Akzo Nobel N.V.: The Service Fees Bought No Service

In the Akzo Nobel FCPA case, the company agreed to pay over $2.9 million in a civil settlement over allegations that subsidiaries hid Iraqi Oil-for-Food kickbacks in agent commissions. The Securities and Exchange Commission alleged that the payments bought no after-sales services at all. For someone who prices contracts, approves commissions or records payments, the case turns on familiar paperwork used to conceal a very different transaction.

Akzo Nobel was a Netherlands-based pharmaceutical company whose subsidiaries, Intervet International and Organon, sold humanitarian goods to Iraq. On December 20, 2007, the Securities and Exchange Commission announced its accounting action under the Foreign Corrupt Practices Act against the parent, while the Justice Department announced a separate non-prosecution agreement. According to the Justice Department’s account of that criminal agreement, the company acknowledged responsibility for the subsidiaries’ improper payments to obtain Iraqi ministry contracts.

Oil-for-Food Contracts With Money Built in for Kickbacks

The Oil-for-Food Program allowed Iraq to sell oil and use the proceeds for United Nations-approved humanitarian goods and services, including food and medicine. The proceeds went into a United Nations-controlled bank account. That arrangement put a purchasing safeguard between Iraq’s oil revenue and the government spending it.

The Justice Department’s announcement explained that, beginning in 2000, the Iraqi government required suppliers seeking ministry contracts to pay kickbacks, often described as after-sales service fees. The Securities and Exchange Commission alleged that Akzo Nobel’s subsidiaries authorized and made $279,491 in kickbacks from 2000 to 2003. Third parties paid them into Iraqi-controlled accounts in Lebanon and Jordan, bypassing the program’s escrow account.

The contract price and the agent’s fee did different jobs in the alleged scheme. A higher contract price created room for the kickback, while an increased commission moved the money through an ordinary business expense. The SEC’s account follows those changes through each subsidiary, down to the reimbursement request and the backdated quote.

The alleged arrangement made the humanitarian program finance the kickback itself. We see a service fee doing the work of a disguise, with no service behind it.

Intervet’s Commission Change Reimbursed the Agent

Intervet’s alleged kickback began with a demand the company initially refused. According to the Securities and Exchange Commission’s account of its complaint, Intervet used two agents for Iraqi business and paid them jointly on its contracts. In August 2000, each agent’s fee was 2.5 percent.

The following month, one agent told Intervet that the Iraqi ministry demanded a five percent kickback on a contract under negotiation. At the signing, an Intervet employee who knew about the demand saw the agent deliver an envelope to an Iraqi representative. The agent then sought reimbursement for the kickback.

The Securities and Exchange Commission alleged that Intervet employees restored an earlier commission arrangement, giving each agent five percent. That let the agents retain their ordinary compensation and reimbursed the agent who had passed money to the ministry. The company could record commissions while concealing why the extra money had been paid.

The Securities and Exchange Commission put the kickback on this contract at $38,741. For an employee familiar with the account, the reimbursement request and the commission change explained what the payment was for.

Organon’s Prices and Commissions Rose Together

Organon’s alleged scheme used inflated contract prices and increased commissions across three contracts. The Securities and Exchange Commission alleged $240,750 in kickbacks, with the same agent involved in the Intervet transaction participating in each. Organon employees allegedly knew the extra money would go to the Iraqi Ministry of Health, also known as Kimadia.

For the first contract, Organon and the ministry agreed on an initial price. When Organon prepared the documents submitted for United Nations approval, it allegedly increased that price by ten percent to cover the kickback. For the next two contracts, the parties allegedly built the increase into the initial agreed price before submitting the documents.

The Securities and Exchange Commission also described an employee creating backdated price quotes that matched the pricing in the contracts. A quote usually helps explain how a price was reached. Here, the alleged backdating made the supporting paperwork fit a price that already contained the hidden payment.

