Archie Bunker, Batgirl and the International Fight Against Corruption

This week saw the death of two notables from the television industry, Bud Yorkin and Yvonne Craig. According to his Obituary in the New York Times (NYT), Yorkin rose up the television industry ranks to eventually team with Norman Lear to produce one of the true “pioneering, provocative and singularly successful satirical series” in the history of television, All In The Family, introducing one of the most recognizable characters in all of TV – Archie Bunker. When I say he began at the bottom end of the business: it literally was that, as he began repairing TVs in New York City bars. All In The Family not only broke ground by discussing taboo subjects it also became “the first TV series to top the Nielsen ratings for five consecutive years.”

Yvonne Craig was known, according to her Obituary in the NYT, as the girl “who kept Gotham safe as Batgirl” whom she played in the 1960s TV series Batman. Craig was a classically trained ballerina who brought athleticism and “a scrappy girl-power element” to the series in its third and final season. However, I remember Craig as the green skinned slave girl in the “Whom The Gods Destroy” episode from the original Star Trek series. Her Obituary noted, “She performed a seductive, loose-limbed dance that seemed to nearly overwhelm William Shatner’s red-blooded Captain Kirk, while Leonard Nimoy’s Mr. Spock pronounced it “mildly interesting.””

Interestingly both of these televisions stars inform today’s compliance issue. Yorkin for the way he and his partner Lear held up a mirror, through All In The Family, to address such issues as “racism, sexism, abortion, gay rights and the war in Vietnam, among other television taboos” and Craig, “who kept Gotham safe as Batgirl.” Of course I am referring to the devastating disaster that occurred last week in the Chinese city of Tianjin. A NYT article, entitled “Report Details Role of Political Connections in Tianjin Disaster”, reported that the death toll now stands at 114, with 674 injured and more than 17,000 homes damaged. An unknown number of persons are still missing.

Is anyone really surprised corruption was involved in the tragedy? Enforcement of anti-corruption laws, such as the Foreign Corrupt Practices Act (FCPA), the UK Bribery Act or even Chinese domestic anti-bribery laws, is not a game for corruption can kill. While most corruption leads to economic damage, there have been clear instances where corruption led to the loss of life. The 2013 massacre at the Narobi Westgate shopping mall was clearly a result of corruption in Kenya that allowed guns used in the attack to be illegally smuggled into the country through bribery.

Now it has been reported that corruption led to the disaster in Tianjin. The FCPA Blog, in a post entitled “Report: Tianjin warehouse owners used guanxi to land phony safety licenses”, wrote that “The owners of the warehouse in the port of Tianjin that exploded last week and killed more than 100 people obtained fraudulent safety licenses through their connections with fire and safety officials, China state media said.” The warehouse where the fire started and spread from was illegally holding certain lethal chemicals. The post also noted, “Ruihai International Logistics owned the warehouse. The main shareholders of the company are ex-Sinochem executive Yu Xuewei and Dong Shexuan, the son of a late police chief, VAO News reported.” The FCPA Blog went on to quote the VOA report for the following, “In an interview with the official Xinhua news agency, Dong and Yu admitted to using their connections, or guanxi, with local officials to obtain various fire safety, land, environmental and safety certifications.”

In addition to the illegally stored chemicals, it turns out there should not even have been a warehouse in that location in the first place. In another NYT article, entitled “Report Details Role of Political Connections in Tianjin Disaster”, Dan Levin reported the warehouse itself was not far enough back from the prescribed distance for residential housing. It seemed clear from the confession of the Mayor of Tianjin that he had been involved in the corruption when he stated, “I bear the unshirkable responsibility for this accident as head of the city.”

Another indicia of Chinese corruption had come into play as well. The executives of the company, which owned the warehouse and illegally stored chemicals, Ruihai, hid their ownership interest. The article reported they “had other people list their shares to avoid the appearance of a conflict of interest.”

In yet another NYT article, entitled “Fear of Toxic Air and Distrust of Government Follow Explosions in China” also by Dan Levin, it was noted “Later on Tuesday, China’s anticorruption agency announced on its website that Yang Dongliang, a former deputy mayor of Tianjin who became the head of the State Administration of Work Safety, was under investigation for “suspected violations of party discipline and the law,” a common euphemism for corruption. The Beijing Youth Daily reported, however, that Mr. Yang has been under investigation for a half-year, raising questions about why the case was announced now. Two other officials accused of taking bribes are also under investigation.”

The fallout from this tragedy continues. However, with such widespread corruption many Chinese feel they are not being told the truth and that their government is protecting corrupt officials. Levin said, “Public reflection on man-made tragedies is politically risky for the ruling Communist Party, according to David Bandurski, an editor of the China Media Project at the University of Hong Kong. “The party leadership is very aware that questions of responsibility in a disaster like this can very quickly move to fundamental issues of power and legitimacy,” he said, explaining that in an authoritarian system, “the buck stops with you.” Mr. Bandurski noted that censors had struggled to control the Tianjin narrative because some Chinese journalists had pushed ahead with their own reporting. “This is a very messy story, and for Chinese media, messy means opportunity,” he said.”

The Petrobras scandal in Brazil is bringing into question the government of President Dilma, it could forebode the same in China. Corruption in all its forms is no laughing matter and enforcing anti-corruption laws is no game. While prosecuting companies engaging in bribery and corruption through the hiring of sons and daughters of government officials to retain or garner new business may seem quite a long way from the Westgate Mall massacre or the massive loss of life in Tianjin; they are clearly on a unidimensional continuum.

Just as Archie Bunker put a light up to many of the social ills of his time, the more light you can shine on corruption, the more you can root it out of the shadows. But do not forget to send in Batgirl and those fighting for justice against corruption as well.

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, 2015

What Goes Downhill May Go Uphill in FCPA Compliance

Usually the question I am posed is how far down the chain must you go in your due diligence to ensure that your suppliers are in compliance with the Foreign Corrupt Practices Act (FCPA). I would pose that now, after the Petrobras scandal, a company may need to examine the flow in the other direction. I thought about this directional shift when I read an exhaustive report in the Sunday New York Times (NYT) on the Petrobras scandal, entitled “Brazil’s Great Oil Swindle”, by David Segal. The article reviews the genesis of and details the ongoing nature of the Petrobras scandal.

While I have previously written about the other Brazilian companies that have been caught up in the scandal, such as Oderbrecht, Camargo Corrêa and UTC Engenharia, Segal’s article detailed a level of immersion in corruption that should concern every US Company subject to the FCPA and catch the eye of Department of Justice (DOJ) prosecutors handling FCPA cases. It appears that the companies that had direct contracts with Petrobras also colluded in the old-fashioned anti-trust sense, so that not only did they control all the subcontract work done on any Petrobras project but they would also demand bribes from the subcontractors which they then passed up the chain to Petrobras executives and eventually Brazilian politicians. If this scheme turns out to be true, it literally could explode potential FCPA exposure for any US Company doing business on any subcontract where Petrobras was the eventual beneficiary.

Segal reported, “according to prosecutors, these companies stopped competing and started to collaborate. They formed a cartel and decided, in advance, which of them would win a particular deal. A charade competition was orchestrated, and the anointed winner could charge vastly more than it would in a free market.” Further, “A document obtained by prosecutors laid out what it called the “rules of the game.” The trumped-up bidding process was labeled a “sports tournament”, with an assortment of rounds and a “trophy.” There was a no-sore-loser codicil, too: “The teams that participate in a round should honor the rules that have been agreed on, even when they are not the winner.”

