Case 6-2
Con-way
Inc.
Summary
of
Findings
Con-way is a Delaware corporation headquartered in San Mateo, California. It is an international freight transportation and
logistics services company that conducts operations in a number of foreign jurisdictions. During the relevant period, the company
was named CNF, Inc.; it changed its name to Con-way in April 2006. Con-way’s common stock is registered with the SEC
pursuant to Section 12(b) of the Exchange Act and is listed on the NYSE.
Menlo Worldwide Forwarding, Inc. (Menlo Forwarding) was a wholly owned U.S-based subsidiary of Con-way that Con-way
purchased in 1989. During the relevant period, Menlo Forwarding was headquartered in Redwood City, California, and had a 55
percent voting interest in Emery Transnational (Emery). Con-way sold Menlo Forwarding to United Parcel Service of America, Inc.
(UPS), in December 2004.
California-based Con-way Inc., a global freight forwarder, was charged by the SEC with making payments that violated the
FCPA. The company paid a $300,000 penalty and accepted a cease-and-desist order to settle the FCPA enforcement action. Con-
way’s FCPA violations were caused by a Philippines-based subsidiary, Emery Transnational. It made about $244,000 in improper
payments between 2000 and 2003 to officials at the Philippines Bureau of Customs and the Philippine Economic Zone Area,
and $173,000 in improper payments to officials at 14 state-owned airlines. In connection with the improper payments, Con-way
failed to record these payments accurately on the company’s books and records and knowingly failed to implement or maintain a
system of effective internal accounting controls.
Lack of Oversight over Emery
T
ransnational
During the relevant period, Con-way and Menlo Forwarding engaged in little supervision or oversight over Emery. Neither
Con-way nor Menlo Forwarding took steps to devise or maintain internal accounting controls concerning Emery, to ensure that it
acted in accordance with Con-way’s FCPA policies, or to make certain that its books and records were detailed or accurate.
During the relevant period, Con-way and Menlo Forwarding required only that Emery periodically report back to Menlo its
net profits, from which Emery then paid Menlo a yearly 55 percent dividend. Menlo incorporated the yearly 55 percent dividend
into its financial results, which were then consolidated in Con-way’s financial statements. Neither Con-way nor Menlo asked for or
received any other financial information from Emery. Accordingly, neither Con-way nor Menlo maintained or reviewed any of the
books and records of Emery—including the records of operating expenses, which should have reflected the illicit payments made to
foreign officials.
Payments to
Philippine
Customs
O”cials
Emery made hundreds of small payments to foreign officials at the Philippines Bureau of Customs and the Philippine Economic
Zone Area between 2000 and 2003 in order to obtain or retain business. These payments were made to influence the acts and
decisions of these foreign officials and to secure a business advantage or economic benefit. By these payments, foreign officials
were induced to (1) violate customs regulations by allowing Emery to store shipments longer than otherwise permitted, thus
saving the company transportation costs related to its inbound shipments; (2) improperly settle Emery’s disputes with the
Philippines Bureau of Customs, or (3) reduce or not enforce otherwise legitimate fines for administrative violations.
To generate funding for these payments, Emery employees submitted a Shipment Processing and Clearance Expense Report
to Emery’s finance department. These reports requested cash advances to complete customs processing. The cash advances were
then issued via checks made payable to Emery employees, who cashed the checks and paid the money to designated foreign
officials. Unlike legitimate customs payments, the payments at issue were not supported by receipts from the Philippines Bureau
of Customs and the Philippine Economic Zone Area. Emery did not identify the true nature of these payments in its books and
records. From 2000 to 2003, these payments totaled at least $244,000.
