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In Depth On The Weatherford Enforcement Action

Last week, the DOJ and SEC announced (here and here) that Switzerland-based oil and gas services company Weatherford International agreed to resolve a Foreign Corrupt Practices Act enforcement action based primarily on alleged conduct by its subsidiaries in Angola, the Middle East, and in connection with the Iraq Oil for Food program.  The enforcement action has been expected for some time (as noted in this prior post, in November the company disclosed that it had agreed in principle to the settlement announced last week).

The enforcement action involved a DOJ criminal information against Weatherford Services Ltd. resolved via a plea agreement, a criminal information against Weatherford International Ltd. (“Weatherford”) resolved via a deferred prosecution agreement, and a SEC settled civil complaint against Weatherford.  [Note, the SEC enforcement action also alleged violations of the books and records and internal controls provisions in regards to commercial transactions with various sanctioned countries in violation of U.S. sanction and export controls laws.  The DOJ – or other government entities – also alleged such conduct, but in resolution documents separate and apart from the FCPA resolution documents highlighted below].

Weatherford agreed to pay approximately $153 million to resolve its alleged FCPA scrutiny ($87 million to resolve the DOJ enforcement action and $66 million to resolve the SEC enforcement action).  The Weatherford action is the 8th largest FCPA settlement of all-time (see here for the top ten FCPA settlements).

DOJ

Weatherford Services Ltd.

Weatherford Services (“WSL”), incorporated in Bermuda, is identified as a wholly-owned subsidiary of Weatherford International that “managed most of Weatherford’s activities in Angola.”

The conduct at issue involved “two schemes to bribe Sonangol officials to obtain or retain business.”

Sonangol is alleged to be a “government-owned and controlled corporation” of the Angolan government. The information specifically states:

“Sonangol was the sole concessionaire for exploration of oil and gas in Angola, and was solely responsible for the exploration, production, manufacturing, transportation, and marketing of hydrocarbons in Angola.  Sonangol was run by a board of directors established by governmental decree in 1999.  Each member of the board was also appointed or renewed in their position by governmental decree.  Because Sonangol was wholly owned, controlled, and managed by the Angolan government, it was an ‘agency’ and ‘instrumentality’ of a foreign government and its employees were ‘foreign officials'” under the FCPA.

According to the information, the first bribery scheme “centered around a joint venture which WSL and other Weatherford employees established with two local Angolan entities.”  The information alleges that “Angolan Officials 1, 2, and 3 (described as “high-level, senior officials of Sonangol” with influence over contracts) controlled and represented one of the entities” and that a “relative of Angolan Official 4 (described as a “high-level, senior official of Angola’s Ministry of Petroleum” with influence over contracts entered into by the Angolan government) controlled and represented the other.”

The information alleges that the “joint venture began because WSL sought a way to increase its share of the well screens market in Angola” and states that “WSL learned that Sonangol was encouraging oil services companies to establish a well screens manufacturing operations in Angola with a local partner.”  Thereafter, “a high-level Weatherford executive sent Angolan Official 1 a letter expressing Weatherford’s intent to form a well screens manufacturing operation in Angola with a local partner and requesting Sonangol’s participation in the process.”

The information next alleges that “Angolan Official 1 advised WSL that Sonangol had selected local partners for WSL and that Sonangol would support the joint venture.”  According to the information:

“… the parties agreed that two local Angolan entities (“Angolan Company A” and Angolan Company B”) would be WSL’s joint venture partners.  Angolan Officials 1, 2 and 3 conducted all business with WSL on behalf of Angolan Company A.  Angolan Company B was owned in part by the daughter of Angolan Official 4.”

According to the information, “certain WSL and Weatherford employees knew from the outset of discussions regarding the joint venture that the members of Angolan Company A included a Sonangol employee and Angolan Official 3’s wife, while Angolan Company B’s members included Angolan Official 4’s daughter and son-in-law.”

According to the information, “prior to entering into the joint venture, neither Weatherford nor WSL conducted any meaningful due diligence of either joint venture partner.”  The information specifically alleges that Weatherford Legal Counsel A (a citizen of the U.S. and a Senior Corporate Counsel at Weatherford from 2004 to 2008) reached out to a law firm “to discuss whether partnering with the Angolan companies raised issues under the FCPA,” but that Weatherford Legal Counsel A “did not follow the advice” that had been provided to him.  In addition, the information alleges that Weatherford Legal Counsel A “falsely told [another] outside counsel that the joint venture had been vetted and approved by another outside counsel, when, in fact, no outside law firm ever conducted such vetting or gave such approval.”

The information alleges that WSL signed the final joint venture agreement with Angolan Company A and Angolan Company B in 2005, but that “neither Angolan Company A nor Angolan Company B provided any personnel or expertise to the joint venture, nor did they make any capital contributions.”

According to the information:

“In 2008, Angolan Company A and Angolan Company B received joint venture dividends for 2005 and 2006, including on revenues received in 2005 [before the joint venture agreement was executed].  […]  In total, the joint venture paid Angolan Company A $689,995 and paid Angolan Company B $136,901.”

The information alleges that “prior to the distribution of joint venture dividends, WSL executives knew that Angolan officials were directing the distribution of those dividends.”

According to the information, “WSL benefitted from the joint venture arrangement” in the following ways: “Sonangol began taking well screens business away from WSL’s competitors, even when a competitor was supplying non-governmental companies, and awarding it to WSL”  and “WSL received awards of business for which its bids were, by its own admission, not price competitive.”