The agent’s commission rose from five percent to fifteen percent, according to the Securities and Exchange Commission. On the first contract, the agent asked Organon to send the kickback portion to an entity called Sabbagh Drugstore. On the later contracts, the agent asked for the extra commission to go directly to an account in his name.

That is a transaction an insider can recognize across sales and finance. The contract shows what the customer was charged, the commission arrangement shows what the agent was entitled to receive, and the payment instruction shows where the money was sent. In the SEC’s allegations, the people handling those records knew the ministry was the ultimate beneficiary.

The Subsidiaries Made the Payments, the Parent Faced the Accounting Action

The Securities and Exchange Commission brought books-and-records and internal-controls charges against Akzo Nobel itself. It alleged that the company knew, or was reckless in not knowing, about the improper payments and lacked adequate controls to detect and prevent them. The accounting allegedly described the payments as legitimate agent commissions.

The subsidiaries’ roles explain the parent’s accounting problem. Intervet employees allegedly changed the commission arrangement to reimburse a payment already made. Organon employees allegedly inflated prices, increased commissions and created backdated support. The parent-level allegation concerned the records and controls that allowed those payments to appear as ordinary business expenses.

This is why a commission approval cannot explain a payment by itself. The person authorizing a payment, the agent receiving it and the ultimate beneficiary can sit in different companies and countries. Someone in finance may see an approved commission while someone in sales knows the fee changed because a ministry demanded money.

What the Civil Settlement and Criminal Agreement Covered

The Securities and Exchange Commission’s settlement terms called for Akzo Nobel to surrender $1,647,363 in profits and pay $584,150 in interest and a $750,000 civil penalty. The profits to be surrendered were far larger than the kickbacks the SEC alleged. We see a civil penalty smaller than the profits the company agreed to surrender.

The Justice Department’s announcement said Akzo Nobel disclosed the improper payments after publication of the United Nations inquiry committee’s final report and thoroughly reviewed them. We see an important limit to the self-reporting credit: the inquiry’s report came first.

Siemens Shows Where the Disguised Commission Led

Siemens used inflated prices and agent commissions in its own Oil-for-Food transactions. In its criminal statement of offense, the company agreed that the stated facts were true, including that its businesses increased contract prices to generate and conceal kickback funds. The document explains the economic point: including the kickback in the contract price let suppliers fund it from the program instead of their profits.

For Siemens France contracts, the statement describes an agent depositing money into a Jordanian account held by Iraqi officials, who transferred it to a Ministry of Electricity account. The agent obtained bank confirmation of the payment. Siemens then reimbursed the agent through sham commission invoices, and the false descriptions entered the parent’s financial records.

The parallel makes Akzo’s alleged commission changes easier to understand. A payment to an agent was one stage in a transaction whose beneficiary was the government customer. The bank confirmation, commission invoice and accounting entry described in the Siemens criminal case connect stages that employees in separate departments might otherwise see in isolation.

What Your View of the Transaction Can Show

In Akzo’s case, the Securities and Exchange Commission’s account connects people who knew the ministry’s demand with the commission arrangements and prices they changed. That makes the ordinary working history of a contract valuable: what was agreed, what changed, who approved it and what the payment was meant to accomplish. Those are the connections our whistleblower experts examine with someone who knows the business.

The 2022 Journal of Forensic and Investigative Accounting paper Fresenius Medical Care: A Case Study on the FCPA found that managers and employees bypassed controls at Fresenius Medical Care despite flagged transactions and company policies. For the reader looking at Akzo’s alleged backdated quotes and restored commissions, the useful question is what the approval process actually examined. A file can contain an approval and still conceal why the payment was requested.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. Akzo’s was an SEC enforcement action, and foreign-bribery information can qualify for whistleblower rewards through a separate program.

You Know Why the Commission Changed

If you know why an agent’s fee rose, who requested a different payee or how a contract’s supporting quotes were created, speak with our whistleblower experts. We connect your knowledge of the sale to the payment and the company’s accounting, bring in foreign-bribery whistleblower lawyers who understand intermediary payments, and stay beside you through the case.