UNITED STATES OF AMERICA
In the Matter of
ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934
The Securities and Exchange Commission ("Commission") deems it appropriate that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act"), against Monsanto Company ("Monsanto," the "Company," or the "Respondent").1
In anticipation of the institution of these proceedings, the Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which are admitted, the Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934 ("Order"), as set forth below.
On the basis of this Order and the Respondent's Offer, the Commission finds2 that:
Monsanto, a Delaware corporation based in St. Louis, Missouri, is a global producer of technology-based solutions and agricultural products for growers and downstream customers in agricultural markets. The Company's common stock is registered with the Commission pursuant to Exchange Act Section 12(b) and is listed on the New York Stock Exchange.
PT Monagro Kimia ("PTMK") is a majority-owned subsidiary of Monsanto with its headquarters in Jakarta, Indonesia. PTMK reports to Monsanto through Monsanto's Asia Pacific regional management, which is headquartered in Singapore. The results of financial operations of PTMK are included in Monsanto's consolidated results of financial operations.
PT Branita Sandhini ("PTBS") is a contractually-controlled nominee company of Monsanto with its headquarters in Jakarta, Indonesia. PTBS reports to Monsanto through Monsanto's Asia Pacific regional management, which is headquartered in Singapore. The results of financial operations of PTBS are included in Monsanto's consolidated results of financial operations.
PTMK and PTBS are collectively referred to herein as the "Indonesian affiliates."
In 2002, a senior Monsanto manager, who was responsible for certain activities in the Asia Pacific region, authorized and directed an Indonesian consulting firm to make an illegal payment totaling $50,000 to a senior Indonesian Ministry of Environment official ("the senior Environment Official"). The bribe was made to influence the senior Environment Official to repeal an unfavorable decree that was likely to have an adverse effect on Monsanto's business. Although the payment was made, the unfavorable decree was not repealed. In addition, from 1997 to 2002, Monsanto inaccurately recorded, or failed to record, in its books and records approximately $700,000 of illegal or questionable payments made to various Indonesian government officials. The approximate $700,000 was derived from a bogus product registration scheme undertaken by the Indonesian affiliates. In certain instances, entries were made in the books and records of the Indonesian affiliates that concealed the source, use and true nature of these payments. During the period, the Indonesian affiliates violated the accounting policies, controls, and procedures of Monsanto.
In addition to its pesticide business, Monsanto develops and produces various genetically-modified organisms ("GMOs"). GMOs are promoted as being better than conventional crops because they resist disease and pestilence, and produce higher yields. Monsanto wanted to increase acceptance of GMO crops in Indonesia. To do so, in 1998 Monsanto retained a Jakarta-based investment consulting firm ("consulting firm") that represented U.S. companies in Indonesia. The consulting firm employed a United States national ("the consulting firm employee") and assigned him to lead Monsanto's account. The consulting firm employee worked closely with the management team of the Indonesian affiliates and a senior Monsanto manager ("the senior Monsanto manager") who was responsible for certain activities in the Asia Pacific region. The senior Monsanto manager is a citizen of, and was based in, the United States.
On behalf of Monsanto, the senior Monsanto manager, management of the Indonesian affiliates, and the consulting firm employee lobbied for legislation and ministerial decrees favorable to GMO crops. Thereafter, in February of 2001, Monsanto obtained limited approval from Indonesia's Ministry of Agriculture, for farmers in South Sulawesi, Indonesia to grow its Bollgard Cotton, a GMO crop.4
Later in 2001, the Ministry of Environment issued a decree amending Indonesia's longstanding law requiring an environmental impact assessment ("AMDAL") as a condition for approval for certain projects. The AMDAL decree required, for the first time, certain agricultural products, such as Monsanto's Bollgard Cotton, to undergo an environmental impact assessment prior to cultivation within Indonesia. The decree was likely to have an adverse effect on Monsanto's business interests in Indonesia. Thus, through its Indonesian affiliates and the consulting firm, the Company lobbied for repeal of the decree.
Due to a change in administration, in August of 2001, new Ministry of Environment officials were appointed. Monsanto focused its lobbying efforts on the repeal of the AMDAL decree and met on multiple occasions with the senior Environment Official. Near the end of 2001, when it became clear that the lobbying efforts were having no effect on the senior Environment Official, the senior Monsanto manager told the consulting firm employee to "incentivize" the senior Environment Official with a cash payment of $50,000. The consulting firm employee discussed the payment with the senior Environment Official and, while the senior Environment Official did not promise to repeal the AMDAL amendment, the senior Environment Official indicated to the consulting firm employee that he would try.
