As recently highlighted here by the Wall Street Journal, the Foreign Corrupt Practices Act criminal trial of former PetroTiger CEO Joseph Sigelman, originally scheduled to begin this week, was “pushed back for two months to allow him assistance from an unlikely ally: the former Colombian official he is accused of bribing.” As noted in the article, “Mr. Sigelman is accused of paying David Duran, a former official at Colombia’s Ecopetrol SA to win business for his oil services company, PetroTiger.”
This November 2014 post highlighted how Sigelman is challenging various aspects of the DOJ’s case, including its interpretation and application of the “foreign official” element to Ecopetrol. Similar to previous “foreign official” challenges, the DOJ argued that the dispute is an issue of fact inappropriate for pre-trial disposition. Accordingly, as in the previous “foreign official” challenges, the “foreign official” issue is moving to other phases of the case.
Recently the DOJ and Sigelman filed motions foreshadowing the evidence the parties intend to offer to prove or disprove whether Ecopetrol is an “instrumentality” of the Colombian government and thus whether Duran is a “foreign official” under the FCPA.
Although not binding in the Sigelman case pending in federal court in New Jersey, approximately one year ago in U.S. v. Esquenazi, the 11th Circuit concluded, in a case of first impression at the appellate level, that “an ‘instrumentality’ [under the FCPA] is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” (emphasis added).
In this letter the DOJ provides notice that it may call (1) Alejandro Linares Cantillo and (2) Carlos Mantilla McCormick to provide expert testimony. In pertinent part, the letter states:
Alejandro Linares Cantillo
Mr. Linares is the Vice President for Legal Affairs and General Counsel of Ecopetrol S.A., and he has been in this position since October 2014. Mr. Linares’s testimony is based on his training, education, and experience as described in his curriculum vitae, including his experience at Ecopetrol S.A. (“Ecopetrol”), as well as his review of relevant material including, but not limited to, Ecopetrol’s Forms 20-F filed with the U.S. Securities and Exchange Commission, Colombian laws and regulations, scholarly articles and books, and Ecopetrol company materials. If called as a witness, Mr. Linares would generally testify about the history, business, and structure of Ecopetrol over time. Mr. Linares would also testify about the Colombian government’s control of Ecopetrol and the company’s functions as a government-controlled entity, particularly as it relates to the Mansarovar contract at issue in this case. More specifically, if called as a witness, we anticipate Mr. Linares would testify to the following:
In Colombia, the state owns all hydrocarbon reserves. To ensure proper management and supply of hydrocarbon resources to the nation, the Colombian government has adopted laws, regulations, and policies to ensure an appropriate supply of energy to the nation while responsibly maintaining the nation’s hydrocarbon resources. It effectuates these goals through various agencies and state-controlled entities, including Ecopetrol.
Ecopetrol was originally incorporated by the Colombian government on August 25, 1951, as the Empresa Colombiana de Petróleos S.A. It functioned as a governmental industrial and commercial company responsible for administering Colombia’s hydrocarbon resources.
The company’s legal form has evolved since its inception. For example, in 1970, the company adopted its first by-laws, ratifying its nature as a stateowned industrial and commercial company linked to the Ministry of Mines and Energy and fiscally supervised by the Office of the General Controllership.
In 2003 the government restructured Empresa Colombiana de Petróleos into a 100% state-owned corporation by shares linked to the Ministry of Mines and Energy and renamed the company Ecopetrol S.A. (hereinafter referred to as “Ecopetrol” regardless of time period).
In 2006 the legal nature of Ecopetrol was changed to one of a mixed economy corporation, linked with the Ministry of Mines and Energy and funded by Colombian government and private capital.
The Republic of Colombia is required by law to own at least 80% of the outstanding voting shares of Ecopetrol. In 2009 and 2010 the government owned roughly 90% of the outstanding voting shares, and it currently owns roughly 88.5% of Ecopetrol’s outstanding voting shares. Ecopetrol has had American Depository Shares trading on the New York Stock Exchange since 2008.
In 2003 the Colombia government created the National Hydrocarbons Agency (NHA), and the government granted the NHA authority over, among other things, the design, promotion, negotiation, conclusion, tracking, and management of new exploration and exploitation of Colombian hydrocarbon resources. The Ministry of Mines and Energy continues to administer the overall oil policy and planning coordination, and together with the Oil and Gas Regulation Commission it also regulates the downstream sector.
Prior to December 31, 2003, Ecopetrol exercised administrative, industrial, and commercial powers over Colombian hydrocarbon resources owned by the Republic of Colombia.
After December 31, 2003, as a mixed economy company, Ecopetrol retained authority to engage in industrial and commercial activities, under the indirect control of the Colombian government, with respect to, among other things, the exploration, exploitation, transportation, and supply and marketing of Colombian hydrocarbon resources, as well as related concessions, assets, and real estate. It does so as an association contracts administrator in the commercial sphere on behalf of the Colombian government.
Ecopetrol has also retained certain administrative functions with regard to association contracts it entered into prior to December 31, 2003, including the Mansarovar contract at issue in this case. Administrative functions retained by Ecopetrol after December 31, 2003, with respect to association contracts include, but are not limited to, the following: management, development, and negotiation of exploration and exploitation rights in connection with hydrocarbon resources; overseeing the advancement of programs that benefit the communities in the areas of influence of the contracts; managing the Colombian government’s share of moneys and in-kind resources obtained from the exploitation of hydrocarbon resources; and managing and disposing of the assets and real estate associated with exploration and exploitation of hydrocarbon resources at the end of the Association contracts.
