Securities & Exchange Commission v. Fiat S.p.A. and CNH Global N.V., Civil Action No. 08 CV 02211 (D.D.C.) (CKK)

SEC Files Settled Books and Records and Internal Controls Charges Against Fiat S.p.A. and CNH Global N.V. For Improper Payments to Iraq Under the U.N. Oil for Food Program – – Fiat Agrees to Pay Over $10 Million in Disgorgement, Interest, and Penalties

(LAWFUEL) – The Securities and Exchange Commission today filed Foreign Corrupt Practices Act books and records and internal controls charges against Fiat S.p.A. and CNH Global N.V. in the U.S. District Court for the District of Columbia. Fiat S.p.A., an Italian company, provides automobiles, trucks and commercial vehicles. CNH Global N.V., a majority-owned subsidiary of Fiat, provides agricultural and construction equipment. The Commission’s complaint alleges that from 2000 through 2003, certain Fiat and CNH Global subsidiaries made approximately $4.3 million in kickback payments 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. The Program was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. The Program required the Iraqi government to purchase humanitarian goods through a U.N. escrow account. The kickbacks paid by Fiat’s and CNH Global’s subsidiaries diverted funds out of the escrow account and into Iraqi-controlled accounts at banks in countries such as Jordan.

According to the Commission’s Complaint:

During the Oil for Food Program, Fiat’s subsidiary, IVECO S.p.A., used its IVECO Egypt office to enter into four direct contracts with Iraqi ministries in which $1,803,880 in kickbacks were made on the sales of commercial vehicles and parts. After agreeing to pay the ASSFs, IVECO Egypt increased its agent’s commissions from five percent to between fifteen and twenty percent of the total U.N. contract price, which the agent funneled to Iraq as kickbacks. The agent submitted invoices for the inflated commissions, and IVECO financial documents show line items for “contract pay-back” due to the agent. IVECO and the agent secretly inflated the U.N. contracts by ten to fifteen percent. Despite the agent’s invoices being held for one year and the unusually large commissions, IVECO paid the invoices. In one instance, IVECO set up a bank guarantee in the amount of the ASSF in favor of a Dubai-based firm that operated as a front company for Iraq. IVECO’s bank guarantee was canceled and, instead, the agent established an identical bank guarantee to conceal IVECO’s role. A line item identified as “pay-back” on IVECO documents corresponded to the amount of the agent’s bank guarantee. The ASSFs were incorrectly recorded as legitimate commissions on the company’s books and records.

Beginning in November 2000, IVECO changed its method of doing business for future contracts by making the agent its distributor. As a distributor, the agent purchased equipment directly from IVECO for its own account, and in turn, the agent sold IVECO trucks and parts to Iraq under its own inflated contracts to the U.N. With IVECO’s knowledge, the agent facilitated $1,364,080 in ASSFs on twelve additional contracts. Through this mechanism, IVECO was able to move its goods into Iraq, but keep itself distanced from any involvement in the ASSF scheme. IVECO knew or should have known from its direct sales to Iraq that the agent’s sales of IVECO products included ASSFs. In correspondence with the U.N., the agent conceded that it paid ASSFs on the contracts and confirmed that the payments were made through Al Rafidain Bank.

In mid-2001, CNH Global subsidiary Case France engaged in three direct transactions with Iraqi ministries in which $187,720 in kickbacks were made on the sale of construction equipment. Armed Iraqi officials approached Case France’s Baghdad facility reiterating its request for kickbacks. Case France then entered into a side letter agreeing to pay kickbacks. The side letter was not disclosed to the U.N. To generate funds to pay the kickbacks and to conceal the ASSFs, Case France and its agent secretly inflated the U.N. contracts by approximately ten percent. Case France inflated its commission payments to its distributor, who then forwarded the excess funds to Iraq as kickbacks. Case France did not record the kickbacks on its books and records.

Between December 2000 and May 2001, CNH Global subsidiary New Holland engaged in two direct transactions with Iraqi ministries in which $447,116 in kickbacks were made on the sale of tractors. To generate funds to pay the kickbacks and to conceal the ASSFs, New Holland secretly inflated the U.N. contracts by approximately ten percent. On one contract, New Holland obtained a bank guarantee in favor of the Iraqi ministry in the amount of the ASSF. The ASSFs were recorded as cost of goods sold in New Holland’s books and records. Soon after the two direct contracts were negotiated, New Holland ceased entering into direct sales to Iraq. After an Iraqi official inquired why the company no longer conducted business in Iraq, New Holland resumed its business but in a manner that distanced itself from the ASSFs. New Holland made its dealer a distributor, which allowed the dealer to purchase New Holland goods for the dealer’s own account. The dealer, in turn, then sold New Holland products to Iraq under the dealer’s own secretly inflated U.N. contracts. A November 2001, correspondence from the dealer to New Holland discussed the fact that New Holland’s direct sales to Iraq remain impracticable as long as the “famous 10” (a reference to the ten percent kickback) was required, and showed the dealer could make the payment rather than New Holland. With New Holland’s knowledge, the dealer facilitated ASSF payments totaling $576,861 to Iraq on three U.N. contracts. An additional $312,198 ASSF payment on a fourth contract was authorized, but never received by Iraq.

Fiat and CNH Global failed to maintain adequate systems of internal controls to detect and prevent the payments and their accounting for these transactions failed properly to record the nature of the payments. Fiat and CNH Global, without admitting or denying the allegations in the Commission’s complaint, consented to the entry of a final judgment permanently enjoining Fiat and CNH Global from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and ordering Fiat to disgorge $5,309,632 in profits plus $1,899,510 in pre-judgment interest plus a civil penalty of $3,600,000. Fiat will also pay a $7,000,000 penalty pursuant to a deferred prosecution agreement with the U.S. Department of Justice, Fraud Section. The Commission considered remedial acts promptly undertaken by Fiat and CNH Global and the cooperation the companies 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.

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