The investment community largely anticipated Diebold Inc.’s $48 million fine for overseas bribery and thinks of it as a one-time event, an industry analyst says.
Documents filed this week with U.S. District Court in Cleveland spell out in detail how federal investigators pieced together the actions of some Diebold top executives and employees allegedly violating the Foreign Corrupt Practices Act by arranging bribes to “retain lucrative business with government owned banks in China and Indonesia” and to help sales of ATMs to private banks in Russia.
The Securities and Exchange Commission alleged in a lawsuit filed in Washington, D.C., that Diebold paid about $3 million in bribes from 2005 to 2010.
The U.S. Department of Justice charged the Green maker of ATMs and security systems with one count of conspiracy and one count of “books and records” — falsifying books, records and accounts. The charges are felonies.
The Diebold executives and employees are not identified by name in the court records; the company said it cannot comment on any of the individuals in the documents.
The court documents, filed Tuesday, show that initial violations were discovered by Diebold “during the course of acquisition-related due diligence.”
A company spokesman confirmed that the federal investigation was triggered by Diebold’s discovery and subsequent disclosure of apparent Federal Corrupt Practices Act, or FCPA, violations while the company was looking into an acquisition in Russia.
The SEC and Department of Justice on Tuesday announced that Diebold had agreed to pay $48 million to settle the litigation. Diebold also is required to have an independent “corporate compliance monitor” for at least 18 months.
The federal government said the bribes included “lavishing international leisure trips, entertainment and other improper gifts on foreign officials.”
The stock market largely shrugged off the news on Wednesday. In August, Diebold said it expected to pay $48 million to settle the litigation. The payment includes a $25.2 million criminal penalty, with the balance of $22.9 million for restitution.
Shares of Diebold fell 16 cents to $29.76 on Wednesday. Shares are up 2 percent, including reinvested dividends, since Jan. 1 and are up less than 1 percent from a year ago.
“Paying the fine kind of puts it behind,” said Kartik Mehta, an analyst with Northcoast Research in Cleveland who follows Diebold. “They had an issue. They addressed the issue. Most investors will look at this as a one-time issue, not an ongoing thing.”
Flirting with violations
U.S. District Court documents show that some Diebold staff recognized they were, at the very least, flirting with violations of U.S. and foreign laws.
Court documents refer to “Executive A,” a “senior executive with Diebold” who was a citizen of Taiwan and resident of China who resigned from Diebold in December 2011; “Executive B,” a “vice president of Diebold’s Asia Pacific division” who was a citizen of Taiwan and resident of China who resigned in December 2011, and “Executive C,” a “high level executive at Diebold.”
The Department of Justice documents also refer to employees “A” “B” and “C” and other entities, also not specifically named.
The federal government said that Diebold executives and employees “attempted to conceal the payments, gift and travel provided to employees of customers by, among other means, making payments through third party agents designated by bank customer employees and describing leisure trips as ‘training.’ ”
Court documents cited Diebold emails, including one on Oct. 14, 2008, from “Employee B” that said in part “this process violates Chinese law and regulation and we have risk to be challenged by government. ... Also, if we check our practice with the FCPA [Foreign Corrupt Practices Act] regulation, I should say we have potential risk on this area.”
Another email, dated March 27, 2007, from an unidentified employee in Diebold’s corporate development department, said in part, “(Distributor 1) is involved in the practice of giving cash gifts to win their business. In order to record these special handouts, they over pay one of their suppliers in exchange for cash (equal to the over payment) and the cash so received is used to pay their clients.”
The record identifies “Distributor 1” only as a Ukraine firm that Diebold was considering purchasing at that time.
Illicit payments discovered
The SEC complaint said Diebold discovered corrupt business practices while considering buying a Ukranian company identified as “Distributor B.” Diebold did not buy the company but continued to do business with it until 2010, the SEC said.
The SEC also said Diebold found evidence in 2009 of illicit payments while looking into buying its largest independent distributor, identified as “Distributor A,” in Russia and the Ukraine.
“Only later, in 2010, after evidence emerged that Distributor A had also been funneling bribe payments on behalf of Diebold Russia, did the company terminate its business dealings and acquisition plan with Distributor A,” the SEC said in a court document.
The Department of Justice charged that from 2005 to 2009, Diebold entered into false contracts with a business identified only as Distributor 2 “for services that Distributor 2 was not performing. Distributor 2, in turn, used that money that Diebold paid to it, in part, to pay bribes to employees of Diebold’s privately owned bank customers in Russia in order to obtain and retain contracts with those customers.”
Diebold signed a “deferred prosecution agreement” in which it agreed that the allegations described in the court documents are true and accurate.
“The settlement agreement is an important step for the company moving forward,” Diebold spokesman Mike Jacobsen said via e-mail. “It’s imperative for Diebold to recognize these issues head on, acknowledge responsibility, put the FCPA investigation period behind it and get on with the business of managing the company.”
The settlement document says that “following discovery of the FCPA violations during the course of acquisition-related due diligence, the company initiated an internal investigation and voluntarily disclosed to the Department [of Justice] the misconduct ... ”
Diebold Chairman Henry D.G. Wallace and other top Diebold executives, along with federal prosecutors, signed the “deferred prosecution agreement” earlier in October that specified the terms and conditions Diebold agreed to meet.
Diebold in 2010 agreed to pay a $25 million fine to settle a lawsuit with the SEC alleging the company manipulated earnings from 2002 to 2007.
Jim Mackinnon can be reached at 330-996-3544 or firstname.lastname@example.org.