FCPA Compliance and Ethics Blog

July 9, 2014

Mid-Year FCPA Report, Part I

Mid Year ReportAs we are now past the halfway mark of 2014, I thought it might be a good time to look at the year in review, so over the next couple of days, I will be reviewing what I believe to be some issues and developments to the Foreign Corrupt Practices (FCPA) world. In this Part I, I will look at an enforcement action which brought a company to No. 5 on the list of highest FCPA settlements, to a company which seemingly came back from the edge of very bad FCPA conduct and finally some individual prosecutions and one interesting settlement in a SEC action against individuals. 

Alcoa

In one of the more long-running international bribery and corruption sagas, Alcoa Inc. settled a FCPA action by having one of its subsidiary’s plead guilty to bribing officials in Bahrain to win contracts to supply the raw materials for aluminum to Aluminum Bahrain BCS or Alba. As reported by the FCPA Professor, “Alcoa entities agreed to pay approximately $384 million to resolve alleged FCPA scrutiny (a criminal fine of $209 million and an administrative forfeiture of $14 million to resolve the DOJ enforcement action and $175 million in disgorgement to resolve the SEC enforcement action – of which $14 million will be satisfied by the payment of the forfeiture in the criminal action).” Alcoa now sits as No 5 on the list of all-time FCPA settlements and has the distinction of paying the largest disgorgement.

Payments were made through shell corporations, agents and distributors. As reported in the Wall Street Journal (WSJ), in an article entitled “Alcoa Snared in Bahrain Bribery Case”, although one of its subsidiaries, Alcoa World Aluminum, pled guilty to violating the FCPA, its parent Alcoa issues a statement that “neither the Department of Justice nor the SEC alleged or found that anyone at Alcoa “knowingly engaged in the conduct at issue.”” According to the WSJ article, the bribery scheme had been in place since at least 1989. Further, at least one in-house counsel had raised concerns in 1997 that the contracts around the bribery scheme when she wrote in an email to Alcoa’s corporate headquarters stating “The contract looks odd. Are these factors OK from an anti-trust and FCPA perspective?” I guess sometimes actual knowledge is really not actual knowledge.

Hewlett-Packard (HP)

In what can only be described as one of the most stunning failures of internal controls to be seen in the annuls of FCPA enforcement actions, HP resolved a matter through a guilty plea, a Deferred Prosecution Agreement (DPA) and a Non-Prosecution Agreement (NPA), for three separate bribery schemes in three countries. For a deal in Russia, HP paid a one-man agent approximately $10MM, which was simply a conduit to pay bribes. In Poland, HP’s Country Manager literally carried bags of cash in the amount of $600K to a Polish government representative for contracts. Finally, in HP’s Mexico subsidiary, according the to the Securities and Exchange Commission (SEC) Press Release, HP “paid a consultant to help the company win a public IT contract worth approximately $6 million. At least $125,000 was funneled to a government official at the state-owned petroleum company with whom the consultant had connections. Although the consultant was not an approved deal partner and had not been subjected to the due diligence required under company policy, HP Mexico sales managers used a pass-through entity to pay inflated commissions to the consultant.”

As noted by Mike Volkov, “In total the three HP entities paid $76 million in criminal penalties and forfeitures. In a related filing, the SEC and HP entered into a civil settlement under which HP agreed to pay $31 million in disgorgement, prejudgment interest, and civil penalties.”

The enforcement action is also notable for two other factors. The first is that HP did not self-disclose the conduct even after German authorities raided the company’s Germany subsidiary’s offices in connection with the Russia transaction. HP seemingly made a dramatic comeback in the eyes of the Department of Justice (DOJ), which leads to the second point of note. That involved the overall penalty assessed against HP. What are we to make of the criminal fines levied against the Russian and Polish subsidiaries of HP? The US Sentencing Guidelines for the Polish subsidiary suggested a fine range of $19MM to $38MM, yet the final fine was $15MM. The US Sentencing Guidelines for HP’s Russian subsidiary suggested a fine range of $87MM to $174MM, yet the final fine was $58MM.

What does it all mean? It would seem that a company could come back from the brink of very bad facts and no self-disclosure. How did HP do it? The resolution documents only reference HP’s ‘extraordinary cooperation’ and installation of a best practices compliance program. My hope is that HP will publicize the steps it took so that the rest of us might learn how they accomplished the results they received.

