U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20504 / March 20, 2008
Securities & Exchange Commission v. AB Volvo, Civil Action No. 08 CV 00473 (D.D.C.) (JB)
SEC Files Settled Books and Records and Internal Controls Charges Against AB Volvo For Improper Payments to Iraq Under the U.N. Oil for Food Program — Company Agrees to Pay Over $12.6 Million in Civil Penalties, Disgorgement of Profits, and Interest
The Securities and Exchange Commission today filed Foreign Corrupt Practices Act books and records and internal controls charges against AB Volvo in the U.S. District Court for the District of Columbia. AB Volvo is a Swedish company that provides commercial transport solutions, including trucks, buses and construction equipment. The Commission's complaint alleges that from 1999 through 2003, two of AB Volvo's subsidiaries and their agents and distributors made approximately $6,206,331 in kickback payments, and authorized additional payments of $2,388,419 in connection with their sales of humanitarian goods to Iraq under the United Nations Oil for Food Program (the "Program"). The kickbacks were characterized as "after-sales service fees" ("ASSFs"), but no bona fide services were performed. One of Volvo's subsidiaries also made other types of illicit payments to Iraq. The Program was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. The Program allowed the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The kickbacks paid by AB Volvo's subsidiaries diverted funds out of the escrow account and into Iraqi-controlled accounts at banks in Jordan.
According to the Commission's Complaint:
Between November 2000 and July 2001, AB Volvo's subsidiary, Renault Trucks SAS, entered into at least eighteen contracts under the Program to supply trucks. Renault Trucks then sub-contracted commercial bodybuilders to outfit the trucks with trailers or superstructures, commonly referred to as "bodies," to tailor the trucks to the Iraqi ministries' specifications. In order to mask its payment of ASSFs, Renault Trucks devised a scheme in which the bodybuilders facilitated the ASSF payments to Iraq. The bodybuilders added the cost of the ASSF into their bodybuilding costs and submitted the total cost to Renault Trucks for payment. The bodybuilders then passed the ASSF payments to Iraq. Internal documents discuss the fact that had Renault Trucks made the payments in its own name, "we would have been caught red-handed." One bodybuilder signed side letters to pay the ASSF on Renault's behalf, and agreed to send Renault an invoice for the ASSF so that Renault would have paperwork to cover the scheme. ASSFs of $5,103,941 were paid, and another $1,255,922 was authorized but not paid.
Prior to Iraq's imposition of ASSF payments, one of AB Volvo's subsidiaries was paying kickbacks to obtain business. From October 1999 to July 2000, Volvo Construction Equipment International ("VCEI") entered into four contracts under the Program in which more than $103,000 in kickbacks were paid to Iraqi ministries. On two contracts, illicit payments between 5% and 11.27% of the contract value were paid. An internal VCEI document discussed the extra trips VCEI staff had to make to Iraq in order to make the payments, and the possibility of having to give more than just payments. On one contract, VCEI documents indicate that VCEI gave its Jordanian Agent a total of $15,950 as "the commitment to the third party whom support us and VOLVO to gain orders in the said ministry." In addition, VCEI internal documents show that $19,000 was given to the Jordanian Agent to purchase a car for the Ministry of Interior. VCEI did not disclose the payments or the car to the U.N.
After Iraq began imposing ASSFs, VCEI or its distributors entered into five additional contracts. VCEI employees learned of the demands for ASSF payments when VCEI employees visited Iraq in November 2000. In an internal memorandum discussing the trip, the employees noted that the ASSF demand "appears to be a clear violation of the UN Embargo Rules that we are expected to participate in." In an e-mail, VCEI personnel discussed the need for handling the ASSF payments with "utmost discretion." On the first contract, VCEI inflated the U.N. contract price by ten percent, but did not disclose the ASSF to the U.N. VCEI then entered into a backdated agency agreement with its Jordanian Agent, who invoiced VCEI for its commission on the sale, including reimbursement of the ASSF payment. VCEI changed its method of doing business for future contracts in an effort to distance itself from the ASSF payments. VCEI made the Jordanian Agent its distributor, which allowed the Jordanian Agent to purchase vehicles directly from VCEI, and in turn sell directly to the U.N. at inflated prices. Thus, VCEI was no longer the party named on the U.N. contracts, but rather, the Jordanian Agent was the named party. With VCEI's knowledge, the Jordanian Agent made ASSF payments on these contracts. The Jordanian Agent did not have the infrastructure that normally would have been required by VCEI for its distributors, and VCEI did not enter into any written distributorship agreement. VCEI sold its products at a price that ensured the Jordanian Agent would have enough "spread" to enable the agent to make the ASSF payments. According to a U.N. report of an interview of the Jordanian Agent, the agent admitted that he personally paid kickbacks on behalf of VCEI. VCEI also used a Tunisian distributor to facilitate additional sales of its products to Iraq, and reduced its prices to the distributor to enable the distributor to make the ASSF payments. In total, VCEI or its distributors authorized more than $2.2 million in ASSF payments.
AB Volvo either knew or was reckless in not knowing that illicit payments were either offered or paid in connection with these transactions. AB Volvo failed to maintain an adequate system of internal controls to detect and prevent the payments and its accounting for these transactions failed properly to record the nature of the payments. AB Volvo, without admitting or denying the allegations in the Commission's complaint, consented to the entry of a final judgment permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, ordering it to disgorge $7,299,208, in profits plus $1,303,441 in pre-judgment interest, and to pay a civil penalty of $4,000,000. AB Volvo will also pay a $7,000,000 penalty pursuant to a deferred prosecution agreement with the U.S. Department of Justice, Fraud Section. Volvo is not the company that currently makes the "Volvo" brand car.
The Commission considered remedial acts promptly undertaken by AB Volvo and the cooperation the company afforded the Commission staff in its investigation. The Commission acknowledges the assistance of the Department of Justice, Fraud Section and the United Nations Independent Inquiry Committee.