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Lessons Learned from the Honeywell FCPA Settlement (Part III of III)

The Honeywell FCPA settlement underscored a number of important issues – lessons learned for compliance professionals.  Every FCPA case carries important lessons learned, but some more than others.  The Honeywell case with its focus on the large project in Brazil, and the contractual dispute in Algeria both provide important pointers relating to third party risk management. 

In addition to the third party issues, however, Honeywell has to answer for a fundamental deficiency – the complete absence of any commitment to corporate ethics and a compliance culture.  Let’s discuss this overarching deficiency and then turn to the third-party risk management issues.

Absence of Corporate Culture

The factual statements underlying the DOJ and SEC settlements reveal the complicity of Honeywell’s senior management in the ongoing bribery scheme in Brazil.  The Honeywell account manager responsible for the Brazil Premium project reported regularly through emails and conversations about the progress being made on the Petrobras bidding process. 

In fact, everyone who was involved in these communications referred to the Petrobras director as “the King” and the lobbyist as “the King’s assistant.”  Everyone included on these emails understood what was occurring and the importance of the “King and the assistant” to the overall bidding process.

Honeywell suffered from serious deficiencies in its internal controls.  But, perhaps more importantly, Honeywell’s actions occurred in an environment where no one raised a question about the bribery scheme, the ongoing work with the “King and the assistant,” and the narrow focus on winning the project through whatever means possible.

Large Project Risks

The Honeywell Brazil scandal occurred in a high-risk country, Brazil, and was exacerbated by the overall size of the project – the design and construction of a refinery for a cost of $348 million. The risks were heightened by the fact that Honeywell was competing against two of its major competitors.  Winning at all costs quickly turned into winning without any compliance with the law.  This attitude and conduct were easily embraced by actors who supported the scheme, even if they did not actively participate in execution of the scheme.  To Honeywell, its culture quickly fell to the bottom rung – win without regard to violating the law.

Third Party Risks

Honeywell’s FCFPA violations in Brazil and Algeria involved active use of third-party agents who were enlisted to facilitate bribery payments.  From start to finish, the selection, engagement, performance and payment of each agent revealed a glaring absence of relevant controls to each step in the third-party relationship process.

Let’s start with the Brazil sales agent who was used to make contact with the Petrobras director and arrange (with the Honeywell account manager) the bribery terms.  The sales agent was engaged and selected because of Honeywell’s need to establish close contacts with high-level Petrobras officials.  That reason alone presents a dubious business justification and suggests that the selection was solely made for bribery purposes. 

In recognition of this weak business justification, the Honeywell employees who prepared the due diligence materials for internal review falsely stated they knew the agent for two years and failed to state that the agent would interact with Petrobras officials.  The internal review of the agent’s due diligence application was deficient.

In Algeria, the Monaco sales agent was retained without any consideration of the plan to use the agent to assist Honeywell in resolving the Sonatrach contract dispute.  After securing approval of the Monaco sales agent, Honeywell Belgium used the agent to repay a consultant for bribery payments.

Finally, in both the Brazil and Algeria situations, Honeywell’s financial controls failed to require proper invoicing and description for services prior to making payments.  In the Brazil situation the sales agent changed his company and banking location to a Swiss bank account, and no inquiries were made as to the nature of the changes and the reasons to justify payments to a Swiss bank account.

Most importantly, however, the failure to inquire as to the nature of the payments, the actual services provided and the contractual terms that applied to the payments all combined to permit illegal payments to be made in furtherance of the bribery schemes.  

In the Algeria case, an executive questioned the $300,000 lump sum payment to the sales agent, but was quickly pressured to approve the payment.  The executive’s intuition was right but it is interesting how quickly he abandoned his position in the face of opposition. Again, if Honeywell placed organizational value on a culture of ethics and compliance, the executive may have stood up to the opposition and followed up on his concerns.

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