The payments were also concealed in CNH Italia’s, and Fiat’s books and records through the false characterization of the payments as “service fees.”
According to the Department’s pleadings, from in or about June 2001 through in or about July 2001, CNH France caused approximately $188,000 in kickbacks to be paid to the Iraqi government in exchange for the award of OFF Program contracts, worth approximately €2.2 million, to supply construction vehicles and spare parts.7 The illicit funds, which were generated by inflating the contract prices by 10%, were paid by a Lebanese agent that acted as a distributor for CNH France.
The Deferred Prosecution Agreement
Although Fiat was not criminally charged, it did acknowledge responsibility for the actions of its subsidiaries with regard to the illicit payments.8 According to the Department, its decision to defer criminal prosecution of the Fiat subsidiaries was based upon: (1) Fiat’s thorough investigation and prompt report of its findings to the Department; (2) its willingness to cooperate with the Department’s investigation; and (3) its implementation of, and continued commitment to, remedial measures designed to prevent corrupt conduct.
The Deferred Prosecution Agreement contains many of the terms typically found in such agreements, including a prohibition on repudiating or contradicting the agreed upon Statement of Facts and the requirement to (1) provide continued cooperation with investigations by the Department and any other law enforcement authority in connection with any investigation of Fiat or any subsidiary and (2) implement a rigorous compliance program designed to detect and deter violations of the FCPA and other applicable anti-corruption laws. Unlike the requirements of other recent Deferred Prosecution Agreements, however, Fiat will not have to retain an independent monitor.
Although the facts in the Fiat case are similar to those alleged in other OFF Program cases brought in connection with the Oil for Food investigations, the matter demonstrates the substantial financial penalties that can be imposed on “issuers,” both foreign and domestic, under the books and records and controls provisions of the FCPA, even where a substantive FCPA anti-bribery violation is not alleged.