General Cable Corp. has agreed to pay more than $80 million in penalties to the U.S. government in settlement of charges related to inventory and accounting misstatements in Brazil and allegations it violated the Foreign Corrupt Practices Act over a period of 12 years when it made “improper payments” to government officials in several African and Asian countries.
As part of the agreement announced by the U.S. Securities and Exchange Commission (SEC) the Kentucky wire and cable suppliers to high-tech and electronics equipment manufacturers said it will improve its supply chain and accounting reporting processes and “self-report its FCPA compliance efforts for the next three years,” according to the regulatory body. The company said it cooperated with the SEC investigations and will set aside additional funds to pay the fine.
“As of the third quarter of 2016, General Cable had accrued $33 million for the FCPA-related investigations,” General Cable said in its statement. “As a result of the resolutions with the SEC and the DOJ, General Cable will record a charge of approximately $49.3 million in the fourth quarter of 2016. Taking this charge into account, General Cable will have recognized all costs associated with the resolution of this matter with the SEC and the DOJ.”
The SEC said General Cable assisted in its investigations and had taken certain remedial actions to avoid a reoccurrence of the accounting problems and violations of the FCPA regulations. “General Cable operated globally without the effective compliance programs and internal controls necessary to proactively address corruption risks and accounting errors,” said Stephanie Avakian, acting director of the SEC Enforcement Division, in a statement.
The SEC detailed a web of activities involving the payment of bribes by General Cable sales operatives and regional executives to government officials in Angola, Bangladesh, China, Egypt, Indonesia, and Thailand as part of efforts to secure sales contracts. The payments were deemed “improper” by the SEC, which said sales commissions approved by senior executives of General Cable exceeded limits approved by the company’s management and violated U.S. laws. In Angola, some of the improper payments were made even after General Cable was made aware of the violations, the SEC said.
The further “improper payments” were approved for the Angolan operation by Karl Zimmer, then a senior VP with the company in charge of global supply chain, The agreement required that Zimmer pay a fine of $20,000 to the U.S. government although “without admitting or denying the SEC’s findings that he knowingly circumvented internal accounting controls and caused FCPA violations when he approved certain improper payments.” Zimmer left General Cable in 2015.
The financials misstatements were first identified by accountants investigating inventory mismatches at General Cable’s Brazil division. Although the accountants informed senior executives in charge of the Brazil unit, the violations were not immediately brought to the attention of General Cable’s senior management at the headquarters in Highland Heights, Kentucky. Once informed, the company’s CEO and CFO at the time immediately implemented a further review of the company’s financials, which then resulted in a restatement of General Cable’s results in 2013 and 2014.
No Fault Agreement
General Cable did not admit or deny any wrongdoings with regard to the SEC and U.S. Department of Justice investigations into the FCPA violations and its accounting misstatements, the company said in a statement. It further noted that the agreement with the SEC would result in a payment of approximately $82.3 million in fines, interest and penalties to the SEC and the DOJ. No company executives would be charged with any malpractices, according to General Cable.
“No criminal charges will be brought against General Cable provided it complies with its obligations under the agreement,” the company said in a filing with the SEC. “In light of the significant compliance enhancements made by the Company to date, neither the SEC nor the DOJ is requiring an independent compliance monitor. The Company has instead agreed to annual self-reporting for a period of three years.
Here are further details of the case against General Cable as outlined by the SEC:
From 2008 to the second quarter of 2012, GCC materially misstated its financial statements due to improper inventory accounting at its Brazil subsidiary that went undetected due to the company’s internal accounting controls failures.
Certain Brazilian accounting employees manipulated the company’s accounting systems, which GCC executives knew were highly manual and presented financial reporting risks, by entering false entries for inventory values to cover up missing copper inventory from the subsidiary’s manufacturing plants.
The missing inventory in Brazil caused GCC to materially overstate its inventory by $46.7 million and overstate its net income available to common shareholders by 21.6%, 11.3%, and 29.8% for the annual periods ended December 31, 2011, 2010, and 2009, and 8.8% and 13.8% for the quarterly periods ended June 30 and March 31, 2012, respectively.
The lack of segregation of responsibilities for making and approving manual journal entries further enabled the manipulation to occur and go undetected. Although GCC executive management was unaware that inventory accounting for Brazil was overstated during the relevant period, it was aware that the ERP system, which was widely used by several countries within ROW, was highly manual, unevenly implemented throughout ROW, and was not subject to centralized oversight, creating financial reporting risks.
