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From Securities Regulation Daily, October 22, 2013

Diebold to pay $48.1 million to settle SEC, DOJ corruption charges

By Mark S. Nelson, J.D.

The SEC has announced that Diebold, Inc. (Diebold) has consented to a final civil judgment imposing $22.9 million in penalties for allegedly illicit travel and other gifts the Ohio-based ATM maker’s foreign subsidiaries allegedly made to Chinese, Indonesian, and Russian government-owned and private banks to raise Diebold’s sales. The SEC’s complaint alleged that Diebold’s Asian and Russian subsidiaries funneled nearly $2.95 million in illicit gifts to bank officials and employees (SEC v. Diebold, Inc., October 22, 2013).

Scott W. Friestad, Associate Director, SEC Division of Enforcement, said of the settlement, “[a] bribe is a bribe, whether it’s a stack of cash or an all-expense-paid trip to Europe.” Friestad added, “[p]ublic companies must be held accountable when they break the law to influence government officials with improper payments or gifts.”

The U.S. Department of justice also announced that Diebold has agreed to pay $25.2 million to end the parallel criminal case against it. The criminal information and deferred prosecution agreement, filed in the U.S. District Court for the Northern District of Ohio, alleged that Diebold conspired to and violated the FCPA’s books and records provisions.

Acting Assistant Attorney General Mythili Raman said, “[t]oday’s action–which holds Diebold accountable for its criminal conduct, while also recognizing its cooperation and voluntary disclosure to the government of its conduct–underscores that fighting global corruption is and will remain a mainstay of the Criminal Division’s mission.”

According to Steve Olson, partner at O’Melveny & Myers LLP, “this case highlights two potential pitfalls: one is the special and frequent challenge that many companies in China are state-owned and their employees can fall under the definition of ‘foreign official.’ Another is the real challenge that comes along with justifying expenses, which means the expense must be justified and reasonable for the business purpose.” Olson added, “these cases are almost always not black and white.”

Chinese banks. According to the SEC’s complaint, Diebold’s Chinese subsidiary, Diebold Financial Equipment Company (China), Ltd., paid for Chinese bank officials and their employees to travel the world from 2005 to 2010. Diebold allegedly made $1.6 million in payments to get and keep lucrative deals with government-owned Chinese banks. Diebold earned $265 million in revenues from its dealings with these banks during the period targeted by the SEC.

Specifically, the SEC said that in 2005, 2007, and 2009, Diebold paid for 39 Bank A officials to visit the U.S. and France, with the latter trip being recorded as “training.” Three Bank E officials visited the U.S. in 2008. Eight officials each from Banks B and D got European trips in 2006 and 2008, respectively, while five officials from Bank C visited Australia and New Zealand in 2006. Ten employees of Bank F toured four Asian destinations in 2008, including Bali. Diebold also allegedly paid cash gifts of $100-$600 annually to “dozens” of bank officials.

According to the SEC, two of Diebold’s Asian executives knew of the alleged payments. Executive A was Diebold’s Executive Vice President for international Operations from January 2010 to December 2011, when he resigned. Previously, Executive A was Diebold’s Vice president for the EMEA and Asia Pacific Regions. Executive B was Diebold’s Vice president for the Asia Pacific Region from January 2010 to December 2011, when he too resigned. Executive B once was Diebold’s managing Director in China, Hong Kong, and Taiwan. Executives A and B are Taiwan citizens who reside in China.

The SEC also alleged that Diebold did not take strong enough action to fix its China FCPA issues. Here, the SEC alleged that other Diebold executives were “on notice” of corruption woes at its Chinese subsidiary. For example, Diebold’s Chinese and U.S. executives allegedly became aware of problems after the Chengdu Administration of Industry & Commerce (CDAIC), a Chinese regional agency, investigated gifts said to have been paid by Diebold’s Chinese subsidiary to bank officials and raided a Diebold field office. The CDAIC never brought corruption charges, but Diebold settled “business registration violations” by paying an administrative penalty of 600,000 RMB ($80,000 U.S.).

Indonesia supervisor’s email. The SEC alleged that Diebold made similar payments to officials at three government-owned Indonesian banks between 2005 and 2010. Diebold’s allegedly illicit payments to these officials for travel and entertainment totaled $147,000 and Diebold got $16 million in revenues from these same banks. As an example, the SEC’s complaint cited a Diebold supervisor’s alleged 2009 email approval of an employee’s proposed travel payment to Bank X officials: “Make this trip successful for upcoming bid too!”

Russian service contracts. The SEC’s allegations that Diebold falsified records of alleged bribes to Russian private banks to get ATM sales focused on Diebold’s dealings with two independent Russian distributors. Diebold allegedly learned of Distributor B’s alleged history of making unlawful payments while exploring a possible 2007 acquisition. Diebold, however, allegedly could not tell if those payments involved its products and opted not to bid for the company, but Diebold’s and Distributor B’s business relationship did not end until 2010.

In 2009, the SEC said Diebold tried to acquire its largest independent Russian and Ukrainian distributor, Distributor A. As with Diebold’s prior due diligence on Distributor B, its examination of Distributor A showed an alleged pattern of illicit payments. Diebold, however, kept trying to acquire Distributor A until 2010, when it ended these efforts upon learning that Distributor A had made allegedly illicit payments for Diebold Self-Service Ltd., Diebold’s Russian subsidiary. Diebold’s subsidiary allegedly made payments to the private banks directly and via false service contracts between the subsidiary and Distributor A.

Penalties. Count one of the SEC’s three-count complaint had alleged that Diebold and its agents and subsidiaries violated the anti-bribery provisions of Exchange Act Section 30A. The other two counts alleged violations of the books and records and internal controls provisions of Exchange Act Sections 13(b)(2)(A) and (B).

The SEC’s civil settlement with Diebold permanently enjoins the company from engaging in the charged conduct. Diebold also must disgorge $22.9 million with prejudgment interest and cooperate with an independent compliance monitor. Diebold will pay $25.2 million to end the criminal case.

Attorneys: Scott W. Friestad for Securities and Exchange Commission.

Companies: Diebold, Inc.; Diebold Financial Equipment Company (China), Ltd.; P.T. Diebold Indonesia; Diebold Self-Service Ltd.

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