Richard Grime,
Jeremy Maltby
On August, 27, 2008, Con-way Inc., (“Con-way”) a California international freight transportation company settled an FCPA enforcement action with the Securities and Exchange Commission by agreeing to the entry of a cease-and-desist order and payment of a $300,000 penalty. No disgorgement was assessed against the company and, so far, no criminal action has been filed. The SEC alleged that Conway violated the books and records and internal controls provisions of the FCPA when a Philippines based firm, controlled by Con-way, made approximately $417,000 in improper payments to two categories of foreign government officials -- customs officials and employees of majority state-owned airlines.
This action is further evidence of several recent trends in FCPA enforcement: voluntary disclosure while potentially lowering the penalty to be assessed by the government does not extinguish the liability; the SEC’s continued use of the books and records and internal controls provisions regardless of any criminal enforcement or knowledge of the alleged wrongdoing by the issuer; and that relatively small improper payments which add up over time can result in liability.
Summary of Allegations
According the SEC, from approximately 2000-2003, Menlo Worldwide Forwarding, Inc., a wholly-owned subsidiary of Con-way, owned a 55% voting interest in Emery Transnational, a Manila-based firm engaged in shipping and freight operations in the Philippines. For that interest, Menlo received a yearly 55% dividend from Emery, which was then consolidated into Con-way’s financial statements. Con-way and Menlo engaged in little supervision or oversight of Emery and neither company took steps to devise or maintain internal accounting controls concerning Emery. Neither Con-way nor Menlo asked for or received detailed books or records from Emery which would have included the records of operating expenses showing illicit payments to foreign officials. In December 2004, Menlo and Emery were sold to UPS.
Between 2000 and 2003, Emery made hundreds of small payments to government officials at the Philippines Bureau of Customs and the Philippine Economic Zone Area. The payments induced the officials to allow Emery to store shipments longer than otherwise permitted, thus saving the company transportation costs, and to improperly settle Emery’s disputes with customs or else reduce or not enforce otherwise legitimate fines. From 2000 to 2003, the payments totaled at least $244,000.
The second set of improper payments were paid to officials at fourteen state-owned airlines. Emery employees induced the officials to improperly reserve space for Emery on their airplanes and to falsely under-weigh shipments, resulting in lower shipping charges. From 2000 to 2003, these payments totaled at least $173,000.
Con-way discovered the questionable payments made by Emery in 2003 and disclosed them to the SEC. Menlo conducted an internal investigation of the payments and a broader review of its foreign business. Menlo imposed heightened financial reporting and compliance requirements on Emery. Menlo also provided FCPA training to its employees and strengthened its regulatory compliance program.
Key Issues
The Con-way settlement illustrates several recent trends in FCPA enforcement by both the SEC and Department of Justice. To begin, this action is another in a recent pattern of cases involving a logistics or shipping company and payments to customs officials. A similar ongoing investigation has centered on freight-forwarding agent, the Swiss company Panalpina, which arose out of a February 2007 settlement with Vetco International Ltd. The government alleged that Panalpina and a Vetco subsidiary had paid bribes to customs agents via Panelpina in Nigeria in order to get shipments processed. The Panalpina investigation has ensnared several major corporations and the DOJ and SEC have asked several of Panalpina’s customers to detail their relationships with Panalpina. Both the Con-way settlement and the Panalpina investigation suggest that U.S. companies must maintain sufficient oversight and control of their shipping agents and their interactions with foreign customs officials.
The Con-way case also notably involved relatively small payments. Nonetheless, they added up to a relatively significant amount over time. Neither the anti-bribery nor the accounting requirements of the FCPA contain any materiality threshold, and companies such as Con-way face liability for even the smallest payment that is inaccurately recorded in any controlled subsidiary’s books and records.
The settlement also is another example of the SEC’s use of the books and records and internal control requirements for issuers. These provisions can be the Achilles heel for issuers because of the minimal requirements required to establish liability. Con-way had no knowledge of the payments by Emery, its subsidiary, nor are there any allegations that there was any conduct in the United States. Nevertheless, because for purposes of civil charges filed by the SEC against issuers, the books and records and internal control provisions contain neither an intent nor jurisdictional requirement, Con-way was exposed.
Finally, as illustrated by many past settlements, the government continues to apply a broad definition of foreign officials, designating the employees of state-owned airlines as officials of various foreign countries. Accordingly, issuers should carefully review and re-review their dealings with FCPA designated foreign officials that include so far, employees of state-owned oil companies, airlines, and hospitals.