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The FCPA And South Asia

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Yesterday, I had the pleasure to participate in the South Asia Legal Studies conference at the University of Wisconsin Law School.  I participated in a panel moderated by Andy Spalding (here – Visiting Assistant Professor at Chicago-Kent College of Law) titled “Corruption in South Asia:  The Role of Law and Legal Institutions.”

The focus of my remarks addressed the following question:  are U.S. companies (or other multinational companies subject to the FCPA) doing business in South Asia intent on engaging in bribery or are such companies doing business in South Asia confronted by conditions not of their own making (the later comment inspired by Joseph Covington’s recent observation regarding a potential FCPA compliance defense – see here).

I noted, as evidenced by recent FCPA enforcement activity in India, Bangladesh, and Pakistan, that the latter seems to be true.  South Asia is plagued by harassment bribes.  For instance, according to the 2010 Transparency International Global Corruption Barometer –  here – 54% of Indian households paid a bribe in a 12 month period to receive basic services.  As noted in this previous post, Kaushik Basu (India’s Chief Economic Advisor) recently stated that “harassment bribery is widespread in India and it plays a large role in breeding inefficiency and has a corrosive effect on civil society.”  This 2010 National Public Radio piece noted that “getting things done without hassles [in India] requires a bribe.”  The piece observed as follows.  India is “famous for paperwork, tangled bureaucracy and the courts are slow.  So, often it just makes economic sense to shrug and pay the money.  Because when you bribe someone, they can become like your own personal Ganesh, the god who is the remover of obstacles.”

FCPA enforcement in South Asia has almost exclusively focused on harassment bribes, payments made by companies, nearly always with the assistance of local agents, consultants, and brokers, simply to get things done and remove obstacles.  For instance, the Diageo enforcement action concerned, in part, payments in India in connection with product label registration and securing favorable product placement and promotion.  The Wabtec enforcement action concerned payments in India in connection with the scheduling of pre-shipping product inspections, issuance of product delivery certificates and tax audits.  The Dow enforcement action concerned payments in India in connection with registering products.  The Avery Dennison enforcement action concerned, in part, payments in Pakistan in connection with obtaining bonded zone licenses and to overlook bonded zone regulatory violations.  The Baker Hughes enforcement action concerned, in part, payments in India in connection with shipping permits.

Are the above FCPA enforcement actions the best way to address harassment bribes in South Asia and other parts of the world?

“Rapid Multinational Expansion Through Mergers and Acquisitions” Leads to FCPA Enforcement Action Against Diageo

The Foreign Corrupt Practices Act is of course no laughing matter. Yet if an FCPA joke book is ever written there is surely to be an entry about the Indian and Korean military officials, a Thai lobbyist, and a Korean Customs official, who while on a purely recreational side-trip to Budapest, stopped in a bar, nibbled on some rice cakes, downed a Guinness and talked about product labeling, excise taxes, and transfer pricing.

Yesterday, the SEC announced (here) an FCPA books and records and internal controls enforcement action against Diageo PLC via an administrative cease and desist order. Diageo, headquartered in London, has American Depository Shares registered with the SEC and traded on the New York Stock Exchange and is thus an “issuer” under the FCPA.

In summary fashion, the Order (here) stated as follows.

“This matter concerns multiple violations of the Foreign Corrupt Practices Act (“FCPA”) by Respondent Diageo, one of the world’s largest producers of premium alcoholic beverages. Over more than six years, Diageo, through its subsidiaries, paid over $2.7 million to various government officials in India, Thailand, and South Korea in separate efforts to obtain lucrative sales and tax benefits.”

“In India, from 2003 through mid-2009 Diageo made over $1.7 million in illicit payments to hundreds of Indian government officials responsible for purchasing or authorizing the sale of its beverages. Increased sales from these payments yielded more than $11 million in ill-gotten gains. In Thailand, from 2004 through mid-2008, Diageo paid approximately $12,000 per month – totaling nearly $600,000 – to retain the consulting services of a Thai government and political party official. This official lobbied extensively on Diageo’s behalf in connection with multi-million dollar pending tax and customs disputes, contributing to Diageo’s receipt of certain favorable dispositions by the Thai government. With respect to South Korea, in 2004, Diageo paid 100 million won (KRW) (over $86,000) to a customs official as a reward for his role in the government’s decision to grant Diageo significant tax rebates. Diageo also paid over $100,000 in travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations. Separately, Diageo made hundreds of gift payments totaling over $230,000 to South Korean military officials in order to obtain and retain liquor business.”

“Diageo and its subsidiaries failed to account accurately for these illicit payments in their books and records. Exercising lax oversight, Diageo also failed to devise and maintain internal accounting controls sufficient to detect and prevent the payments.”

As set forth in the SEC’s order, “Diageo’s history of rapid multinational expansion through mergers and acquisitions contributed to defects in its FCPA compliance programs.” Indeed, the conduct at issue focused on Diageo India Pvt. Ltd. (“DI”) (a wholly-owned indirect subsidiary acquired as a result of a merger); Diageo Moet Hennessy Thailand (“DT”) (a joint venture Diageo acquired an indirect majority interest in as a result of a merger) and Diageo Korea Co. Ltd. (“DK”) (a wholly-owned indirect subsidiary acquired during an acquisition). According to the SEC, “at the times of these acquisitions, Diageo recognized that its new subsidiaries had weak compliance policies, procedures, and controls” but “nevertheless, Diageo failed to make sufficient improvements to these programs until mid-2008 in response to the discovery of illicit payments.”

