Following recent trends, the U.S. Securities and Exchange Commission brought an administrative proceeding against a U.S. issuer for the corrupt activities of its foreign subsidiaries. Earlier this week, Goodyear Tire & Rubber Company agreed to pay the SEC over $16 million to settle charges that it violated the accounting provisions of theForeign Corrupt Practices Act by failing to prevent or detect over $3 million in bribes paid by its Angolan and Kenyan subsidiaries. Goodyear also must report its compliance remediation efforts to the SEC annually for the next three years.
The SEC’s Charges
According to the SEC’s cease and desist order, between 2007 and 2011, Goodyear’s downstream subsidiaries in Kenya andAngola bribed employees of both private and government-owned companies to obtain business. The subsidiaries also bribed police, tax authorities and other local officials, though the SEC’s order did not allege the purposes of those payments. The bribes “were falsely recorded as legitimate business expenses in the books and records of the subsidiaries, which were consolidated into Goodyear’s books and records.”
The SEC found that “Goodyear did not prevent or detect these improper payments because it failed to implement adequate FCPA compliance controls at its subsidiaries” and, for the Kenyan subsidiary, “because it failed to conduct adequate [pre-acquisition] due diligence.” Goodyear was not alleged to have any involvement with or knowledge of its subsidiaries’ illicit conduct. Nonetheless, comments by Scott Friestad, Associate Director of the SEC’s Enforcement Division, displayed the SEC’s willingness to hold parent companies responsible for failing to adequately supervise their subsidiaries: “Public companies must keep accurate accounting records, and Goodyear’s lax compliance controls enabled a routine of corrupt payments by African subsidiaries that were hidden in their books.”
Lessons Learned
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Benefits of self-disclosure, cooperation, and remediation: Although Goodyear had to disgorge over $14 million in profits from its Kenyan and Angolan operations, and over $2 million in prejudgment interest, it avoided a civil penalty. This relatively favorable outcome likely is due to Goodyear’s timely self-disclosure to the SEC after receiving information about the bribes (through internal whistleblower mechanisms), its substantial cooperation with the SEC during the course of the investigation, and its extensive remediation efforts. Those efforts included divesting one subsidiary and preparing to divest the other, disciplining employees, and enhancing its anti-corruption compliance program. The settlement bolsters repeated assertions by law enforcement and regulatory officials that companies who self-disclose and cooperate will be rewarded with leniency.
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Buyers (and parents) beware: Parent companies may be on the hook for their subsidiaries’ misconduct, even when the parent company does not participate in or know about the illicit activities. Indeed, the SEC was careful to note that the Kenyan subsidiary’s corrupt activities may have begun prior to Goodyear’s acquisition, and could have been identified through adequate pre-acquisition due diligence. Pre- and even post-acquisition anti-corruption due diligence has become mandatory for companies that seek to acquire entities in high-risk foreign jurisdictions. And after the transaction is consummated, parents who are subject to the FCPA’s accounting provisions must ensure that their subsidiaries maintain robust internal controls and accurate books and records, regardless of whether they too are issuers.
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FCPA charges may include commercial bribery: According to the SEC’s order, both of Goodyear’s subsidiaries paid bribes not only to employees of government-owned entities, but also to employees of private companies. This settlement should serve as a reminder that although the FCPA’s anti-bribery provisions only extend to the bribery of foreign government officials, the accounting provisions may be used to prosecute commercial bribery.
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Expect more FCPA enforcement actions in administrative proceedings: Companies facing a civil FCPA enforcement action by the SEC must remain cognizant of the likelihood that the proceedings will play out on the administrative stage. Defendants in administrative forums face truncated deadlines, an absence of judicial scrutiny and limited appellate rights, and cannot avail themselves of the protections in the Federal Rules of Evidence and Civil Procedure. The SEC likely will continue to seek home-court advantage, whenever possible.