In order to fund the $50,000 payment, the senior Monsanto manager devised a scheme involving false invoices. The senior Monsanto manager sent several e-mails, processed on a server located in the United States, to the consulting firm employee and spoke to him in person regarding the scheme. During the planning of the payment to the senior Environment Official, the senior Monsanto manager told the consulting firm employee not to discuss the payment with any other employee of Monsanto.
As part of the scheme, the senior Monsanto manager instructed the consulting firm employee to make the invoices total $66,000, so that the amount paid by Monsanto would include the amount necessary to cover the tax consequences of the consulting firm reporting Monsanto's payment as consulting fee income. The senior Monsanto manager instructed the consulting firm employee to draft several invoices, detailing hours that the consulting firm employee spent traveling on two trips to the United States; in December of 2001 he accompanied the Minister of Environment to St. Louis, in January 2002 he was to accompany the Minister of Agriculture to St. Louis. The invoices were submitted to Monsanto in the United States on December 20, 2001, several weeks before the second trip occurred.
Despite Monsanto's retainer arrangement with the consulting firm, the invoices included detailed charges for hours allegedly expended by the consulting firm employee. The invoices were different from the consulting firm's previous invoices because the amount charged was based on the hours allegedly spent on the trips whereas normally the consulting firm only billed the standard retainer amount plus any expenses. The improper invoices also included charges for hours of other consulting firm employees who did not travel to the United States. The breakdown accompanying the invoices made it appear as though other consulting firm employees also traveled to the United States. Despite the obvious irregularities in the invoices, the senior Monsanto manager approved the invoices and convinced other Monsanto managers to approve the invoices for payment.
In order for the consulting firm employee to withdraw $50,000 from the consulting firm's Indonesian bank account, he needed the approval of the president of the consulting firm. During the time that the consulting firm employee was having discussions with the senior Monsanto manager and the senior Environment Official, he spoke to the consulting firm's president, informed the president of the plan to bribe the senior Environment Official, and gave the president periodic updates. The consulting firm's president then authorized the firm's accounting department to release $50,000 in U.S. currency to the consulting firm employee.
On or about February 5, 2002, the consulting firm employee visited the senior Environment Official at his home. The consulting firm employee briefly spoke with the senior Environment Official, informed the senior Environment Official that he had the money, and then gave an envelope containing $50,000 in $100 bills to the senior Environment Official. After the meeting, the consulting firm employee separately reported back to both the senior Monsanto manager and the consulting firm's president and informed each that he had given the money to the senior Environment Official. In early March, the consulting firm received payment on the false invoices from Monsanto. Despite the cash payment, the senior Environment Official never repealed the AMDAL requirement for Monsanto's products.
Monsanto first became aware of possible financial irregularities within its Indonesian affiliates in March of 2001. Monsanto began an internal investigation, which continued at the direction of the Board of Directors. As a result of the investigation, Monsanto notified the Commission of books and records and compliance irregularities involving the Indonesian affiliates. While Monsanto's investigation uncovered numerous questionable payments, which Monsanto disclosed to the Commission, it did not uncover the payment to the senior Environment Official described above.
The Indonesian affiliates established more than twenty nominee companies in Indonesia without the knowledge of Monsanto. Several of these nominees were purportedly established to hold pesticide product registrations on Monsanto's behalf in exchange for a fee.5 However, the Indonesian affiliates used the nominees to inflate sales of Monsanto's pesticide products between the Indonesian affiliates and the nominees. This was done through a scheme of over-invoicing, in most cases, and "ghost" sales, in other cases. The Indonesian management team then siphoned monies from these unauthorized and improperly documented sales to, in part, finance payments to Indonesian government officials.
From 1997 to 2002, the Indonesian affiliates made at least $700,000 of illicit payments to at least 140 current and former Indonesian government officials and their family members. The largest single set of payments was for the purchase of land and the design and construction of a house in the name of the wife of a senior Ministry of Agriculture official. The total amount of improper payments made in 1998 and 1999 for the house and land was the rupiah equivalent of $373,990. Other examples of improper payments include, among others, payments to a senior official of Budget Allocation at the National Planning and Development Board, totaling $86,690, and payments to other Ministry of Agriculture officials, totaling $8,100. Other payments for travel and gifts (such as cellular phones and golf memberships) were also made by the Indonesian affiliates on behalf of various Indonesian government officials.