India

As to India, the SEC stated as follows. “From at least 2003 through June 2009, DI paid an estimated $792,310 in improper cash payments through its third-party distributors to 900 or more employees of government liquor stores in and around New Delhi. DI also paid an estimated $186,299 (representing 23% of the payments) in “cash service fees” to the distributors as compensation for advancing the funds. DI made the payments to increase government sales orders of its products, and to secure favorable product placement and promotion within the stores.”

The SEC further stated as follows. “During the same six-year period (2003 – 2009), Diageo, through DI, also reimbursed an estimated $530,955, and made plans to reimburse an additional $79,364, in improper cash payments made by third-party sales promoters to government employees of the Indian military’s Canteen Stores Department (“CSD”). The payments, made with DI’s knowledge and authorization, were designed to: (i) foster the promotion of Diageo products in the CSD’s canteen stores (analogous to the U.S. military’s post exchanges); (ii) obtain initial listings and annual label registrations for Diageo brands, price revision approvals, and favorable factory inspection reports; (iii) secure the release of seized shipments of Diageo products; and (iv) promote good will through the distribution of Diwali and New Year’s holiday gifts to CSD employees.”

The SEC also stated as to India as follows. “Diageo failed to ensure that DI properly accounted for a number of additional, improper payments to government officials who controlled administrative functions vital to DI’s business. From at least 2003 through 2008, Diageo, through DI, reimbursed an estimated $98,310 in cash payments made by its third-party promoters and distributors to government officials in the North Region of India and in the State of Assam for the purpose of securing label registrations for Diageo products.” In addition, the SEC Order stated as follows. “… [F]rom at least 2003 through June 2009, Diageo, through DI, paid an estimated $78,622 in extra commissions to its distributors in the North Region to reimburse them for payments made to Excise officials to secure import permits and other administrative approvals.”

Thailand

As to Thailand, the SEC Order stated as follows. “From April 2004 through July 2008, Diageo, through DT, retained the services of a Thai government and foreign political party official (the “Thai Official”) to lobby other Thai officials to adopt Diageo’s position in several multi-million dollar tax and customs disputes. For this retainer DT paid approximately $12,000 per month for 49 months, for a total of $599,322. DT compensated the Thai Official through 49 direct payments to a political consulting firm (the “Consulting Firm”) for which the Thai Official acted as a principal. Most, if not all, of the $599,322 paid to the Consulting Firm was for the Thai Official’s services and accrued to his benefit. The Thai Official served as a Thai government and/or political party official throughout the relevant period (April 2004 – July 2008) in which he received compensation from DT. At various times the Thai Official served as Deputy Secretary to the Prime Minister, Advisor to the Deputy Prime Minister, and Advisor to the Ministry of Agriculture and Cooperatives. The Thai Official also served on a committee of the ruling Thai Rak Thai political party, and as a member and/or advisor to several state-owned or state-controlled industrial and utility boards. DT’s senior management knew that the Thai Official was a government officer during its engagement of the Consulting Firm. The Thai Official was the brother of one of DT’s senior officers at that time. Several members of Diageo’s global and regional management attended meetings with the Thai Official and senior members of the Thai government. The Thai Official provided extensive lobbying services on behalf of Diageo and DT in connection with several important tax and customs disputes that were pending between Diageo and the Thai government. For example, with respect to excise taxes, the Thai Official coordinated and attended numerous meetings between senior Thai government officials and senior Diageo and DT management, including two meetings in April and May 2005 with Thailand’s then Prime Minister. In May 2005, shortly following the meetings arranged by the Thai Official, the Prime Minister made a radio address publicly endorsing Diageo’s position in favor of a “specific” approach (based on quantity) rather than an “ad valorem” approach (based on price) to calculating excise taxes. On Diageo’s behalf, the Thai Official also met repeatedly with senior commerce, finance, and customs authorities in charge of the transfer pricing and import tax disputes, as well as with members of the Thai parliament. The Thai Official’s services contributed to Diageo’s successful resolution of several components of these disputes. For example, during 2004 and 2005 Diageo and DT were actively engaged in a dispute with the Thai government over the appropriate transfer pricing formula applied to One Liter bottles of Johnnie Walker Red Label and Black Label Scotch whiskey. Based in part on the Thai Official’s lobbying efforts, the Thai government accepted important aspects of DT’s transfer pricing method and released over $7 million in bank guarantees that DT had been required to post while the tax dispute was pending.”

