Israeli Companies in the Crosshairs for Violation of the U.S. Foreign Corrupt Practices Act (FCPA)
17/04/2018
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Israeli Companies in the Crosshairs

by Maor Berdicevschi and Steven D. Feldman

For any Israeli company that has a U.S. subsidiary, lists its shares on a U.S. exchange, or trades its foreign shares on U.S. exchanges (“ADRs”), knowledge of the U.S. Foreign Corrupt Practices Act (“FCPA”) is a must.  Running afoul of this law can bring serious consequences, as Israeli real estate development company Elbit Imaging Ltd. recently learned.  Charged with violating the FCPA in several transactions, on March 9, 2018 Elbit paid a $500,000 fine to the U.S. Securities and Exchange Commission (“SEC”) to settle the matter. It could have been worse. The SEC stated that it considered the remedial measures taken by Elbit and the company’s cooperation in the investigation when assessing the penalty. FCPA enforcement has been a top U.S. government priority for years, and there is no indication that it will slow down.

The Israeli government is following suit. Since 2016, it has ramped up its anti-corruption efforts. Israeli companies are now facing both criminal and civil prosecutions by U.S. authorities, and separate prosecutions by Israeli regulators. The takeaway is the Israeli companies need to take pro-active steps to avoid becoming the next target of U.S. and Israeli authorities.

THE U.S. FCPA STATUTE

The FCPA statute contains two prongs.  The first prong is the broadest. It prohibits all U.S. companies, as well as foreign companies whose shares are traded on U.S. exchanges, from making any payments, or giving anything of value to foreign officials (i) for the purpose of influencing any act of that foreign official in violation of official duty, or (ii) to secure any improper advantage in order to obtain or retain business.  The second prong requires any domestic or foreign company whose shares trade publicly on U.S. markets to make and keep books and records that accurately and fairly reflect company’s transactions and to devise and maintain an adequate system of internal accounting controls.  Essentially, the second prong makes it illegal for public companies to set up and use secret, off-the-books slush funds to pay foreign officials.

ELBIT’S CONDUCT AT ISSUE

According to the SEC’s Order Instituting Proceedings, between 2007 and 2012, Elbit and Plaza Centers NV (Elbit’s then majority-owned indirect subsidiary) directly and indirectly paid millions of dollars to third-party offshore consultants and sales agents.  The payments purportedly were for services related to a real estate development project in Romania, and the sale of a large portfolio of real estate assets in the U.S.  Elbit and Plaza made these payments even though they allegedly had no evidence that the consultants and sales agents actually provided the contracted for services.  The absence of such evidence led the SEC to conclude either that the payments were bribes or that the funds were embezzled.

Specifically, in 2006, Plaza hired an offshore consulting service to assist it in obtaining the rights to a redevelopment project in Romania. Plaza then bought a 75 percent interest in the project, but no evidence exists that the offshore consultant actually provided any services in connection with the transaction. In 2011, Plaza entered into a second contract with an offshore consultant in relation to the same project. As with the first transaction, no evidence exists that the second offshore consultant provided any services in furtherance of 2011 transaction. The consultants did not attend any meetings between Romanian officials and Plaza officials, and do not appear to have submitted any material evidencing any consulting work. In total, between 2007 and 2012, Plaza paid the consultants approximately $14 million, even though the documentation supporting the payments did not identify the services the consultants provided pursuant to the contracts. In its books and records, Plaza characterized the payments to the consultants as legitimate business expenses for services rendered.  But the SEC concluded that some or all of the funds may have been used to make corrupt payments to Romanian government officials or were embezzled.

Separately, in 2011, Elbit’s CEO directed Elbit and Plaza to enter into a sales contract with a third-party offshore sales agent purportedly to assist in selling a portfolio of shopping centers. Pursuant to the Sales Agent Contract, the offshore sales agent was to create marketing materials, locate potential buyers, and assist in negotiating a sales contract in exchange for a fee. Elbit and Plaza conducted no due diligence on the offshore sales agent. Unbeknownst to Elbit and Plaza, the day after they entered into the contract, the offshore sales agent assigned its rights and obligations to another offshore entity, including approximately 98 percent of the commission. At the time, the other offshore entity was indirectly beneficially owned by Elbit’s CEO. The CEO did not disclose this assignment or his interest in the other offshore entity to Elbit or Plaza.

