Securities and Exchange Commission may increase its investigations of U.S. Sanctions violations by companies

Late last year, the Securities and Exchange Commission (“SEC”) penalized a public company for violating U.S. economic sanctions. The violation cited the “books and records” and “internal controls” provisions of the Securities Exchange Act of 1934 (the “Exchange Act”). On September 26, 2019, the SEC issued an Order instituting a settled cease-and-desist proceeding against Quad, a public company focused on printing and desktop publishing. According to the Order, in 2010 Quad purchased World Color Press Inc. (“World Color”), resulting in the acquisition of numerous foreign subsidiaries in several high-risk jurisdictions. The SEC that Quad’s global compliance program was inadequate and Quad had “failed to implement sufficient internal accounting controls or anti-corruption policies and procedures and failed to conduct meaningful due diligence on third parties.” Id. at 2. As a result, its newly acquired foreign subsidiaries were able to engage in various unlawful schemes, including paying bribes to government officials and judges in Peru, paying bribes to officials in China, and, notably, evading U.S. sanctions against Cuba.

Under Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act public companies must keep accurate books and records and maintain internal controls sufficient to ensure that transactions are executed in accordance with management directives and accurately recorded for reporting in the company’s financial statements. The SEC  cites public companies for violations of these provisions in cases involving allegations of foreign bribery. In this context, the SEC often will assert that a public company violated these provisions by disguising the illicit transactions in its books and records and by failing to maintain internal controls capable of detecting and preventing such transactions.

The sanctions violations related to World Color’s business dealings with a state-owned telecommunications company in Cuba. Quad employees conspired to maintain the relationship by routing the directories through a third-party vendor and falsifying the profits earned in the company’s books and records.

In its recent action against Quad/Graphics (“Quad”), the SEC found that a public company violated these provisions not only through a foreign bribery scheme but also through a scheme to evade longstanding United States sanctions against Cuba. In so doing, the SEC has stepped into an area of enforcement traditionally occupied by the DOJ and OFAC. It remains to be seen whether this expansion of SEC authority will be limited to sanctions, or may extend to other areas of financial crime, such as money laundering.

To hide sales to Cuba,  Quad Peru employees made it appear that the directories were purchased by a Peruvian agent. Quad would print the directories, ship them to the agent, and the agent would ship the directories to Cuba.  The SEC said that “the Peruvian Agent was not a true customer but a pass-through company used to conceal Quad’s sales of telephone directories to Cuba.” The business continued through October 2013.  The Order reflects that at one point, Quad executives in the United States learned of the sales to Cuba, but failed to “put adequate internal accounting controls and trade compliance measures in place to ensure” that no further transactions occurred.  The SEC Staff concluded that revenue from the sales was “illegal” and was “falsely recorded” in Quad’s books and records “as a sale to the Peruvian agent.”

Based on the aggregate conduct, the SEC found that Quad violated, among other things, the “books and records” and internal controls provisions of the FCPA. Quad agreed to cease-and-desist from further violations of the federal securities laws, to pay $7.4 million in disgorgement and prejudgment interest, and to pay a civil penalty of $2 million. Quad also agreed to conduct two compliance reviews over a one-year period, and submit two formal reports to the SEC Staff.

The  Justice Department publicly declined to prosecute the company and, in its declination letter, made no reference to the alleged sanctions violations.

Jeffrey Newman Esq. represents whistleblowers including SEC whistleblowers nationwide and can be reached at Jeffrey.Newman1@gmail.com or by calling 617-823-3217.