South Korea

As to Korea, the SEC Order stated as follows. “Diageo had significant tax and customs issues in South Korea. In April 2003, DK, under Diageo’s direction, requested from South Korea a more advantageous formula for calculating the transfer pricing, for tax purposes, of Windsor Scotch whiskey that DK was importing into South Korea. As part of those negotiations, DK also sought tens of millions of dollars in tax rebates based on a claim that DK had overpaid under the then existing transfer pricing formula. In April 2004, following a year of intense negotiations and lobbying by DK, the South Korean government granted DK a rebate of approximately $50 million. In July 2004, three months after DK received the tax rebates, a DK manager (the “Manager”) paid an apparent reward of 100 million KRW ($86,339) to a Korean Customs Service official (the “Customs Official”) who had played a key role in the transfer pricing negotiations. With the approval of DK’s then chief financial officer, the Manager generated 60 million KRW ($51,802) of the payment by means of a surreptitious cash kickback scheme. The Manager solicited an inflated invoice from DK’s third-party customs brokerage firm (the “Customs Broker”), which had provided DK with consulting services during the transfer pricing negotiations. As orchestrated, DK paid an inflated invoice amount to the Customs Broker, which then gave 60 million KRW ($51,802) in cash back to the Manager. The Manager funded the remaining 40 million KRW ($34,537) of the total reward amount from personal sources. The Manager then provided the Customs Official with 100 million KRW ($86,339) in the form of ten bank checks of approximately 10 million KRW ($8,634) each.”

The SEC Order further stated as follows. “During the course of the transfer pricing negotiations in 2003 and 2004, DK also paid $109,253 in travel and entertainment costs for Korean customs and other government officials. Some of these expenses were unapproved and constituted improper inducements of the South Korean officials. For example, in December 2003, the Customs Official and several official colleagues traveled to Scotland with DK employees. The purported reason for the trip was to inspect Diageo’s Windsor Scotch production facilities as part of the transfer pricing negotiations. During the course of this apparently legitimate trip, DK’s chief financial officer and the Manager took the South Korean officials on a purely recreational side-trip to Prague and Budapest.”

In addition, the SEC Order stated as follows regarding gifts to Korean military officers. “From at least 2002 through at least 2006, Diageo, through DK, routinely made hundreds of small payments to South Korean military officers for the purpose of obtaining or maintaining business and securing a competitive business advantage. The payments assumed two forms: (i) holiday and vacation gifts known as “rice cake” payments; and (ii) business development gifts, called “Mokjuksaupbi” payments. Rice cake payments were customary and traditional presents that Diageo, through DK, provided to scores of military officers – many of whom were responsible for procuring liquor – several times each year during holidays and vacations. From 2002 through 2006, DK made approximately 400 rice cake payments, totaling at least $64,184, in the form of cash or gift certificates ranging in value between $100 and $300 per recipient. In October 2004, a senior officer within Diageo’s global compliance department explicitly approved the practice of making rice cake payments after a DK employee explained that the company would face a competitive disadvantage if it refrained. Over the same four-year period, Diageo, through DK, also spent approximately $165,287 on hundreds of non-traditional, non-seasonal gifts and entertainment for the military. Of these so-called “Mokjuksaupbi” payments (a term that was broadly intended by DK to refer to “payments for relationships with customers”), approximately $106,051 were for the purpose of influencing specific purchasing decisions. For example, in 2003, DK personnel requested approval of approximately $2,600 to entertain army personnel “for their cooperation” in connection with the re-selection of Windsor Scotch.”

Based on the above conduct, the SEC found FCPA violations, but only FCPA books and records and internal control violations. The absence of FCPA anti-bribery violations against Diageo and the referenced entities would seem to be the result of a lack of a U.S. nexus as to the payments. Even though the FCPA was amended in 1998 to provide an alternative nationality jurisdiction test as to U.S. issuers and domestic concerns, the FCPA retains a territorial U.S. nexus jurisdictional test as to non-U.S. issuers such as Diageo that are nevertheless subject to the FCPA.

As to the FCPA violations, the SEC order states as follows. “Diageo’s books and records did not accurately reflect illicit payments that it made, through its subsidiaries, to Indian, Thai, and South Korean government and military officials. Instead, Diageo, through DI, DT, and DK, disguised the improper payments as legitimate vendor expenses or recorded them under misleading rubrics such as “factory expenses,” “telephone expenses,” “shareholder stake,” and “sales support.” In several instances, the illicit payments were not recorded at all.” The SEC Order further states as follows. “As evidenced by the extent and duration of the wrongful payments and their improper recordation, Diageo failed to devise and maintain sufficient internal accounting controls.”

The SEC Order mentions Diageo’s cooperation and “certain remedial measures undertaken by Diageo, including employee termination and significant enhancements to its compliance program.”

As is common in all SEC FCPA enforcement actions, Diageo settled the matter without admitting or denying the SEC’s findings. Per the SEC Order, Diageo shall pay disgorgement of $11,306,081, prejudgment interest of $2,067,739, and a civil monetary penalty of $3,000,000.

In a press release (here) Diageo stated as follows. “Diageo takes the SEC’s findings seriously and regrets this matter. Systems and controls have been enhanced in an effort to prevent the future occurrence of such issues and to reinforce, everywhere the Company operates, a culture of compliance and commitment to the principles embodied in Diageo’s Code of Business Conduct.”

Diageo’s most recent Annual Report (Sept. 2010) stated as follows.

“As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators’ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo’s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations.”

Friday Roundup

Another FCPA hearing on Capital Hill next week, news regarding Goldmann Sachs, questioning the use of NPAs and DPAs, an informative read regarding India, and something for your “foreign official” file.

Its all here in the Friday roundup.

House Hearing

Next Tuesday, June 14th, the Subcommittee on Crime, Terrorism and Homeland Security of the House Judiciary Committee will hold a hearing titled “Foreign Corrupt Practices Act.” According to this report by Christopher Matthews of Main Justice the hearing is expected to focus on the following issues: successor liability, a potential compliance defense, “foreign official,” and corporate mens rea issues.

