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

 

 

October 27, 2011

Everything Old is New Again: Alcoa and Olympus

Two articles this week spoke about the continuing struggle companies have with the issue of agents and other third party representatives and the potential liability under the Foreign Corrupt Practices Act (FCPA).  In an article in the Wall Street Journal (WSJ), entitled “Kickback Probe at Alcoa Heats Up”, reporter Dionne Searcey takes a look at the arrest of two figures in the bribery investigation of Alcoa’s activities in Bahrain in connection with the government owned manufacturing company known as Alba. In an article in the New York Times, entitled “Acquisitions at Olympus Scrutinized,” reporter Hiroko Tabuchi reviews “a tale of deals and advisors, with puzzling results.” Both cases present novel twists and turns that, if you told someone the facts, you would be accused of making up both stories.

Alcoa

This case involves allegations that Alcoa overcharged Alba by “hundreds of millions of dollars” for purchases of alumina. Alcoa and its representative, Victor Dahdaleh then paid kickbacks to the former Alba Chief Executive, Bruce Hall. Both Hall and Dahdaleh were arrested over the past two weeks. One of the more interesting facts about this matter is that it was brought to light in 2008, when Alba filed a lawsuit in federal district court in Pennsylvania, the corporate home of Alcoa.

According to the FCPA Professor Alba alleged in the lawsuit, “that Alcoa and its employees or agents (1) illegally bribed officials of the government of Bahrain and (or) officers of Alba in order to force Alba to purchase alumina at excessively high prices, (2) illegally bribed officials of the government of Bahrain and (or) officers of Alba and issued threats in order to pressure Alba to enter into an agreement by which Alcoa would purchase an equity interest in Alba, and (3) assigned portions of existing supply contracts between Alcoa and Alba for the sole purpose of facilitating alleged bribes and unlawful commissions. As reported by the FCPA Blog, “Just weeks after Alba sued Alcoa, the U.S. Justice Department intervened in the case” and asked for a stay to investigate “possible criminal violations of the FCPA and other laws by Alcoa and its executives and agent.” The trial court granted the stay.

The WSJ article provided further information on the alleged actions of Dahdaleh. Searcey reported that he “set up a company that acted as an intermediary for Alcoa, a move that officials at the metals company supported”. Further Dahdaleh’s company “used Alcoa’s logo on its letterhead in communications with Alba”. Although Alcoa had a commercial relationship directly with Alba, at some point Dahdaleh’s company acceded to this business relationship.

Olympus

This case may join News Corp as yet another case that keeps on giving. It is not often (as in never) that a former Chief Executive Officer (CEO) claims he was fired for being a whistleblower. However, on October 14, 2011 Olympus Chairman, Tsuyoshi Kikukawa, dismissed the former head of the company, the Briton Michael C. Woodford, citing cultural differences in management styles. However, Mr. Woodford later said he had been fired after raising questions about a series of acquisitions made by Olympus at what he said were inexplicably high prices or involving disproportionately pricey advisory fees. Woodford later provided documents to the Serious Fraud Office (SFO) and is reported to be to meeting with the US Federal Bureau of Investigation (FBI).

As reported earlier in Dealb%k, in an article entitled “2 Japanese Bankers at Heart of Olympus Fee Inquiry”, reporter Ben Protess said that two persons, Hajime Sagawa and Akio Nakagawa, were alleged to have received $687 million payout by Olympus for advising Olympus on the 2008 takeover of a British company, the Gyrus Group. The money went to a “tiny unknown firm run by Mr. Sagawa and Mr. Nakagawa…the bulk of the fee later went to a Cayman Islands company that also had ties to at least one of the men.”

Dealb%k said the fee in question was over 30 times the norm on Wall Street for such transactional advice. After the “deal closed and the fees were paid, both firms closed up shop.” Dealb%k, citing securities lawyers and corporate governance experts, said that “federal authorities will probably examine whether the steep fees point to deeper ties between Olympus and the bankers, or even kickbacks to Olympus officials involved in the deal.”

Lessons Learned

Both matters provide clear lessons for the compliance practitioner.

  • Detection. If there were ever two cases that screamed out for Paul McNulty’s maxim No. 2 “What did you do to detect it”, these were the poster children. From Alcoa, it is clear that your company must absolutely, positively have the right to audit your agent AND then exercise that right. If Alba’s federal court suit allegations are anywhere close to hitting the mark, an audit would have picked this up.

From the Olympus matter, if any of your company’s agent sends its money to the Cayman Islands or Jersey, for example, do not walk but charter a plane and get there as fast as you can to audit the agent’s books and records.

  • Due Diligence, Due Diligence and then more Due Diligence. What was the size of these agents companies? Dahdaleh formed a company to act as Alcoa’s agent for sales to Alba. Sagawa and Nakagawa were characterized as a “tiny, unknown firm”. Do you think this would have turned up in any credible due diligence investigation on either of these agents or their companies? I would say absolutely.
  • Amount of Commission. Any agent who receives a commission which ranges in the neighborhood of more than 30 times the norm for such transactions is receiving way too much money for whatever services he or she is rendering. The Department of Justice is beginning to look at  any commission amount because any commission so far out of line can provide money which can be used to pay a bribe or kickback.
  •  Agent Oversight. Lastly, where were Alcoa and Olympus in managing these agent relationships? Any best practice should include an Oversight Committee to review agent commission rates and payments.
  •  CEOs and Whistleblowers. And finally, it is never a good thing to fire your CEO because he wants to blow the whistle on potentially criminal conduct and then say it is due to ‘cultural differences”. Strike that—it is never a good thing to fire your CEO because he wants to blow the whistle on potentially criminal conduct—period.

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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