GCC has terminated or taken disciplinary actions against employees who were involved in the accounting issues. All of GCC’s executive management during the relevant time period has been replaced. GCC has restructured its financial reporting to require its regional finance departments to report directly to GCC’s CFO and Controller.
GCC [has] restructured its compliance policies and programs by appointing a Chief Compliance Officer who reports directly to GCC’s CEO and Audit Committee. Under this restructuring, GCC has enhanced its training of sales and accounting personnel on compliance policies and expectations, implemented regular reviews of accounting adjustments, improved the inventory reconciliation process and security procedures, developed a global information technology strategy for risk assessment and control for financial reporting, and instituted evaluations for compliance performance through performance indicators and audits.
GCC did not provide adequate guidance or training on policies and procedures to ensure compliance with the FCPA. As a result, a number of GCC’s foreign subsidiaries lacked internal accounting controls for doing business with third-party entities on sales to government customers.
GCC subsidiaries Celcat (in Portugal) and Condel (in Angola) in GCC’s E&M (Europe & Mediterranean) segment sold wire and cable products to SOEs in Angola. Celcat and Condel made 81 improper payments through commissions totaling over $9 million either directly to employees of SOEs [State-Owned Enterprise) in Angola, or to a third-party agent, resulting in more than $34 million in profits on Celcat or Condel’s sales to SOEs in Angola.
The commissions were approved by senior management at Celcat or Condel, but the true nature of the payments were concealed from GCC’s executive management. In particular, Condel’s Country Manager conceived of and orchestrated the scheme to make improper payments to employees of the SOEs in Angola.
Despite red flags that GCC’s relationship with the Agent may violate anti-bribery laws and its policies, GCC’s executive management failed to implement any additional internal accounting controls in response to the report until August 2013. As a result, from December 2012 to August 2013, Condel continued to make commission payments to the Agent over $1.5 million in violation of GCC’s policies.
From January 2008 to January 2013, GCC’s subsidiary, PDTL, paid more than $5.4 million in improper payments to a Thailand company (“Thai Company”), resulting in profits of $13 million on PDTL’s sales to SOEs of the Thai government.
DTL’s payments to the Thai Company were approved by PDTL’s senior management and primarily managed by a Domestic Sales Director, who believed that the Thai Company was paying bribes to Thai SOE officials from the success fees paid by PDTL. The Domestic Sales Director told a PDTL executive (“PDTL Executive”) in or around 2010 or 2011 about the potential bribery, but PDTL’s management did not take any corrective action in response.
In or about 2011, the PDTL Executive met with a GCC regional executive officer and expressed concerns that payments to the Thai Company by PDTL were being used for potential bribery. Despite this conversation, the payments did not stop and there was no investigation of PDTL’s relationship with the Thai Company.
From May 2011 to January 2014, PDTL made improper payments of $2.2 million to two purported freight forwarders on sales to an Indonesian SOE that resulted in $2 million in profits. PDTL’s records lacked evidence of services provided by the freight forwarders, which had ties to Indonesian government officials. The fees to the freight forwarders ranged from 8.9 to 70.5% of the related sales to the Indonesian SOE.
In September 2013, PDTL made an improper commission payment of $43,700 to a third-party agent on a sale of products to a Bangladeshi SOE that resulted in profits of $85,759.
From December 2012 to September 2015, GC China made improper payments of more than $500,000 to third-party distributors or agents, typically in the form of special discounts, technical service fees, design institute fees, or rebates, in connection with sales to SOE customers on nineteen projects, resulting in profits of $1.8 million. Portions of these payments, among other things of value such as merchandise, were given or intended to be given by the distributors or agents to SOE employees.
From September 2010 to May 2015, GC Egypt employees gave or offered to give more than $80,000 in improper payments, including cash, gifts, or tips to employees of certain customers or suppliers, some of which were Egyptian SOEs, resulting in approximately $114,000 in profits.
In 2013 GC Egypt’s General Manager offered to pay a third-party agent a commission of approximately 10% on a $1.53 million tender by GC Egypt to sell cables to an SOE of Iraq. The commission was to be shared between the SOE staff and the agent. When the SOE submitted an order under the tender, GCC’s E&M managers rejected the order based on the high level of the contemplated commission, not because the order contemplated the sharing of the commission with the SOE staff.