The witness list for the hearing is as follows (see here).

Hon. Michael Mukasey (Former Attorney General, Partner, Debevoise & Plimpton LLP – see here); Mr. Greg Andres (Deputy Assistant Attorney General, Criminal Division, U.S. Department of Justice); Mr. George Terwilliger (Partner, White & Case LLP – see here); and Ms. Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers – see here).

Predictably, some are blasting the very existence of the hearing. For instance, Political Correction, a project of Media Matters Action Network (a self-described progressive research and information center dedicated to analyzing and correcting conservative misinformation in the U.S. media), describes the hearing here as “Rep. Lamar Smith’s Fight to Make Bribery Easier For Big Business.”

The House hearing follows a November 30th Senate hearing titled “Examining Enforcement of the Foreign Corrupt Practices Act.” See here for a prior post.

This post, prior to the 2010 hearing provided some guiding words, and if those were not enough, how about this statement from William Brock, U.S. Trade Representative, on April 18, 1983 during a hearing before the House Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs.

“Mr. Chairman, no one minimizes the complexity of the issue before you today. Just because the Foreign Corrupt Practices Act spotlights a sensitive subject, some people wish to turn a ‘blind eye’ to its shortcomings rather than risk being accused of being ‘soft on bribery.’ That is too easy a way out. Retreating from controversy will not cure the law’s deficiencies. Such inaction will no more eliminate the need for FCPA reforms today than it can eliminate the criticism of the Act brought over the past several years. After five and on half years experience with this law, after legitimate problems have been identified and examined, we have a responsibility to respond. Is there any U.S. law that ought to be above such review and clarification – especially one as complex as the FCPA.”

Well said.

Goldman Inquiry

Yesterday, the Wall Street Journal reported – “Eyes on Goldman-Libya Dealings” – that the SEC is “examining whether Goldman Sachs Group Inc. and other financial firms might have violated bribery laws in dealings with Libya’s sovereign wealth fund.” The inquiry appears to be focused on a “$50 million fee Goldman initially agreed to pay [but one that was never paid to] the Libyan sovereign-wealth fund as part of a proposal … to help the fund recoup losses.”

A Goldman spokesman is quoted as follows. “We are confident that nothing we did or proposed was or could have been a breach of any rule or regulation. We retained outside counsel, as is our normal practice for any transaction to ensure that we were compliant with all applicable rules.”

Can the FCPA be implicated by payments never made?

Yes. The anti-bribery provisions prohibit “an offer, payment, promise to pay, or authorization of payment …”.

What about payments to foreign governments?

No. The anti-bribery provisions only apply to offers, payments, promises of payment, or authorizations of payments to “foreign officials.”

However, according to the WSJ article the inquiry appears to focus on whether the contemplated payment would have been passed on to an outside adviser firm “run at the time by the son-in-law of the head of Libya’s state-owned oil company.”

For more on the Goldman inquiry, see here from Ashby Jones (WSJ Law Blog) and here from Samuel Rubenfeld (WSJ Corruption Currents).

NPAs / DPAs

Non-prosecution and deferred prosecution agreements ought to be abolished. I’ve argued here and in other places that these agreements have traded one negative externality of white collar prosecution (the much over-hyped Arthur Anderson effect) for a host of others, including the alarming lack of any meaningful judicial scrutiny to ensure that NPAs and DPAs are truly based on facts and appropriate legal theories to support the charges “alleged.”

Mark Mendelsohn, the former head of the DOJ’s FCPA unit during its era of resurgence, stated in a September 2010 interview with Corporate Crime Reporter, that a “danger” with NPAs and DPAs “is that it is tempting” for the DOJ “to seek to resolve cases through DPAs or NPAs that don‟t actually constitute violations of the law.”

Asked directly – if the DOJ “did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year,” Mendelsohn stated as follows: “if the Department only had the option of bringing a criminal case or declining to bring a case, you would certainly bring fewer cases.”

Add W. Neil Eggleston, a former DOJ enforcement attorney currently a partner at Debevoise (here), to the growing list of former DOJ enforcement attorneys critical of these alternative resolution vehicles.

In this recent interview with Corporate Crime Reporter, Eggleston stated as follows. “I worry that [NPAs and DPAs] will become a substitute for a prosecutor deciding – this is not an appropriate case to bring – there is no reason to subject this corporation to corporate criminal liability. In the old days, they would have dropped the case. Now, they have the back up of seeking a deferred or non prosecution agreement, when in fact the case should not have been pursued at all. That’s what I’m worried about – an easy out.”

Well said.

India

If India is a country of concern or focus of yours, you will want to check out the most recent quarterly newsletter of the India Committee of the ABA Section of International Law. (See here).

Guest editor James Parkinson of BuckleySandler (here) provides the following articles, among others, in the newsletter: one devoted to the FCPA risks of doing business in India; another devoted to India’s demand-side statute – the Prevention of Corruption Act; another focused on reducing corruption risks in India through compliance programs; and another calling for India to join the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

“Foreign Official”

And finally, because your “foreign official” file would be incomplete without it, here is a transcript of the May 9th oral argument in the Carson “foreign official” challenge. See here and here for previous posts.

*****

A good weekend to all.

Something To Think About

The holiday weekend is upon us and perhaps you have already left the office.