The SEC concluded that Elbit and Plaza failed to properly record those payments in a manner that, in reasonable detail, accurately and fairly reflected the nature of the payments in their books and records. The SEC also concluded that Elbit and Plaza failed to devise and maintain internal accounting controls sufficient to provide reasonable assurances that company funds would only be used as authorized for legitimate corporate purposes, and that transactions were recorded as necessary to maintain accountability for assets, particularly with regard to the accounts payable process. To resolve the SEC’s charges, Elbit paid a civil penalty of $500,000.

ELBIT’S SELF-REPORTING AND COOPERATION

The SEC’s Order notes that when Elbit discovered evidence suggesting the payments described above were improper and may have been recorded incorrectly in Plaza’s books and records, Elbit and Plaza reported this information to U.S. and Romanian authorities, fully cooperated with the SEC’s investigation, and implemented extensive remedial measures. Elbit, through a special committee of its board of directors, hired outside counsel to conduct an independent investigation to determine the scope of potential issues.

During that investigation, additional facts came to light about Elbit’s and Plaza’s payments to the offshore sales agent and the ownership of the second sales agent.  Those facts caused Elbit and Plaza to form a joint special committee to investigate the shopping center portfolio transaction.

As the investigations progressed, Elbit shared findings with the SEC staff, was fully responsive to requests for additional information, and provided translations of certain documents.  In addition, counsel to the special committee examined and recommended revisions to Elbit’s and Plaza’s internal accounting controls, and anti-bribery policies and procedures. Both Elbit’s and Plaza’s boards accepted all of the recommendations and directed management to implement them.

OTHER ISRAELI COMPANIES TARGETED BY U.S. AND ISRAELI LAW ENFORCEMENT

The Elbit matter marks a continuing trend targeting Israeli companies for violating anti-corruption laws. The settlement follows on the heels of a settlement reached by Teva Pharmaceuticals in December 2016 when it agreed to pay a criminal penalty of $283 million in a deferred prosecution agreement with the U.S. Department of Justice (“DOJ”) and an additional $236 million to settle civil charges filed by the SEC, while its Russian subsidiary Teva LLC agreed to plead guilty to charges of violating the FCPA.  Following its settlement with U.S. authorities, in January 2018 Teva signed a conditional arrangement to end proceedings with the Israeli Justice Ministry, where Teva paid an additional fine of ILS 75 million (approximately $21.5 million).

The Israeli Justice Ministry’s settlement with Teva took into account Teva’s cooperation with the investigation, and the company’s implementation of a fundamental compliance program aimed to prevent future infractions and reorganize to minimize risks. It also committed to training the company’s thousands of employees in compliance and enforcement matters in order to prevent corruption.

While the proceedings undertaken by the U.S. law enforcement authorities did not immunize Teva from facing additional sanctions in Israel for the same conduct, the heavy fine that Teva paid to the American authorities, as well as the various remedial measures it adopted, were significant factors in determining the penalty, resulting in the unusual decision to end the criminal proceeding against Teva without charging it in a criminal court, and to settle with only a fine.

ISRAEL’S BRIBERY LAWS

Notably, Israel is a member of the Organisation for Economic Co-operation and Development’s (“OECD”) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, as well as the UN Convention Against Corruption, which commit member countries to eradicate corruption and bribery, a cross-border phenomenon seen to impact competition in the international arena and undermine the principles of sound governance and economic development. Israel adopted its own version of the U.S. FCPA, resulting in the Penal Code, 5737-1977 being amended in 2008 with the addition of Section 291A, which criminalizes bribing a foreign public official solely with regard to business transactions: “One who provides a bribe to a foreign public official in return for an action relating to its position, in order to obtain, ensure or promote a business activity or other advantage relating to a business activity, shall be considered as one who provides a bribe…”  The maximum sentence is seven years’ imprisonment and a significant fine.

