Lessons From Deere FCPA Sanction

Deere & Co. is paying $10 million to settle one of the more colorful FCPA cases we’ve seen in a while, replete with Thai massage parlors, envelopes of cash, sketchy overseas agents — and even a few lessons about compliance fundamentals from due diligence of acquisitions to program remediation. Let’s take a look.

The Securities and Exchange Commission announced the settlement earlier this week. The gist is that Deere acquired a German business in 2017 called the Wirtgen Group, and then slow-rolled the integration of Wirtgen into Deere’s existing compliance program. All the while, Wirtgen’s Thailand subsidiary was paying bribes to government officials there and covering their tracks by recording the payments as legitimate expenses. This continued into 2020, netting Deere $4.3 million in ill-gotten proceeds.

Deere (maker of John Deere agricultural machinery) must now pay $5.4 million in disgorgement and interest, plus a $4.5 million civil penalty. We don’t know whether the Justice Department has any corresponding criminal investigation underway, but clearly the SEC decided the books-and-records violations were egregious enough for enforcement unto themselves. The agency was also clear about the message it wants other companies to absorb from this case.

“Deere failed to timely integrate it into its existing compliance and controls environment, resulting in these bribery schemes going unchecked for several years,” Charles Cain, head of FCPA enforcement for the SEC, said in a statement. “This action is a reminder for corporations to promptly ensure newly acquired subsidiaries have all the necessary internal accounting control processes in place.”

Now let’s get to the details, which sound like an FCPA training course come to life. 

‘Improper Entertainment Expenses’

The SEC settlement order minces no words. To win contracts with several Thai government agencies, Wirtgen Thailand employees “engaged in bribery through several different mechanisms,” including entertaining government officials at massage parlors (which certainly puts a new spin on the term “grease payment”), hosting officials on luxe sightseeing expeditions disguised as “factory visits,” and making cash payments to officials both directly and through third-party agents.

All this, even though Wirtgen Group had a code of business conduct that forbade employees from giving “absolutely anything” to improperly influence a government official. Wirtgen Thailand executives ignored that directive, and then submitted expense reports with red flags all over them. Sometimes the expenses were recorded in nicely rounded amounts; other times, the reports lacked detail about exactly what they were for. On several occasions, executives padded the reports with names of additional Wirtgen Thailand employees to make the amounts seem more plausible, when those employees didn’t actually go to the massage parlors. 

The expense reports were then rubber-stamped by Wirtgen’s managing director for Southeast Asia or its managing Director in Thailand, without any regard for compliance with Deere’s policies and procedures for entertaining government officials.

We could keep going, with violations so blatant they border on the comical:

• Footing the bill for four Thai officials and two of their spouses to conduct a “factory visit” in Germany, that actually was a sightseeing trip to Switzerland, complete with shopping trips and luxury hotel stays.
• Directly paying “candy money” to government officials, in the form of five envelopes stuffed with 20,000 Thai baht (worth about $600 at the time) each. The managing director ordered the finance director to arrange for the withdrawals, although he stuffed the envelopes personally.
• Arranging for indirect payments to government officials through a sham consulting agreement with a local business agent, who was simply a conduit for bribes. Over the course of three years, Wirtgen Thailand funneled $285,000 through the agent, and received illicit profits worth $2.7 million.
• Plus the afore-mentioned massage parlor visits, which we won’t discuss further since Radical Compliance tries to be a family publication.

Like, could you write up an FCPA training course any better? These fact patterns would drive any compliance or internal audit team to reach for the aspirin, and leave federal prosecutors wondering whether they’d been pranked. 

Compliance Lessons to Learn

The crucial issue here is that Deere did not integrate Wirtgen into Deere’s larger compliance infrastructure after Deere acquired the business in December 2017. Wirtgen literally failed to get with the program. 

One has to wonder why. Wirtgen was one of the world’s leading manufacturers of road equipment, selling to government highway and transportation agencies in more than 100 countries, with roughly 8,200 employees at the time. Deere paid $5.1 billion for the firm. This was not a small acquisition. 

So did Deere perform pre-acquisition due diligence to assess Wirtgen’s potential bribery risk? If it did, was Thailand such a small market overall (Deere had $37 billion in total sales in 2018) that the bribery issues there went undetected? We don’t know. (Fun fact we do know: Deere has been on Ethisphere’s World’s Most Ethical Companies list 17 times. Ahem.) 

What about a pre-acquisition assessment of Wirtgen’s compliance program, assuming it had one at all — to what extent did that take place? After all, it’s not unreasonable to argue that a large acquiring business might not sniff out every instance of bribery risk in a significant acquisition; but the target’s compliance program is the nose that helps you sniff out bribery issues after the deal closes. If you don’t assess at least that compliance program’s capability pre-closing, your ability to find inherited FCPA risks gets a lot more messy.

Regardless of pre-acquisition due diligence, Deere’s post-acquisition integration left a lot to be desired, too. The deal closed in December 2017. The massage parlor nonsense continued into early 2020, more than two years later. Ditto for the cash payments and the third-party agent. The managing director and the finance director of Wirtgen Thailand were both directly involved, and they were passing along expense reports as bogus as a three-dollar bill. 

How did none of that get detected, and acted upon, more quickly? At the very least, weren’t expenses related to a massage parlor a red flag? Could someone higher up have noticed the questionable expense reports and issued a “no massage parlors” edict while internal investigations ensued? Perhaps the amounts involved were too small to catch anyone’s attention, but that calls out a crucial FCPA risk: even expenditures that might be immaterial in financial reporting can still bring material FCPA risks. And here we are.

Deere Remediation

We don’t know how the SEC got wind of the Wirtgen Thailand episode, although there is no mention of voluntary self-disclosure in the settlement order. On the other hand, the order did call out numerous remediation steps that Deere did undertake:

• Firing the Wirtgen employees responsible for the offenses.
• Launching “significant improvements” to Deere’s internal audit and compliance programs.
• Cooperating extensively with the SEC investigation, which included document translation, the production of overseas witnesses, sharing a forensic accounting analysis, and more.
• Ongoing improvements to Deere’s compliance program, including upgrades to its anti-corruption risk assessments, internal audits, and internal accounting controls for third-party management.

Most fun, however: Deere also launched a companywide bi-monthly compliance newsletter and an in-house compliance podcast! I failed to find an episode online; if anyone knows where to obtain one, I’d love to give it a listen.