Here is something to think about over the long weekend.

India’s Chief Economic Adviser, the economist Kaushik Basu, recently posted a paper titled “Why, for a Class of Bribes, the Act of Giving a Bribe Should be Treated as Legal” (here).

The abstract is as follows.

“The paper puts forward a small but novel idea of how we can cut down the incidence of bribery. There are different kinds of bribes and what this paper is concerned with are bribes that people often have to give to get what they are legally entitled to. I shall call these harassment bribes. Suppose an income tax refund is held back from a taxpayer till he pays some cash to the officer. Suppose government allots subsidized land to a person but when the person goes to get her paperwork done and receive documents for this land, she is asked to pay a hefty bribe. These are all illustrations of harassment bribes. Harassment bribery is widespread in India and it plays a large role in breeding inefficiency and has a corrosive effect on civil society. The central message of this paper is that we should declare the act of giving a bribe in all such cases as legitimate activity. In other words the giver of a harassment bribe should have full immunity from any punitive action by the state.

It is argued that this will cause a sharp decline in the incidence of bribery. The reasoning is that once the law is altered in this manner, after the act of bribery is committed, the interests of the bribe giver and the bribe taker will be at divergence. The bribe giver will be willing to cooperate in getting the bribe taker caught. Knowing that this will happen, the bribe taker will be deterred from taking a bribe.

It should be emphasized that what is being argued in this paper is not a retrospective pardon for bribe-giving. Retrospective pardons are like amnesties. They encourage rather than discourage corrupt behavior by rewarding the corrupt. And, in the process, they corrode society‘s morals.”

See here for the recent CNN segment “What in the World” for more on Basu’s proposal as well as other innovative ideas to reduce bribery and corruption.

The solution Basu addresses would seem most applicable to domestic bribery where a prosecuting agency has jurisdiction over both the bribe payor and bribe recipient. That is not the case in a typical FCPA scenario, but Basu’s paper and proposal is indeed interesting, thought provoking material.

*****

Finally, a previous post (here) discussed customer rewards programs and the SEC’s interest in RAE Systems.

Turns out there is an interest in this general issue on the other side of the Atlantic as well.

The office of Richard Alderman (Director of the U.K. Serious Fraud Office) alerted me to a recent speech he gave (here) at the 2011 International Medical Device Industry Compliance Conference. In the speech, Alderman talked about the soon-to-go live Bribery Act, self reporting, and the SFO’s relationship with the DOJ.

Alderman also talked about “incentive payments” and stated as follows.

“What I am also seeing is corporates having a hard look at some of the arrangements that are in fact justifiable for commercial reasons but which have not been scrutinized before with a view to seeing whether or not there are risks of bribery. Let me give you an example. Incentive payments. These are a common feature of many industries and I suspect of your own as well. I know that a number of companies and a number of industry organisations have been looking at this issue in order to see whether there are risks when the Bribery Act comes into force. We have had a number of meetings in the SFO with corporates and industry bodies about this issue. We have been able to talk through the issues and offer reassurance.

Clearly, these incentive payments are normally designed for commercial reasons and are commercially justifiable. There are risks though. What we have been talking about with corporates is the need for transparency and, in particular, the need to know where the money goes and the fact that it is justifiable. We also talk about the need for a senior person at the corporate’s head office to have visibility of what is happening and to be satisfied that what is happening is justifiable.

This may well be a feature of your own industry (and indeed I imagine that it probably is) and it may be that this is something that you want to discuss.”

*****

A good weekend to all.

Pride – A Little Bit Of Nigeria, And A Whole Lot Else … Plus It Pays To Assist the DOJ!

Next up in the analysis of CustomsGate enforcement actions is Pride International.

As described below, the Pride enforcement action includes not only Nigeria – Panalpina related conduct, but also conduct relating to contract extensions in Venezuela, bribing an administrative law judge in India, customs duties in Mexico, as well as other improper conduct in other countries.

See here for the prior post on the Shell enforcement action, here for the prior post on the Transocean enforcement action, here for the prior post on the Tidewater enforcement action here for the prior post on the Noble enforcement action and here for the prior post on the GlobalSantaFe enforcement action.

The Pride enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $56.2 million ($32.6 million criminal fine via a DOJ plea agreement and deferred prosecution agreement; $23.5 million in disgorgement and prejudgment interest via a SEC settled complaint).

DOJ

The DOJ enforcement action involved a criminal information against Pride International Inc. (“Pride International”) resolved through a deferred prosecution agreement and a criminal information against Pride Forasol S.A.S. (“Pride Forasol”), a wholly-owned subsidiary of Pride International resolved through a plea agreement.

Pride International Inc. Criminal Information

Houston based issuer Pride International Inc. (here) is one of the world’s largest offshore drilling companies.

The criminal information (here) alleges bribery schemes in Venezuela, India and Mexico.

Venezuela

According to the information, “Pride International owned and operated numerous oil and gas drilling rigs throughout South America, including in Venezuela.” In Venezuela, Petroleos de Venezuela S.A. (“PDVSA”), “a Venezuelan state-owned oil company,” leased “the semi-submersible rig Pride Venezuela from Pride Foramer Venezula.” Pride Foramer is described as a branch of Pride Forasol’s wholly-owned subsidiary Prime Foramer operating in Venezuela. According to the information, PDVSA “also contracted with Pride Foramer Venezuela to operate two jackup rigs, the GP-19 and the GP-20.”

