On September 28, 2015, Hitachi Ltd. of Japan (Hitachi) agreed to pay US$19 million to settle Securities and Exchange Commission (SEC) charges that it violated the US Foreign Corrupt Practices Act’s (FCPA) “books and records” provisions, in connection with alleged improper payments to obtain government contracts to build two multibillion-dollar power plants in the Republic of South Africa (the Medupi and Kusile power stations). The Hitachi settlement provides a critical reminder to SEC reporting companies of the importance of conducting foreign business ventures in accordance with the internal controls requirements of the FCPA, as well as the trend toward greater ethics and compliance enforcement in Africa.
The Alleged Scheme
The Medupi and Kusile power stations are two of the largest coal-fired power stations currently under construction in the Southern Hemisphere. It is widely acknowledged that significant delays in the construction of the power stations have affected South Africa’s ability to ensure that it has enough power generation capacity to meet demand. This has resulted in country-wide “load shedding,” which has negatively impacted South Africa’s economic outlook. Rating agencies have cited this as one of the factors that may lead to a potential downgrade of South Africa’s sovereign debt rating.
As the SEC’s complaint alleges, in 2005, Hitachi, through a subsidiary known as “HPE” sold a 25% stake in its South African subsidiary, Hitachi Power Africa (Pty) (HPA), to Chancellor House Holdings (Pty) Ltd (Chancellor), which Hitachi and HPA knew, or should have known, was a front company for South Africa’s ruling party, the African National Congress (ANC). Hitachi pursued this partnership aware that while Chancellor had extensive political connections, Chancellor had no relevant engineering or operational capabilities. This arrangement ultimately gave Chancellor (and, by extension, the ANC) the ability to share in profits from any power station contracts Hitachi and HPA secured. In exchange, Hitachi and HPA encouraged Chancellor to use its political influence to obtain government contracts from Eskom Holdings SOC Ltd., a public utility owned and operated by the South African government that supplies 95% of all electricity in South Africa.
In 2006 and 2007, Eskom Holdings awarded HPA/HPE contracts to build the boiler works for the Medupi and Kusile power stations. As a result, HPA eventually paid Chancellor roughly US$5 million in “dividends” based on its profits from the contracts. In a separate, undisclosed agreement, HPA paid Chancellor another US$1 million in “success fees” related to these tender awards, which were inaccurately recorded as consulting fees in HPA’s books. As the complaint alleges, the payments to Chancellor were made despite Hitachi’s knowledge from press reports and other sources of the connection between Chancellor and the ANC. Indeed, the SEC alleged that the payments were made in direct violation of compliance policies enacted by both HPE and HPA that prohibited contributions to political parties.
Hitachi was subject to the FCPA for the alleged violations that occurred in South Africa because, at the time of the violations, its American Depositary Shares (ADS) were registered with the SEC and were listed and traded on the New York Stock Exchange (NYSE). The SEC pursued the case against Hitachi, despite the fact that Hitachi delisted its ADS from the NYSE in 2013, and only traded on the US over-the-counter markets thereafter.
While the Hitachi settlement does not break new ground in FCPA enforcement, it is a notable reminder for foreign companies doing business in Africa of the FCPA’s long reach. In this case, the FCPA was enforced against a Japanese company (Hitachi) that is no longer subject to the registration requirements of the SEC, as a result of the acts of its South African subsidiary (HPA). Ultimately, it was the company’s alleged “lax control environment” that was criticized, and that led to the multimillion-dollar settlement. The liability here arose not from an express claim that Hitachi committed bribery, but instead that it: (a) failed to conduct adequate due diligence on its South African partner; (b) miscategorized certain success fees as consulting expenses; (c) failed to ensure compliance with existing anti-corruption policies; and (d) failed to conduct adequate FCPA compliance training.
Anti-Corruption Compliance Cooperation in South Africa and Africa
In announcing the settlement, the chief of the SEC Enforcement Division’s FCPA Unit, Kara Brockmeyer, noted that the Hitachi case was the first collaboration, in what they hope will be a series of collaborations, between the SEC and the African Development Bank’s (AfDB) Integrity and Anti-Corruption Department.
In recent years, the AfDB has vigorously enforced ethics violations. For example, on October 1, 2015, the AfDB settled claims against SNC-Lavalin Group Inc., alleging the company made illicit payments to public officials in order to secure contracts on two AfDB-financed projects, and in December 2014, the AfDB imposed a three-year debarment and a US$18.86 million fine on the China First Highway Engineering Co., Ltd, following the company’s admission of fraudulent and collusive practices in an AfDB-financed project.
Additionally, the SEC has been active in other parts of Africa during the past year. In February, Goodyear Tire & Rubber Company agreed to pay the SEC more than US$16 million to settle charges that its subsidiaries paid bribes to obtain tire sales in Kenya and Angola. Recently, on September 29, 2015, Hyperdynamics Corporation settled SEC charges that its Guinean subsidiary had failed to accurately record payments to two companies.
We can expect to see more FCPA enforcement coordination between US law enforcement, foreign law enforcement, and the multinational development banks across the African continent. Companies that enter into project ventures with in-country businesses must pay careful attention to due diligence, compliance policy and training, and accounting control issues to avoid any suggestion that they are illegally purchasing political influence or corruptly influencing tender awards.