Individual Indictments, Arrests and Settlements

As reported in the FCPA Blog, there were a number of individuals who fell under FCPA criminal scrutiny in the first half of 2014.

PetroTiger

Joseph Sigelman, the former co-CEO of PetroTiger Ltd., was charged with conspiracy to violate the FCPA and to commit wire fraud, conspiracy to launder money, and substantive FCPA and money laundering offenses. He is accused of bribing an official at Ecopetrol SA, Colombia’s state-controlled oil company, and defrauding PetroTiger by taking kickbacks. As reported by Joel Schectman in the WSJ, two other PetroTiger executives, Sigelman’s co-CEO, Knut Hammarskjold and the company’s former General Counsel (GC), Gregory Weisman, have already pled guilty to the charges.

It is alleged that Sigelman bribed an official in Colombia to help win an oil contract worth $39 million and of seeking kickback payments during the acquisition of another company, in exchange for a better price. Most interestingly, even after the company conducted an internal investigation, which uncovered the conduct and self-disclosed its findings to the DOJ, Sigelman has said he will go to trial and contest the charges.

Firtash and His Associates

In what may be an early preview of the corrupt doings of the old guard in Ukraine, there were a number of individuals arrested or indicted in connection with an alleged scheme to pay $18.5 million in bribes to officials in India to gain titanium mining rights. They include team leader, Dmitry Firtash, a Ukrainian national, who was arrested in Vienna, Austria, March 12, 2014, and the following were indicated with Firtash and charged with conspiracy to violate the FCPA, and who are still at large: Andras Knopp, a Hungarian businessman,; Suren Gevorgyan a Ukrainian national,; Gajendra Lal, an Indian national and permanent resident of the US; Periyasamy Sunderalingam, a Sri Lankan. K.V.P. Ramachandra Rao, a member of parliament in India and former official of the state of Andhra Pradesh, has been charged along with the other five defendants with one count each of a racketeering conspiracy and a money laundering conspiracy, and two counts of interstate travel in aid of racketeering. Although he was not charged under the FCPA, the DOJ has asked India to arrest him.

Direct Access Partners

Continuing the investigation into the first investment bank, Direct Access Partners LLC (DAP), to be charged with FCPA violations, there were two more individuals charged, in addition to the four from 2013 who all pled guilty. Benito Chinea, former CEO of DAP, was charged in federal court in New York for bribery involving Venezuela’s state bank and Joseph Demeneses, a former managing director, was also charged in the 15-count indictment of paying kickbacks to a vice President of the Venezuelan Nation Bank BANDES, in exchange for the bank’s bond-trading business.

Noble Energy Executives

While it is not entirely clear if these cases belong in the first half or second half of the their, the Securities and Exchange Commission (SEC) rather unceremoniously dropped its enforcement action against one former and one current Noble Energy executives. The SEC had claimed that former Noble Corporation CEO Mark A. Jackson along with James J. Ruehlen, had bribed customs officials to process false paperwork purporting to show the export and re-import of oil rigs, when in fact the rigs never moved. These actions led to allegations that Jackson and Ruehlen directly violated the anti-bribery provisions, internal controls and false records provisions relating to the FCPA. For all of these claims the SEC sought injunctive relief and monetary damages.

But as reported in the FCPA Blog, “A docket entry from July 1 for the U.S. federal district court in Houston said all deadlines in the SEC’s civil FCPA enforcement action against two former Noble executives have been vacated “pending final settlement documents.”” Both defendants agreed not to violate or aid and abet any violation of the FCPA going forward. Pretty stout stuff when you consider that all US citizens have that obligation going forward, whether they agree to it in a court filed documents or not.

Tomorrow we continue with Part II.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2014

 

 

February 15, 2012

The Mercury 7, Chuck Duross and Continuous Improvement to Your Compliance Program

Next Monday, February 20, 2012 is the 50th anniversary of the first American manned orbital space flight. It made John Glenn a national hero and heralded America’s move into direct competition with the (then) Soviet Union for the race to put the first man on the moon. In an article in the New York Times, entitled, “At 90, John Glenn Looks Back” reporter John Noble Wilford wrote about this flight, the Mercury program and Glenn based upon two interviews with the ex-astronaut and former Senator from Ohio. This coming Saturday, Glenn will be honored at Cape Canaveral at a celebration of the remaining members of the Mercury space team.

