FCPA Compliance: Structuring Transactions

In terms of FCPA compliance, how a transaction or relationship is structured should be carefully considered.  In this regard, a number of violations of the FCPA’s accounting and record-keeping violations were alleged with respect to the complaint filed in conjunction with the SEC’s settlement with Hitachi.¹

Hitachi is alleged to have sold a 25-percent interest in its South African subsidiary [(Hitachi SA)] 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 …. 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.”²

Of particular significance is how dividends on the ANC’s shares were used as a vehicle for the front company to receive an extraordinary return on its investment. Moreover, the repurchase of the front company’s shares represented another means of earning an extraordinary return on its acquisition of its 25-percent interest in Hitachi SA.  Given Hitachi SA’s status as a foreign subsidiary, no violations of the FCPA’s anti-bribery provisions were alleged. However, the extraordinary returns were among the improper inducements associated with the ANC’s intervention to assist Hitachi SA in securing business.

The resolution demonstrates how and why the manner in which a transaction is structured requires close scrutiny as it may be used as a vehicle through which improper inducements may be facilitated.  In this instance, what might commonly be described as kickbacks were treated as dividends on the books and records of Hitachi SA in violation of the record-keeping provisions. Moreover, despite a compliance policy being in place, Hitachi SA’s failure to provide training or to otherwise enforce the compliance policy were among the bases for alleging violations of the internal controls provisions.

¹Complaint, SEC v. Hitachi, Ltd., Case No. 1-15-cv-01578 (D.D.C., Sept. 28, 2015), ECF No. 1.