When Does the SEC Act and the Justice Department Decline to Act?
The easiest answer to the questions is burden of proof: The SEC has civil responsibility, meaning a preponderance of evidence; and the Justice Department has criminal responsibility, meaning beyond reasonable doubt. But is that the only difference?
Some practitioners lament that the SEC “always” will find a violation while the Justice Department staff is more “reasonable” when it comes to finding a violation. It is hard to come up with a clear dividing line.
In 2011, there are two cases – Rockwell Automation and now Diaego where the SEC acted and the Justice Department declined prosecution, which is significant since the Justice Department did not enter into a non-prosecution agreement in these two cases but declined to prosecute.
In the Rockwell case, the SEC entered into a cease and desist involving “violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Rockwell, through one of its former subsidiaries in China, Rockwell Automation Power Systems (Shanghai) Ltd. (“RAPS-China”), which was divested by Rockwell in January, 2007.”
The SEC outlined specific facts: “From 2003 to 2006, certain employees of RAPS-China paid approximately $615,000 to Design Institutes, which were typically state-owned enterprises that provided design engineering and technical integration services that can influence contract awards by end-user state-owned customers. The payments were made through third-party intermediaries at the request of Design Institute employees and at the direction of RAPS-China’s Marketing and Sales Director. RAPS-China’s Marketing and Sales Director intended that these funds be paid directly to the Design Institute employees, with the expectation that they would influence the ultimate state-owned customers to purchase RAPS products. While the Design Institutes did provide some bona fide engineering and other services in connection with RAPS-China’s end-user contracts, RAPS-China could not substantiate the specific services rendered or the value of those services. Also during the same period, employees of RAPS-China paid approximately $450,000 to fund sightseeing and other non-business trips for employees of Design Institutes and other state-owned companies.”
Rockwell ultimately earned $1.7 million in net profits on sales contracts with end-user Chinese government-owned companies and failed to accurately record the payments in its books and records. More importantly, Rockwell discovered the DI Payments through its normal financial review process, hired counsel and investigated the DI Payments with the oversight of its Board of Directors. It voluntarily self-reported the DI Payments to the Commission and voluntarily provided the Commission Staff with all relevant facts found in the investigation, and otherwise cooperated with the Commission. Rockwell undertook numerous remedial measures, including employee termination and disciplinary actions, enhancements to its internal controls and compliance program and conducted a global review of its other operations.
Rockwell agreed to “pay disgorgement of $1,771,000, prejudgment interest of $590,091and a civil money penalty of $400,000. Other FCPA enforcement actions focused on alleged improper travel and entertainment benefits to employees of Chinese state-owned enterprises include but resulted in criminal fines and settlements ( Lucent Technologies and UTStarcom Inc.); and other FCPA enforcement actions focused (in whole or in part) on allegedly improper payments to employees of so-called Chinese “Design Institutes” (see e.g. ITT Corp.and Avery Dennison).
In the most recent FCPA enforcement action, Diageo agreed to pay the SEC more than $16 million to resolve FCPA offenses that stretched over six years and involved bribes to foreign officials in India, Thailand, and South Korea. This recent action was resolved through an administrative action – which is a relatively new procedure authorized by the Dodd-Frank reform law.
The SEC alleged that Diaego – paid $2.7 million in bribes through subsidiaries for sales and tax benefits. Diageo’s civil penalty consists of $11,306,081 in disgorgement, prejudgment interest of $2,067,739, and a further penalty of $3 million. The Justice Department declined to prosecute Diaego.
Diageo paid $1.7 million in bribes to government officials in India from 2003 to mid-2009. In India, government officials were responsible for purchasing or authorizing the sale of its beverages in India; in Thailand, Diageo paid $12,000 per month from 2004 to 2008– totaling nearly $600,000 – to a Thai government and political-party official for “consulting” services. He intervened on Diageo’s behalf in multi-million dollar tax and customs disputes, helping it win favorable decisions from the Thai government; and in South Korea, Diaego paid $86,000 to a customs official “as a reward for his role in the government’s decision to grant Diageo significant tax rebates.” Other payments went to customs officials for travel and entertainment expenses connected with the tax negotiations. Diageo also gave hundreds of cash payments as gifts to South Korean military officials to obtain and retain liquor business.
Diageo’s subsidiaries made hundreds of illicit payments to foreign government officials because of lax oversight and deficient controls. Diageo cooperated with the investigation and took remedial measures, “including the termination of employees involved in the misconduct and significant enhancements to its FCPA compliance program.”
In reviewing the publicly-available facts of both these cases, there is no apparent rationale which explains why the SEC acted and the DOJ did not. The violations themselves seem pretty clear cut. One can only surmise that the evidence supporting the claimed bribes was not sufficiently strong to justify a criminal prosecution. This may reflect the fact that some of the payments had “mixed motives” in that a portion of the payments were made in return for legitimate services and the other part constituted the “illegal” component intended to influence the decision maker to obtain and retain business.
