On December 4, 2015, the African Development Bank Group (AfDB) announced that it reached an agreement with Hitachi, Ltd. (Hitachi) that debars the company from participating in AfDB projects for twelve months with conditional release. The debarment was the result of an investigation by AfDB’s Integrity and Anti-Corruption Department (IACD) concerning bribery allegations against Hitachi on the Medupi project in South Africa. The AfDB debarment follows a $19 million settlement Hitachi reached with the U.S. Securities and Exchange Commission (SEC) on September 28, 2015 to resolve civil bribery charges under the Foreign Corrupt Practices Act (FCPA) relating to the same project.
The Hitachi settlements are noteworthy because this is the first time AfDB’s IACD worked together with the SEC to investigate alleged bribery in AfDB-funded projects. Companies under investigation for suspected anti-bribery law violations have come to expect close collaboration between the SEC and the U.S. Department of Justice (DOJ), which investigates criminal bribery violations under the Foreign Corrupt Practices Act (FCPA), and increasingly with regulators in other countries. Hitachi’s settlements, however, further underscore that U.S. regulators may also collaborate with international financial institutions like AfDB who may be investigating similar alleged misconduct. Therefore, companies embroiled in any international anti-bribery law related investigation need to be mindful about the risk of parallel investigations and the need for global resolutions.
Hitachi’s debarment will be terminated after twelve months, assuming Hitachi improves its integrity compliance program to meet AfDB’s Integrity Compliance Guidelines. In particular, based on the allegations, one could anticipate Hitachi should undertake improvements to, among other things, its due diligence processes for third-party agents and transaction recording procedures to prevent and detect improper transactions.
The AfDB “acknowledge[d] that Hitachi and its affiliates co-operated fully and openly with the IACD investigation, and that Hitachi was determined throughout to maintain its good relations with the AfDB and to protect the integrity of the Medupi project.” The Medupi project refers to construction at the Medupi Power Station, one of two South African power stations where Hitachi was accused of manipulating the tender process to secure contract awards. In a press release issued after filing charges against Hitachi on September 28, 2015, the SEC summarized its allegations against Hitachi by stating that the company
- sold a 25-percent stake in a South African subsidiary to a company serving as a front for the African National Congress (ANC). This arrangement gave the front company and the ANC the ability to share in the profits from any power station contracts that Hitachi secured. Hitachi was ultimately awarded two contracts to build power stations in South Africa and paid the ANC’s front company approximately $5 million in “dividends” based on profits derived from the contracts. Through a separate, undisclosed arrangement, Hitachi paid the front company an additional $1 million in “success fees” that were inaccurately booked as consulting fees without appropriate documentation.
The SEC complaint further alleged that as a result of these actions, Hitachi’s subsidiaries were awarded power station contracts worth approximately $5.6 billion. According to the SEC, Hitachi’s actions violated the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act, which are in turn violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 (15 U.S.C. § 78m(b)(2)(A)-(B)).
Significantly, violators also face the potential of cross-debarment by other multi-lateral development banks, which is virtually mandatory for publicly disclosed debarments exceeding one year for the commission of a “sanctionable practice” that occurred within ten years of the debarment decision and which can be the death blow to companies that rely heavily on bank-funded projects. Sanctionable practices include corruption, fraud, coercion, and collusion as defined in the Agreement for Mutual Enforcement of Debarment Decisions. According to the AfDB, Hitachi’s “high level of assistance” contributed to the bank’s decision to refrain from imposing more onerous sanctions. The AfDB also cited Hitachi’s voluntary agreement to make an undisclosed “substantial financial contribution to the AfDB” and to “co-operate with the IADC on a variety of matters.” The financial contribution to the bank is an uncommon settlement component, and little is published about the bank’s objective and use of the contribution. It will be interesting to observe whether targets making financial contributions to the AfDB will become a trend.
Hitachi’s settlements illustrate that FCPA-related enforcement actions can lead to substantial penalties, but resolution of a government enforcement action does not completely conclude the matter. In addition to the threat of parallel or subsequent enforcement proceedings by other country governments, multi-national development banks can also levy sanctions. Because certain multi-national development bank sanctions also lead to cross-debarment by other development banks, those facing sanctions should consider working with the banks to reach an agreement that avoids the potentially crippling sanction of cross-debarment. In the sanctions process one must weigh the potentially onerous conditions the banks may seek to impose with proposed settlement benefits. One potential benefit is the possibility of a global settlement of corruption allegations addressing enforcement actions by multiple agencies.
In addition to cooperating with the bank in the sanctions process, companies facing sanctions should take steps to review and enhance their anticorruption compliance programs to come in line with bank and international enforcement agency expectations. Enhancements to compliance programs even during the disclosure and sanctions negotiation process may ameliorate the potential sanctions imposed.
Numerous Greenberg Traurig attorneys have experience managing complex enforcement actions before the SEC and DOJ as well as suspension and debarment proceedings. Because actions of an investigation’s target can affect the enforcement result, companies and individuals should seek advice of counsel early in the process to best position themselves for a favorable outcome.