Payments to O”cials of Majority
State-Owned
Airlines
To obtain or retain business, Emery also made numerous payments to foreign officials at 14 state-owned airlines that did business
in the Philippines between 2000 and 2003. These payments were made with the intent of improperly influencing the acts and
decisions of these foreign officials and to secure a business advantage or economic benefit. Emery Transnational made two types
of payments. The first type was known as “weight-shipped” payments, which were made to induce airline officials to reserve
space for Emery on the airplanes improperly. These payments were valued based on the volume of the shipments the airlines
carried for Emery. The second type were known as “gain shares” payments, which were paid to induce airline officials to falsely
underweigh shipments and to consolidate multiple shipments into a single shipment, resulting in lower shipping charges. Emery
paid the foreign officials 90 percent of the reduced shipping costs.
Both types of payments to foreign airline officials were paid in cash by members of Emery’s management team. Checks
reflecting the amount of the weight-shipped and gain shares payments were issued to these managers, who cashed the checks and
personally distributed the cash payments to the foreign airline officials. Emery Transnational did not characterize these payments
in its books and records as bribes. During the 2000–2003 period, these payments totaled at least $173,000. Neither Con-way nor
Menlo requested or received any records of these payments or any of Emery’s expenses during this period.
Discovery of Improper Payments
and
Internal
Investigation
Con-way discovered potential FCPA issues in early 2003. Starting in January 2003, Menlo initiated steps to increase Emery ’s
internal reporting requirements, including requiring Emery to begin reporting its income and expenses, in addition to its net
profits. As a result, in reviewing Emery’s records, Menlo employees noticed unusually high customs and airline-related
expenditures.
Menlo conducted an internal investigation of the suspicious payments at Emery and determined that Emery employees had
been making regular cash payments to customs officials and employees of majority state-owned air- lines. Based on Menlo’s
investigation, Con-way conducted a broader review of all of Menlo foreign businesses and voluntarily disclosed the existence of
possible FCPA violations to the staff. After completing its internal investigation, Con-way imposed heightened financial
reporting and compliance requirements on Emery. Menlo terminated a number of the Emery employees involved in the
misconduct, and Con-way provided additional FCPA training and education to its employees and strengthened its regulatory
compliance program. In December 2004, Con-way sold Emery to UPS.
Legal Analysis
The FCPA, enacted in 1977, added Exchange Act Section 13(b)(2)(A) to require public companies to make and keep books,
records, and accounts that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the issuer, and added Exchange Act Section 13(b)(2)(B) to require such companies to devise and maintain a system of
internal accounting controls sufficient to provide reasonable assurances that (1) transactions are executed in accordance with
management’s general or specific authorization; and (2) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to
maintain accountability for assets.
As already detailed, Con-way’s books, records, and accounts did not properly reflect the illicit payments made by Emery to
Philippine customs officials and to officials of majority state-owned airlines. As a result, Con-way violated SEC Exchange Act
Section 13(b)(2)(A). Con-way also failed to devise or maintain sufficient internal controls to ensure that Emery Transnational
complied with the FCPA and to ensure that the payments it made to foreign officials were accurately reflected on its books and
records. As a result, Con-way violated Section 13(b)(2)(B) of the Act.
Securities Exchange Act Section 13(b)(5) 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). By knowingly failing to implement a system of internal
accounting controls concerning Emery Transnational, Con-way also violated Exchange Act Section 13(b)(5).
According to the SEC’s complaint, none of Emery’s improper payments were reflected accurately in Con-way’s books and
records. Also, Con-way knowingly failed to implement a system of internal accounting controls concerning Emery that would
both ensure that Emery complied with the FCPA and require that the payments that it made to foreign officials were reflected
accurately on its books and records.
NOTES
This case brings up the issue of what constitutes bribery and the ethics involved. In this case, Emery Transnational
made a number of illegal payments to officials at the Philippines Bureau of Customs and the Philippine Economic
Zone Area, and officials at fourteen state-owned airlines in order to obtain or retain business. The extent of
corruption in Philippine’s has been measured as averaging 4.4 points out of a scale of five, which is the extreme
corruption level, according to the 2013 Global Corruption Barometer (GCB) survey conducted by Transparency
International (TI) , a Berlin- based organization. In the perception of Filipino respondents of the TI survey, the
degree of corrupt practices in the government, ranked among the highest in Asia, next only to Indonesians’
perception on their country’s corruption level which averaged at 4.7.