But the corruption did not stop simply at these non-Petrobras entities. These companies would demand bribes from their subcontractors that they passed up the line to Petrobras. Segal wrote, “From 1 to 5 percent of the value of a given contract was diverted to those on the receiving end of the scheme, a group that included 50 politicians from six parties, according to prosecutors. Money from cartel members took a circuitous route to politicians’ pockets, passing through ghost corporations whose owners made bribes look like consulting fees.”

Think about all of this for a minute. What happens when everyone and every company associated with a National Oil Company (NOC) is in on the corruption? I thought about this question when I read an article in the Financial Times (FT) by Andres Schipani, entitled “We were terrorized by the drop in oil prices”, where he discussed how the drop in world oil prices has negatively affected Venezuela more than any other top oil producing company. Part of the country’s trouble is the rampant corruption around its NOC PDVSA. Schipani quoted a former minster for the following, “The design of the political economy here only benefits the corrupt.” Moreover, the country is near the bottom of the Transparency International Corruption Perceptions Index (TI-CPI) coming in at 161^st out of 175 countries listed.

Most Chief Compliance Officers (CCOs) and compliance practitioners had focused their third party risk management program around third parties, first on the sales side and then in the Supply Chain (SC). However now companies may well have to look at other relationships, particularly those where the company is a subcontractor involved in a country prone to corruption with a NOC or other key state owned enterprise. Last year the Wall Street Journal (WSJ) in an article entitled “Venezuelan Firm Is Probed In U.S.”, by José De Córdoba and Christopher M. Matthews, reported that a US company ProEnergy Services LLC (ProEnergy), a Missouri based engineering, procurement and construction company, sold turbines to Venezuelan company Derwick Associates de Venezuela SA (Derwick), who provided them to the Venezuelan national power company. The article reported that the DOJ’s “criminal fraud section are reviewing actions of Derwick and ProEnergy for possible violations of the Foreign Corrupt Practices Act”. Derwick was reported to have been “awarded hundreds of millions of dollars in contracts in little more than a year to build power plants in Venezuela, shortly before the country’s power grid began to sputter in 2009”. All of this with a commission rate paid by ProEnergy to Derwick of a reported 5%.

The Brazilian investigation poses far more dire consequences for any US Company that did business with the cartel of Brazilian companies that had locked up the Petrobras work. It means that you need to go back immediately and not only review the underlying due diligence which you did (probably none); then review the contracts with those entities; and, finally, cross-reference to see if there were any contract over-charges which were rebated back to the cartel members. If so, you may well have a serious problem on your hands as any unwarranted rebates, refunds, customer credits or anything else that could have been readily converted into cash to be used to fund a bribe.

This second part is one thing that challenges many compliance officers. The compliance function does not always have visibility into the transactions assigned to specific contracts or projects like your company might be engaged in for Petrobras in Brazil. However it also speaks to the need for transaction monitoring as not simply a cutting edge technique or even best practice but a required financial controls tool that is also applicable to compliance internal controls as well.

As Brazilian prosecutors expand ever outward from Petrobras, US companies subject to the FCPA and UK companies and others subject to the UK Bribery Act would do well to review everything around their Brazilian operations, contracts and dealings. The Petrobras scandal has shown two clear trends to-date. First is that we are far from the end of this scandal. Second, the prosecutors have been fearless so far in following the corruption trail wherever it may go. If they follow it to US companies, they could prosecute them on their own in Brazil for violation of domestic anti-bribery and anti-corruption laws or turn the evidence over to the DOJ. The thing to do now is to get out ahead of this all too certain waterfall.

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, 2015

The Fifth Letter and Expansion of the Brazilian Corruption Scandal into the Private Sector

I recently received a review copy of the book The Fifth Letter by fellow University of Michigan grad Vivian L. Carpenter. It is a rollicking good read which touches on areas of constitutional law, inalienable rights in the US, the complexities of racial relations in the South up to this day, an all-knowing/all seeing cabal which runs things from behind the scenes all wrapped up in the politics of modern day Washington DC. As a lawyer I greatly enjoyed the scenes that occurred in, around and about the US Supreme Court, the Senate’s advise and consent process for Supreme Court nominees and even a civics lesson in amending the Constitution. As a maven of thrillers I enjoyed the non-stop ride lead by the all-knowing/all-seeing cabal (who I like to call the Omnipotent ‘they’) who the protagonist, Katherine Ross, must face down and defeat. If you enjoy any of this, I would suggest you check out The Fifth Letter on Amazon.com or at your local bookstore. It is one of those rare books that is a great read, a roller coaster of a good ride and one from which you will learn quite a bit, all wrapped up into one book.

I thought about how well Carpenter tied all these seemingly disparate events, strands and concepts together in her work of fiction as I was reading a recent article in the Financial Times (FT) about the ever-increasing scope of the Petrobras corruption investigation in Brazil. In an article entitled “Petrobras scandal turns spotlight on Odebrecht” Joe Leahy, John Paul Rathbone and Andres Schipani reported on the arrest of Marcelo Odebrecht in the wake of the ongoing Brazilian corruption investigation dubbed “Operation Car Wash”.

The reporters noted that the investigation has shifted “in the latest sign of how Brazilian business and politics is being reconfigured by the Petrobras scandal, Mr Odebrecht is being held without bail in a sparse cell in the southern city of Curitiba. There, the billionaire member of a class that traditionally considers itself above the law, reportedly has to sleep on a concrete bunk and share a communal shower.” They quoted Professor Sérgio Lazzarini of São Paulo’s Insper business university who said, ““We are in a kind of different story now,” It [the investigation] is changing the perspective of many businessmen.”

Odebrecht is “president and chief executive of Odebrecht — the Brazilian multinational that is Latin America’s largest construction company but also, because it is privately held, one of the world’s biggest companies that most people have never heard of.” “With $41bn in revenues, 181,000 employees and businesses that include building football stadiums and nuclear submarines, his company operates in 23 countries, from Angola to the UK and most of Latin America.” Moreover, it “almost acted as the corporate handmaiden of Brazilian foreign policy, managing complex infrastructure projects in strategic locations that had caught the eye of former president Luiz Inácio Lula da Silva.”

This confluence of public influence for private benefit, a hallmark of Carpenter’s novel, is also present in the Odebrecht investigation as former President da Silva is “being investigated on separate allegations that he improperly used his connections to help Odebrecht win international contracts. Mr Lula da Silva and Odebrecht vehemently deny any wrongdoing. The yearlong probe, now aided by the Swiss attorney-general’s office and Portuguese and Latin American prosecutors, promises to illuminate the shadier side of Latin American business practices.”

As a company Odebrecht is privately held yet has $61bn in assets, which the article notes are largely held in joint venture (JV) with Petrobras. In 2014 the company had sales of $41bn but only profits of $210MM. The company says that it is due to its “razor thin margins” but it seems to me the money could be running out to others with profits that slim on such revenues. Unfortunately for the company, the arrest of its President has led to concerns from financial analysts. The article noted, “Moody’s, the rating agency, has warned the case could jeopardise some of Odebrecht’s $34bn backlog of construction contracts, including $3bn of Colombian projects.” Luis Fernando Andrade, head of Colombia’s infrastructure agency, said, “[If] proven guilty in Brazil, that could generate inabilities [for the company] in Colombia.”

