On September 24 the Securities and Exchange Commission (SEC) announced that WPP plc (WPP), an advertising group with operations in over 100 countries, agreed to pay $19.2 million to resolve charges that it violated the anti-bribery, books and records, and internal accounting controls provisions of the Foreign Corrupt Practices Act (FCPA). The SEC's order (the Order) focused on conduct by employees of WPP's subsidiaries and affiliated entities in India, China, Brazil, and Peru between 2013 and 2018. The Order provides a rare look into the application of the FCPA against a multinational advertising company, which, while an unusual target for international anti-corruption enforcement, are susceptible to many of the same FCPA risks other industries face when operating in high-risk jurisdictions.
The Order attributed the violations to an "aggressive business growth strategy" that included acquiring controlling interests in several localized advertising agencies in high-risk markets. The order stated that WPP failed to ensure that the newly acquired subsidiaries implemented WPP's internal accounting controls and compliance policies and allowed the leaders of the subsidiaries to operate independently and outside of the company's global compliance program. The order also called out reporting and remediation deficiencies, which the SEC said led to a failure to respond to repeated warning signs of corruption at certain subsidiaries.
Violations Documented in the SEC Order
The Order described several anti-bribery, books and records, and internal controls violations, attributed in part to deferred payment structures and financial target incentives WPP entered into with the founders and executives of the newly acquired subsidiaries. The violations involved not only alleged payments made to government officials to obtain contracts, but also allegations of payments to avoid tax obligations, the falsification of accounting entries, and actions facilitating bribery on behalf of third parties.
Payments to Secure Government Contracts
One of the entities WPP acquired was an Indian advertising agency (India subsidiary) that received half of its revenue from state and local government advertising contracts. The SEC's Order alleges that the India subsidiary maintained "off-book" funds at vendors used in part to pay government officials responsible for awarding those contracts. The Order also alleges that the India subsidiary funded those vendor accounts through sham advertising contracts and payments for advertising space in excess of what the vendors were entitled to. According to the Order, in one instance an entire $1.5 million advertising campaign ostensibly commemorating the formation of the Indian state of Telangana was in fact completely funneled back to government officials through vendors and other third parties, used to pay off outstanding receivables from unrelated clients of the India subsidiary, or retained by executives of the India subsidiary. Despite several anonymous complaints alleging the India subsidiary's CEO's direct involvement in the bribery schemes, WPP's internal investigation into the conduct failed to contact related third parties or independently corroborate information provided by the India subsidiary's executives. WPP did not terminate certain vendors or take other remedial action until two years after the initial complaints.
Payments to Avoid Taxes
Subsidiaries with public sector customers are not the only ones with potential FCPA exposure. Unlike the operations of the India subsidiary, which made up a large portion of its total revenue from government contracts, a subsidiary WPP acquired in China (China subsidiary) focused on celebrity branding and endorsements – not a business model typically associated with anti-corruption risk. The China subsidiary's corruption exposure came from taxes due to Chinese authorities, over $3 million in 2018. Tax officials conducting an audit of the China subsidiary directed WPP to retain a specific vendor to assist the China subsidiary during the audit. The China subsidiary paid that vendor $107,000 for services it never performed; the vendor sent the majority of the payment to an unknown recipient, and the China subsidiary avoided paying the $3 million tax liability.
Books and Records Violations
The bribery violations in India and China were accompanied by corresponding false entries in the subsidiaries' books and records. Books and records violations, however, can also occur where direct evidence of bribery cannot be proven, such as in the case of WPP's subsidiary in Brazil (Brazil subsidiary). WPP's adviser payment policy at the time prohibited subsidiaries from paying third parties to assist in obtaining or retaining government contracts without WPP's express approval. Despite this policy, the CEO of the Brazil subsidiary ordered payments to be made to vendors in connection with securing government contracts. These payments directly violated WPP policy and were made in circumstances in which it was likely that a portion of the payments may have been passed to the government officials with authority to award the contracts. The Brazil subsidiary recorded the payments to the vendors as unrelated bona fide expenses, such as marketing or IT services.
Conduit for Bribery
Many multinationals expect their exposure to anti-corruption risk to lie primarily in their interactions with third-party vendors and distributors they do business with, third parties that the multinational has limited control over and who may make illicit payments to government officials. In one of the violations documented in the SEC's Order, WPP's subsidiary in Peru (Peru subsidiary) was actually the third party through which a construction company was making illicit payments to Peruvian government officials. The Peru subsidiary, as well as WPP subsidiaries in Colombia and Chile, received payments from the construction company for services they never provided, and directed portions of the proceeds to fund the mayor of Lima's political campaigns in exchange for contract awards.
Best Practices When Operating Abroad
While the advertising industry has not been a traditional focus for FCPA enforcement authorities, as demonstrated by the WPP resolution, advertising companies face many of the same challenges as other industries operating in high-risk jurisdictions. As was the situation with the India subsidiary, false or exaggerated work orders and invoices from third-party vendors continue to be a leading risk for illicit payments to government officials with contracting authority. Brokers, vendors, lead generators, and other third parties operating on behalf of companies internationally are often a source of uncovered bribery schemes that later embroil those companies in government investigations. Other third parties, even consultants brought in for tax advice during a government audit, may in fact be a channel through which to fund bribery, as in the case of WPP's China subsidiary.
To manage these types of risks, advertising companies with international activities should adopt policies and procedures governing compliance with the U.S. and local anti-corruption, AML, and economic sanctions requirements. These policies should be tailored to take into account the advertising company's particular products and services, geographic focus, operating structure, and business risks. Companies should ensure that board members, management, and staff receive appropriate training on a regular basis, covering FCPA and other risks in doing business abroad. In addition, the company should implement a process for regular internal and external compliance audits to review operations for compliance with applicable legal requirements.
Venable has experienced attorneys ready to assist in drafting FCPA compliance programs, directing risk assessments, and conducting internal investigations into anti-corruption allegations in numerous jurisdictions. Proactive and reactive measures such as these can make all the difference in preventing an FCPA violation or receiving cooperation credit if an enforcement agency comes knocking.