General Electric Pays $23.5 Million SEC Settlement Following Iraq Investigation

General Electric announced on 27 July 2010 that it had reached a $23.5 million settlement with the SEC regarding alleged violations of the FCPA in securing contracts under the UN Oil for Food programme. The charges brought by the SEC related to two European GE subsidiaries, in addition to subsidiaries of Amersham plc, a UK-based company, and Ionics Inc., companies later acquired by GE.

The settlement involves a $1 million penalty and the disgorgement of profits plus interest which the subsidiaries are estimated to have earned on the transactions. The case draws attention to the liability assumed by corporations for the acts of their subsidiaries and agents.

GE operates one of the most respected anti-corruption compliance programmes and adopts a public commitment to corporate integrity and transparency. However, as a company with subsidiaries across a diverse range of industries and jurisdictions, enforcing compliance can be difficult.

UN Oil for Food programme

The UN Oil for Food programme permitted Iraq to sell oil amid strict trade embargoes in order to fund the purchase of basic humanitarian products such as food and water. Unfortunately the programme quickly became a vehicle for corruption. A UN inquiry found that $1.7 billion in illicit income was diverted to the Iraqi government, $1.5 billion of which was derived from supplier kickbacks.

Conduct of GE subsidiaries

Two European subsidiaries of GE, Marquette-Hellige of Germany, and Switzerland-based OEC Medical Systems (Europa) AG, were both said to have authorised the payment of kickbacks to the Iraqi government, which referred to the payments as “after-sales service fees” (“ASSF payments”).

When negotiating with the Iraqi government, Marquette’s officials refused to make cash payments to the Ministry of Health but later agreed to their agent’s proposal that payments were made in the form of computer equipment, medical supplies and services. Marquette provided equipment and services to secure three contracts and covered the payments by increasing their agent’s commission by 10%.

Using the same Iraqi agent, OEC-Medical Systems agreed to make similar ASSF payments to the Iraqi Ministry of Health in relation to its contract. The payment was again covered by inflating the agent’s commission fee by 10%. This inflation was concealed by the creation of a fictitious “services provider agreement” between OEC-Medical and the agent, asserting the additional services performed to justify the increased commission.

UN regulations prohibit payments of any kind, whether in cash or in the form of goods and services, and the FCPA defines payments as money or anything of value. The Bribery Act goes further still, prohibiting any form of payment made to gain advantage.

Liability for the pre-acquisition actions of new subsidiaries

When General Electric acquired Amersham plc, a UK-based company, in 2004 and Ionics Inc. in 2005, it assumed both their assets and liabilities.

Amersham fell under the jurisdiction of the FCPA on account of the American Depository Receipts it had listed on the NYSE. It was charged over the conduct of its subsidiary Nycomed, which allegedly paid cash ASSF payments in relation to nine contracts with the Iraqi Ministry of Health between 2000 and 2002.

Ionics Inc. was publicly-listed in the US and was charged under the FCPA in relation to the acts of its Italian subsidiary, Ionics Italba. The SEC alleged that Ionics Italba made ASSF payments on contracts with the Iraqi Oil Ministry.

The importance of due diligence and compliance programmes

The SEC claimed that, among the four subsidiaries, payments of approximately $3.6 million were made, resulting in profits of $18.4 million. The $23.5 million settlement may be relatively small but it belies the hidden costs of conducting an internal investigation across the organisation.

Due diligence processes and compliance programmes must provide total coverage and ensure that agents and subsidiaries do not engage in corrupt activities. Even where such programmes exist, they must be maintained. The case demonstrates how important it is that employees are aware of how broad the application of anti-corruption laws often is.

Sam Eastwood is a litigation partner and Head of the Business Ethics and Anti-Corruption Group and Adam Smith is a researcher at Norton Rose LLP, http://www.nortonrose.com/. Sam can be contacted on +44(0)20 7283 6000 or by email: sam.eastwood@nortonrose.com.

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