Odebrecht is well known as an international construction company, with a particularly strong reputation for the “ability to operate successfully and manage relationships in countries with “significant levels of political risk”, as it noted in a recent bond prospectus. That includes building Tripoli’s airport — until work was disrupted by the 2011 Libyan military intervention — and Panama, where Odebrecht won $8.5bn of projects under former President Ricardo Martinelli, who is currently being investigated for corruption. A 2.8km viaduct built around Panama City’s old town for $782m had a cost per kilometre surpassed in the US only by Boston’s infamous “big dig”, according to official US statistics cited by local environmentalists.”

Such kudos would seem to indicate that the company plays in a very high-risk market. When you have high-risk, it is incumbent that you manage that risk appropriately. With the well-known proclivity for corruption in the international construction business perhaps the imbroglio that the company now finds itself is not too surprising. Yet the article noted “Many say that even if Mr Odebrecht proves his innocence, the scandal marks a watershed for Brazil’s construction companies, much like the partial humbling of banks after the global financial crisis.”

The article also details the trail of alleged money payments made by the company to Petrobras officials. It shows payment through known money laundering havens on its way to the bank accounts of Petrobras officials in Switzerland. The officials alleged to have received these monies are Renato Duque, Pedro Barusco and Paulo Roberto Costa. It is further alleged that some of this money was passed onto officials from Brazilian political parties.

I think Carpenter’s book portends today’s lesson for the compliance practitioner; which is re-emphasized by the FT article. For any US or UK company which has been doing business in Brazil for at least the last 10 years, you need to look very hard at who you did business with and how you did business with them. You need to see if there were any suspicious payments that could tie your company to not only Petrobras but also other Brazilian companies caught up in this scandal. You can be certain if the Brazilian prosecutors turn up evidence of involvement by a US company, they will turn it over to US prosecutors. You definitely want to a head off any letter from the Securities and Exchange Commission (SEC) about your accounting provisions or any raids by the Federal Bureau of Investigation (FBI) or Department of Justice (DOJ) looking for evidence of corrupt payments.

You can purchase a copy of the book The Fifth Letter on amazon.com by clicking here.

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, 2015

Mifune Gets a Star on the Walk of Fame-the Petrobras Scandal Only Gets Worse

It was announced last week that actor Toshirō Mifune (1920-1997) will be honored with a star bearing his name on the Hollywood Walk of Fame. The Hollywood Chamber of Commerce will add the star in 2016, together with new stars in the motion picture category for Quentin Tarantino, Michael Keaton, Steve Carell, Bradley Cooper, Ashley Judd and Kurt Russell. For those of you who may not have heard of Mifune, he was a veteran of sixteen films directed by Akira Kurosawa as well as many other Japanese and international classics. His films with Kurosawa are considered cinema classics. They include Drunken Angel, Stray Dog, Rashomon, Seven Samurai, The Hidden Fortress, High and Low, Throne of Blood, Sanjuro, and Yojimbo. While there are many great, great performances in these films, my personal favorite is Yojimbo where Mifune plays an un-named Ronin, who cleans out a village infested by two warring clans. The film was the basis for the great first Sergio Leone/Clint Eastwood Spaghetti western, A Fistful of Dollars. 

I had always thought that the Hollywood Walk of Fame honors actors but it turns out that it honors a great many more performers. For instance, next year will also see names like LL Cool J, Cyndi Lauper, Shirley Caesar, Joseph B. “Joe” Smith, Itzhak Perlman, Adam Levine, and Bruno Mars added in the music category. I considered this category of entertainers wider than simply actors when I recently read more about the burgeoning scandal in Brazil around the state owned energy company Petrobras and its ever-growing fallout.

The fallout has extended far beyond Petrobras, Brazil and even the direct parties who may have been involved. In an article in the Financial Times (FT), entitled “Petrobras woes loom large in Shell deal for BG”, Joe Leahy, Jamie Smyth and Christopher Adams reported on how the ongoing matter is affecting the world of super sized mergers and acquisitions. The rather amazing thing about this issue is not that British Gas (BG) has been caught up in the scandal or even has been alleged to paying bribes to Petrobras.

Rather it is because of assets that BG has in its portfolio. The article said, “Brazil has the potential to become the location of the most troubled assets in BG’s portfolio because the UK company is partner to Petrobras in some of the vast pre-salt oilfields off the country’s east coast in the Santos Basin.” This has led to speculation that “There is a risk that Petrobras will struggle to fulfill its mandate as sole operator for all new pre-salt oilfields because of the corruption scandal, and that this leads to delays in developing the deepwater discoveries, including those involving BG.”

This development arising out of the Petrobras scandal is so significant that BG mentioned it in their annual report, saying “In Brazil, we are closely monitoring how the current corruption allegations affecting Petrobras may impact the cost and schedule of the Santos Basin [pre-salt] development because of supply chain disruption and/or capital and liquidity constraints placed on Petrobras.” Think about that statement for a moment. It is only in the annual report because it could have a ‘material’ effect on BG and BG is a company being acquired by Shell to the tune of £55 million. However, as noted in the FT article, “many analysts say that Petrobras, partly because of the magnitude of the scandal, does not have the capital or management bandwidth to be the sole operator of all new pre-salt fields.”

What if Petrobras becomes unable to develop enough resources to feed South America’s largest democracy’s need for energy? In 2014 alone, the company posted a new loss of $7.4 billion, of which $2.5 billion was attributable to the ongoing bribery and corruption scandal. How much will it cost the country of Brazil to bring in outsiders to develop its own natural resources? This is a real possibility and it was further driven home by another FT article by Joe Leahy, entitled “Petrobras plans 37% cut in investment”. Petrobras currently is required by Brazilian “government policy forcing it to import petrol at international prices and sell it in the domestic market at a subsidized rate.”

Things can only get worse as Leahy reported that the company announced it “was cutting its projection for investment in 2015-2019 to $130.3bn or by 37 percent in relation to its previous plan.” This would lead to a reduction in “domestic production to 2.8m barrels per day of oil equivalent by 2020 from the previous target of 4.2m.” The article ended by noting that Petrobras would “divest $15.1bn in assets and undertake additional restructuring and sales of assets totaling $42.6bn in 2017-18.”

All of this certainly bodes poorly for the citizens of Brazil. For those who claim that bribery is a victim-less crime; I would point to this as Contra-Example A. But this information is also of significance to any Chief Compliance Officer (CCO) or compliance practitioner for a US, UK or other western country. Not only must you review any contracts you had with Petrobras and any of its suppliers; now you must digger several levels deeper. If you are in an acquisition mode, you not only need to look at the contracts of your target to see if they may have been obtained through bribery and corruption, the simple fact of having a contract with Petrobras may put your potential portfolio asset base at risk. For if Petrobras has to cut back 37% on investments at this point, chances are it will only get much worse. This 37% reduction is based on only the first round of estimates of the cost to the company of the bribery scandal.