The second bribery scheme alleged in the information relates to the “Cabinda Region Contract Renewal” in which WSL allegedly “bribed Angolan Official 5 (described as “a Sonangol official with decision-making authority in Angola’s Cabinda region”) so that he would approve the renewal of a contract under which WSL provided oil services to a non-governmental oil company in the Cabinda region of Angola.”  The information alleges that even though the contract was between WSL and a non-governmental company, Angolan law required “that it be approved by Sonangol before being finalized” and that “Angolan Official 5 was the Sonangol official responsible for approving or denying the renewal contract.”

The information alleges that Angolan Official 5 solicited the bribe and that “WSL executives agreed to pay the bribe Angolan Official 5 had demanded” even though a prior WSL Manager had refused to pay it.  According to the information, WSL made the payments to Angolan Official 5 through the Freight Forwarding Agent (described as a Swiss Company who provided freight forwarding and logistics services in Angola) who had previously paid bribes on behalf of WSL.”

As to the Freight Forwarding Agent, the information alleges that WSL retained the agent via a consultancy agreement in which the agent rejected a specific FCPA clause, but that “WSL and Weatherford acquiesced by removing the FCPA clause and inserting a clause requiring the Freight Forwarding Agent to ‘comply with all applicable laws, rules, and regulations issued by any governmental entity in the countries of business involved.”  According to the information, “WSL generated sham purchase orders for consulting services the Freight Forwarding Agent never performed, and the Freight Forwarding Agent, in turn, generated sham invoices for those non-existent services.”  The information alleges that the Freight Forwarding Agent passed money on to Angolan Official 5.

Based on the above, the information charges WSL with one count of violating the FCPA’s anti-bribery provisions and specifically invokes the dd-3 prong of the statute applicable to “persons” other than issuers or domestic concerns.

Pursuant to the plea agreement, WSL agreed to pay a criminal fine in the amount of $420,000.

Weatherford International

The Weatherford information largely focuses on the company’s internal accounting controls and alleges as follows.

“Weatherford, which operated in an industry with a substantial corruption risk profile, grew its global footprint in large part by purchasing existing companies, often themselves in countries with high corruption risks.  Despite these manifest corruption risks, Weatherford knowingly failed to establish effective corruption-related internal accounting controls designed to detect and prevent corruption-related violations, including FCPA violations, prior to 2008.

Prior to 2008, Weatherford failed to institute effective internal accounting controls, including corruption-related due diligence on appropriate third parties and business transactions, limits of authority, and documentation requirements.  This failure was particularly acute when it came to third parties, including channel partners, distributors, consultants, and agents.  Weatherford failed to establish effective corruption-related due diligence on third parties with interaction with government officials, such as appropriately understanding a given third party’s ownership and qualifications, evaluating the business justification for the third party’s retention in the first instance, and establishing and implementing adequate screening of third parties for derogatory information.  Moreover, Weatherford failed to implement effective controls for the meaningful approval process of third parties.  Weatherford also did not require, in practice, adequate documentation supporting retention and in support of payments to third parties, such as appropriate invoices and purchase orders.

Prior to 2008, Weatherford did not have adequate internal accounting controls and processes in place that effectively evaluated business transactions, including acquisitions and joint ventures, for corruption risks and to investigate those risks when detected.  Moreover, following the establishment of joint ventures and certain other business transactions, Weatherford did not appropriately implement its policies and procedures to ensure an effective internal accounting control environment through proper integration.

Prior to 2008, Weatherford also did not have an effective internal accounting control system for gifts, travel, and entertainment.  In practice, expenses were not typically adequately vetted to ensure that they were reasonable, bona fide, or properly documented.

These issues were exacerbated by the fact that, prior to 2009, a company as large and complex as Weatherford – with its substantial risk profile – did not have a dedicated compliance officer or compliance personnel.  Although Weatherford promulgated an anti-corruption policy that it made available on its internal website, it did not translate that policy into any language other than English, and it did not conduct anti-corruption training.

Prior to 2008, Weatherford did not have an effective system for investigating employee reporting of ethics and compliance violations.  If an employee’s ethics questionnaire response indicated an awareness of payments or offers of payments to foreign officials or of undisclosed or unallocated funds, Weatherford did not have a protocol in place to perform any further investigation into the alleged corruption.  As a matter of practice, in fact, Weatherford did not conduct additional investigation of such allegations.  Prior to 2004, Weatherford did not require any employee to complete any kind of ethics questionnaire.

Further, Weatherford lack effective mechanisms to control its many foreign subsidiaries’ activities to ensure that they maintained internal accounting controls adequate to detect, investigate, or deter corrupt payments made to government officials.”

Under the heading “corrupt conduct” the information alleges – in summary form – as follows:

“Due to Weatherford’s failure to implement such internal accounting controls, a permissive and uncontrolled environment existed within Weatherford in which employees of certain of its wholly owned subsidiaries in Africa and the Middle East were able to engage in various corrupt conduct over the course of many years, including both bribery of foreign officials and fraudulent misuse of the United Nations’ Oil for Food Program.”

Thereafter, the information contains nine paragraphs of allegations that track the Angola allegations in the WSL information.

In addition, the information contains allegations about another alleged “scheme, in the Middle East, from 2005 through 2011” in which “employees of another Weatherford subsidiary [Weatherford Oil Tool Middle East Limited (WOTME) – described as a British Virgin Islands corporation headquartered in Dubai that was a wholly-owned subsidiary of Weatherford and responsible for managing most of Weatherford’s activities in North Africa and the Middle East] awarded improper ‘volume discounts’ to a distributor who supplied Weatherford products to a government-owned national oil company, believing those discounts were being used to create a slush fund with which to make bribe payments to decision makers at the national oil company.”