The information alleges that between February 2003 and July 2003 Country Manager 1 [a U.S. citizen who was the Country Manager in Venezuela], the Marketing Manager [a Venezuelan citizen working for Pride Foramer Venezuela in Venezuela], the Operations Manager [a French citizen working for Pride Foramer Venezuela in Venezuela], and others known and unknown agreed to pay $120,000 to the Venezuela Intermediary [a company that provided catering services to Pride Foramer Venezuela] with the intent that the money would be paid to the PDVSA Director [a Venezuelan citizen appointed by the President of Venezuela as a member of the PDVSA Board of Directors] to secure a contract extension for the Pride Venezuela.”

According to the information, “in order to conceal and to generate money to pay the bribes to the PDVSA Director” the above named individuals “agreed and instructed one of Pride Foramer Venezuela’s vendors, Vendor A, to inflate certain of its invoices for its services” that “Pride Foramer Venezuela then paid Vendor A for the undelivered services relating to the inflated invoices” and that “Vendor A delivered the excess money it received from Pride Foramer Venezuela to the Venezuela Intermediary with the intent that it would be provided to the PDVSA Director.”

According to the information, “on behalf of Pride International and Pride Foramer Venezuela, Vendor A wire transferred bribe payments of at least $120,000 to, or for the benefit of, the PDVSA Director to an account at a bank in Miami, Florida in the name of the Venezuelan Intermediary.” According to the information, “in exchange for the corrupt payments, the Pride Venezuela contract was extended for approximately three months” and “the profits Pride International derived from extending the contract were approximately $2.45 million.”

As to GP-19 and GP-20, the information alleges that between April 2004 and November 2004 “the Marketing Manager, the Operations Manager, and others known and unknown also agreed to pay at least $114,000 to the Venezuelan Intermediary with the intent that the money would be paid to the PDVSA Director to secure contract extensions for the GP-19 and GP-20.” The information describes a similar payment scheme and payments made to an account in Miami, Florida in the name of the Venezuela Intermediary. According to the information, “in exchange for the corrupt payments, the PDVSA Director caused PDVSA to extend the GP-20 contract from July 2004 through June 2005 and the GP-19 contract from February 2005 through June 2005.”

According to the information “the profits that Pride International derived from the contract extensions for the GP-20 were approximately $596,000” however, the “GP-19 extension was not profitable.” The information further alleges that Senior Executive A [a U.S citizen located in Houston] “concealed information relating to the bribe payments to the PDVSA Director from reports submitted to Pride International auditors.”

India

The information alleges that between January 2003 and July 2003, “Senior Executive B [a French citizen who served as the Director of International Finance for Pride International], the Legal Director [a French citizen who served as the Director of Legal Affairs for Pride Forasol], the Base Manager [a Canadian citizen working for Pride India], the Area Manager [a U.S. citizen with responsibility for the Asia Pacific region], the India Customs Consultant [an individual who provided customs consulting services to Pride India], and others known and unknown agreed to pay $500,000 into bank accounts in Dubai in the names of third party entities with the intent that it would be passed on to an Indian CEGAT [Customs, Excise, and Gold Appellate Tribunal – an Indian administrative judicial tribunal] judge to secure a favorable judicial decision for Pride India [a branch of Pride Forasol’s wholly-owned subsidiary Pride Foramer] relating to a litigation matter pending before the official involving the payment of customs duties and penalties owed for a rig, the Pride Pennsylvania.”

According to the information, “to pay the bribe, employees of Pride Forasol, including Senior Executive B and the Legal Director, caused false invoices for agent and consulting services to be created and submitted to Interdrill [a wholly-owned subsidiary of Pride International organized under the laws of the Bahamas] for payment.” The invoices were processed, the payment was made and on June 30, 2003″Pride India received a favorable ruling from CEGAT” resulting in an “estimate gain to Pride Forasol” of “at least $10 million.”

According to the information, “to conceal the bribe, the Finance Manager [a British citizen who was the Eastern Hemisphere Finance Manager for Pride International], who was located in Houston, Texas, with knowledge of the scheme to bribe the Indian CEGAT judge, sent an e-mail to the Assistant Controller [a U.S. citizen], who was located in Houston, Texas, authorizing the booking of the bribe payments by Pride International’s subsidiary, Interdrill, as a ‘regular fee’ in a newly created ‘miscellaneous fees’ account.”

Mexico

The information alleges that around December 2004, “Senior Executive A, the Logistics Coordinator [a U.S. citizen who was the Logistics Coordinator for Pride Mexico], Country Manager 2 [a U.S. citizen who was the Country Manager in Mexico], and others known and unknown agreed to pay approximately $10,000 to the Mexican Marketing Agent [an individual who provided marketing services to Pride Mexico] to avoid taxes and penalties for alleged violations of Mexican customs regulations relating to a vessel leased by Pride International.”

According to the information, “to conceal the payments, the Mexico Marketing Agent caused false invoices purportedly for electrical maintenance services to be submitted to Pride Mexico [collectively Mexico Drilling Limited LLC, Pride Central America LLC, and Pride Drilling LLC – wholly owned subsidiaries of Pride International] in support of the payment.”