According to the survey, 44 percent of Filipino respondents said they would not report a corruption case because “it
wouldn’t make a difference,” while 39 percent said they would not because they were “afraid of the consequences.
However, 52 percent were willing to report incidences of corrupt practices to the news media, while only 21 percent
said they would approach an anti-corruption agency or call an anti-graft hotline and another 21 percent would report
directly to the institution involved.
A complete version of the discussion of bribery in the Philippines can be found at:
http://www.malaya.com.ph/index.php/opinion/37422-corruption-under-noynoys-regime
Ethical Issues
From a justice perspective, paying bribes to obtain business is not fair to the other companies that do business with
these Philippines’ companies. They are not receiving the secret benefits that Emery paid for under the table. Also,
these bribes are not being recorded on Emery’s financial statements correctly and therefore are not reflecting the true
price of each transaction. This is unfair to the shareholders and creditors of the company because they are not
provided with a fair presentation of the financial statements. Under the theory of Deontology, Emery had a duty to
provide these accurate statements and a duty to do business under the regulations of the FCPA. Failure to comply
with these regulations is also unethical under the theory of rule-utilitarianism. In fact, the only theory in which
Emery’s actions are just, is egoism.
Questions
1. The FCPA distinguishes between so-called facilitating payments and more serious activities. Do you think such a
distinction and the related penalties for violations under the Act make sense from an ethical perspective? Use the
utilitarian analysis of harms and benefits of facilitating payments to support your position.
“Facilitating payments” are made to an official to expedite her performance, rather than influencing the act of the official. These
From an ethical sense both facilitating payments and bribery, which induces a favorable action that might not occur otherwise, are
From a harms and benefits approach, the company that makes the facilitating payment gets what it wants and deserves in the first
place, i.e., off-loading goods at the customs location. There is no monetary benefit other than being able to sell one’s goods in the
country. If that was considered the utilitarian benefit, then it would have to be weighed against the cost for the payment and
2. Securities Exchange Act Section 13(b)(5), 15 U.S.C. §78m(b)(5) prohibits any person or company from
knowingly circumventing or knowingly failing to implement a system of internal accounting controls or
knowingly falsifying any book, record, or account. What is the purpose of the accounting provisions in the SEC
laws and FCPA? Assume the auditors of Con-way knew about the accounting for FCPA payments in the books
and records of the company. Do you think the auditors would be guilty of: (1) ordinary negligence; (2) gross
negligence; or (3) fraud? Explain.
In the years leading up to the FCPA, defense contractors and oil companies were rapidly expanding internationally. Bribes and
facilitating payments were made. The companies must have known that the payments were illegal as they were often falsified on
the books as being a legitimate routine expense. Part of the rationale was so that the payments could be deductible for tax
purposes in the U.S. (U.S. does not allow any payments that are bribes or frustrate public policy to be tax deductible.) Also, at
times the payment of bribes was done by the ex-patriot working in the foreign land and the payments may not have been
Assuming the auditors of Con-Way knew of the payments, they could have insisted on disclosure and proper recording of the
payments or they could keep quiet and go along with Con-Way. If the auditors had insisted on disclosure, transparency and proper
recording of the payments, then they would not have been guilty of negligence. They also may not have been the auditors very
3. Given that the FCPA permits facilitating payments, do you believe it is ethically appropriate for companies to deduct
such payments from their income taxes? Why or why not? What about outright bribery payments? What does the law
require in each instance with respect to tax deductibility?
U.S. tax law does not allow deductions for payments that illegal or frustrate public policy. Bribes are illegal in the U.S. and are
not deductible. A company can only deduct ordinary and necessary business expenses. A facilitating payment is not ordinary or a
necessary payment, although a company might argue it is to get things done in a country. The company can, however, refuse to
An example of payments that frustrate public policy that students can relate to is if Domino’s paid speeding tickets for the