In addition, questionable payments were made concerning a cotton gin in South Sulawesi, Indonesia. In connection with the Sulawesi project, one of Monsanto's Indonesian affiliates, PTBS, entered into a ginning contract with an affiliate of the consulting firm. Under the ginning contract, PTBS paid the affiliate of the consulting firm to gin the cotton grown in South Sulawesi using cotton gins "rented" from the Indonesian Government.6 At the same time, PTBS had instituted a program wherein PTBS paid local South Sulawesi Department of Agriculture officials a certain percentage of each kilogram of cotton fruit produced. Payments of approximately $29,500 were made to various officials under this payment scheme.
The Indonesian affiliates failed to properly account for the illicit payments. Instead, members of the Indonesian management team used a complex scheme of bogus pesticide product registration fees and over-invoicing to finance off-book slush funds. These off-book accounts were the source for reimbursements to employees of the Indonesian affiliates for numerous improper payments made to Indonesian officials. These improper payments were inaccurately recorded by both the Indonesian affiliates and Monsanto as payments for bona fide services or bona fide product sales. The improper payments were then reflected in Monsanto's consolidated financial statements as payments for bona fide services or bona fide product sales.
During the review period, Monsanto lacked internal controls sufficient to detect or prevent the illicit payment schemes operated by the Indonesian affiliates. In fact, from 1996 to 2001 Monsanto did not conduct any internal audits of its Indonesian affiliates.7 Instead, Monsanto assumed the financial statement information it received from its Indonesian affiliates was accurate. Despite the statements being unaudited, Monsanto management did not require the Indonesian affiliates to substantiate the information in the financial statements. The absence of effective internal controls enabled the Indonesian management team to conceal their illicit payment scheme.
Upon completion of its internal investigation, Monsanto voluntarily approached the Commission's staff, notified the staff of the results of the investigation, and cooperated with the staff's investigation, including declining to assert its attorney-client privilege with respect to communications during the relevant time period. Monsanto also undertook certain remedial actions. In particular, Monsanto: revised the accounting treatment of the subject payments and included the appropriate supporting documentation in the accounting records; terminated all Monsanto employees involved in improper financial activities or who failed to properly oversee such activities; terminated its relationship with the consulting firm; restructured its Indonesian affiliates; appointed a new Director of Business Conduct; and implemented an improved and expanded Foreign Corrupt Practices Act ("FCPA") compliance program for its worldwide operations.
As a result of the conduct described above, Monsanto violated Section 30A of the Exchange Act, which makes it unlawful, in order to obtain or retain business, for any issuer with a class of securities registered pursuant to Section 12 of the Exchange Act to give, or authorize the giving of, anything of value to any foreign official for purposes of influencing the official or inducing the official to act in violation of his or her lawful duties.
As a result of the conduct described above, Monsanto violated Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect their transactions and disposition of their assets.
As a result of the conduct described above, Monsanto violated Section 13(b)(2)(B) of the Exchange Act, which requires all reporting companies to devise and maintain a system of internal accounting controls sufficient to, among other things, provide reasonable assurances that transactions are recorded in accordance with management's general or specific authorization, access to assets is permitted only in accordance with management's general or specific authorization, and the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any difference.
As a result of the conduct described above, Monsanto violated Section 13(b)(5) of the Exchange Act, which prohibits any person or company from knowingly circumventing or knowingly failing to implement a system of internal accounting controls as described in Section 13(b)(2)(B), or knowingly falsifying any book, record, or account as described in Section 13(b)(2)(A).
As a result of the conduct described above, Monsanto violated Rule 13b2-1 of the Exchange Act, which prohibits any person or company from, directly or indirectly, falsifying or causing to be falsified, any book, record or account subject to Section 13(b)(2)(A).