But more than simply contracts directly with Petrobras, if you are evaluating a target who has contracts with Petrobras suppliers, you may be at equal risk. Not only could those suppliers obtain their contracts with Petrobras through bribery and corruption, those same contracts, even if valid, may not be worth their estimated value if Petrobras cannot fulfill them or even worse, pay for the goods and services delivered thereunder. How about payment terms? Do think for one minute, Petrobras would not unilaterally extend payment dates out 30, 60, 90 even 180 days when it finds itself in more bribery and corruption hot water?

Finally, I think there is a very good chance the US Department of Justice (DOJ) or Securities and Exchange Commission (SEC) could come knocking, unannounced, for any US company doing business with Petrobras or even with significant operations in Brazil. The SEC could do something as simple as send a letter requesting clarification of your internal controls or books and records regarding subcontractors or other third parties in Brazil. If you received such a letter, would you be in position to respond from the requirements for a public company under the Foreign Corrupt Practices Act?

Toshirō Mifune had a long and distinguished acting career. While it is not clear how long, how far and how deep the Petrobras corruption scandal will reach, it is clear that its repercussions will extend far past the energy industry or even Brazil. You need to review and be prepared to respond now.

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, 2015

George Carlin and Erga Omnes: the Petrobras Bribery Scandal Expands

On this date in 2008 George Carlin died. If you grew up in the late 1960s or early 1970s and you had anti-parental or anti-establishment inklings, which of course all teenagers do, you knew about George Carlin. In the early 1960s, Carlin was a relatively clean-cut, conventional comic. But around 1970, he reinvented himself as an eccentric, biting social critic and commentator. In this new incarnation, Carlin began appealing to a younger, hipper audience. He grew out his hair and added a beard together with a wardrobe in the stereotypically hippie style.

Carlin’s comedy also became counter-culture, not Cheech and Chong, hippy-dippy dopers, but with pointed jokes about religion, politics yet with frequent references to drugs. His second album with his new routine, FM/AM, won a Grammy Award for Best Comedy Recording. My favorite cut was the 11 O’Clock News. But it was his third album Class Clown that had, what I believe, to be the greatest comedy monologue ever, the profanity-laced routine “Seven Words You Can Never Say on Television.” When it was first broadcast on New York radio, a complaint led the Federal Communications Commission (FCC) to ban the broadcast as “indecent.” The US Supreme Court later upheld the order, which remains in effect today. The routine made Carlin a hero to his fans and got him in trouble with radio brass as well as with law enforcement; he was even arrested several times, once during an appearance in Milwaukee, for violating obscenity laws.

Interestingly I thought about Carlin and his pokings of the Establishment (AKA The Man) when I read several articles over the weekend about the recent spate of arrests around the Petrobras bribery and corruption scandal. In article in the Wall Street Journal (WSJ), entitled “Brazil Probe Sweeps Up Corporate Magnates” Will Connors, Rogerio Jelmayer and Paul Kiernan reported that “Brazilian officials arrested the heads of two Latin American construction giants, alleging they helped to mastermind a cartel that stole billions of dollars from state-run oil company Petrobras with the help of corrupt politicians to whom they paid kickbacks.” Also arrested with the heads of the two companies, Marcelo Odebrecht, head of Odebrecht SA and Chief Executive Officer (CEO) of Andrade Gutierrez, Otávio Azevedo.

The WSJ article reported that “Odebrecht is Latin America’s largest construction conglomerate, with business in the U.S., Europe and Africa, and whose head, Marcelo Odebrecht, is a household name in Brazil. Andrade Gutierrez has business in 40 countries. The privately owned companies are deeply involved in the development of stadiums and infrastructure for the 2016 Summer Olympics in Rio de Janeiro.” Moreover, Odebrecht is reported to have “a presence in 21 countries”. Obviously a question is if the company had engaged in bribery and corruption in Brazil, did they do so in any of the other countries in which they are doing business?

Interestingly, these arrests “come months after the heads of other construction companies were detained by Brazilian authorities.” Indeed in a BBC article in , entitled “Petrobras scandal: Top construction bosses arrested in Brazil”, David Gallas said, “Odebrecht had been named by former Petrobras executives as one of the companies that allegedly paid bribes in exchange for contracts with the oil firm, but until now the firm had not been targeted by investigators.” The WSJ article quoted Brazilian prosecutor Carlos Fernando dos Santos Lima who said at a news conference that the executives from the two companies had not been arrested earlier as the entities, “had a more sophisticated system for making the alleged bribe payments, using foreign bank accounts in Switzerland, Monaco and Panama, so it took longer to prove their case.” David Fleischer, a Brasilia based political analyst, quoted in the WSJ article was even more circumspect. He said, “The prosecutors are very careful. If you’re going after big fish you want to make sure you can take them down.”

Brazilian police said the arrests were “Erga omnes” which the WSJ translated from Latin as “towards all”. I thought about that statement in light of the ongoing debate about enforcement of the Foreign Corrupt Practices Act (FCPA) here in the US. On one side is the Chamber of Commerce and their allies who raise the ever-burgeoning cry that the Department of Justice (DOJ) needs to prosecute the invidious ‘Rogue employees’ who violate the FCPA. You will notice they never want the DOJ to look at the executives who might facilitate payment of bribes in the first place; whether through faux commitment to doing business in compliance, failing to properly allocate resources to compliance and ethics, simply rewarding those employees who git ‘er done no matter what the circumstances or (my favorite) putting a paper program in place and calling it a best practices compliance program.

Indeed those progenitors of relaxed enforcement want the DOJ to back off and let them do business the old fashioned way. However, if the bribery and corruption news from the first half of this year has told the world anything, it is about the dire effects of allowing such illegal conduct to take place and warning against slacking off laws which mandate doing business without bribery and corruption. In another WSJ article, entitled “Roots of a Brazilian Scandal That Weighs Heavily on the Nation’s Economy, Politics”, Marla Dickerson noted, “The scandal has crippled Petrobras, Brazil’s largest and most important company. In late April, the company wrote off more than $16 billion related to losses from graft and overvalued assets. The company’s woes have all but paralyzed the nation’s oil and gas sector. Hurt by slumping oil prices and strapped for cash, Petrobras has slashed investments, sparking a wave of credit downgrades, bankruptcies and layoffs among its suppliers that the weighed on Brazil’s economy.”

I wonder what George Carlin might have thought about all of this. He might have said that what else would you expect but I am relatively certain he would have done so while also sticking his thumb in the eye of The Man. 

For a YouTube version of the 11 O’Clock News, click here.

For a YouTube version of the 7 words you can never say on television, click here.

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, 2015

 

Lunch with the FCPA Compliance and Ethics Blog – Donald Anderson of TDI

Ed. Note-today I continue my sometimes series of blog posts based on lunches with the FCPA Compliance and Ethics Blog. In this post, I report on a visit with Donald Anderson, the Partner in Charge for TD International’s (TDI) Houston Office.

I recently had the chance to sit down for a lovely lunch at the Federal Grille with Donald Anderson, the Partner in Charge for TD International’s (TDI) Houston Office. Donald is a Louisiana native who attended LSU, receiving a BS in Civil Engineering and later a MS in the same discipline. He worked for many years in the energy sector with Fugro Consultants, a geosciences firm. He later obtained a MBA from Rice University in Houston and began his career with TDI, where he specializes in country and regional business strategies, pre-transaction due diligence for mergers and acquisitions (M&A), compliance investigations for anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act, assessment and mitigation of above-ground risks, and litigation support.