According to the information, “officials at the national oil company had directed WOTME to sell goods to the company through this particular distributor” and the information alleges:

“Prior to entering into the contract with the distributor, neither WOTME nor Weatherford conducted any due diligence on the distributor, despite (a) the fact that the Distributor would be furnishing Weatherford goods directly to an instrumentality of a foreign government; (b) the fact that a foreign official had specifically directed WOTME to contract with that particular distributor, and (c) the fact that executives at WOTME knew that a member of the country’s royal family had an ownership interest in the distributor.”

According to the information, “between 2005 and 2011, WOTME paid approximately $15 million in volume discounts to the distributor” that were “recorded in WOTME’s general ledger under a heading titled “Volume Discount Account.”

The information next contains four paragraphs of allegations relevant to the Iraq Oil for Food program and how Weatherford’s “failure to implement effective internal accounting controls also permitted corrupt conduct relating” to the program.

In a summary allegation, under the heading “Profits from the Corrupt Conduct in Africa and the Middle East” the information states:

“Due to Weatherford’s failure to implement internal accounting controls, an environment existed within Weatherford in which employees of certain of its wholly owned subsidiaries in Africa and the Middle East were able to engage in various corrupt business transactions, which conduct earned profits of $54,486,410, which were included in the consolidated financial statements that Weatherford filed with the SEC.”

Based on the above conduct, the information charges Weatherford with violating the FCPA’s internal controls provisions – specifically – that Weatherford knowingly:

“(a) failed to implement, monitor, and impose internal accounting controls and to maintain their effectiveness; (b) failed adequately to train key personnel to implement internal accounting controls to detect and avoid illegal payments and to identify and deter violations of those controls; (c) failed to monitor and control the financial transactions of its subsidiaries, in a manner that provided reasonable assurances that its subsidiaries’ transactions were executed in accordance with management’s general and specific authorization; (d) failed to monitor and control the financial transactions of its subsidiaries, in a manner that provided reasonable assurances that its subsidiaries’ transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and any other criteria applicable to such statements; (e) failed to maintain a sufficient system for the selection and approval of, and performance of corruption-related due diligence on, third party business partners and joint venture partners, which, in turn, permitted corrupt conduct to occur at subsidiaries; (f) failed to investigate appropriately and respond to allegations of corrupt payments and discipline employees involved in making corrupt payments; (g) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed, including training employees, and performing monitoring to detect criminal conduct; (h) failed to maintain internal accounting controls sufficient to prevent a subsidiary from entering into a joint venture agreement to funnel improper benefits to, and receive preferential treatment from, foreign government officials; (i) failed to maintain internal accounting controls sufficient to prevent a subsidiary from making payments to a channel partner not authorized by contract knowing there was a substantial likelihood that those payments were used to make corrupt payments; and (j) failed to maintain internal accounting controls sufficient to prevent kickbacks paid to the government of Iraq by a subsidiary.”

The charge against Weatherford was resolved via a DPA in which the company admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees, and agents as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states:

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and the Company.  Among the facts considered were the following:  (a) the Company’s cooperation has been, on the whole, strong, including conducting an extensive worldwide internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department, including the production of more than 3.8 million pages of data; (b) the Company has engaged in extensive remediation, including terminating the employment of officers and employees responsible for the corrupt misconduct of its subsidiaries, establishing a Compliance Officer position that is a member of the Company’s executive board, as well as a compliance office of approximately 38 full-time compliance professionals, including attorneys and accountants, that the Compliance Officer oversees, conducting more than 30 anti-corruption compliance reviews in many of the countries in which it operates, enhancing its anti-corruption due diligence protocol for third-party agents and consultants, and retaining an ethics and compliance professional to conduct an assessment of the Company’s ethics and compliance policies and procedures designed to ensure compliance with the FCPA and other applicable anti-corruption laws; (c) the Company has committed to continue to enhancing its compliance program and internal accounting controls …; (d) the Company has already significantly enhanced, and is committed to continue to enhance, its compliance program and internal controls …; and (e) the Company has agreed to continue to cooperate with the Department in any ongoing investigation …”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $87.2 million to $174.4 million.  The DPA states that the monetary penalty of $87.2 million “is appropriate given the facts and circumstances of this case, including the nature and extent of the Company’s criminal conduct, the Company’s extensive cooperation, and its extensive remediation in this matter.”

The DPA specifically states that “any criminal penalties that might be imposed by the Court on WSL in connection with WSL’s guilty plea to a one-count Criminal Information charging WSL with violations of the FCPA, and the plea agreement entered into simultaneously, will be deducted from the $87.2 million penalty agreed to under this Agreement.”

Pursuant to the DPA, Weatherford agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA and other applicable anti-corruption laws.   The specifics are detailed in Attachment C to the DPA.  The DPA also requires Weatherford to engage a corporate compliance monitor for ”a period of not less than 18 months from the date the monitor is selected.”  The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA.

As is common in FCPA corporate enforcement actions, the DPA contains a “muzzle clause” prohibiting Weatherford or anyone on its behalf from “contradicting the acceptance of responsibility by the company” as set forth in the DPA.

In the DOJ’s release, Acting Assistant Attorney General Mythili Raman stated:

“Effective internal accounting controls are not only good policy, they are required by law for publicly traded companies – and for good reason.  This case demonstrates how loose controls and an anemic compliance environment can foster foreign bribery and fraud by a company’s subsidiaries around the globe.  Although Weatherford’s extensive remediation and its efforts to improve its compliance functions are positive signs, the corrupt conduct of Weatherford International’s subsidiaries allowed it to earn millions of dollars in illicit profits, for which it is now paying a significant price.”