The information then alleges that all of the above-described payments were falsely characterized in the books and records of various subsidiaries or branches that were consolidated into the books, records, and accounts of Pride International for purposes of financial reporting.

Under the heading “total corrupt payments paid and improper benefits received,” the information alleges that between January 2003 through December 2004 “certain Pride International subsidiaries and their branches paid at least $804,000 in bribes to foreign government officials in Venezuela, India, and Mexico to extend contracts, secure a favorable judicial decision, and avoid the payment of customs duties and penalties.”

According to the information, “the benefit that Pride International received as a result of these payments was at least $13 million.”

Based on the above allegations, the DOJ charged Pride International with one count of conspiracy to violate the FCPA’s anti-bribery provisions and to knowingly falsify books and records as to the Mexico payments; one count of violating the FCPA’s anti-bribery provisions as to the Venezuela payments; and one count of FCPA books and records violations as to the India payments.

Pride International Inc. DPA

The DOJ’s charges against Pride International were resolved via a deferred prosecution agreement (see here).

Pursuant to the DPA, Pride International admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, subsidiaries, and agents as set forth above.

The term of the DPA is three years and seven months and it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and Pride International. Among the factors stated are the following.

(a) during a routine audit, Pride International discovered an allegation of bribery;

(b) Pride International voluntarily and timely disclosed to the Department and the SEC the misconduct;

(c) Pride International conducted a thorough internal investigation of that misconduct;

(d) Pride International voluntarily initiated a comprehensive anti-bribery compliance review of Pride International’s business operations in certain other high-risk countries [as to this broader compliance review, this Joint Motion to Waive Presentence Investigation notes that the review included a number of “high-risk countries including Angola, Brazil, Kazakhstan, Libya, Nigeria, the Republic of Congo, and Saudi Arabia” and that outside counsel with assistance from forensic accounting professionals were involved in the review of approximately 20 million pages of electronic and hard copy documents gathered from approximately 350 custodians, and that more than 200 interviews of employees and agents took place;

(e) Pride International regularly reported its findings to the Department;

(f) Pride International cooperated in the Department’s investigation of this matter, as well as the SEC’s investigation;

(g) Pride International undertook, of its own accord, remedial measures, including the enhancement of its FCPA compliance program, and agreed to maintain and enhance, as appropriate, its FCPA compliance program; and

(h) Pride International agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of Pride International and its employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.

As stated in the DPA, the fine range for the above describe conduct under the U.S. Sentencing Guidelines was $72.5 million to $145 million. Pursuant to the DPA, Pride International agreed to pay a monetary penalty of $32.625 million – approximately 55% below the minimum guideline amount.

Pursuant to the DPA, Pride International agreed to a host of compliance undertakings and to report to the DOJ on an annual basis (during the term of the DPA) “on its progress and experience in maintaining and, as appropriate, enhancing its compliance policies and procedures.”

As is standard in FCPA DPAs, Pride International agreed not to make any public statement “contradicting the acceptance of responsibility by Pride International as set forth” in the DPA and Pride International further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.

Pride Forasol Criminal Information

The Pride Forasol criminal information (here) alleges the same scheme to bribe an administrative judge in India as described in the Pride International information. The information charges one count of conspiracy to violate the FCPA’s anti-bribery provisions and to knowingly falsify books and records; one count of violating the FCPA’s anti-bribery provisions; and one count of aiding and abetting the creating of false books and records.

Pride Forasol Plea Agreement

The above described charges against Pride Forasol were resolved via a plea agreement (see here). Even though the Pride Forasol information is limited to India conduct, the sentencing guidelines range, $72.5 million to $145 million, is the same as set forth in the above described Pride International DPA.

The agreement sets forth factors motivating the DOJ to resolve the criminal charges in the manner in which they were resolved.

Such factors include: “Pride International’s and Pride Forasol’s substantial assistance with other related Department investigations regarding the bribery of foreign government officials in Venezuela and Mexico, including providing: (1) the names of individuals involved; and (2) contact information for the individuals” and “Pride International’s and Pride Forasol’s substantial assistance with other Department investigations regarding the bribery of foreign government officials in Nigeria and Saudi Arabia, including providing documentation and access to individuals.”

The above referenced Joint Motion to Waive Presentence Investigation states that Pride Forasol and Pride International “developed and timely provided detailed and significant information regarding third parties, including Panalpina Word Transport (Holding) Ltd. […] that was used to pay bribes to foreign government officials by numerous companies around the world.” The Joint Motion states that “the information provided by the Companies substantially assisted the Department because the extent of Panalpina’s conduct was unknown by the Department at the time of the Companies’ disclosure. It was only through the extensive, worldwide investigative efforts of the Companies that these complex criminal activities were uncovered and reported to the Department.”

SEC

The SEC’s civil complaint (here) alleges the same Venezuela, India, and Mexico payments described above.

As to Venezuela, the complaint alleges as follows:

“From approximately 2003 to 2005, Joe Summers, the country manager of the Venezuelan branch of a French subsidiary of Pride, and/or certain other managers authorized payments totaling approximately $384,000 to third-party companies believing that all or a portion of the funds would be given to an an official of Venezuela’s state-owned oil company in order to secure extensions of three drilling contracts. In addition, Summers authorized the payment of approximately $30,000 to a third party believing that all or a portion of the funds would be given to an employee of Venezuela’s state-owned oil company in order to secure an improper advantage in obtaining the payment of certain receivables.” (See this prior post for a summary of the Summers enforcement action).

