APRIL 2006
INTRODUCTION
On April 17, 2006, the United States Securities and
Exchange Commission (“SEC”) settled a civil injunctive action against Tyco International Ltd.
(“Tyco”).
1 The SEC’s complaint 2 alleged that, from
1996 through 2002, Tyco violated the federal securities laws by, among other things, overstating its reported financial results by at least one billion dollars. As part of the settlement, Tyco agreed to pay a $50 million civil penalty.
Although the principal focus of the SEC’s complaint was Tyco’s alleged overstatement of its reported financial results by engaging in various improper accounting and executive compensation disclosure practices, the SEC also alleged that Tyco violated the
Foreign Corrupt Practices Act (“FCPA”).
FCPA ALLEGATIONS
The FCPA’s antibribery provisions prohibit U.S.
issuers 3 and their officers, directors, employees and agents from offering “anything of value” to a foreign government official, foreign political party or candidate for foreign office to influence an official act or secure an improper advantage in order to assist in obtaining or retaining business. In addition, the
FCPA’s accounting provisions require U.S. issuers to maintain accurate “books and records” and to establish and maintain an effective system of “internal controls” to account for transactions and assets.
The SEC alleged that Tyco violated the FCPA’s antibribery and accounting/controls provisions through the actions of subsidiaries in Brazil and
South Korea. In 1998, Tyco acquired a Brazilian engineering company and renamed it Earth Tech
Brasil Ltda. (“Earth Tech Brazil”). The SEC alleged that Tyco acquired Earth Tech Brazil despite due diligence that indicated illicit payments to government officials were common in Brazil and that such payments were necessary in Earth Tech Brazil’s line of business, which included various construction projects and operations for Brazilian government entities. After the acquisition, according to the SEC,
Earth Tech Brazil employees made frequent payments to Brazilian officials to obtain business, and submitted false invoices from companies owned by the employees to conceal the illicit payments.
Roughly sixty percent of Earth Tech Brazil’s total contracts allegedly involved some form of payment to government officials. The SEC further alleged that executives in Tyco’s U.S. corporate offices participated in discussions and received communications about making illicit payments to
Brazilian officials.
In 1999, Tyco acquired the South Korean fire protection services firm Dong Bang Industrial Co.
Ltd. (“Dong Bang”). According to the SEC’s complaint, Tyco’s due diligence for this acquisition
1 “SEC Brings Settled Charges Against Tyco International Ltd. Alleging Billion Dollar Accounting Fraud,” Litigation Release
No. 19657, April 17, 2006, available at http://www.sec.gov/litigation/litreleases/2006/lr19657.htm.
2 Securities and Exchange Commission v. Tyco International Ltd., Case no. 06 CV 2942 (S.D.N.Y. 2006), available at http://www.sec.gov/litigation/litreleases/2006/lr19657.htm.
3 The FCPA defines a U.S. issuer as (i) any U.S. company and its foreign affiliates or (ii) any foreign company issuing securities registered with the SEC.
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indicated that illicit payments to government officials were common in the South Korean contracting business. After the acquisition, Dong Bang executives allegedly made payments and provided entertainment to government officials to obtain business and made at least one payment to an employee of a government-operated power plant to obtain business. Further, the SEC alleged that Dong
Bang attempted to conceal the payments by establishing fictitious employees on its books and using phony payroll disbursements to wire cash to the executives spending these improper funds. Unlike the alleged practices at Earth Tech Brazil, the SEC did not allege that Tyco executives in the U.S.
participated in discussions regarding illicit payments to South Korean officials. However, the SEC alleged that Tyco did not implement an effective companywide FCPA compliance program or system of internal controls that could detect and prevent FCPA violations throughout its worldwide business units, nor did Tyco effectively train Dong Bang or Earth
Tech Brazil employees despite its knowledge of
South Korean and Brazilian business customs.
The Tyco case also highlights the importance of effective FCPA compliance programs and internal controls. Even though Tyco was apparently not aware of Dong Bang’s illicit payment practices, the SEC faulted Tyco for failing to implement an effective
FCPA compliance and training program. While the
SEC has acknowledged that it is impossible to detect and prevent every potential FCPA violation, global companies must demonstrate that they have programs in place reasonably designed to avoid FCPA violations. At a minimum, FCPA compliance programs should clearly document prohibited practices, incorporate a plan to disseminate company policy, require that management and sales and other personnel that handle cash or interface with customers certify FCPA compliance, and provide web-based or in-person FCPA training to relevant personnel.
CONCLUSION
The Tyco case indicates that U.S. government authorities continue to make FCPA compliance an enforcement priority. U.S. companies and foreign companies issuing securities registered with the
SEC must develop effective compliance procedures and internal controls to help them (and their employees) avoid the stiff penalties that often accompany FCPA violations, particularly in connection with the acquisition and subsequent oversight of foreign subsidiaries.
IMPLICATIONS
The Tyco case underscores the potential pitfalls facing U.S. companies that acquire and operate business units around the world. To help avoid FCPA violations, companies must incorporate FCPA issues into their due diligence activities. Although it is not clear whether Tyco’s due diligence revealed the extent of illicit payments undertaken by its acquisition targets, Tyco was at least aware of general business customs in the targets’ countries and industries. The United States Department of Justice has specified that “a pattern of corruption in the country” is one red flag that may provide a parent company with sufficient notice of corrupt conduct by a subsidiary’s employees or agents.
Edward J. Fishman
202.778.9456
efishman@klng.com
Jonathan M. Young
202.778.9390
jyoung@klng.com
2 Kiirrk pa & L occk Niicch ollsso ah am L P || APRIL 2006

If you have questions or would like more information about the Foreign Corrupt Practices Act (FCPA), please contact one of our lawyers listed below:
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Dick Thornburgh
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+1.202.778.9302
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