Valerie Parlave, Assistant Director in Charge of the FBI’s Washington Field Office, stated:

“When business executives engage in bribery and pay-offs in order to obtain contracts, an uneven marketplace is created and honest competitor companies are put at a disadvantage.  The FBI is committed to investigating corrupt backroom deals that influence contract procurement and threaten our global commerce.”

SEC

The SEC’s complaint (here) is largely based on the same core set of facts alleged in the above DOJ action.

In summary fashion, the complaint alleges:

“Between at least 2002 and July 2011, Weatherford and its subsidiaries authorized bribes and improper travel and entertainment intended for foreign officials in multiple countries to obtain or retain business or for other benefits. Weatherford and its subsidiaries also authorized illicit payments to obtain commercial business in Congo and authorized kickbacks in Iraq to obtain United Nations Oil for Food contracts.  Weatherford realized over $59.3 million in profits from business obtained through the use of illicit payments.”

As to the additional Congo allegations, the complaint states:

“In addition to bribery schemes involving Angolan government officials, WSL made over $500,000 in commercial bribe payments through the Swiss Agent to employees of a commercial customer, a wholly-owned subsidiary of an Italian energy company, between March 2002 and December 2008.

[…]

WSL mischaracterized the bribe payments as legitimate expenses on its books and records. Bank account records and a U.S. brokerage account statement show that among the recipients were two employees of the commercial customer who were responsible for awarding contracts to WSL. Weatherford obtained profits of$1,304,912 from commercial business in Congo relating to payments made by Swiss Agent.”

The SEC complaint also contains allegations concerning conduct in Algeria and Albania.

Under the heading “Improper Travel and Entertainment in Algeria,” the complaint alleges:

Weatherford also provided improper travel and entertainment to officials of Sonatrach, an Algerian state-owned company, that were not justified by a legitimate business purpose. The improper travel and entertainment to Sonatrach officials include:

• June 2006 trip by two Sonatrach officials to the FIFA World Cup soccer tournament in Hanover, Germany;

• July 2006 honeymoon trip of the daughter of a Sonatrach official; and

• October 2005 trip by a Sonatrach employee and his family to Jeddah, Saudi Arabia, for religious reasons that were improperly booked as a donation

In addition, on at least two other occasions, Weatherford provided Sonatrach officials with cash sums while they were visiting Houston. For example, in May 2007, Weatherford paid for four Sonatrach officials, including a tender committee official, to attend a conference in Houston. Prior to the trip, a Weatherford finance executive sent an email to a Weatherford officer requesting $10,000 cash to be advanced to a WOTME employee without providing any explanation tor the cash advance. The request was approved and a portion of the funds was provided to the tender committee official. There is no evidence the cash was used for legitimate business or promotional expenses. In connection with a December 2007 trip by three Sonatrach officials traveling to Houston, a Weatherford finance employee questioned the propriety of a WOTME employee’s request for a $14,000 cash advance in connection with the trip.  The finance employee’s concern was disregarded and the request was ultimately approved at high levels within Weatherford and a portion of the funds was provided to the officials.  In total, Weatherford spent $35,260 on improper travel, entertainment and gifts for Algerian officials from May 2005 through November 2008 that were recorded in the company’s books and records as legitimate expenses.”

Under the heading “Improper Payments to Albanian Tax Authorites,” the complaint alleges:

“From 2001 to 2006, the general manager and financial manager at a Weatherford Italian subsidiary, WEMESP A, misappropriated over $200,000 of company funds, a portion of which was improperly paid to Albanian tax auditors. WEMESPA’s general manager and financial manager misappropriated the funds by taking advantage of Weatherford’s inadequate system of internal accounting controls. They misreported cash advances, diverted payments on previously paid invoices, misappropriated government rebate checks and received reimbursement of expenses that did not relate to business activities, such as golf equipment and perfume. 

[…]

In addition to the cash payments, in 2005, after a regime shift in Albania, the Country Manager provided three laptop computers for the tax director and two members of Albania’s National Petroleum Agency, which the WEMESPA executives approved and misrecorded in the books and records.”

Under the heading “Misconduct During the Investigation and Subsequent Remediation Efforts,” the complaint states:

“Certain conduct by Weatherford and its employees during the course of the Commission staffs investigation compromised the investigation. These activities involved the failure to provide the staff with complete and accurate information, resulting in significant delay. In one instance, the staff sought information concerning the Iraq Country Manager who signed letters agreeing to pay bribes to Iraqi officials during the Oil for Food Program. The staff was informed that the Country Manager was missing or dead when, in fact, he remained employed by Weatherford. In at least two instances, email was deleted by employees prior to the imaging of their computers. On another occasion, Weatherford failed to secure important computers and documents and allowed potentially complicit employees to collect documents subpoenaed by the staff.  Subsequent to the misconduct, Weatherford greatly improved its cooperation and engaged in remediation efforts, including disciplining employees responsible for the misconduct, establishing a high level Compliance Officer position, significantly increasing the size of its compliance department, and conducting numerous anti-corruption reviews in many of the countries in which it operates.”

Under the heading “Anti-Bribery Violations,” the complaint states in pertinent part:

“Weatherford’s conduct in the Middle East and Angola violated [the FCPA’s anti-bribery provisions]. From 2005 through 2011, Weatherford authorized $11.8 million in payments to national oil company officials through a distributor intended to wrongfully influence national oil company decision makers to obtain and retain business.  Weatherford also violated [the anti-bribery provisions] when it retained the Swiss Agent to funnel bribes to a Sonangol official to obtain the Cabinda contract. Weatherford similarly violated [the anti-bribery provisions] by bribing other Sonangol officials via the joint venture in return for contracts and preferential treatment.”

