This week, we explore the recent Securities and Exchange Commission (SEC) cease and desist order last week with WPP plc, the world’s largest advertising group, for paying bribes to government officials and participated in other “illicit programs”. in China, Brazil and Peru. WPP has agreed to pay over $ 11 million in restitution and interest and a penalty of $ 8 million for a total amount of just over $ 19 million. Today we take a detailed look at the corruption schemes involved.
Mergers and Acquisitions
WPP’s road to the ruin of the Foreign Corrupt Practices Act (FCPA) began with an ambitious expansion program over the past decade. To grow the business, WPP made extensive purchases around the world. As stated in the ordinance, “As a result of this growth strategy, WPP operated in 112 countries and employed approximately 100,000 people in 3,000 locations during the reporting period. WPP generated 86% of its revenue from 10 companies and 88% of its revenue came from operations in 20 countries. It is clear from some of the acquisitions reported in The Order that WPP has not dug its targets very deep.
Clearly, the people who sold their agencies to WPP certainly didn’t have compliance up front, back, or anywhere else in their minds. In China, the agency engaged in such blatant tax evasion that WPP was informed by a whistleblower that “the management of the Chinese subsidiary could face criminal charges for its tax evasion schemes.” In India, where “about half of the income of the Indian branch was attributable to the Indian states of Telangana and the Information and Public Relations Departments of Andhra Pradesh (” DIPR “), which were responsible for retaining the agencies. press to conduct publicity and public relations campaigns for their respective state governments ”; the acquired unit engaged in bribery and corruption almost immediately after the acquisition.
Not only best practices, but all compliance practices require both pre-acquisition investigation and due diligence AND full post-acquisition onboarding, training and audit. Does it sound like one of them was done by WPP? If such measures have been taken, they are not described in the ordinance.
But there was another key issue identified in The Order that also contributed to WPP corruption. This is a feature of many M&A transactions where the seller is kept to manage the new unit or remains in the management of it, a so-called “earn-out provision”. It turned into a perverse incentive. As stated in the Ordinance, “WPP has often structured these acquisitions to include a earn-out clause. Under these earn-out clauses, the parties agreed to defer part of the purchase price until the agency founder achieves his future financial goals. In some cases, WPP has agreed that the founder of the agency will continue as the CEO of the entity controlled by WPP (hereinafter the Founder Controlled Entities or “FICs”). WPP placed the FIC entities within a WPP network and consolidated the financial statements of the FIC entities into the financial statements of WPP.
There is nothing inherently wrong with including a earn-out clause in an acquisition, just as there is nothing inherently wrong with inducements to sell, but when you tie processes together. sub-optimal M&A compliance, with lackluster internal controls and no corporate compliance function, the recipe for compliance violations is clear. This is another demonstration of the nested nature of compliance checks. If there is one failing domain, there may not be a systemic compliance failure, but when there are systemic deficiencies, you see the risks inherent throughout the business.
Missed or ignored whistleblower reports and red flags
The corruption schemes may appear to have been rather trivial, but this is the very heart of the compliance lessons learned from the enforcement action of the WPP FCPA. It was the fact that they were so blatant that in India there were seven internal reports of denunciation. As stated in the order, “From July 7, 2015 to September 2, 2017, WPP received seven anonymous complaints alleging – with increasing specificity – two corruption programs related to the work of the Indian affiliate for DIPR. The first program involved the use of a third party agency (“Seller A”) which the Indian subsidiary used to purchase media for DIPR to create an unofficial fund. The second program involved the Indian subsidiary fabricating an entire advertising campaign in order to create an unofficial fund with a third-party agency (“Seller B”) which was used to compensate DIPR officials for the attribution of campaigns to the Indian subsidiary and for the personal benefit of CEO A.
Indeed, in India, things were so serious that WPP ordered an audit of the business unit. Yet here WPP has so crippled the international accounting firm “apparently” hired to investigate the allegations and review the Indian subsidiary’s processes regarding government contracts and transactions involving government clients, that it found “no finding related to corruption allegations “. However, the investigation company relied on information provided by the Managing Director (CEO) and Chief Financial Officer (CFO) of the Indian business unit “did not contact any third parties and ultimately provided a report to WPP, which did not contain any conclusions regarding the corruption allegations. . “The investigation company found” several red flags regarding Supplier A, such as the Indian subsidiary which failed to obtain comparative quotes from other suppliers or to properly vet Supplier A. Yet, even with this information, “WPP allowed the Indian subsidiary to continue to route DIPR’s media purchases through Supplier A.”
In China, the story was similar. Here, “an internal audit in 2017 determined that the Chinese subsidiary was employing tax evasion schemes and other material violations of WPP’s internal accounting controls resulting” from the actions of the CEO of the business unit. Then, an employee of the Chinese subsidiary informed WPP “that [the] The Chinese subsidiary was in the midst of a tax audit and the management of the Chinese subsidiary could face criminal charges for its tax evasion schemes. Finally, a WPP China tax manager was told that the CEO was “comb[ing] through a lot of [his] personal social ties ”, in an attempt to control the direction of the tax audit. Once again, WPP has taken no further action to fire recalcitrant employees or address the corruption.
The bottom line was that even though these known and reported corruption risks were present, WPP did not have sufficient internal accounting controls to prevent corruption. As stated in the order, “WPP did not have a compliance department during the reporting period, and there was a lack of meaningful coordination between its legal and internal audit departments ”and management. Even when WPP tasked its branch management with addressing the deficiencies identified by WPP’s legal and internal audit departments, “neither WPP nor the networks provided adequate oversight” of entities to ensure that entities have implemented WPP’s internal accounting controls and compliance policies.