Multi-Party Conspiracies in Central America: The Latest FCPA Case

This article was republished with permission from FCPAméricas Blog, for which Matteson Ellis is founder, editor and regular contributor.

On August 12, 2015, the U.S. Department of Justice (DOJ) announced that Vicente Eduardo Garcia, a former executive of the software and technology solutions company SAP International, pleaded guilty to criminal charges of conspiracy to violate the U.S. Foreign Corrupt Practices Act (FCPA). Mr. Garcia also consented to a cease-and-desist order by the U.S. Securities and Exchange Commission (SEC), agreeing to pay US$92,395, representing the sum of the total amount of kickbacks he received in the scheme plus prejudgment interest of US$6,430. The SEC found that Mr. Garcia violated both the anti-bribery and internal controls provisions of the FCPA.

The Miami-based executive is a 65-year-old former regional director of SAP who participated in a scheme over four years that was designed to bribe Panamanian officials to secure US$3.7 million in revenues for SAP from software contracts. Mr. Garcia is scheduled to be sentenced on December 16, 2015.

The Scheme. Mr. Garcia admitted to conspiring with Latin American advisors and consultants to bribe various Panamanian officials while he was responsible for Latin American sales of Germany-headquartered SAP between 2008 and 2014. According to the SEC, the conspirators paid US$145,000 to one official and offered to pay two other officials pursuant to the scheme to obtain four contracts to sell software.

In its Information, the DOJ explains, “Panama was viewed by SAP as strategically important, as it would showcase SAP’s technology in Latin America.” The DOJ states that Mr. Garcia estimated the Panamanian government contracts to be potentially worth approximately US$150 million. Winning a first contract was particularly important because it would position SAP to be favored for future contracts.

To win the first contract with the Panamanian social security agency, Mr. Garcia worked with an advisor, a local lobbyist that had existing relationships with the newly elected government in Panama, a second consultant and the principal of an SAP channel partner based in Mexico to devise a plan to pay bribes to two agency officials and the brother-in-law of a third official. The advisor was an SAP Mexico employee working under Mr. Garcia who resigned and began advising the Panamanian Government on assessing its technology needs.

The SEC explained that Mr. Garcia made arrangements to provide illegitimate discounts of up to 82 percent on sales to the channel partner, thereby generating a slush fund from which improper payments would be made. The SEC found that he did this by circumventing SAP’s internal controls. The DOJ stated that the conspirators used sham contracts and false invoices to disguise the true nature of the bribes. SAP’s partner was successful in obtaining the first contract for US$14.5 million, which included US$2.1 million in SAP software sales.

When developing the business relationships to support the scheme, Mr. Garcia agreed to send a fictitious invitation from SAP to one of the officials for a visit to Mexico that included a made-up itinerary where meetings ostensibly for business purposes would be held. This was designed to give the Panamanian official cover to take a trip to Mexico during Carnival. The lobbyist in the conspiracy told Mr. Garcia that, with this favor, the official would “owe us a big one.” In a follow up e-mail to the lobbyist that Mr. Garcia sent from his personal Yahoo account, Mr. Garcia inquired into whether the letter had been sufficient for the official’s purposes and requested that a deal for between US$5 and $10 million be finalized.

In the run up to the scheme, the lobbyist also proposed using sham consulting contracts that would be provided to the brother-in-law of one of the officials and drafted them in a way that “no trace remains if SAP conducts an audit … I made it as simple as possible and made it look like a real contract.” The advisor shared spreadsheets with Mr. Garcia listing planned payments to the officials.

FCPA Risk and Discounts. This FCPA action highlights once again the risks involved when companies extend discounts to distributors, resellers, channel partners or other third parties that purchase their goods and sell them to others. FCPA enforcement officials take the position that companies should seek to justify discounts as legitimate and should apply enhanced controls and heightened scrutiny when discounts exceed market rates. They maintain that large discounts have the potential to generate slush funds or “loose money” that can be used by third parties for bribe payments.

