Inadequate FCPA Remediation, History Yields Monitor for Diebold

Diebold, Inc., an Ohio based manufacturer and seller of ATM machines and bank security systems, resolved FCPA charges with the DOJ and the SEC. With the DOJ the firm agreed to pay a $25.2 million penalty and entered into a three year deferred prosecution agreement to resolve possible criminal charges. With the SEC Diebold consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) and agreed to pay disgorgement and prejudgment interest totaling $22,972,942. Although the company self-reported and cooperated a monitor was installed under the deferred prosecution agreement and SEC settlement for at least 18 months. U.S. v. Diebold, Inc., Case No. 5:13CR464 (N.D. Ohio Filed Oct. 22, 2013); SEC v. Diebold, Inc., Civil Action No. 1:13-cv-01609 (D.D.C. Filed Oct. 22, 2013).

The actions center on payments made through the subsidiaries of the company in China, Indonesia and Russia from 2005 through 2010. In China there were payments for travel, entertainment and gifts to foreign officials through its subsidiary, Diebold China. For example, in 2005 the subsidiary paid for a fifteen day leisure trip to the U.S. for two officials from a government owned and controlled bank. In 2006 it paid for a twelve day trip to Europe for eight officials from a state owned bank. In 2007 Diebold China paid for a two week trip to France for thirteen employees of a state owned bank. Similar travel was paid for in 2008 and 2009. In addition, the subsidiary provided bank officials with cash gifts ranging from less than $100 to over $600.

Not only did the company lack sufficient internal controls to detect and prevent these payments, “executives at Diebold were on notice of potential corruption issues at Diebold China,” according to the SEC complaint. In 2007 the company settled an inquiry by a regional government agency into its practices regarding travel for, and gifts to, local bank officials by paying an administrative penalty of about $80,000 for business registration violations. The company failed to effectively “investigate and remediate these problems,” the SEC stated in its complaint.

In Indonesia and Russia, according to the court papers, the company engaged in similar conduct, providing travel and entertainment for officials at government banks to secure business through the local subsidiary. While there is no allegation that the parent company was aware of the activities of Diebold Indonesia, in Russia the company was on notice of corruption issues regarding its distributor and failed to take appropriate action. There the SEC complaint alleges that in 2007 while conducting due diligence relating to a deal to acquire a local distributor “the company’s legal and corporate development offices learned that Distributor B had previously made illicit payments to employees of its bank customers.” While it could not determine if the payments were made in relation to its products, the acquisition was not completed. Diebold continued to do business with the distributor until 2010 without taking any further steps to investigate the matter. In 2009, however, when due diligence regarding the potential acquisition of Distributor A revealed that the firm had paid bribes on behalf of Diebold Russia the company terminated the deal and the relationship.

The criminal information alleges one count of conspiracy and one count of books and records violations. The SEC’s complaint asserts three counts, one based on the bribery provisions, a second on the books and records sections and a third based on internal controls.

The three year deferred prosecution agreement acknowledges that the company self-reported and cooperated as reflected in the calculation of the criminal fine. Nevertheless, a monitor was imposed because the remediation undertaken was deemed inadequate and there is a risk of reoccurrence: “[A]lthough the Company has undertaken some remedial measures, in light of the specific facts and circumstances of this case and the Company’s recent history, including a previous accounting fraud enforcement action by the Securities and Exchange Commission, the Department believes that the Company’s remediation is not sufficient to address and reduce the risk of recurrence of the Company’s misconduct and warrants the retention of an independent corporate monitor . . .”

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