Monsanto has undertaken to:
1. Retain, through its Board of Directors, by March 1, 2005 and for a period of three years thereafter, an independent consultant ("Independent Consultant"), not unacceptable to the staff of the Commission, to review and evaluate Monsanto's internal controls, record-keeping, and financial reporting policies and procedures as they relate to Monsanto's compliance with the books and records, internal accounting controls, and anti-bribery provisions of the FCPA, codified at Sections 13(b)(2)(A), 13(b)(2)(B) and 30A of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) & (B) and 78dd-1]. Monsanto shall cooperate fully with the Independent Consultant and shall provide the Independent Consultant with access to its files, books, records, and personnel as reasonably requested for the review;
2. Require that the Independent Consultant issue a report, within sixty (60) days after being retained, summarizing the review and recommending policies and procedures reasonably designed to ensure compliance with the federal securities laws as they relate to the FCPA. Simultaneously with providing that report to Monsanto's Board of Directors, Monsanto shall require that the Independent Consultant contemporaneously transmit a copy to Richard W. Grime, Assistant Director, Division of Enforcement, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C., 20549-0800;
3. Adopt all recommendations in the report of the Independent Consultant; provided, however, that within sixty (60) days after the Independent Consultant serves that report, Monsanto shall in writing advise the Independent Consultant and the Commission of any recommendations that it considers to be unduly burdensome, impractical, or costly. With respect to any recommendation that Monsanto considers unduly burdensome, impractical or costly, Monsanto need not adopt that recommendation at that time but shall propose in writing an alternative policy, procedure or system designed to achieve the same objective or purpose. As to any recommendation on which Monsanto and the Independent Consultant do not agree, such parties shall attempt in good faith to reach an agreement within sixty (60) days after Monsanto serves the written advice. In the event Monsanto and the Independent Consultant are unable to agree on an alternative proposal, Monsanto will abide by the determinations of the Independent Consultant;
4. Require the Independent Consultant to undertake a special review of Monsanto's policies and procedures as they relate to compliance with the federal securities laws as they relate to the FCPA during the first year and in the third year following the date of retention of the Independent Consultant. During each review of Monsanto's compliance program, the Independent Consultant shall (i) certify that Monsanto's policies and procedures are appropriately designed to accomplish their goals, (ii) monitor Monsanto's implementation and compliance with the policies and procedures, and (iii) report on the Independent Consultant's findings to Monsanto's Corporate Compliance Officer as to the effectiveness of the policies and procedures. Should the Independent Consultant, during this three-year period, determine that there is a reasonable likelihood that corrupt payments have been offered, promised, paid, or authorized by any Monsanto entity, including agents, consultants, and joint ventures, shareholders acting on Monsanto's behalf, and contractors and sub-contractors working directly or indirectly for Monsanto, the Consultant shall promptly report such payments to Monsanto's Corporate Compliance Officer and Monsanto shall then be obligated to promptly report the same to the staff of the Commission at the address listed above. Should Monsanto fail to make such disclosure, the Independent Consultant shall independently disclose its findings to the staff of the Commission, at the address listed above, notwithstanding any privileged relationship that may exist between the Independent Consultant and Monsanto. Further, the Independent Consultant shall disclose to the staff of the Commission in the event that Monsanto, or its officers, employees, consultants, agents, and joint ventures, or shareholders acting on Monsanto's behalf, or contractors or sub-contractors working directly or indirectly for Monsanto refuse to provide information necessary for the performance of the Independent Consultant's responsibilities. By this Agreement, Monsanto agrees that any privilege, to the extent that it exists, shall not bar such disclosures by the Independent Consultant and that it will not take any action to retaliate against the Independent Consultant for such disclosures. During the three-year period, Monsanto shall immediately disclose to the staff of the Commission, at the address listed above, any information of which it learns that suggests there is a reasonable likelihood that corrupt payments were offered, promised, paid, or authorized by any Monsanto entity, including agents, consultants, and joint ventures, shareholders working on Monsanto's behalf, and contractors or sub-contractors working directly or indirectly for Monsanto; and
5. Require the Independent Consultant to enter into an agreement with Monsanto that provides that for the period of engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Monsanto, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity. The agreement will also provide that the Independent Consultant will require that any firm with which he/she is affiliated or of which he/she is a member, and any person engaged to assist the Independent Consultant in performance of his/her duties under this Order shall not, without prior written consent of the Securities and Exchange Commission's Division of Enforcement, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Monsanto, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of the engagement and for a period of two years after the engagement.
In determining to accept the Offer, the Commission considered remedial actions taken by the Respondent and cooperation afforded the Commission staff.
In view of the foregoing, the Commission deems it appropriate to accept the Respondent's Offer and to impose the sanctions specified therein.
Accordingly, it is hereby ORDERED, pursuant to Section 21C of the Exchange Act, that Respondent Monsanto:
By the Commission.
Jonathan G. Katz
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