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Cady Bar the Door Insight & Commentary on SEC Enforcement Actions and Related Issues

SEC Charges Allianz with FCPA Violations

Posted in FCPA, Non-scienter-based Violations, Whistleblowers

On December 17th, the SEC brought a settled administrative FCPA action against Allianz SE, a German insurance company with a subsidiary in Indonesia.  The order does not allege violations of the FCPA’s antibribery provisions, but does claim violations of its books-and-records and internal controls provisions.

As the summary in the SEC’s order says, the proceedings involve:

Allianz SE [and] its Indonesian majority-owned subsidiary, PT Asuransi Allianz Utama (“Utama”).  Between 2001 and 2008, Utama managers made improper payments to employees of state-owned entities in Indonesia in order to obtain and retain business.  Allianz learned of the improper payments from two complaints made several years apart.  The first complaint was submitted in 2005 alleging significant misconduct, including unsupported payments to agents.  A subsequent audit of Utama’s accounting records uncovered that managers at Utama were using “special purpose accounts” to make illicit payments, many to government officials, in order to secure business in Indonesia.  Despite the audit, the conduct continued.  The second complaint was lodged in 2009 to Allianz’s external auditors and alleged that Allianz created illicit off-the- books accounts.  In response, Allianz began an internal investigation.  The Commission staff opened an investigation in April 2010 after receiving an anonymous complaint of possible FCPA violations.  The investigation determined that from at least 2001 through December 2008, the Utama managers, with the assistance of others in the Indonesian office, made payments to employees of state-owned entities in Indonesia to procure or retain insurance contracts related to large government projects in Indonesia.  As a result of improper payments of approximately $650,626 to agents and employees of state-owned entities and others, Allianz realized $5,315,649 in profits.

Two facets of this matter interest me in particular:  (1) the whistleblower origins of the case; and, (2) signals the SEC hopes to send regarding voluntary disclosures of potential violations.

Whistleblowers

This case seems to have the hand of SEC Whistleblower Chief Sean McKessy guiding it.  The order tells us that it came to the SEC’s attention in April 2010, when an anonymous tip reported possible FCPA violations at Allianz.  If the complainant had put his or her name on the tip – and had waited until after Dodd-Frank’s passage on July 22, 2010, he or she might have been eligible for 10-30% of the $12 million collected in disgorgement penalties, and prejudgment interest.  Before Dodd-Frank, except for narrow circumstances in the insider trading context, there was no such thing as a compensable whistleblower in the SEC’s world.  We’ll soon outlive this situation when whistleblowers came in too early to collect, but we’re apparently still in it.

But McKessy wants to get the SEC’s whistleblower program off the ground, and I imagine the detailed information about the April 2010 tip is geared to that end.  The size of many FCPA awards makes these cases likely candidates for substantial whistleblower awards.  If this one had come just a few months later, the payout could have been substantial.

Self-Disclosure

But that wasn’t even the first “whistleblower” tip.  That one came in on December 1, 2005, and reported potential control weaknesses with the Utama special purpose accounts.  An audit was initiated a week later, and identified one of the accounts as a “vehicle to pay project development and overriding commissions to the special projects and clients for securing business with Utama.”  The audit also identified another account as being set up for “various” purposes.  But no other steps were taken to determine the nature and purpose of the accounts or to identify the recipients of payments from the accounts.  Though the Utama management agreed to close the accounts and stop making the payments, it continued making improper payments to secure business for Allianz anyway through 2008.

In March 2009, Allianz’s outside auditor received an anonymous complaint alleging that an Allianz executive had created slush funds during his tenure with an Allianz subsidiary.  In response to that complaint, Allianz retained counsel to conduct an internal investigation of Utama’s payment practices in Indonesia.  Ominously, the SEC’s order says, “Allianz did not report the conduct to the Commission staff.”

The result was the case released on Monday: charges under §13(b)(2)(A) and §13(b)(2)(B) of the Exchange Act, with disgorgement of $5.3 million, an equal penalty, and prejudgment interest of $1.7 million.  Unfortunately, FCPA observers are left – as is often the case – to wonder what benefit quick reporting to the SEC would have brought. Would the disgorgement figure have been lower?  Perhaps, but it’s impossible to tell by how much.  Did Allianz’s cooperation after the tip was reported allow it to escape charges under the antibribery provisions?  As Mike Koehler notes, those charges were probably impossible to make in any event.  “Issuers” can only be liable under those provisions if they use the means of interstate commerce to effect the violations.  Here, no contact with the United States is alleged at all.

The SEC makes the point that it would rather have seen Allianz disclose its potential violations voluntarily.  But it doesn’t shed much light on what the benefits of doing that would have been.

Happy New Year!