Under the heading “Failure to Maintain Books and Records,” the complaint states in pertinent part:

“Weatherford, directly and through its subsidiaries, also violated [the books and records provisions] when it made numerous payments and engaged in many transactions that were incorrectly described in the companys books and records. In the Middle East, for example, the money given to a distributor to be used as bribes was reflected in Weatherfords books and records as legitimate volume discounts. In Angola and Congo, payments to foreign officials and others were described as legitimate consulting fees rather than bribe payments.  Payments to Sonangol executives through the joint venture were misrecorded as legitimate dividend payments.”

Under the heading “Failure to Maintain Adequate Internal Controls,” the complaint states in pertinent part:

“Weatherford violated [the internal controls provisions] by failing to devise and maintain an adequate system of internal accounting controls.  The violations were widespread and involved conduct at Weatherford’s headquarters as well as at numerous subsidiaries. Executives, managers and employees throughout the organization were aware of the conduct, which lasted a decade.  Weatherford paid millions of dollars to consultants, agents and joint venture partners without adequate due diligence. Weatherford approved cash payments to Algerian officials traveling to Houston without any justification for the payments. Employees made payments to agents without regard to grants of authority and, on some occasions, without even receiving an invoice. In Italy, internal accounting controls were ineffective, allowing executives to embezzle and pay bribes for years.

In the Middle East, the company failed on several occasions to perform due diligence on the distributor it used, despite the fact that the agent was imposed upon them by a national oil company official and would be selling to a government entity. The use of large volume discounts was not routinely reviewed.  […] Weatherford also failed to provide FCPA … training.  While Weatherford did require certain employees to complete a yearly ethics questionnaire seeking instances of alleged misconduct, Weatherford failed to investigate or even review the responses.”

As noted in the SEC’s release, Weatherford agreed to pay approximately $65.6 million to the SEC, including an approximate $1.9 million penalty assessed in part for lack of cooperation early in the investigation.

In the SEC’s release, Andrew Ceresney (Co-Director of the SEC’s enforcement division) stated:

“The nonexistence of internal controls at Weatherford fostered an environment where employees across the globe engaged in bribery and failed to maintain accurate books and records.  They used code names like ‘Dubai across the water’ to conceal references to Iran in internal correspondence, placed key transaction documents in mislabeled binders, and created whatever bogus accounting and inventory records were necessary to hide illegal transactions.”

Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:

“Whether the money went to tax auditors in Albania or officials at the state-owned oil company in Angola, bribes and improper payments were an accustomed way for Weatherford to conduct business.  While the profits may have seemed bountiful at the time, the costs far outweigh the benefits in the end as coordinated law enforcement efforts have unraveled the widespread schemes and heavily sanctioned the misconduct.”

Joseph Warin (Gibson Dunn) represented Weatherford.

In this statement, Bernard Duroc-Danner (Weatherford’s Chairman, President and CEO) stated:

“This matter is now behind us. We move forward fully committed to a sustainable culture of compliance.  With the internal policies and controls currently in place, we maintain a best-in-class compliance program and uphold the highest of ethical standards as we provide the industry’s leading products and services to our customers worldwide.”

On the day of the enforcement action, Weatherford’s shares closed up approximately 1.2%.

Designing Corruption Out of The System: Collective Action Through Transformation Mapping

Note:  Professor Juliet Sorensen (Northwestern University School of Law) and Northwestern Law students Akane Tsuruta and Jessica Dwinell are attending the Fifth Conference of the State Parties (CoSP) to the United Nations Convention against Corruption in Panama City, Panama.  See here for a live feed of the States Parties’ discussions.

This post regarding the proceedings is by Akane Tsuruta.

*****

Companies can be agents of change.  But it is better if they act together, and act with a focus.

Representatives from the World Economic Forum`s Partnering Against Corruption Initiative (PACI), the OECD, the Basel Institute on Governance, and Siemens agreed on the need for collective action by companies against corruption and “transformation mapping” as an innovative way to focus their action.

Collective action in the corruption context is a “coordinated, sustained process whereby businesses and their partners jointly tackle the problems of corruption that affect them all.”  To be successful, action requires trust, time, and a joint understanding of the risks and potential areas for change.  But in an area as complex as corruption, companies and their collective endeavors may not know where to start.

Transformation mapping is a method to figure that out.  It “helps companies be more efficient about where to engage in collective action.”  It works by first brainstorming central topics and then radiating outward by identifying related issues, stakeholders, solutions, and challenges, until there is a “constellation” of ideas.  Such a visual may build understanding by illuminating connections and gaps between the various points – areas where company action may be especially impactful.

Yesterday at the CoSP , state delegates and observers tried transformation mapping corruption.  Some ideas that emerged were:

  • Corruption as an interaction between human beings and a system.  Human beings create the system but also react to it.
  • Corruption is the big elephant in the room, and the best way to tackle an elephant is bit by bit.
  • Language is important.  Just like visual mapping may build understanding, visual words may also better aid the emergence of new ideas.  Language may also be an indicator of business and country readiness to engage in real anti-corruption initiatives.  For example, if a company’s compliance officer cannot bear to say “corruption” and prefers “circumlocution,” the company might not be ready to take effective action.
  • Balancing collective action and anti-trust allegations. Collective action among industry competitors may raise eyebrows.  In the course of collective action, company competitors may need to discuss details that would verge on collusion.
  • Effective anti-corruption collective action may be realistically limited to companies who together hold a significant share of their market.  If competition abounds, a small band of small companies may not make a difference – bribe solicitors can just go to someone else.
  • An anti-corruption “tone from the top” should come from business leaders and government leaders, but anti-corruption recommendations should also be sensitive to the real consequences in some countries of “sticking your head above the parapet.”