TDI is a strategic intelligence advisor to business and financial leaders operating in emerging and first world markets. It has four main focus areas including strategic advisory services, which combines the company’s commercial, diplomatic, and intelligence experience; its business risk services for domestic and internal business and reputational issues; due diligence work from third parties under the FCPA to potential business acquisitions and business partner reputational issues; and localized assessments for corporate strategy.

Anderson and I enjoyed a wide-ranging chat on a variety of topics. He always has some great strategic insights. Since we are both in Houston, the current state of the energy industry was one of our initial topics of conversation; ranging from the current price of oil to where it may go with the ongoing instability in the Middle East. Within the FCPA context, one of the more interesting set of issues is coming out of Iraq.

Unfortunately the corruption issues surrounding the current Iraqi government are well-known. But the status of the Islamic State (ISIS) has only acerbated the corruption situation. Anderson expounded that this is because Iraq’s financial woes are caused by the two-fold problem of dramatically increased military expenditures, coupled with decreasing oil revenues. This dip in oil revenues comes from the twin problems of the world-wide drop in the price of oil and the country’s internal loss of oil resources to ISIS. In the short term, the government can fund its operations against ISIS at the expense of other government programs. However, this will seriously increase Iraqi government’s debt to foreign energy companies and negatively impact desperately needed investments for critical infrastructure and other government related construction projects.

Anderson explained that the Iraqi government has resorted to ceasing payments to energy firms with oil supplies. Instead, the government is selling oil on the open international market. Of course with the drop in prices from more than $100 per barrel to somewhere now hovering in the neighborhood of $50 per barrel, this has seriously impacted the ability to raise significant cash, so the government has to sell ever-increasing amounts of oil to maintain revenues.

Moreover, in the long-term, this is a very risky strategy for the country. These changes have made bribery and corruption more rampant because the contracts that directed where the oil was to be sold have become porous, with many sales going to the highest bidder. It is not hard to see how an Iraqi government official might well be tempted to make a sale, in this situation, facilitated through the payment of a bribe.

Another issue coming out of Iraq is the implosion of the oil agreement between the government and the Kurdistan Regional Government (KRG). Under this oil agreement, there was a contractually mandated formula for the exporting of oil out of the area held by the KRG with a revenue sharing component from the central Iraqi government back to the Kurds. The KRG has attempted to export oil unilaterally and the Iraqi government has cut off the KRG from receiving its full portion of the federal budget. We had this conundrum come up in Houston late last year, when a tanker of KRG oil was stopped from unloading their oil by the Iraqi government through an injunction it obtained in US Federal District Court in Houston.

Anderson emphasized that if the oil agreement continues to be held in abeyance, both the central Iraqi government and the KRG will suffer financially. But from the compliance perspective, he indicated that if the KRG exports oil, it could be through a pipeline which goes out through Turkey or some other country. I view this situation as one which could well lead to bribery and corruption to get KRG oil out in violation of the agreement between the central government and the KRG.

Later in the lunch, our conversation turned to Brazil and the ever-burgeoning corruption scandal, which began with Petrobras. Anderson gave his opinion that the matter could become one of the world’s largest corruption scandals. When I brought up GlaxoSmithKline PLC (GSK) and how I thought it would be such a game-changer in anti-corruption compliance, Anderson responded that while the Chinese corruption scandal certainly was large, it is still largely focused on China and Chinese persons and entities. He did acknowledge the role of GSK but pointed out that the Brazil corruption scandal had exploded beyond Petrobras and Brazilian companies to a number of western companies from the US and Europe. Further, the recently announced scandal in the Brazilian tax appeal board has implicated a number of non-Brazilian companies.

In our discussions relating to Petrobras, I raised with Anderson the issue of the scheme used by Petrobras employees to obtain bribes. It appeared that contract prices were over-inflated by 3% and then the company paying the bribe would rebate the money to the corrupt Petrobras official or his Swiss bank account. My question to Anderson was how could you determine if 3% is truly an overcharge to the contract or is even outside a reasonable range of profit. Anderson had a great phrase which was to “follow the money” by looking at similar contracts awarded to the company or where they had bid to determine. One might need to look at a large number of contracts to determine the full value of services or products offered but he believes that such an analysis could be done.

We both agreed that this type of analysis is something any US or UK company which has done business with Petrobras over the past 5 years should do so sooner rather than later. We also discussed any companies, which may have won Brazilian contracts for infrastructure or other construction projects for the 2014 World Cup or 2016 Olympics. There is already one European company, the German company Bilfinger, which has announced an internal investigation into contracts from construction projects relating to these events. We both believe that there will be others so ensnared and that the better approach for any US or European company would be to engage in an internal investigation now to see if there are issues along these lines.

Finally, Anderson had an insight I had not seen previously, around bribery and corruption the energy space. He drew out a graph, which detailed the spending in any mineral extraction process. He explained to me that at certain points the lifecycle of a project you have increased spending. One time is during the bid process, a second time is during the exaction or drilling process and finally in the divestiture or sale of the asset phase. It is during these times where there is money being bid out for work but also a large number of permits or other government interactions required. There may also be a new set of players in each phase, who have their collective hands out. It is during these phases that companies have the highest risk of their employees engaging in bribery and corruption. Armed with this knowledge, a company can bring greater compliance resources and risk management to bear to prevent or detect FCPA or UK Bribery Act issues.

Unfortunately our time for lunch ran out and we had to return to our respective offices. As you can tell from this article, Anderson has an extremely interesting background and his work with TDI allows him to utilize his wide variety of educational and professional tools. If you have the need for any of the services discussed in this article, I would urge you to contact Anderson. He can be reached at anderson@tdinternational.com.

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, 2015

The Easter Rebellion and Petrobras’ $17 Billion Write Down

On this day, 99 years ago the Easter Rebellion began. If there is one event that is seared into history as a turning point for Irish independence from Britain, it was the Easter Rebellion. England had finally granted Home Rule to Ireland in 1914 but suspended implementation due to World War I. This did not appease the Irish nationals in the Irish Republican Brotherhood, who led the Easter Rebellion. On this day in 1916, on Easter Monday in Dublin, the Irish Republican Brotherhood, led by Patrick Pearse, launched their armed uprising against British rule. Assisted by militant Irish socialists under James Connolly, Pearse and his fellow Republicans rioted and attacked British provincial government headquarters across Dublin and seized the Irish capital’s General Post Office. Following these successes, they proclaimed the independence of Ireland, which had been under the repressive thumb of the United Kingdom for centuries, and by the next morning were in control of much of the city. Later that day, however, British authorities launched a counteroffensive, and by April 29 the uprising had been crushed. After the Rebellion, the English commander decreed the execution of its leaders creating martyrs in Ireland who are honored to this day.

In what may turn out to be a date almost as significant for the Brazilian energy giant Petrobras, yesterday the company announced the results of its audit to determine how much money it lost through the systemic bribery and corruption which is alleged to have pervaded the company. In an article in the Wall Street Journal (WSJ), entitled “Brazil’s Petrobras Reports Nearly $17 Billion in Asset and Corruption Charges”, Paul Kiernan reported that the State-run oil company wrote off “$2.1 billion of alleged bribe payments”. The remaining losses came from “graft and overvalued assets”.

