I’ve taken a look inside one of the hundreds of Deferred Prosecution Agreements that the current Department of Justice has negotiated with corporate felons. It is not a pretty sight.
The value for me in looking at this particular DPA is the admitted criminal behavior is on a small enough scale that I can actually wrap my little brain around the situation.
This particular DPA has been denied by a federal judge instead of getting his automatic rubber stamp approval. The DoJ and now-confessed felon both appealed. The case will soon be heard on appeal. There are ripple effects if the judge’s denial is ratified at appeal.
There is an old saying you should never look at how sausage or legislation is made. Reason is the details can turn your stomach.
Here is what I’ve learned of this particular sausage making effort:
8/8, print edition – Wall Street Journal – Corporate Prosecution Deals Headed for a Legal Test / Justice Department worries judges may gain sway over agency’s pacts with firms under criminal investigation
A federal judge declined a deferred prosecution agreement that the DoJ negotiated with Fokker Services BV who illegally made over 1,000 shipments of aircraft parts to Iran, Sudan, and Myanmar. Trade with those countries, or any individuals or companies in those countries, is banned by a variety of U.S. federal laws and regulations.
The penalty? The company
…paid a $21 million penalty, admitted wrongdoing, pledged to cooperate with U.S. authorities and enhanced its compliance program
The DoJ and company say the judge had no business looking at the terms of the deal. They appealed his ruling and will get a hearing from the D.C. Circuit Court of Appeals.
What did Fokker Services BV do?
The company fabricated paperwork from 2005 through 2010 as they shipped aircraft parts, we usually call those things munitions, to one country that was in the process of killing American soldiers in the field.
A thousand shipments.
I am sure the company counts the fine merely as a cost of doing business. They merely lost the revenue for a small number of shipments. Or perhaps they lost the revenue on the shipments for which they got caught. Since they fabricated and altered documents, there could be more shipments they got away with that they forgot to self-identify.
The DPA, which can be found here, indicates Fokker Services BV has historically done their work in Iran mostly with civilian customers. They do, however, provide aviation parts and service to the Iranian Air Force, Iranian Navy, and Iranian Army. Internal memorandums indicate they might have to walk away from $5M of sales to military customers if they want to start doing more business in and through the U.S.
So, if the U.S. ever trades shots with the Iranian military, we can thank the good folks at Fokker Services BV for helping keep the Iranian aviation assets flying.
Having been founded in the Netherlands in 1919, I am confident they have a distinguished legacy of proudly serving countries that dislike the US and England and France, particularly during those couple of little dustups in the 20th century. One of their products, mentioned at the parent company’s website, is pictured above.
Good for them I wasn’t on the DoJ team. I would have been asking them what they thought would be appropriate terms to settle treason and trading with the enemy charges and negotiating how many dozens of their employees would do hard time in federal penitentiaries.
According to the DoJ press release on 6/5/14, there were 1,153 shipments with a value of $21 million.
The company used a wide range of techniques to evade sanctions. They gave false tail numbers when sending work to vendors. They fabricated documents. They altered databases to hide the source or destination of shipments. They lied to FAA inspectors.
The scheme was carried out in a variety of departments and a variety of locations.
The company kept a ‘black list’ of companies in the industry who were vigilant on making sure shipments were legal. Fokker Services BV only did business with companies not on the list.
Sounds like that list would be a superb filter to identify the other companies who are loose on complying with trade bans.
One manager printed a ‘how-to’ guide to help other staff evade sanctions. Great–a management tool on how to commit felonies.
The DoJ press release says senior management, the company’s legal staff, and their export compliance teams were in on the scheming. They knew all about it.
Oh, all those comments are not just assertions by the DoJ. They are admitted by Fokker Services BV in the DPA mentioned above. The company agrees they did all those things.
Hmmm. Sounds like a RICO charge would have been more appropriate.
A question for auditors to ponder
As an aside, I’ll repeat the questions I often think about:
- How can a CPA audit a company in which the corporate culture is to deliberately break laws?
- How can a CPA handle a tone-at-the-top situation where systemic collusion is normative?
Cost of doing business
The consolidated parent company’s top line revenue in 2012 was €769M, or US$859M. Losing the revenue on the 1,153 shipments of $21M annualizes out to $3.5M a year for the 6 years of the illegalities. That is actually noticeable on their consolidated bottom line of $10.3M net in 2012 and $34.0M in 2011. Maybe a tiny bit larger than just a cost of doing business.
Revenue in 2014 was €758M with Operational EBIT of €45M. That would be $846M top line and $50M EBIT. So annualized $3.5M a year is 7% of FY 14 EBIT.
That is a bit stronger penalty than the too-big-to-fail banks typically pay. But that is still in the tolerable range for betting on the good ol’ audit lottery – we’ll pay up if we get caught, otherwise we make some good bucks.
Still, seems to me a RICO charge would have been a bit more just. Or a complete ban on trade or using the US banking system. Or even a serious fine. Maybe a few dozen prison sentences.
End of DPAs?
David Dayen at Naked Capitalism discusses this is possibly The End of the Deferred Prosecution Agreement. He points out the company gave up most, but not necessarily all, of their revenue on the shipments. The only other consequence is they promised to start obeying the law, which they should have been doing all along. Other than that? Nothing really.
If the judge’s actions are upheld, other judges would be allowed to actually look at DPAs instead of rubber-stamping them.
If judges are allowed to decline go-easy deals, one option might be for the DoJ to shift to Nonprosecution Agreements, which are not subject to any court oversight or public disclosure. The other possible outcome, according to the author, would be that DoJ might, possibly, just maybe
…have to do their job properly.
We can only hope.