In an area like corruption, where the target is always moving and adapting, transformation mapping may be a valuable means of gathering experts–whether CEOs or state delegates—and identifying the gaps where corruption may not exist now, but has the potential to spring up like a weed in the future.

Constructive Public-Private Partnerships to Prevent Bribery Solicitation: The High Level Reporting Mechanism

Note:  Professor Juliet Sorensen (Northwestern University School of Law) and Northwestern Law students Akane Tsuruta and Jessica Dwinell are attending the Fifth Conference of the State Parties (CoSP) to the United Nations Convention against Corruption in Panama City, Panama.  See here for a live feed of the States Parties’ discussions.

This post regarding the proceedings is by Jessica Dwinell.

*****

To date, most governmental anti-bribery efforts focus on either the offering or giving of bribes. However, on Monday afternoon, members of governance institutions and the business community discussed an innovative approach to prevent demand-side bribery solicitation by public officials: the “High Level Reporting Mechanism” (HLRM). The Basil Institute on Governance and the OECD developed the HLRM concept—a mechanism dependent on public-private partnerships—in response to company concerns regarding the extent of bribery solicitation and extortion, and their fear of retaliation should they report illicit public official activity. According to the HLRM Concept Brief submitted by the OECD and Basil Institute on Governance, the HLRM seeks to mitigate such concerns by “allow[ing] companies faced with bribery solicitation to report these to a dedicated and high-level institution that is tasked with responding swiftly and in a non-bureaucratic manner to reports.”

Successful implementation of an HLRM depends on several factors, including access to high level reporting, institutional independence, ability of the institution to address concerns quickly, country-specific procedures, and, perhaps most importantly, public and corporate trust in the host institution. However, as panelists Rafael Merchan (Secretary for Transparency in the Office of the President of Colombia) and Enery Quinones, (Chief Compliance Officer of EBRD) underscored, HLRM implementation is not a cookie-cutter process and the mechanism procedures can vary greatly.

For instance, Mr. Merchan explained that prior to implementing the HLRM in the area of procurement, companies faced with bribery solicitation by Colombian officials had three choices: (1) seek a judicial remedy which could take four to five years to resolve and never adequately address corporate concerns; (2) pay the bribe and risk prosecution; or (3) refuse to invest in the country. To address this prisoner’s dilemma—one in which all companies would be better off should they collectively refuse bribery solicitations—Colombian officials proposed an HLRM. Specifically, the Colombian pilot program consists of a group of experts dependent on the Secretary for Transparency (thus providing high level access), yet independent from the agencies that make procurement decisions. Complaints of solicitation are sent directly to Mr. Merchan, who maintains confidentiality and prevents press leakages. In return, companies sign transparency pacts in which they agree to engage only in public procurement meetings, not to offer gifts to public servants and refrain from hiring public officials until two years after the completed transaction. Though the HLRM has yet to receive a complaint, the Colombian government has shown a clear political will to fight corruption and fifteen companies have voluntary signed the transparency pacts.

Ukraine’s proposed HLRM—designed in large part to address private sector concerns in an expedient manner—differs vastly and, as Ms. Quinones explained, its creation “has been a very difficult process.”  When the Ukrainian government realized that it was struggling to attract foreign investors, and the European Bank for Reconstruction and Development (EBRD) considered withdrawing its investments entirely, Ukrainian officials had to listen to investor concerns. Thus began the process of detailing an HLRM completely independent of the government. Though such independence proved the “first stumbling block,” Ms. Quinones told government personnel, “businesses will not trust this [HLRM] process if [Ukrainian officials] are controlling it.”

As a result, the proposed mechanism would consist of a director, two deputies and staff members tasked with both receiving and resolving business complaints and publicly monitoring and reporting on the actions—and non-actions—of government agencies. These individuals would not serve as law enforcement, they would not investigate allegations and they would not act in a judicial capacity. Rather, they would focus on providing a “way for businesses to feel confident in bringing complaints,” and would offer the means for resolving bribery solicitation complaints in a timely and effective manner. For instance, rather than seek to blame an individual or assess liability in cases of customs bribery solicitation, Ms. Quinones explained that the HLRM would focus on helping companies delayed at customs for failure to pay a bribe seek release of their goods. Since private sector concerns, rather than State political will, drove the creation of the Ukrainian proposal, its aims focus first and foremost on addressing businesses’ immediate concerns.

The panelist’s business representatives generally supported implementation of HLRMs. Javier Lozada, (Vice President and Regional General Counsel of Philips Latin America) stressed that for business, “any reporting mechanism that can help level the playing field, . . . particularly in growth markets . . . is more than welcome.” Dominique Lamoureux (Vice President of Ethics and Corporate Responsibility of Thalès) likewise recognized that you “need two to tango” and that businesses appreciate the HLRM concept.

Nevertheless, both individuals identified potential obstacles from a business perspective. First, they underscored that it may take considerable time for companies to fully trust that filing a complaint in accordance with the HLRM will not provoke retaliatory action. Second, the HLRM’s failure to offer—or protect—confidentiality in reporting mechanisms may dissuade companies from coming forward. And third, companies may fear that competitors who have lost a tender will simply manipulate the system to delay the procurement process.