“In or about 2003, a French subsidiary of Pride made three payments totaling approximately $500,000 to third-party companies, believing that all or a portion of the funds would be offered or given by the third-party companies to an administrative judge to favorably influence ongoing customs litigation relating to the importation of a rig into India. Pride’s U.S.-based Eastern Hemisphere finance manager had knowledge of the payments at the time they were made.”

“In or about late 2004, Bobby Benton, Pride’s Vice President, Western Hemisphere Operations, authorized the payment of $10,000 to a third party, believing that all or a portion of the funds would be given by the third party to a Mexican customs official in return for favorable treatment by the official regarding certain customs deficiencies identified during a customs inspection of a Pride supply boat.” (See here for a summary of the Benton enforcement action).

Based on these allegations, the SEC charged Pride International with FCPA anti-bribery violations. Based on these allegations, as well as the below allegations, the SEC charged Pride International with FCPA books and records and internal control violations.

The SEC’s complaint also describes certain other “transactions entered into by wholly or majority owned Pride subsidiaries operating in Mexico, Kazakhstan, Nigeria, Saudi Arabia, the Republic of Congo, and Libya [that] were not correctly recorded in those subsidiaries’ books.”

As to Mexico, the complaint alleges that a $15,000 payment was made to a “Mexican customs official during the course of the export [of certain rigs] to ensure that the export of the rig would not be delayed due to claimed violations relating to non-conforming equipment on board the rig.”

As to Kazakhstan, the complaint alleges that the Kazakhstan affiliate of Panalpina informed a Pride Forasol logistics manager “that Kazakh customs officials had identified irregularities during a customs audit of Pride Forasol Kazakhstan, but that the issue could be resolved by making a cash payment of approximately $45,000 and paying substantially reduced monetary penalties.” According to the complaint, “certain Pride Forasol managers authorized the cash payment by [Panalpina] to resolve the customs irregularities.” The complaint further alleges that Pride Forasol Kazakhstan made “three payments totaling approximately $204,000” to a Kazakh Tax Consultant while “knowing facts that suggested a high probability that the Kazakh Tax Consultant would give all or a portion of the payments to Kazakh tax officials” who previously threatened to levy substantial taxes and penalties against Pride Forasol Kazakhstan.

As to Nigeria, the complaint alleges that “certain Pride Forasol Nigeria and Pride Forasol managers were aware of information suggesting a high probability that [Panalpina] would give all or a portion of the lump-sum payments charged in connection with obtaining or extending Pride Forasl Nigeria temporary importation (“TI”) permits to Nigerian customs officials in exchange for their cooperation in issuing the TI permits on favorable terms and/or without completing certain legally required steps.” The complaint further alleges that Pride Forasol Nigeria records were incompete and that Pride Forasol Nigeria “did not have adequate assurances” that certain tax payments were not paid directly to tax officials. In addition, the complaint alleges that Pride Forasol Nigeria “authorized the payment of $52,000 to a Nigeria Tax Agent while knowing facts that suggested a high likelihood that the Nigeria Tax Agent would give all or a portion of the money to a Nigerian tax official.”

As to Saudi Arabia, the complaint alleges that the Saudi Arabian affiliate of Panalpina informed a Pride Forasol Arabia manager that expedited customs clearance of a rig could be assured for a payment of $10,000. The complaint alleges that the manager “took $10,000 in cash from Pride Forasol Arabia’s petty cash fund, describing on the petty cash voucher the purpose of the payment as ‘freight forwarding services,’ and gave the money to a Saudi customs official.”

As to Congo, the complaint alleges as follows. “An inspection by the Congo Merchant Marine revealed that certain personnel abroad [a Pride Congo rig] lacked required maritime certification. A Merchant Marine official proposed that Pride Congo could resolve the paperwork defiiciency by making a payment for his personal benefit. A Pride Congo manager agreed to pay the Merchant Marine official $8,000 in lieu of an official penalty.” According to the complaint, the “payments were recorded as travel expenses in Pride Congo’s books and records.”

As to Libya, the complaint alleges that Pride Forasol managers authorized payments to a Libya Tax agent in connection with unpaid social security taxes and penalties against Pride Forasol Libya “without adequate assurances that the Libyan Tax Agent would not pass some or all of these fees to” officials of Libya’s social security agency.

According to the complaint, “Pride obtained improper benefits totaling approximately $19,341,870 from the conduct” described in the complaint. “Prejudgment interest on this amount is $4,187,848.”

Without admitting or denying the SEC’s allegations, Pride agreed to an injunction prohibiting future FCPA violations and agreed to pay disgorgement and prejudgment interest of $23,529,718.

Pride’s press release (here) notes, among other things, as follows: “In addition to self-reporting in February 2006 and voluntarily cooperating with the government, we have greatly strengthened and enhanced our antibribery compliance program and policies. Our current management and board are strongly committed to conducting the company’s business ethically and legally, and we seek to instill in our employees the expectation that they uphold the highest levels of honesty, integrity, ethical standards and compliance with the law.”

Martin Weinstein (here) and Jeffrey Clark (here) both former DOJ enforcement attorneys with Willkie Farr & Gallagher, as well as Samuel Cooper (here) of Baker Botts, represented the Pride entities.

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