Argentines certainly value their sense of style. Unfortunately, however, they just lost official retail access to the Polo brand. Ralph Lauren Corporation has decided to wind down its operations in the country.
Yesterday’s FCPA settlement with the Ralph Lauren Corporation suggests that the company’s decision to pull out might be linked, at least in part, to the high corruption risks associated with operating in Argentina. Based on bribes the company’s subsidiary paid to customs and other officials, the DOJ and SEC just reached FCPA non-prosecution agreements (NPAs) with the company. The settlement carries more than $1.6 million in fines and penalties combined. Other notable features of this FCPA enforcement action include:
Customs Risks. In an internal investigation, Ralph Lauren found that the manager of its Argentine subsidiary, a dual citizen of the United States and Argentina, bribed customs officials over the span of five years. Such activity, in fact, is not so uncommon in Argentina. Earlier this month, FCPAméricas highlighted customs risks in Latin America, featuring Argentina as a particularly problematic case. In the 2012 Latin America Corruption Survey, respondents considered customs to present the most significant corruption risk in that country. In this FCPA action, the Ralph Lauren subsidiary is alleged to have made corrupt payments to Argentine officials to (1) improperly obtain paperwork for customs clearance, (2) permit clearance of items without the necessary paperwork, (3) permit clearance of prohibited items, and (4) avoid customs inspections.
Third Party Risks. Many of the alleged violations were committed using a purported customs broker to transfer improper payments to public officials. FCPAméricas has discussed how “phantom” companies, or third parties who provide no legitimate services and are set up only to facilitate bribery, are a particularly common feature in Argentina. While it is unclear whether or not the broker in this case was a true phantom, ie. whether it was created for the sole purpose of transferring bribe payments to officials and otherwise provided no legitimate services, the action nonetheless highlights the persistent nature of third party risk in Latin America. The broker in this case used fake invoices with line items for “Loading and Delivery Expenses” and “Stamp Tax/Label Tax.” These line items contained no backup support. They were used to disguise the bribe payments and justify them as proper.
Internal Controls Violations. FCPAméricas has previously offered examples of common FCPA internal controls violations in Latin America. In the Ralph Lauren case, such violations included: (1) failure to ensure that proper and effective due diligence was conducted on the customs broker, and (2) failure of the review process for authorization or approval of reimbursement payments to the broker to detect a single improper payment.
Gifts as Bribes. FCPAméricas has discussed how gift giving to foreign officials can create FCPA liability. In the Ralph Lauren case, the General Manager of the company’s subsidiary is alleged to have given perfume, dresses, and handbags to Argentine officials. The goods were valued between $400 and $14,000 each. This is a reminder that gifts with relative low values (less than $500) can still create liability.
Relatively Low Fines and Penalties. The SEC alleges that Ralph Lauren Corp. made a total of $593,000 in improper payments and gifts over the span of several years to Argentine officials. Under the NPA with the SEC, the company agreed to pay the same amount in disgorgement ($593,000) plus $141,845.79 in prejudgment interest. It also paid an $882,000 penalty to the DOJ. At a time when average FCPA enforcement action fines and penalties hover in the multi-million dollar range, why were the ultimate fines and penalties in this case smaller? The SEC suggests that the company’s efforts to self-disclose, cooperate, and remediate were essential to its relatively lenient treatment, including the offer of a non-prosecution agreement (NPA) instead of a deferred prosecution agreement (DPA). This was the first time the SEC has offered an NPA, sending a strong message to the market that cooperation will be rewarded. The company’s remediation included enhanced compliance training, termination of the employment and business arrangements with all individuals involved in the wrongdoing, and strengthening of internal controls and third party due diligence. The SEC also stressed the speed at which the company disclosed the issues, within two weeks of uncovering the payments and gifts.
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© 2013 Matteson Ellis Law, PLLC
Post authored by Matt Ellis, FCPAméricas Founder & Editor