How Colombian and Ukrainian officials will react when the first complaint is filed remains to be seen and the mandates of the HLRMs will have to clearly outline measures—if any—intended to protect confidentiality and prevent manipulation. Yet, as Mr. Merchan underscored, the process to combat corruption and discourage bribe solicitations will move forward on a “trial and error” basis. Though the HLRM may not be the solution, it is at the very least an additional piece of the puzzle.

Friday Roundup

Another acknowledgment of the logic, whistleblower statistics, a guilty plea, and for the reading stack.  It’s all here in the Friday roundup.

Another Acknowledgment of the Logic

Previous posts here and here have highlighted recent speeches by top SEC officials in which they acknowledge the underlying logic supporting a compliance defense.  Deputy Attorney General James Cole did the same in this recent speech before a bank compliance officer crowd.

“At the Department of Justice, we know that compliance officers within financial institutions, and the lawyers, bankers, and others who work with them, are the first line of defense against abuse within these institutions.  Compliance officers are critical to protecting both a bank’s reputation and its bottom line.  They’re essential when it comes to preventing criminal activity – and if that effort is not entirely successful, detecting and reporting such conduct.  It is not an exaggeration to say that compliance is fundamental to protecting the security of our financial institutions and is essential to the integrity of our entire financial system. Despite, and in some ways because of, this crucial role, I know that working in compliance is often difficult.  Compliance is seldom thought of as a ‘money-maker’ for any bank, and it may be challenging to get sufficient resources and authority to do the job well.  To some, compliance may not seem to fit within the culture of a fast-moving, cutting-edge institution.  And at times, certain business units or managers may seem downright hostile toward the compliance function. We at the Department of Justice understand this reality.  And we appreciate that, despite these challenges, you and your colleagues are fully committed to helping protect the integrity of your institutions and our financial system.”

[…]

The notion that compliance must be firmly embedded in a corporation’s culture has been raised before, including at this conference, by many government officials.  You’ve heard a great deal about the importance of ‘tone at the top.’  Indeed, companies regularly argue during negotiations that they have taken various steps to set the right tone at the highest levels of their institutions.  But based on what we have seen, we cannot help but feel that the message is not getting through often enough or clearly enough. Despite years of admonitions by government officials that compliance must be an important part of a corporation’s culture, we continue to see significant violations of law at banks, inadequate compliance programs, and missed opportunities to prevent and detect crimes.”

In “Revisiting a Foreign Corrupt Practices Act Compliance Defense,” I argue, among other things, that a compliance defense will better incentivize corporate compliance and reduce improper conduct.  Compliance is a cost center within business organizations and expenditure of finite resources on FCPA compliance is an investment best sold if it can reduce legal exposure, not merely lessen the impact of legal exposure.

In short, an FCPA compliance defense will best allow compliance professionals in the FCPA context to – in the words of Cole – “get sufficient resources and authority to do the job well.”

Will the DOJ and SEC ever be capable of realizing that a compliance defense is a race to the top, not a race to the bottom?  (See here for the prior post).  Will the DOJ and SEC ever have the courage to realize that a compliance defense can best help the enforcement agencies accomplish its laudable goals? (See here for the prior post).

Whistleblower Statistics

The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act.  In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement.  As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement.  So anxious was FCPA Inc. for a marketing opportunity to sell its compliance services, some even called the generic whistleblower provision the FCPA’s “new” whistleblower provisions.

So far, there have not been any whistleblower awards in connection with FCPA enforcement actions.  Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.

Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress.  Recently, the SEC released (here) its annual report for FY2013.

Of the 3,238 whisteblower tips received by the SEC in FY2013, 4.6% (149) related to the FCPA.  As noted in this similar post from last year, of the 3,001 whisteblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA.  In FY2011 (a partial reporting year)  3.9% of the 334 tips received by the SEC related to the FCPA.

Yes, there will be in the future a whistleblower award made in the context of an FCPA enforcement action.  Yes, there will be much ink spilled on this occasion and wild predictions about this “new trend.”  Yet, I stand by my prediction – now 3.5 years old, that Dodd-Frank’s whistleblower provisions will have a negligible impact on FCPA enforcement.

“Foreign Official” Pleads Guilty

Earlier this week, the DOJ announced that Maria Gonzalez, the alleged “foreign official” at the center of the FCPA enforcement actions against individuals associated with broker-dealer Direct Access Partners LLC, pleaded guilty to “conspiring to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses.”  Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes – an alleged state-run economic development bank in Venezuela) is to be sentenced on August 15, 2014.

As noted in the DOJ’s release:

“Previously, three former employees of the Broker-Dealer – Ernesto Lujan, Jose Alejandro Hurtado, and Tomas Alberto Clarke Bethancourt – each pleaded guilty in New York federal court to conspiring to violate the Foreign Corrupt Practices Act (FCPA), to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses, relating, among other things, to the scheme involving bribe payments to Gonzalez.  Sentencing for Lujan and Clarke is scheduled for Feb. 11, 2014, before U.S. District Judge Paul G. Gardephe.  Hurtado is scheduled for sentencing before U.S. District Judge Harold Baer Jr. on March 6, 2014.”

Reading Stack

An interesting read from a Vietnam media source regarding the notion that – just like in tango – it takes two in a bribery scheme and that many instances of bribery are the result of harassment by foreign officials and extortion-like demands.  When passing the FCPA in 1977, Congress fully recognized and understood this reality and that is why it did not seek to capture facilitation payments in the FCPA.  (See here for more reading).

*****

A good weekend to all.

What’s On Your Mind?

