On February 24 the SEC charged Ohio-based Goodyear Tire and Rubber Company with violating the books and records provisions of the Foreign Corrupt Practices Act (FCPA). Goodyear agreed to pay $16.2 million to settle the charges, which stemmed from allegations that the company failed to prevent or detect bribes amounting to more than $3.2 million distributed by local executives at two of its Sub-Saharan subsidiaries in order to obtain tire sales. Most of the illicit payments were made prior to Goodyear’s acquisition of the Kenyan company in 2007. The SEC’s enforcement order suggests that the pre-acquisition due diligence Goodyear conducted was insufficient to uncover the illicit behavior. Furthermore, the SEC found Goodyear’s post-acquisition compliance efforts insufficient as well.
Evidence of improper payments in Kenya first came to light five years after Goodyear’s acquisition through an employee tip submitted via Goodyear’s ethics hotline. The company later disclosed its findings to the SEC and increased compliance trainings and audits. Goodyear’s cooperation and compliance efforts helped it avoid additional criminal fines. However, the dollar amount of the settlement doesn’t quite capture the extent to which this lapse in due diligence cost the company. Goodyear is also required to unwind its operations in Sub-Saharan Africa and stomach the loss of investment funds, time, and future opportunity in the region.
Ignorance of foreign subsidiaries’ illicit behavior does not shield a parent company from liability under the FCPA. In this case, Goodyear’s Kenyan subsidiary had independently initiated the illegal practices prior to the acquisition and continued to be managed locally even after Goodyear acquired a majority stake in the company. The U.S. government was able to establish jurisdiction and charge Goodyear with FCPA violations because it had incorporated misleading records of the illicit payments into its accounting records. However, the company could have avoided the violations if it had conducted better pre-acquisition due diligence and implemented anti-corruption training with the subsidiaries right off the bat.
Pre-acquisition due diligence should include:
- A complete audit of all books and records
- An assessment of risks based on the location of the business and the nature of the particular industry
- A review of internal control measures and the compliance culture
- Risk assessments of political activities and third-party relationships (customers, contractors, vendors, agents, distributors, investors and partners)
- A violations inquiry to assess target’s relationship with the DOJ and SEC as well as local agencies
- Pre-acquisition actions to address red flags before the deal goes through
- Thorough documentation of all due diligence efforts (to present in the event of a government investigation)
- Immediate implementation of a compliance education and training program including manuals, policies, certifications and management support of the overall compliance program assessing the likelihood of violations, ability to provide mitigation, and the need for restructuring to provide effective protection against future violations.