Case 6-8 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.1
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.
Lack of Oversight over Emery Transnational
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.
Payments to Philippine Customs Officials
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Payments to Officials 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
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
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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
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.
Questions
Overview
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
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.
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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 to
support your position.
“Facilitating payments” are made to an official to expedite her performance, rather than
influencing the act of the official. These payments may still be illegal for the person to
receive even though they may be an acceptable part of the culture in the country. The
facilitating payments are like tipping a maître d to get a better table at a restaurant.
2. 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.
The accounting provisions in the FCPA law were set up to make sure that the executives
and board of directors are aware of any payments, and that if any payments were made,
they had to be recorded accurately and not deducted for tax purposes since they are
against tax law.
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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?
In 1977 the Foreign Corrupt Practices Act (FCPA) was passed in the U.S., which set the
standard worldwide for anticorruption legislation. The FCPA criminalizes U.S.
companies engaged in any interstate commerce from bribery of, or illegal payments to,
foreign officials in order to obtain or retaining business through any improper advantage
over its competitors. It must be noted that the illegal payments must be done with a
“corrupt” intent for the act to be prohibited by the FCPA.
Since 1998 the FCPA applies not just to U.S. companies, but also to foreign companies
and persons who participate in any furtherance of an act of corrupt payment while in the
U.S. The FCPA also requires companies which have securities listed in the U.S. to
comply with its accounting provisions requiring the maintaining of accurate records
regarding transactions of the corporation, and devising and maintaining an adequate
system of internal accounting controls. This is where the deductibility of payments
becomes important from an internal control perspective.
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