The dog days of summer.  A time for reflection, a time to think.

I posed the question “what’s on your mind” to the following FCPA practitioners and below are their responses.

Philip Rohlik (Debevoise & Plimpton – Hong Kong)

“While I have been working on Asian related FCPA matters for more than seven years, I moved to the region two years ago.  Living here and interacting with local employees in situations other than investigations has given me a different perspective of the cost and difficulties associated with compliance.

Facilitating payments and transnational legal regimes that seek to bar them are on my mind.  While it is correct and easy to say that ethical multinational corporations should not give in to the petty extortion that characterizes facilitation payments, the issue is not so simple when looked at from the reality of an employee in a high-risk jurisdiction — the kind of employee who recently asked me for advice on “how do I make the police go away?” when they visit the second or third week of every month (about the time their last month’s paycheck runs out).  It is easy for a compliance officer or lawyer who encounters random government officials on his or her way to or from the airport to make full use of the ICC’s Resist handbook.  Local (and, let’s face it, not that well paid) employees who must deal with specific officials on a regular basis are in a different situation especially if they have no desire to test the limits of “imminent physical harm.”

When laws impose vicarious or respondeat superior liability, situations to which the law applies should not be determined from the abstract perspective of a corporation but from the realities faced by the company’s employees.  Is the fight against corruption really furthered by having zero tolerance policies for facilitation payments at the corporate level, but local employees very rationally believing that such grand pronouncements leave them in a situation that will either (i) make their life very difficult or (ii) force them to circumvent internal controls in order to make the payment (thereby creating a potential mechanism for more nefarious payments)?  In this respect, the U.S. law that exempts facilitating payments from the anti-bribery provisions of the FCPA may be less anachronistic than it is often made out to be.

Also often on my mind is third party due diligence.  Right now, one of our concerns is attending to our clients’ needs for right-sizing third party due diligence. Businesses are concerned that the continued lack of clarity from regulators as to the required steps results in excessive cost and a misallocation of compliance resources.  While some third parties deserve thorough diligence, how much diligence is due other third-parties?  Is a basic questionnaire and (the often-not-inexpensive) outsourcing of a public records check sufficient?  What if such checks are almost always inconclusive in countries with limited public records?  Do they just become inefficient box ticking?  We are actively working with both clients as well as due diligence firms providing cloud-based and world-wide investigative services to help get these costs under control.  Among the solutions we are working on are greater use of in-house information.  If there are adequate internal controls on the evaluation of in-house experience with a third party, we believe that the greater use of on-hand information to evaluate third parties can be a real cost-saver.  Doing so would free up resources for other compliance tasks as well as improve the client’s bottom line.”

John Rupp (Covington & Burling – London)

“As we continue to struggle on behalf of clients with demands for bribes, large and small, by government officials in a depressing number of countries, I have become ever more convinced that a new approach to the campaign against bribery – in particular, by western countries – is needed.  The approach that western countries have taken thus far to the bribery of foreign government officials is to punish the bribe giver.  The premise appears to be that international companies, including those subject to the US Foreign Corrupt Practices Act and the UK Bribery Act 2010, rather like bribing foreign government officials, seeing it as a convenient way to win business without having to compete fairly with other companies operating in the same space.

A completely different picture emerges, of course, when one spends a good part of each working day developing strategies to enable clients to operate in countries where official corruption is endemic.  The international company employee who wakes up in the morning, steadies himself or herself in the mirror and then looks forward to winning business through bribery is an exceedingly rare bird in my experience.  Overwhelming, the reflected image of the vast majority of employees of international companies grappling with bribery demands is of consternation – how does one continue to operate in Country X when everyone on the government payroll in the country is demanding a bribe for everything?

A fully developed, and maximally effective, anti-bribery program by a western country would involve, I believe, much more attention than has been paid in the past to assisting international companies when they are confronting demands for bribes by foreign government officials.  The US State and Commerce Departments, UK and German Foreign Ministries, World Bank – and many others – should put much more emphasis in the future than they have in the past on assisting companies fend off official demands for bribes.  In many, many cases, they have the resources – and the leverage – to do so.

I’m not suggesting that western countries consider repealing statutes punishing the bribery of foreign government officials.  What I am suggesting is that they balance that approach with an equally concerted effort to deal with the demand side of the bribery equation.

Thomas Fox (Solo Practitioner, Founder and Editor of the FCPA Compliance and Ethics Blog)

“The Securities and Exchange Commission (SEC) is investigating JPMorgan Chase regarding its hiring practices in China. It appears that JP Morgan Chase hired children of Chinese government officials or heads of state owned enterprises. While such hirings do not violate the FCPA per se, they do raise red flags. The FCPA Professor was quoted in the New York Times, “While the hire of a son or daughter itself is not illegal, red flags would be raised if the person hired was not qualified for the position, or, for example, if a firm never received business before and then lo and behold, the hire brought in business.” Such a hire may be a FCPA noteworthy event if the timing of the alleged hiring is closely connected to important business victories and awards of government business.

While the questions of corrupt intent will be paramount I think that this episode emphasizes the continuing key concept of the three most important things in any FCPA compliance program; that being: Document, Document, Document. If your compliance program does not document its successes there is simply no evidence that it has succeeded. In addition to providing to your company support to put forward to the DOJ, it is the only manner in which to gauge the overall effectiveness of your compliance program. To negate corrupt intent, JP Morgan Chase will have to dis-link any hiring with the obtaining of business. It will be the documentary efforts of the company in answering this query that may well decide the question of whether the SEC will consider the matter a FCPA violation or not.”

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