Yesterday, I reviewed the Weatherford International Limited (Weatherford) Foreign Corrupt Practices Act (FCPA) settlement. Today I will take a more focused look at the bribery schemes involved and the failure of the company to bring internal controls up to standard or even follow its own compliance program. Weatherford’s compliance program was a joke but worse was its conduct, which many in the company knew was illegal and reported internally but the company did not stop the conduct. The company also, early on in the investigation, actively impeded regulators access to personnel and documents. However, and this is one of the key messages from the Weatherford FCPA enforcement action, the company truly ‘turned it around’. Tomorrow we will explore how the company made this dramatic turnaround.
The bribery schemes had four basic scenarios and, for those of you keeping score at home, I have summarized them below.
I. Corrupt Conduct
Weatherford Bribery Box Score
|Country||Bribery Scheme||Government or SOE Official Involved||Amount of Bribe Paid|
|Angola||Payments through 3rd parties||Sonagol Drilling Manager||$250K|
|Angola||JV Partners||Government Ministers, wives and other relatives||$810K|
|Congo||Payments thru 3rd parties||SOE officials||$500K|
|Middle East Countries||Unauthorized distributor discounts||SOE officials||$11.8MM|
|Algeria||Improper travel and entertainment||SOE officials||$35K|
|Albania||Misappropriation of company funds||Tax Auditors||$41K|
In Angola two separate bribery schemes were used. The first involved payment of a $250,000 bribe to the Sonagol Drilling Manager. To funnel the bribe the company retained a Swiss agent who paid the money. This Swiss agent billed Weatherford for non-existent and fraudulent services. He would retain a percentage of the total he billed as a commission and would pass the remainder to the Sonagol Drilling Manager. The bribery of the Drilling Manager also included a week long, all-expenses paid trip to Italy and Portugal, where only one of the days was business related.
The company continued this further creativity when it set up a joint venture (JV) which had two local JV partners, JV Partner A and JV Partner B. Partner A consisted of Sonagol government officials, their wives and other relatives and held a 45% stake in the overall JV. JV Partner B’s principals included the relative of an Angolan Minister, the relative’s spouse, and another Angolan official. It held 10% of the overall JV interest. Neither of these JV Partners contributed capital, expertise or labor to the JV. In addition to the straight quid pro quo of awarding Weatherford 100% of the Angolan well screens market, these JV Partners had contracts which were awarded to Weatherford competitors, revoked after the initial award and then awarded them to Weatherford.
In the Congo, Weatherford made over $500,000 in commercial bribe payments through the same Swiss Agent they had utilized in the initial Angolan bribery scheme to employees of a commercial customer, a wholly-owned subsidiary of an Italian energy company, between March 2002 and December 2008. The Swiss Agent’s role in the scheme included submitting false invoices and sending payments to individuals as directed by Weatherford Services Limited (WSL) employees and others. WSL employees created and sent false work orders to the Swiss Agent. The Swiss Agent, WSL employees and others knew the services would not be performed and that the work orders were a pretext to funnel money to the Swiss Agent. The Swiss Agent forwarded the money, less a commission, once again based on fraudulent invoices for non-existent services.
The Middle East
In certain un-named Middle Eastern countries between the years of 2005 and 2011 another Weatherford subsidiary employed another bribery scheme to funnel payments to officials of state owned National Oil Company (NOC). This bribery scheme entailed the awarding of improper “volume discounts” to a company that served as an agent, distributor and reseller which supplied Weatherford products to a state-owned and controlled NOC, believing that those discounts were being used to create a slush fund with which to make bribe payments to decision makers at the NOC.
The Securities and Exchange Commission (SEC) Complaint noted that as early as 2001, officials at the un-named national oil company directed Weatherford to sell goods to the company through a particular distributor. Prior to entering into the contract with the distributor, Weatherford did not conduct any due diligence on the distributor, despite: (a) the fact that the distributor would be furnishing Weatherford goods directly to an instrumentality of a foreign government; (b) the fact that a foreign official had specifically directed the company to contract with that particular distributor; and (c) the fact that Weatherford executives knew that a member of the country’s royal family had an ownership interest in the distributor. In late 2001, the company entered into a representation agreement with the distributor to sell its Completion and Production Systems products to the NOC.
Thereafter, the distributor created a slush fund by providing the distributor with unauthorized volume and pricing discounts, in addition to the agent’s 5% commission. Company employees intended that the slush fund would be used to pay officials at the un-named NOC. The “volume discounts” to the distributor were typically between 5-l0% of the contact price. The discounts allowed the distributor to accumulate funds which were used to pay bribes to the NOC officials.
Weatherford also provided improper travel and entertainment to officials of the Algerian NOC, Sonatrach, which did not have any legitimate business purpose. The SEC Complaint detailed the following improper travel and entertainment provided to Sonatrach officials:
- June 2006 trip by two Sonatrach officials to the FIFA World Cup soccer tournament in Hanover, Germany;
- July 2006 honeymoon trip of the daughter of a Sonatrach official; and
- October 2005 trip by a Sonatrach employee and his family to Jeddah, Saudi Arabia, for religious reasons that were improperly booked as a donation.
In addition, on at least two other occasions, Weatherford provided Sonatrach officials with cash sums while they were visiting Houston. For example, in May 2007, Weatherford paid for four Sonatrach officials, including a tender committee official, to attend a conference in Houston. Further, the company provided an approximate $24,000 cash advance for the trip where there was no evidence of any legitimate business purpose or promotional expenses.
In Albania, Weatherford had a tax evaluation problem. To deal with this issue the general manager and financial manager of the company’s Italian subsidiary misappropriated over $200,000 of company funds, to fund a bribery scheme involving Albanian tax auditors. The general manager, financial manager and the Albania country manager made $41,000 in payments to Albanian tax auditors who questioned details of the company’s accounts and demanded payment to close out the audit or speed up the certification process in 2001, 2002 and 2004.
The general manager and financial manager misappropriated the funds by taking advantage of Weatherford’s inadequate system of internal accounting controls. They misreported cash advances, diverted payments on previously paid invoices, misappropriated government rebate checks and received reimbursement of expenses that did not relate to business activities. A memo drafted by the general manager and financial manager in the months after their co-worker confronted them discussed the misappropriated funds and indicated that funds were paid to tax auditors in Albania and others for the benefit of Weatherford. This was the bribery scheme which was reported to the company and the internal whistle-blower employee was terminated.
II. Program Deficiencies Lack of Cooperation
The DPA laid out in equally stark terms the complete and utter disregard, non-existence of and/or complete failure of any systemic compliance program, prior to 2008. These deficiencies included:
- Failure to establish internal accounting controls to prevent bribery and corruption;
- Failure to perform due diligence on any prospective third parties, including who they were, ultimate beneficial ownership and business justifications;
- Failure to perform due diligence or in any meaningful manage joint venture partners;
- Failure to have any meaningful internal controls for gifts, travel and entertainment;
- No effective internal reporting system for FCPA violations or issues; and
- (Most amazingly) No Chief Compliance Officer or even compliance professionals in a multi-billion dollar, multi-national company in the energy industry.
In addition to all of the above, Weatherford engaged in active conduct to impede the investigations of both the SEC and DOJ. In one instance, the company told investigators that a key witness was dead when he was not only still alive and well but working for Weatherford. In other instances, the company, emails were deleted by employees prior to the imaging of their computers. It was also noted that Weatherford failed to secure important computers and documents and allowed potentially complicit employees to collect documents subpoenaed by the staff.
Tomorrow, the Weatherford compliance comeback.
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© Thomas R. Fox, 2013