On March 9, 2018, the U.S. Securities and Exchange Commission announced a settled enforcement action against Israel-based Elbit Imaging Ltd. and its majority-owned indirect subsidiary Plaza Centers N.V., alleging violations of the internal accounting controls and books and records provisions of the Foreign Corrupt Practices Act. Specifically, the SEC alleges that between 2007 and 2011, in connection with real estate projects in Romania and the United States, Elbit and Plaza paid approximately $27 million to third-party entities “despite having no evidence that these counterparties actually provided any of the contracted for services.” Without admitting or denying these allegations, Elbit agreed to pay a civil penalty of $500,000 to resolve the matter.
According to the SEC’s Cease and Desist Order (the “Order”), in 2006 and 2011, at the direction of an unnamed high-level executive at Elbit, Plaza engaged two off-shore third-party consultants to assist in obtaining approval from the Romanian government to participate in a real estate development project in Romania. The SEC alleges that Plaza did not conduct any due diligence on either consultant, and that there was no evidence that the consultants provided services relating to the transactions. In particular, the SEC highlighted the consultants’ failure to attend any meetings and inability to provide any evidence of their consulting work. In connection with this real estate project, the SEC alleges that between 2007 and 2012, Plaza paid the consultants approximately $14 million.
The SEC also alleges that in 2011, in connection with the sale of a portfolio of 47 real estate assets in the United States, Elbit and Plaza—at the direction of the same executive at Elbit—retained a third-party agent, again without conducting any due diligence, and paid that agent approximately $13 million in commissions after obtaining $1.428 billion from the portfolio sale. The SEC further alleges that $12.75 million of the $13 million paid in commissions to this third-party agent was subsequently paid to another entity that was beneficially owned by the Elbit executive. According to the Order, “the documentation supporting the payments did not identify the services that the consultants provided pursuant to the contracts.”
The Order also notes that Elbit’s and Plaza’s internal accounting controls were “deficient,” for “fail[ing] to identify” the payments to the third-party agents and consultants, but does not provide details about the state of either company’s internal controls. The Order further notes that both companies “mischaracterized” the payments as legitimate business expenses, “even though some or all of the funds may have been used to make corrupt payments to Romanian government officials or were embezzled.” Similarly, the Order does not describe how the payments were actually characterized in Elbit’s or Plaza’s books and records, or why the SEC concluded the entries were “mischaracterized.”
The SEC recognized that, once the conduct was discovered, Elbit self-reported to Romanian and U.S. authorities. Moreover, according to the Order, Elbit subsequently conducted an independent investigation of its and Plaza’s business, fully cooperated with the SEC, and implemented revisions to both companies’ internal accounting controls and anti-bribery policies.
Implications of the Resolution
This FCPA enforcement action, the first by the SEC in six months, reflects a recurring fact pattern that the SEC has been examining more frequently in recent years, i.e., where payments to third-party vendors or consultants have been identified with little or no evidence that the purported services were legitimate and/or actually provided and, yet, there is also insufficient evidence to conclude whether there was actual bribery, embezzlement, or merely poor record-keeping practices. Although the SEC assessed a relatively modest $500,000 civil penalty, which could be explained by Elbit’s inability to pay, this resolution is a reminder that the SEC will use the civil accounting provisions of the FCPA to bring enforcement actions in situations such as this one, even where the evidence might not sustain a charge under the FCPA’s anti-bribery provisions. For companies, this settlement highlights several important considerations relating to managing third-party risk: (1) conducting appropriate risk-based due diligence; (2) determining whether third parties are being engaged for genuine and needed services; (3) determining whether the contemplated compensation is commensurate with the services to be provided; (4) ensuring that there is sufficient documentation or other evidence that the contracted services were provided; and (5) approving only those invoices for payment based on proof or reliable confirmation of services.
It is also notable that the SEC’s Order is unaccompanied by a corresponding announcement from the U.S. Department of Justice. Given that Elbit self-reported the alleged conduct just as the DOJ’s Pilot Program was unveiled, we would expect the matter to have been evaluated under the Program like others that technically pre-dated its rollout. As was the practice under the Pilot Program, under the current Corporate Enforcement Policy, there is a requirement that decisions to decline prosecution will be made public. It will be interesting to see if action by the DOJ follows in this matter where there appears to be a clear jurisdictional nexus between certain of the alleged conduct and the United States, there is the apparent knowing involvement of a senior executive (an aggravating factor under the Pilot Program), but there is no definitive evidence—according to the SEC—that bribery exists.
Associate H. Bola George contributed to this Client Memorandum.