SEC Settles FCPA Action With Hitachi
The SEC filed a settled FCPA books and records and internal controls action centered on a firm which used a subsidiary partially owned by a foreign political party to influence the award of government contracts. Specifically, the complaint claims that a subsidiary of Japanese giant Hitachi, Ltd., sold a portion of its South African subsidiary to a front entity for the African National Congress, the ruling political, as part of its efforts to secure two government contracts. SEC v. Hitachi, Ltd., Civil Action No. 1:15-cv-01573 (D.D.C. Filed September 28, 2015).
Hitachi is a multinational conglomerate based in Tokyo, Japan whose ADRs were, at the time of this action, listed and traded on the NYSE. Its subsidiary, Hitachi Power Europe gmbH or HPE, was an international supplier of boilers for power stations. Hitachi Power Africa (Pty) Ltd. or HPA, established in 2005, executed power station orders in South Africa.
Hitachi began its efforts to enter the South African power market in 2003. At the time Eskom Holdings SOC Ltd., the largest government owned and operated utility in the country, was planning to build new power stations. Two years later HPA was formed to establish a local presence. Part of the plan was to partner with a local black owned entity to qualify under the South African Black Economic Empowerment Act of 2003. Qualifying entities obtained preferential status in government procurements. A key focus was to secure and exert political influence over engineering or operational capacity. The employees at the subsidiaries did not have FCPA specific compliance training.
The partner identified was Chancellor House Pty (Ltd), owned by Chancellor House Trust. Chancellor House had extensive political connections with the South African government, the ANC and Eskom. At the time it was known that there were a number of key interconnections between Chancellor House and the ANC. Later the local news articles noting that Chancellor House was essentially a front for the ANC, the controlling political party in the country.
After due diligence – the documents for which were not produced during the staff investigation – Chancellor House acquired 25% in HPE. A shareholder agreement provided that the firm’s contribution to the partnership would be lobbying the public and private sector for business – the firm had no engineering experience. Chancellor House paid about $190,000 for its stake in the venture.
One draft of the shareholder agreement called for the payment of a success fee. That provision was dropped in subsequent drafts. HPA explained it preferred that such an arrangement be put into a separate agreement.
In May 2006 Eskom invited Hitachi and others to tender for work on building a power station. The next year Eskom invited tenders for a second station. Eventually both were awarded to HPA. At the time of the first tender the initial news article appeared reporting that Chancellor House was the alter ego of the ANC. The claim was reiterated in subsequent articles.
After the award of the contracts, HPA received two invoices for success fees. Overall fees totaling $1,123,382 were paid. The fees were recorded in an expense account as “consulting fees.” They were recorded in the profit and loss line item titled “Administrative and other expenses” in HPA’s annual financial statements. Those financial statements were consolidated with those of Hitachi which were filed with the SEC.
The success of the power plant projects entitled Chancellor House to a share of future profits as a 25% shareholder. In March 2010 HPA declared a dividend of about $7,032,680 for the shareholders based on 2009 profits. Chancellor House was due a dividend of about $1,758,170. That entry was reflected in HPA’s books and records which were consolidated into those of its parent and filed with the Commission. In February 2014 HPE repurchased the Chancellor House shares for about $4.4 million. The complaint alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).
To resolve the matter the Hitachi consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. The company also agreed to pay a civil penalty of $19 million.