There was Congressional testimony last fall to consider
possible modifications to the Foreign Corrupt Practices Act. In part the
testimony focused on the issue of FCPA compliance procedures as a defense for a
business organization. Under current practice those procedures are not a
defense but mitigation. In contrast, under the new UK Bribery Act compliance
procedures can be a defense. Precisely what will be required is yet to be
The SEC's recent action against International Business
Machine or IBM highlights the relation between FCPA compliance procedures and
internal controls. In its complaint the SEC notes that the company has
anti-bribery and FCPA procedures. IBM's internal controls however were
inadequate, according to the SEC. This resulted in violations. Improper
payments were made to South Korean officials, Improper travel and entertainment
was paid for Chinese officials. All the payments were by subsidiaries for which
IBM was held responsible. SEC v. IBM, Case No. 1;11-cv-00563 (D.D.C.
Filed March 18, 2011).
The complaint centers on the activities of IBM-Korea,
LG-IBM and IBM-China and payments made to employees at South Korean government
entities and Chinese government officials to obtain or retain business.
IBM-Korea is a wholly owned indirect subsidiary of IBM International Group B.V.
which is owned by IBM. LG-IBM is a joint venture between IBM-Korea and LG
Electronics, Inc. which is 51% owned by the IBM subsidiary. IBM-China is owned
by IBM/Hong Kong which is ultimately owned by IBM. The actions detailed in the
complaint involve only these subsidiaries, not IBM.
In Korea the violations are based on the alleged improper
payments by either IBM-Korea or LG-IBM. The complaint states that from 1998
through 2002 these two subsidiaries made improper payments to South Korean
government officials who worked for sixteen government entities. IBM-Korea is
alleged to have made payments over the four year period totaling $135,558 while
LG-IBM's payments totaled $71,599.
Typical of these allegations are the ones made regarding
SKGE -1 or South Korean Government Enterprise No. 1. According to the
complaint, in mid-December 1998 officials from IBM-Korea met with
representatives of SKGE-1. At the meeting IBM-Korea "gave him [SKGE-1] a shopping
bag containing a large IBM-Korea envelope filled with KRW 20 million
($19,093)." This happened repeatedly during the time period.
The summary section of the complaint states that IBM had
"corporate policies prohibiting bribery and procedures relating to compliance
with the FCPA; however, deficient internal controls allowed employees of IBM's
subsidiaries and joint venture to use local business partners and travel
agencies as conduits for bribes or other improper payments to South Korean and
Chinese government officials over long periods of time." The complaint does not
provide any detail or specify how the internal controls were deficient with
respect to the claimed improper payments in Korea.
The conduct alleged in China differs. There the SEC
complaint states that from 2004 through 2009 IBM-China employees created slush
funds at local travel agencies in China. Those funds were used to pay for
overseas and other travel expenses incurred by government officials. The
complaint goes on to specify that in at least 114 instances the internal
controls of the company failed to detect improper payments. This occurred
because: "(1) IBM-China employees and its local travel agency worked together
to create fake invoices . . . (2) trips were not connected to any DTRs
[Delegation Trip Requests]; (3) trips involved unapproved sightseeing
itineraries . . . (4) trips had little or no business content; (5) trips
involved one or more deviations from the approved . . [itinerary]; and (6)
trips where per diem payments and gifts were provided to Chinese government
To resolve the case IBM consented to the entry of a
permanent injunction prohibiting future violations of the books and records and
internal control provisions of the FCPA, Exchange Act Sections 13(b)(2)(A) and
13(b)(2)(B). The company also agreed to pay disgorgement of $5.3 million along
with prejudgment interest and a $2 million civil penalty. There is no
indication in the papers as to how the disgorgement or penalty were calculated.
There is no reference to cooperation by the company.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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