However, until 2016, this law was never enforced in Israel. Israel’s first bribery prosecution targeted NIP Global Ltd. (“NIP”), where the company confessed to paying a bribe of $500,000 to a foreign agent in Africa, who was close to the CEO of the interior ministry, in order to win a tender valued at $30 million. The company reached a settlement with the Israeli Ministry of Justice whereby NIP paid ILS 4.5 million.  NIP undertook, as part of the settlement, to cooperate with the government authorities and adopt a strict and extensive compliance code.

As with the U.S. FCPA, public companies traded on Israeli exchanges are also exposed to reporting violations under the Israeli Securities Law when they pay bribes that are misrepresented in the companies’ books and their financial statements to the Stock Exchange, as in the Elbit case.  In the last year, the Israeli law enforcement authorities have opened many criminal investigations regarding public and private companies on grounds of suspected bribery of foreign public officials. These matters have sent shockwaves through Israeli business entities involved in real estate transactions and international securities transactions, causing these entities to reconsider and reorganize their compliance and control programs.

WHAT THIS MEANS TO YOU

Elbit’s settlement with the SEC reaffirms that U.S. law enforcement authorities continue to view themselves as the world’s policemen. Here, they were empowered to target an Israeli company concerning a real estate deal in Romania because Elbit’s shares were traded on the NASDAQ stock exchange.  The settlement is notable for Elbit’s decision to conduct an internal investigation, self-report to the SEC, and cooperate with the SEC.  The Order settling the matter suggests that the SEC considered these remedial steps in determining the penalty to impose on Elbit.

As the Elbit and Teva cases illustrate, the FCPA empowers U.S. law enforcement authorities to prosecute foreign companies for their conduct while operating in foreign countries across the globe.  Common problems include paying cash bribes or reimbursing non-business related travel and expenses for foreign officials in exchange for business contracts or government benefits, such as licenses, tax refunds, and customs approval.

Similarly, the State of Israel has recently undertaken many proceedings aimed at eradicating international corruption, and the Israel Securities Authority and the Ministry of Justice favor companies that feature strong and effective internal compliance programs. These programs are considered by government authorities both in criminal proceedings and administrative proceedings brought under Israeli Law. Such a compliance program is also important to prevent infractions before they happen and for ongoing monitoring, and not only to avoid future violations after the company is already under investigation.

TAKING ACTION

To manage anti-bribery law risk, companies should consider creating a training and compliance program.  Recent enforcement actions in both the U.S. and Israel suggest that implementing a strong training and compliance program can have a significant influence on the outcome of an action.  To be effective, a program should be designed to (a) prevent violations of the anti-bribery laws and corporate policy in the first place, and when bad conduct happens (b) set the stage for its early detection to allow the company to take prompt remedial measures to minimize the harm to the company.  A company should consider:

  • creating appropriate corporate policies and standards of conduct;
  • educating and training employees in a practical manner concerning the legal requirements;
  • taking reasonable steps to monitor and audit employee (and agent) conduct; and
  • exercising due diligence in determining those with whom the company does business.

While these steps can be burdensome and expensive, they pale in comparison to the cost of being the next company charged with violating anti-bribery laws in multiple jurisdictions.

About the authors:

Steven D. Feldman, Esq., is a Shareholder at Murphy & McGonigle, P.C., a securities litigation firm in New York, N.Y.  A former federal prosecutor in the Securities & Commodities Fraud Task Force for the U.S. Attorney’s Office in Manhattan, Steven focuses his practice on White Collar Criminal litigation.  Adv. Maor Berdicevschi is Head of Criminal Financial and Securities Offenses Department at Tadmor & Co. Yuval Levy & Co. in Tel Aviv, Israel. 

 

 

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