Unfortunately for the company, “Petrobras Chief Executive Aldemir Bendine said in a news conference that additional revisions to the corruption-related write-downs are possible if prosecutors uncover more wrongdoing. But he also said an outside auditor approved Petrobras’s earnings “without any reservations.” That could ease investor concerns about the likelihood of major impairment charges in the future. “We were conservative with this number. We might not reach it, but it was a way to give credibility,” Mr. Bendine said. “We have made our best efforts to turn the page on this sad chapter that the company has passed through.””

Further, and perhaps more ominous for the country as a whole, “The events surrounding Petrobras have slowed both the construction sector and the oil industry, leading to reduced spending, thousands of layoffs and several bankruptcies.” However the article quoted the UK-based economic research group, Oxford Economics, as saying “Petrobras’s need to slash investments could “tip the Brazilian economy into a deeper-than-expected recession.””

Petrobras is the world’s most indebted major energy company. This audited statement was made due to “an April 30 deadline in Petrobras’s bond covenants that could have allowed the holders of billions of dollars of Petrobras debt to demand early repayment, a possibility that prompted Moody’s to yank the company’s investment-grade rating in February. Petrobras has been locked out of capital markets since late 2014 due to repeated delays in its financial statements.”

Petrobras of course claims that it is the victim here. While it cannot claim the tired and tested rogue employee defense, it can draw some support from another source. As reported in another WSJ article, entitled “Brazil’s Alleged Petrobras Corruption Not Widespread, Witness Testifies”, reporters Rogerio Jelmayer and Jeffrey T. Lewis wrote that in testimony before Brazil’s Congress, Augusto Mendonça Neto, president of Setal Engenharia, an engineering company that is a supplier to Petrobras, said that “The alleged corruption scheme at Brazil’s Petroleo Brasileiro SA grew out of an agreement among some of the country’s biggest construction companies to divvy up contracts from the state-owned oil company.”

They reported that “Mr. Mendonça Neto has acknowledged being part of the alleged scheme, and is cooperating with investigators. Mr. Mendonça Neto outlined the history of the conspiracy, saying it started in 1997 when a group of Brazilian construction companies got together informally to try to increase their bargaining power against Petrobras. Mr. Mendonça didn’t name the other companies involved. “The objective of these companies was to have a way to protect themselves, and they arranged things among themselves, so they would each have an opportunity” to win contracts from the oil company, he said. “They competed with the rest of the market. What they wanted was to not compete among themselves, because they were the most important [companies].” The group of companies initially had no control over who was able to bid on Petrobras contracts, but that changed after Petrobras executives joined the scheme in 2003 or 2004, Mr. Mendonça Neto alleged. Once they were on board, the group of suppliers grew to include more companies and together they were able to control which businesses got invited to bid on contracts, he said.”

He went on to testify that “The corruption at Petrobras was limited to three top executives and not spread throughout the company” naming three former Petrobras executives, Paulo Roberto Costa, Renato Duque and Pedro Barusco, as also being involved, and said that the rest of the company isn’t corrupt. “The only contact I had with corruption was with those three people I named, apart from that there was never anything,” Mr. Mendonça Neto told the committee. Petrobras “is a highly competent company, composed of people who are extremely prepared and competent.””

Whether the case is as Mr. Mendonça Neto has alleged, three people trying to extort the entire universe of Petrobras contractors or a broader scheme within the company to shake down those doing business with it or companies paying to play with Petrobras, it hardly matters for investors. Petrobras has already announced that it will not pay dividends for 2015. However that may not be enough for investors, as Keirnan reported, “More broadly, investors say the company needs to improve its governance. The Brazilian government, which is Petrobras’s largest shareholder, now nominates most of the company’s board, including its chairman. Brasília has ordered Petrobras to subsidize fuel prices in recent years while the company was simultaneously executing a massive investment plan, leading it to burn billions of dollars in cash.”

As important as the Easter Rebellion was for Irish independence, it was but one step which led to the creation of the Irish Free State in 1922. While this release of information regarding the cost of bribery to Petrobras and its shareholders will be but one in a long number of steps down (hopefully) the path of doing business legally and not corruptly.

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, 2015

The Petrobras Scandal and Corruption of Political Parties Under the FCPA

When does bribery and corruption move from a business issue to a political issue to a national issue? Why should US companies be held to the gold standard of anti-corruption laws? Should the US government even care if US companies engage in bribery of politicians and political parties outside the US? I pose these questions as we see some of these issues now being played out in real time in Brazil.

Earlier this month, a Wall Street Journal (WSJ) article by Rogerio Jelmayer and Jeffrey T. Lewis, entitled “Brazil Graft Probe Reaches Higher Up” said that “A widening investigation into alleged corruption at Brazil’s state-controlled oil company edged closer to President Dilma Rousseff on Wednesday when police arrested her ruling political party’s treasurer. The official, João Vaccari Neto, was charged with receiving “irregular donations” for the Workers’ Party from some suppliers to the oil company” [Petrobras]. Moreover, one cooperating witness, Pedro Barusco, “told a congressional hearing in March that he amassed nearly $100 million in bribes as a part of the alleged bribery schemes and the Workers’ Party may have received twice as much.”

But the corruption scandal appears to be much broader than simply one politician. Another WSJ article, by reporters Paulo Trevisani and Paul Kiernan, entitled “Brazil Attorney General Seeks Corruption Probe Approval”, said that the Brazilian Attorney General “has asked the Supreme Court for permission to proceed with investigations against an undisclosed number of politicians”. He asked for “28 probes involving 54 persons”. Interestingly, this part of the Brazilian corruption probe is separate and apart from the “team of prosecutors who have been working on the case from the southern Brazilian city of Curitba”. The reason is that under Brazilian law “special treatment is afforded to high-ranking authorities, whose cases my be heard by the Supreme Court.” This anomaly required “any evidence pointing to government officials or lawmakers had to be sent to” the Brazilian Attorney General.

As the corruption scandal continues to morph, allegations have reached the level of last year’s Brazilian Presidential election. Mary Anastasia O’Grady, also writing in the WSJ, in an article entitled “An Escalating Corruption Scandal Rocks Brazil”, said that interviewed defeated Presidential candidate Aécio Neves, head of the Social Democracy Party of Brazil, told her that he lost the election because of “organized crime”. This was not some dark mafia plot but came about from “alleged skimming operations at the government-owned oil company.” She went on to note, “Prosecutors allege that Petrobras contractors were permitted to pad their contracts and remit the excess as kickbacks to the oil company, which passed hundreds of millions of dollars to politician and, more importantly the PT.” The PT is the ruling party currently led by Brazilian President Rousseff.

It has not yet been reported that any US companies are under investigation by the Brazilian Attorney General for the bribing of politicians or a political party such as the President’s Workers’ Party. However, for any US companies that have been engaged in trying to influence elections in Brazil through campaign contributions, the Foreign Corrupt Practices Act (FCPA) specifically incorporates politicians, political parties and candidates for political offices as foreign government officials for purposes of the Act. In the 2012 FCPA Guidance it states, “The FCPA’s anti-bribery provisions apply to corrupt payments made to (1) “any foreign official”; (2) “any foreign political party or official thereof ”; (3) “any candidate for foreign political office”; or (4) any person, while knowing that all or a portion of the payment will be offered, given, or promised to an individual falling within one of these three categories. Although the statute distinguishes between a “foreign official,” “foreign political party or official thereof,” and “candidate for foreign political office,” the term “foreign official” in this guide generally refers to an individual falling within any of these three categories.”