These original seven astronauts, known as the “Mercury 7” were true American heroes. Anyone interested in science in the slightest bit in the 60s knew who these men were. They were featured in Life Magazine with their families and each of their space flights were covered on live television by all three networks. Glenn is one of two of the original Mercury astronauts still alive, the other being Scott Carpenter, who will also be honored on Saturday. The remaining astronauts of the Mercury 7 were Deke Slayton, Gus Grissom, Alan Sheppard, Gordon Cooper and Wally Schirra. They were immortalized for a later generation by Tom Wolfe, in his book, “The Right Stuff”.

So what is the compliance angle here? It is that NASA created an entire system, consisting of processes and procedures to put a man on the moon. Were there setbacks? Yes, the Apollo 1 tragedy still resonates at NASA today. However NASA moved forward and fulfilled President Kennedy’s vow to put a man on the moon by the end of the decade. NASA did this largely by continuous improvement of its system.

I thought about this article while reading the tweets coming from my “This Week in FCPA” co-host Howard Sklar last night. Howard is in Hong Kong, chairing the Anti-Corruption Asia Congress this week. Yesterday, Chuck Duross, Deputy Chief, Foreign Corrupt Practices Act (FCPA) Unit, United States Department of Justice (DOJ) spoke to the event and Howard tweeted some of the highlights of Chuck’s remarks. They included:

  • To combat anti-corruption, there needs to be political will, as it requires prosecution of bribe takers as well as bribe payers.
  • Do not assume that your company is immune from FCPA liability just because you are not a US company. Here you should note that 9 out of the 10 FCPA settlements of all-time are with non-US based companies.
  • Charging individuals leading to more trials. Last year the DOJ tried 3,000 cases last year and there were 4 FCPA trials. In Chuck’s words, (as tweeted by Howard) “Let’s all take a breath”.
  • There was a FCPA trial first: a Foreign official, charged with money laundering, testified against the business bribe-payer. Here it is important to note that the DOJ can and will be charge foreign government offices.
  • Turning to some specifics of compliance programs, Duross remarked that companies using half-measures to prevent bribery are at risk.
  • Companies will receive a significant benefit for having robust compliance programs: lower fines, DPA/NPA, even not having a monitor. He gave some examples; Noble got an NPA, paid $2.6 MM, no monitor. Pride which sustained substantial cooperation with the DOJ, received below-the-guideline range penalty of 55%.
  • Turning to the facilitation payment exception, Duross said that it is a narrow one: it’s usually illegal locally where it is paid, discouraged in US, illegal internationally.
  • He emphasized that third party agents need to be properly vetted.
  • He noted that other violations of US law often accompany FCPA violations, such as anti-competitive behavior, trade violations, embezzlement, and money laundering.
  • He emphasized that your company should do what it can do regarding your compliance program. If necessary, at first, change the tone at the top. Make it clear that illegal acts will not be tolerated. But you must mean it. Vocal support is necessary, but management’s commitment cannot end there. Compliance is a cost center: management must back up vocal support of compliance with budget and resources.
  • Next Duross suggested that companies reevaluate internal controls. They should take the time to review and test, think critically about risk.
  • The DOJ looks at proactive compliance efforts when deciding how and whether to prosecute. He also suggested that your company might consider joining an integrity pact.
  • Howard’s tweets ended with this suggestion; that it is important to TEST your compliance program. You can run a fake invoice through your system which has information which should raise has red flags. You can run information through the hotline and see what happens. That impresses the DOJ.

The last few points raised by Duross emphasized to me the process of compliance. But as important as putting the program in place is testing the program and using the lessons learned to upgrade and update your compliance program. While we celebrate John Glenn, the Mercury 7 and NASA for what they achieved, we should remember that NASA used continuous improvement in its space program. These same techniques can be brought to bear in your compliance program. Based upon the remarks of Chuck Duross, such monitoring, improvement and upgrades will be counted in a positive light by the DOJ if you are involved in a FCPA enforcement action.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

December 12, 2011

Does the FCPA Apply to Retailers? Ask Wal-Mart (or Aaron Murphy)

I am often asked the question by representatives of retailing companies of whether the Foreign Corrupt Practices Act (FCPA) applies to their businesses. While I have always answered in the affirmative, this question was succinctly answered this week with an announcement by Wal-Mart that it had initiated an internal investigation related to possible violations of the FCPA. Further, as reported by the FCPA Professor, Wal-Mart announced in a December 8, 2011 10K filing that “The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice [DOJ] and the Securities and Exchange Commission [SEC].”

