Vacation is great, but it can involve a great deal of planning.  And, paradoxically, leisure travel can involve more planning than traveling for business.  That travel-related work stands out as a centerpiece of the October 22, 2013 Diebold, Inc. (Diebold) Foreign Corrupt Practices Act (“FCPA”) settlement with the U.S. Securities and Exchange Commission (SEC) and Deferred Prosecution Agreement with the U.S. Department of Justice (DOJ).  The $48 million in penalties, disgorgement, and interest, and the 18-month compliance monitor imposed on Diebold under the settlement, serve to demonstrate the strong emphasis that the DOJ and SEC place on appropriate compliance planning, and the significant steps that will be taken against companies seen to be lacking an internal compliance compass.

I. Background

Ohio-based Diebold is a NYSE-listed manufacturer of ATMs and bank security systems.  The DOJ Information and the SEC Complaint allege that from 2005 to 2010, Diebold gave $1.6 million in gifts, entertainment, and non-business travel to employees of at least two Chinese banks (which were considered governmental “instrumentalities” under the FCPA).  The travel expenses were improperly recorded as “trainings,” and it appears that senior regional executives within Diebold attempted to cover up the purpose of at least one trip when it came to light in an audit.  Similar trips, valued at approximately $175,000 over five years, were provided to employees of government-owned Indonesian banks.

Strikingly, the Factual Summary included in the DOJ Deferred Prosecution Agreement about those travel arrangements contains several direct email quotes by Diebold employees and executives that contain suggestions about how travel planned as junkets might be altered to appear more business-oriented.  In particular, those changes are meant to provide information that might be used to “argue some points” in the event of a later investigation or audit.  Taken together, the emails suggest (and the DPA charges) a conspiracy to hide the original purpose of the travel.

Further, Diebold allegedly entered into false contracts in Russia with a distributor which, in turn, used some of the proceeds to pay employees of Diebold’s private bank clients in return for ATM contracts.  During the due diligence process relating to the possible acquisition of a company in Russia, a senior executive within Diebold was made aware of problems with commercial bribery by distributors.  Despite being on notice of issues with commercial bribery, Diebold apparently failed to make any process improvements relating to its business with its distributor.  Both the Information and the Complaint make clear that the alleged improper payments involved purely private banks; nonetheless, both DOJ and SEC charge Diebold with violating the books and records provisions of the FCPA in connection with these payments, and the SEC also alleged violations of the statute’s internal controls provision.

II. Analysis

While the DOJ and SEC have provided useful guidance over the past few years regarding enforcement, most notably the Resource Guide to the U.S. Foreign Corrupt Practices Act issued in late 2012, the Diebold settlement reinforces the elements that are important to the DOJ and SEC and the potential severity of penalties arising from FCPA prosecutions.

First, the Diebold settlement may reflect a renewed interest by the Government in using the FCPA to penalize purely commercial bribery.  The Government did not charge Diebold with violating the FCPA’s anti-bribery provisions in Russia, as such a charge would require a public official on the receiving end.  Instead, Diebold was charged with violating the accounting provisions of the FCPA based on conduct connected to bribery in Russia.  While it is true that FCPA enforcement is almost always directed at alleged misconduct involving interaction with public officials, public companies must remember that the accounting provisions relate to misconduct that is not tied to the substance of the anti-bribery provisions.  In this case, by focusing on a senior executive’s alleged failure to react properly to being made aware of potential commercial bribery and thereby invoking the accounting provisions, the Government may be indicating its willingness to increase enforcement against public companies engaged in private bribery, particularly where those instances are coupled with bribery of public officials.

Second, the Resource Guide provided some evidence that the Government intended to place enforcement priority solely on “expensive gifts,” and expend less energy on penalizing “token[s] of esteem or gratitude.”  Nonetheless, a large percentage of the total value of the alleged bribes in the Diebold matter appears to be the aggregate of multiple small payments.  In other words, much of the alleged misconduct related to gifts of less than $300 (according to the DOJ) and some that were less than $100 (in the case of the SEC).  To be sure, the FCPA itself does not enumerate specific amounts at which liability attaches, but the Resource Guide could be read to suggest that the Government was unlikely to pursue small value bribes.  The Diebold settlement suggests the baseline emphasized by the government in the past continues to hold true: a corrupt payment is illegal, regardless of the amount.

Finally, as originally reported in the blog ‘Main Justice’, from 2009 until the Diebold settlement, all thirteen FCPA settlements under which a monitorship was imposed involved companies that failed to voluntarily disclose their misconduct to the Government.  Diebold, however, did voluntarily disclose its potential violations.  The mitigating impact of voluntary disclosure generally negates the necessity of a corporate monitor; thus, the prospect of avoiding the burdensome monitorship requirements incentivizes companies to disclose potential misconduct.  The Diebold settlement suggests, however, that the relationship between a monitor and voluntary self-disclosure is not necessarily causative – i.e., companies do not get a pass on a monitor merely because they disclose a violation.  Instead, the more likely correlation appears to be that companies that make self-disclosures have either (a) a more robust compliance program, or (b) greater capacity to independently upgrade their compliance program, and therefore do not need a government-imposed monitor to get their house in order.

In a representative sense, all of these points come back to the chains of emails planning travel for Chinese government officials, the meticulous arrangements for payments to Russian private bankers, and the documented suggestions about how to protect those payments from scrutiny.  We talk about “corrupt” intent as an element of the FCPA, but it is also the core of the statute.  The Diebold settlement suggests that in cases where the government sniffs out corrupt intent, the judgment will expand the extent of conduct that is charged, what types of payments are reached, and the remedial measures that the government deems necessary.

III. Conclusion

While the Diebold settlement could be considered an outlier, we think it gives voice to the importance that the government has always placed on corrupt intent and, by extension, the need for corporate compliance programs to be self-governing and able to detect and respond to attempts to evade measures like audits.  Perhaps more importantly for future cases, it opens the possibility that the DOJ and SEC will use the books and records provision to pursue commercial bribery by public companies.  While such a move would be consistent with other international antibribery laws, it could require publicly listed companies to refocus their compliance efforts and resources.