In the SEC’s settlement with Eli Lilly, authorities determined that the company generally gave discounts of between 6.5 percent and 15 percent to its Brazilian distributors and failed to apply special safeguards when extending unusually high discounts of between 17 percent and 19 percent to one particular distributor who was reselling to the Brazilian government. The SEC noted that Eli Lilly’s pricing committee had approved the distributor’s price without further inquiry and relied on representations of the sales and marketing manager without adequate verification and analysis of the surrounding circumstances of the transactions. Similarly, the DOJ and SEC include a hypothetical scenario on page 64 of the Resource Guide to the U.S. Foreign Corrupt Practices Act (FCPA Resource Guide) in which they provide that a distributor’s request for an additional discount would warrant “further inquiry into the economic justification for the change.”

Designing and implementing such compliance efforts are particularly important for companies that rely heavily on local partners as a core component of their business strategies. For example, the SEC highlights that SAP’s own network includes more than 11,500 partners worldwide with 380,000 individuals skilled in SAP software solutions and technology.

SAP’s Compliance Program. Though neither the DOJ nor the SEC explicitly address SAP’s anti-corruption compliance program, they demonstrate how the program had strong elements that Mr. Garcia’s efforts were designed to circumvent.

For example, to obtain approval for the discount, authorities note that Mr. Garcia had to submit internal approval forms with written justifications and that he misrepresented the reasons for the discount in those forms by saying that they were necessary to compete with other software companies in establishing a relationship with the Panamanian government. In its cease-and-desist order, the SEC references the SAP code of conduct prohibiting bribery and notes that Mr. Garcia engaged in the conspiracy despite signing it. Further, the SEC states that “SAP refused to pay additional commission to this new Panamanian company,” which led the conspirators to pursue the discount plan, suggesting that SAP’s controls helped impede the conduct.

Though the agencies do not focus on SAP’s compliance program (as they did, for example, in the Morgan Stanley declination discussed in Miller & Chevalier’s FCPA Summer Review 2012), practitioners can glean helpful guidance from these references to SAP’s program.

Bribe Offers and Promises under the FCPA. In its cease-and-desist order, the SEC explicitly provides that “Garcia, along with others, promised to make bribe payments to two senior government officials and made bribe payments to another government official, all in violation of the FCPA.” In doing so, the SEC highlights that the FCPA’s anti-bribery prohibitions extend not only to actual payments of bribes, but also to mere promises of payments. In fact, no actual payment is needed to violate the FCPA; a simple offer, promise or authorization of an improper payment can be sufficient. This aspect of the statute’s broad reach is often lost on companies and business people engaged in international business who mistake the type of activity necessary to constitute a violation.

Central America and Bribery Risk. This is the fifth time that improper payments in Panama have resulted in FCPA enforcement actions and the 13th time that Central American payments more generally have resulted in FCPA enforcement actions. Given its position as a financial center for Latin America, in at least one case Panama has also served as a conduit for illicit flows of bribe payments subject to FCPA enforcement – payments in Venezuela in the FCPA action involving traders from Direct Access Partners went through Panama.

Mr. Garcia’s conspiracy further highlights the uniquely close-knit relationships that are common between the business and government sectors in Central American countries, where political and economic power is highly concentrated. Interesting enough, almost a week after U.S. authorities announced their actions against Mr. Garcia, the issue had still not been covered thoroughly by the Panamanian or Central American press, despite the fact that numerous individuals from the region appear to have been involved in the conspiracy. This calls into question whether local Panamanian authorities will take action related to the conspiracy or cooperate with U.S. officials.

There also appears to be the possibility that U.S. officials could still proceed against non-U.S. individuals involved in the conspiracy. In particular, in the FCPA Resource Guide, the DOJ and SEC cite United States v. MacAllister, 160 F.3d 1304, 1307 (11th Cir. 1998) and United States v. Winter, 509 F.2d 975, 982 (5th Cir. 1975) for the proposition that the United States generally has jurisdiction over all conspirators where at least one conspirator is an issuer, a domestic concern or commits a reasonably foreseeable overt act within the United States: “[I]f a foreign company or individual conspires to violate the FCPA with someone who commits an overt act within the United States, the United States can prosecute the foreign company or individual for the conspiracy.”

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