Additionally, politicians and political parties are incorporated into the FCPA through the accounting provisions of the FCPA. As further stated in the FCPA Guidance, “Additionally, individuals and entities can be held directly civilly liable for falsifying an issuer’s books and records or for circumventing internal controls. Exchange Act Rule 13b2-1 provides: “No person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to [the books and records provision] of the Securities Exchange Act.” And Section 13(b)(5) of the Exchange Act (15 U.S.C. § 78m(b)(5)) provides that “[n]o person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account ….”. The Exchange Act defines “person” to include a “natural person, company, government, or political subdivision, agency, or instrumentality of a government.”

The most well known FCPA enforcement action involving bribes paid to politicians was the Halliburton/KBR enforcement action. For those of you who may have forgotten this case, which has the third highest FCPA fine of all-time, Halliburton subsidiary KBR admitted that a consortium which it led paid Nigerian officials at least $132 million in bribes for engineering, procurement and construction contracts awarded between 1995 and 2004 to build liquefied natural gas facilities on Bonny Island, Nigeria. The consortium was named TSKJ and consisted of subsidiaries of the following entities: KBR; Technip, a French company; ENI, an Italian company; and JGC, a Japanese company. There was also a corrupt agent involved in paying the bribes, Jeffrey Tesler and another Japanese company Marubeni Corporation.

BONNEY ISLAND SETTLEMENT BOX SCORE

Entity	Fine, Penalty and Disgorgement of Profits (in $ millions)
Halliburton (KBR)	$579
ENI	$365
Technip	$338
JGC	$218
Marubeni Corp	$50
Jeffery Tesler (the Bag Man)	$149
Total	$1,699

 

So for those of you keeping score at home, there has been, and could be fines, penalties and profit disgorgement of over $1.699 billion. This figure does not include the amount paid out by these corporations for attorneys’ fees, forensic costs and other professional fees, which can be only speculated about.

 The Petrobras scandal continues to morph and to grow way beyond the bounds of simple commercial bribery. One of the goals in the passage of the Act was to prevent US companies from illegally influencing foreign officials and foreign elections through the payments of bribes. The Petrobras scandal may well demonstrate to the world community how important it is to remember that now is certainly not the time to try and weaken either the FCPA or its enforcement going forward. If there is ever to be a truly level playing field in commerce across the globe, it will be by enforcement of anti-corruption laws such as the FCPA that makes it safe for US businesses to compete on the global stage and compete on the basis of quality, not bribe paid.

But the morphing of the Petrobras bribery scandal into the Brazilian political scene may also demonstrate how commercial bribery can work to corrupt a democratic political system. If the money paid from bribes for commercial contracts worked its way into the Brazilian election, this would be perversion of the democratic process. It is this commercial issue that demonstrates why businesses, particularly US businesses, have a role in the international fight against bribery and corruption. It also seems to me to be a straight line from commercial bribery to political corruption to the explosion of terrorism against such corruption. While the FCPA may not have been passed with this connection to terrorism in mind, it is certainly an important US government tool in that fight as well.

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, 2015

Brazilian Corruption Scandal Expands Past Petrobras – Is a FCPA Country Sweep Next?

The Brazilian corruption scandal took a new turn last week, when the Brazilian government announced that it was investigating the country’s health ministry and the state-owned bank Caixa Econômica Federal (Caixa). As reported by Rogerio Jelmayer and Luciana Magalhaes in the Wall Street Journal (WSJ), in an article entitled “Corruption Scandal in Brazil Gets Bigger”, the schemes were similar to those used in the Petrobras scandal, where inflated contracts were awarded to contractors who kick backed the overcharges to those in position to award the business.

This expansion of Brazilian government investigation is also the first reported instance of companies outside the energy sector or those doing business with the Brazilian state-owed enterprise Petrobras being investigated by the Brazilian government. Over the years there have been several Foreign Corrupt Practices Act (FCPA) enforcement actions regarding US companies doing business in Brazil. With this expansion of the Petrobras corruption scandal to other government departments and state-owned entities, a new chapter may be opening. This new chapter may bring not only Brazilian domestic bribery and corruption scrutiny but also draw the attention of US or UK regulators, such as the Department of Justice (DOJ), Securities and Exchange Commission (SEC) or the UK Serious Fraud Office (SFO).

In the health ministry the area of contracts under investigation were those for advertising. The WSJ article said, “the cost of advertising contracts was inflated by as much as 10%, prosecutors said, with the surplus also passed along to politicians. The health ministry said all its advertising contracts meet the legal requirements, and it will investigate the allegations and cooperate with police and prosecutors.” It certainly is comforting when the government says it will cooperate with investigators.

But perhaps more interesting was the timing of the allegations against the country’s third largest state-owned bank Caixa. While the allegations around the scope and extent of the bribery were similar to those made against the Brazilian health ministry, the declarations of these new investigations coincided with the announcement last week by the government Finance Minister Joaquim Levy and Caixa Chief Executive Officer (CEO) Miriam Belchior for “an initial public offering [IPO] in the insurance joint venture it has with French insurer CNP Assurances.”

What do you think the comfort level will be for institutional investors about now in this IPO? I wonder if under IPO rules and regulations in Brazil, whether the CEO must certify either the financial statement as accurate or that there is no evidence of corruption in the organization? Even those in Brazil recognize the gravity of these allegations against Caixa. Luis Santacreu, a banking analyst at the Brazilian rating agency Austin Ratings, said that he thought this announcement would make the IPO more difficult and “the allegations against Caixa show it needs to improve its governance.”

These two developments demonstrate the difficulties that international companies may have in doing business in Brazil going forward. It is not difficult to believe that a country sweep on those doing business in Brazil, with the Brazilian government or with Brazilian state-owned enterprises, may well be coming. Given the recent 2014 World Cup and the upcoming 2016 Olympics, it would not seem too great a stretch for the DOJ or SEC to begin to look at US companies with significant amounts of commerce with and in Brazil.

While we have not seen evidence of country sweeps to-date, there has been evidence of industry sweeps in FCPA enforcement. The FCPA Professor, in a blog post entitled “Industry Sweeps”, posted an article from FCPA Dean Homer Moyer, entitled “The Big Broom of FCPA Industry Sweeps”. In his article, Moyer said that an industry sweep is the situation where the DOJ and/or SEC will focus “on particular industries – pharmaceuticals and medical devices come to mind — industry sweeps are investigations that grow out of perceived FCPA violations by one company that enforcement agencies believe may reflect an industry-wide pattern of wrongdoing.” Moyer further wrote, “Industry sweeps are often led by the Securities and Exchange Commission (“SEC”), which has broad subpoena power as a regulatory agency, arguably broader oversight authority than prosecutors. They are different from internal investigations or traditional government investigations, and present different challenges to companies. Because the catalyst may be wrongdoing in a single company, agencies may have no evidence or suspicion of specific violations in the companies subject to an industry sweep. A sweep may thus begin with possible cause, not probable cause. In sweeps, agencies broadly solicit information from companies about their past FCPA issues or present practices. And they may explicitly encourage companies to volunteer incriminating information about competitors.”

