SEC Targets Freight Forwarding in the Philippines
George J. Terwilliger, III

DOWNLOAD PDF: Complete SEC Complaint

DOWNLOAD PDF: Complete SEC Cease-and-Desist Order

DOWNLOAD PDF: Complete SEC Litigation Release

On August 27, 2008, the SEC announced its settlement of alleged Foreign Corrupt Practices Act ("FCPA") violations with Con-way, Inc. (formerly CNF, Inc.), an international freight transportation and logistics services company. Con-way, a US issuer listed on the New York Stock Exchange, agreed to pay a $300,000 civil penalty.

 

From 2000 to 2003, Emery Transnational, a Philippine subsidiary of a Con-way subsidiary, allegedly made payments of more than $417,000 to Philippine customs officials and officials at airlines owned or controlled by foreign governments. These payments allegedly allowed Emery Transnational to settle customs disputes, reduce or avoid fines for administrative violations, and to reduce transportation costs.

 

This disposition highlights the risk of FCPA liability to US issuers for the conduct of foreign subsidiaries, even when US enforcement authorities would not have jurisdiction under the FCPA's anti-bribery provisions over the improper payments themselves. Also, because the standard for civil violations of the FCPA's accounting provisions is strict liability, issuers can be civilly liable under the accounting provisions even when the issuer had no knowledge of, or involvement with, the improper payments.

 

Lack of US Jurisdiction over the Improper Payments

 

Con-way's 2007 annual report disclosed that Con-way had reported the potential FCPA violations to both the DOJ and the SEC, but the DOJ declined to prosecute Con-way. One reason may have been the potential absence of US jurisdiction over the improper payments at issue: there is no reported evidence suggesting a nexus between the bribes and US interstate commerce, or that Con-way, or any US person acting on behalf of Con-way, corruptly acted outside the US in furtherance of the improper payments.

 

Basis for FCPA Liability

 

Despite the apparent lack of US jurisdiction over the payments themselves, parent companies are strictly liable for subsidiaries' civil violations of the FCPA's accounting provisions if the parent owns more than 50% of the subsidiary. In this case, Con-way's wholly owned subsidiary, Menlo Worldwide Forwarding, Inc., had a 55% voting interest in Emery Transnational.

 

The SEC alleged that Con-way violated the accounting provisions because Con-way and Menlo Worldwide failed to take any steps to "devise or maintain internal accounting controls" at Emery Transnational, ensure Emery Transnational's compliance with Con-way's FCPA policies, or review Emery Transnational's books and records for completeness and accuracy. Con-way and Menlo Worldwide required Emery Transnational only to report its net profits, 55% of which were paid to Menlo Worldwide as a dividend, and did not otherwise review Emery Transnational's financial results. Menlo Worldwide's financial results incorporated the Emery Transnational dividend, and Menlo Worldwide's financial results were consolidated into Con-way's financial statements.

 

Cooperation and Remedial Measures

 

The SEC's cease-and-desist order recognized that a $300,000 civil penalty was appropriate due to Con-way's cooperation and remedial measures, which included an internal investigation, a review of all of Menlo Worldwide's foreign operations, and voluntary disclosure of the potential FCPA violations to US authorities. Con-way was able to avoid the imposition of a corporate compliance monitor.

 

Likelihood of Related Investigations

 

US authorities have publicly indicated that they now have the resources to initiate their own investigations in regions, or of industries, that they believe face substantial FCPA compliance challenges. The ongoing investigation of the Nigerian operations of Panalpina, another international logistics company, has reportedly led to approximately a dozen related investigations. If US enforcement authorities believe the Philippines to be another region facing significant FCPA compliance challenges, the Con-way disposition could be the first of many involving payments to Philippine customs agents and other officials.

 

Copies of the SEC's complaint, cease-and-desist order and litigation release can be found in the Downloads section below, or by following these links:

• Click here to read the complete SEC complaint (PDF)
  
• Click here to read the complete SEC cease-and-desist order (PDF)
  
• Click here to read the complete SEC litigation release

 

 

White & Case LLP's White Collar Practice Group will continue to provide updates regarding law enforcement's FCPA policies and practices.

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