So what risks can put a retailer under FCPA scrutiny? In a book entitled “Foreign Corrupt Practices Act – A Practical Resource for Managers and Executives” author Aaron Murphy, a partner at the firm of Latham and Watkins, explored the question of what are “the most common problems areas where managers get themselves into FCPA trouble.” In a chapter entitled “You Do More With the Government Than You Think” Murphy gives several examples of how any US company doing business overseas will come into contact with a foreign governmental official and, thereby, create a risk for possible FCPA liability. The following interactions would certainly apply to a retailer:

  • Interactions with Customs Officials. Every time your company sends raw materials into, or brings them out of, a country there is an interaction with a foreign governmental official in the form of a Customs Official. Every customs transaction involves a payment to a foreign government and every transaction involves some form of a foreign governmental regulatory process. While the individual payment per transaction can be small, the amount of total transactions can be quite high, if a large volume of goods are being imported into a foreign country.
  • Interaction with Tax Officials. While noting that interacting with international tax authorities can present problems similar to those with customs officials, Murphy observes that the stakes can often be much higher since tax transactions may be less in frequency but higher in financial risk. These types of risks include the valuation of raw materials for VAT purposes before such materials are incorporated into a final product, or the lack of segregation between goods to be sold on the foreign country’s domestic market as opposed to those which may be shipped through a free trade zone for sale outside that country’s domestic market.
  • Licensing and Permits. If your company is a retail seller of clothes, cosmetics etc., every physical location that you sell your goods in will require some type of license to operate your business. It could require multiple licenses such as a national license, state license and local municipal license, additionally you will need a building permit if you intend to build out or modify your retail stores.
  • Work Permits and Visas. If your company does any business overseas it will have to send someone from the home office to operate in-country at some point. In the post-9/11 world this probably means that, at a minimum, your company will have to obtain a visa for each employee who enters the foreign country and perhaps a work permit as well. The visa process can start in theUnited States with a trip to foreign government consulate or even the embassy and at that point you are dealing with a foreign governmental official. The work permit process can also begin in theUnited States but often may continue in the foreign country.
  • Inspections and Certifications. We recently wrote about franchising overseas and the impact of the FCPA on such businesses. Consider the Tex-Mex restaurant chain which desires to take this cuisine across the world. In any city in the world there will be some type of certification process to enable to the business to set up and start operating and then there will be the need for ongoing inspections for sanitary conditions. Such inspections may be rare but if there is “slime in the ice machine” it may be grounds to close the restaurant.

Wal-Mart has not specified the FCPA violations it may have been involved in, or the countries which are currently the subject of its internal investigation, or notification to the DOJ and SEC. However, the New York Times (NYT) reported on December 10, 2011, that Wal-Mart did say that the internal investigation included several matters, including, “permitting, licensing, and inspection.” Wal-Mart’s inquiry makes Aaron Murphy sound like the Nostradamus of FCPA prognosticators about now. The NYT article reported that international business now makes up 30% of Wal-Mart’s overall sales in the most recent quarter and that the biggest sales jumps came in “China, Mexico and Argentina.” For those of you keeping score at home, those countries have 2011 Transparency International-Corruption Perceptions Index ratings of 3.6, 3.0 and 3.0 for rankings of 75 for China and 100 for both Mexico and Argentina. In other words, they are all countries where you keep your FCPA guard up.

The greater lesson for any US retailer doing business overseas is that the Wal-Mart matter is a stark reminder of the scope and application of the FCPA for any company operating overseas. Retailers which do not have a FCPA compliance program in place would be well served to put one in place sooner rather than later. For retailers which have a FCPA compliance program in place, they should use this public announcement to re-assess their risks and re-visit their FCPA compliance program to determine what, if any, additional steps they need to take. I would also suggest that you call Aaron Murphy, as in yesterday.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

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