As a compliance professional, one of the key takeaways from the Brazilian corruption scandal is that you should take a very hard and detailed look at your company. With the spread of Brazilian investigations around corruption, we can see that these scandals are not be limited to only the energy or energy-related service industry. One of the first things you can begin to do is to review the list of third parties who might work with the Brazilian government or with Brazilian state-owned enterprises. You should begin by asking such questions as:

• What is the ownership of the third party? Is there a business justification for the relationship?
• Is there anyone in the company who is responsible for maintaining the relationship? Is there ongoing accountability?
• How is the relationship being managed?
• Are you engaging in any transaction monitoring?
• Are you engaging in any relationship monitoring?
• What is the estimated or budgeted size of the spend with the third party?

While the GlaxoSmithKline PLC (GSK) investigation has reverberated throughout the China, I think that the Brazilian corruption scandals will be with us for some time. As bad as it seems about now, and it certainly appears bad, there are many lessons that the compliance practitioner can not only draw from but use for teaching moments within your company. For if you are doing business with the Brazilian government or with Brazilian state-owned enterprises it may not be “if you are subject to a FCPA sweep” but only “when”.

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, 2015

Bone-headed Moves on the Football Field and Idiotic Statements About Corruption

“Three things can happen when you throw the football, and two of them are bad.”

That football truism (allegedly) came from former Texas Longhorn head coach Darrell Royal. While he intoned it in a different era, Pete Carroll and his Seattle Seahawks proved it still to be valid in the most recent Super Bowl, Carroll called for a pass play on the one-yard line in the last minute of the game and his quarterback threw an interception. Was it the most idiotic call in Super Bowl history? I will leave that answer to the pundits but I will say that Carroll now has the ignominy of making two of the most bone-headed decisions of all-time in football, one in the Super Bowl and the second in College Football’s 2005 National Championship Game, which cost his team the game. Perhaps not what you might want as your epitaph.

For those of you who may have forgotten Carroll’s NCAA National Championship Game FUBAR, his team, the University of Southern California, needing to make one yard at the University of Texas (UT) 43 yard line to achieve a first down and ice the game, Carroll called a running play after pulling off the field that year’s Heisman Trophy winner Reggie Bush. That left one running back on the field and everyone on the field, everyone in the stands and watching the game knew the remaining running back, Lendale White, would get the ball. He did and was promptly stuffed by the UT defense. Vince Young then led UT down the field, scored and Texas won the National Championship. As a UT alum all I can say is, thanks Pete.

I thought about Carroll and his making not one but two idiotic calls for the ages as I have been studying the ongoing Petrobras bribery scandal. While the GlaxoSmithKline PLC (GSK) corruption enforcement action in China may well presage a new era of countries enforcing their local anti-bribery and anti-corruption laws, the Petrobras case may herald this too. The scandal came to the attention of many American’s in the fall of 2014 during Brazil’s Presidential election in a New York Times (NYT) article, entitled “Scandal Over Brazilian Oil Company Adds Turmoil to the Presidential Race”, where Simon Romero detailed the bribery scandal involving a former official of Petrobras, the Brazilian national oil company, named Paulo Roberto Costa. Mr. Costa was the person who oversaw the company’s refining operations. He has admitted to having engaged in the receipt of bribes for at least a 10 year period “equivalent to 3 percent of the value of the deals from the Brazilian construction companies that obtained the contracts” to build refineries. This amounted to literally millions being “stashed in bank accounts in Switzerland and the Cayman Islands.”

Costa who “was first arrested in March as part of a money laundering investigation by the federal police, has already agreed to surrender the $25 million fortune he hid in offshore accounts, his yacht and his luxury car, in addition to paying a fine of more than $2 million.” He “inflated budgets for new projects” by 3% and then had that amount kicked back to him as bribes. The allegations were verified “through an associate, Alberto Youssef, a black-market money dealer who testified that he helped launder funds in the scheme. Mr. Youssef, who has also accepted a plea deal, testified that more than a dozen of Brazil’s largest construction companies had paid hefty bribes to obtain lucrative Petrobras contracts.”

Further “He testified that a portion of the money was then handed to João Vaccari Neto, the treasurer of the Workers Party. Mr. Costa said that other top political allies of President Rousseff, including the leaders of both houses of Congress, Henrique Eduardo Alves and Renan Calheiros, also benefited from the kickbacks, according to a report by Veja, a Brazilian magazine.” Interestingly, President Rousseff “has also effectively acknowledged the prevalence of corruption inside the executive suites of Petrobras, while denying that she had known about the kickbacks when they were taking place.”

To say things have mushroomed would be almost likely citing Darrell Royal on passing the football to Carroll. Petrobras is in many ways the engine that drives the Brazilian economy. Not only is it directly responsible for the employ of upwards of 80,000 employees. It is also the continent’s largest company by market capitalization so the amount of work that it generates for the Brazilian economy is staggering.

Just as staggering is this bribery scheme in which it finds itself now engulfed. According to an article by Luciana Maglahaes and Rogerio Jelmayer in the Wall Street Journal (WSJ), entitled “Petrobras Ex-CEO Weighs In”, the company has “lost $80 billion, or 65% of its market share over the past five months.” The company has publicly said that it cannot estimate the amount of money it lost or was overcharged by. The WSJ article noted, “Prosecutors estimate that around $732 million may have been skimmed. But former Petrobras Chief Executive Maria das Graças Silva Foster, who resigned under pressure last week, said projects tied to the alleged scheme may be overvalued by as much as $31 billion.” Think about that number $31 billion in overcharges to the company.

So, how does Carroll and his bone-headed passing call work into this story? First of all it was not Carroll who made the call but the team’s Offensive Coordinator. Yet he did so because Carroll told him to call a passing play. In other words, idiotic tone at the top reigned and the employee base simply followed the boss’s wishes.

In the Petrobras corruption scandal, we were treated to remarks by José Sergio Gabrielli, the former Chief Executive Officer (CEO) of the company from 2005 to 2012. This was also one of the company’s most successful periods of financial growth. The former CEO has claimed not to know anything about any corruption issues that may have arisen during his tenure. Moreover, “Mr. Gabrielli said the alleged fraud was the work of a few bad apples inside the company, and not an indication of broader problems with corporate governance or internal controls at Petrobras.” He then added that the business generated by the company surely outweighed any nefarious effects by stating “Even if the numbers are huge…how much has Petrobras invested from 2003 to 2014? Probably it invested an average of $30 billion a year.” He also added it was really all much ado about nothing by noting that the press had blown the “scandal out of proportion”.

So there you have it encapsulated in three lines; the clearest articulation of a defense of bribery and corruption that I have recently seen. First it was the oldie but goodie rogue employee defense. (I mean there were 80,000 plus employees, how could you stop all of them from engaging in illegal conduct.) Second, look at all the money we made, so even if the corruption cost us $31bn we averaged that much per year while he was at the helm. Finally, it is really no big deal anyway and is all “blown out of proportion.”

Is it really any wonder Petrobras now finds itself in one of the world’s largest corruption scandals? If that is the attitude of the former CEO, do you think he communicated this laissez-faire attitude to his direct reports and that perhaps it cascaded down the organization? As to Carroll, if he gets back to a championship game, either in professional or college football, he might want to consider his play calling. As for the former CEO of Petrobras, Brazilian prosecutors are fighting to freeze his assets and his major complaint is that he has to deal with too many lawyers. Enough said.

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© Thomas R. Fox, 2015