Ecopetrol may extend association contracts, at its sole discretion, which is an administrative function. If Ecopetrol refuses to extend an association contract, the right to exploit the hydrocarbon reserves that are the subject of the contract would revert to Ecopetrol, and Ecopetrol would have the right to exploit those reserves for an indefinite period at no additional cost to it.
Ecopetrol is the largest company in Colombia as measured by revenue, assets, and shareholder’s equity. It is also the main producer and supplier of fuel and refined products in Colombia. In recent years it has contributed approximately 15% of the Colombian government’s annual revenues through royalties, taxes and dividends, and it remains the single largest source of revenue for the government. Oil production and exports account for a significant part of Colombia’s economy. Ecopetrol accounts for a significant percentage of Colombia’s oil production, exports of crude oil, imports of refined oil products, and refining capacity.
Ecopetrol owns outright 42% of the total crude oil pipeline shipping capacity in Colombia, and in conjunction with partners 99% of the total product pipeline shipping capacity in Colombia. The Colombian government controls and regulates the pipelines through the Ministry of Mines and Energy by establishing hydrocarbon transportation tariffs and transportation regulations.
Ecopetrol is the only producer of asphalt in the country and accounts for nearly all domestic consumption.
Ecopetrol owns and manages nearly all oil refining capacity in Colombia. Because domestic demand outstrips domestic refining capacity, Ecopetrol also imports refined oil products, including gasoline. The Colombian government, by means of The Oil Prices Stabilization Fund, may control the price of gasoline and other fuels by setting prices for them domestically through the Ministry of Mines and Energy below prices in the international market. The government makes payments to refiners and importers, principally Ecopetrol, to account for any fuel price differential, in favor of Ecopetrol, caused by these domestic fuel price subsidies. The government controls the timing of such payouts to Ecopetrol and other refiners and importers.
While the Colombian government enjoys the advantages of a natural monopoly over many aspects of the management, development, and supply of hydrocarbon resources in Colombia through its control of Ecopetrol, it also restricts Ecopetrol’s market share in other areas. For example, the government prohibits Ecopetrol from owning more than 25% of any natural gas transportation company.
The Colombian government’s budget is set in part based on expected revenues from Ecopetrol. As a result of falling world prices of crude oil, it is anticipated that Ecopetrol’s revenues and profits will decline in 2015, and the Colombian government has had to cut its budget for 2015.
In addition to exerting control over Ecopetrol through law, regulation, and policy, Colombia controls Ecopetrol through its majority shareholding position, through which it directly appoints a majority of the board of directors and indirectly the chief executive officer. The board consists of nine members. As the majority shareholder, the Colombian government has the right to elect the majority of the directors. Ecopetrol’s by-laws establish that three of its directors will be the Minister of Mines and Energy, the Minister of Finance, and the Director of the National Planning Agency. The board also has the authority to hire and fire the chief executive officer of the company.
As the majority shareholder in Ecopetrol, the Colombian government may propose and approve decisions that are in furtherance of its own economic and political interests that do not necessarily benefit minority shareholders and may not be in the interest of Ecopetrol. It may also approve dividends at the ordinary general shareholders’ meeting, notwithstanding the interest of minority shareholders, in an amount that results in Ecopetrol having to reduce its capital expenditures, thereby negatively affecting Ecopetrol’s prospects, results of operations and financial condition.
In order for Ecopetrol to issue debt in international or Colombian markets with a tenor greater than one year, or incur any other form of indebtedness, the Ministry of Finance and Public Credit must first authorize the issuance of such debt and register any external debt with the Colombian Central Bank. The Colombian government has the authority to refuse to approve such issuances. These restrictions do not apply to private companies.
Ecopetrol reserves the right to plead sovereign immunity under the U.S. Foreign Sovereign Immunities Act of 1976 with respect to actions brought against it under U.S. or state securities laws.
The Office of the Controller General (“OCG”) is a government institution that acts as the highest form of fiscal control in Colombia. It is charged with ensuring the proper management of public resources and funds. The OCG has oversight responsibility for various public entities in Colombia, including Ecopetrol. As a state-controlled entity, Ecopetrol is subject to review by the OCG and has reporting requirements to it regarding the management of public funds or resources. OCG may bring actions against Ecopetrol’s employees for mismanagement of public funds or resources.
The Office of the Inspector General of Colombia (“OIG”) is an independent public institution with authority over public conduct of those in authority or exercising a public function. The OIG is charged with overseeing public officials’ performance, intervening in defense of the legal order, public funds, and fundamental rights, and instituting disciplinary actions against public officials. Ecopetrol employees are subject to the purview of the OIG.
The National Accounting Office of the Colombian government adopted accounting principles for state-owned entities in 2007 known as the Regime of Public Accounting (“RCP”). RCP differs in some regards from the accounting principles required for private enterprises. Ecopetrol has been required to prepare its financial statements in accordance with RCP since 2008. In its Form 20-F, Ecopetrol refers to this accounting regime as Colombian Government Entity GAAP.
Ecopetrol is subject to the jurisdiction of Colombia’s administrative court system. Disputes between Ecopetrol and private companies must be addressed within the administrative court system, whereas disputes between private parties are handled within Colombia’s ordinary court system.
Ecopetrol’s employees are subject to prosecution under Colombia’s laws against public corruption.
Ecopetrol is subject to Colombia’s Transparency Law, which applies to entities that exercise a public function. This law is similar to the Freedom of Information Act in the U.S.
As a government-controlled entity, Ecopetrol is required to unilaterally terminate contracts with contractors who finance terrorist activities. Private companies are not subject to this requirement.
Ecopetrol is controlled by the Colombian government. Ecopetrol functions as an instrumentality of the state, including as an industrial and commercial operator with respect to exploring, exploiting, transporting, and supplying hydrocarbon resources for the Colombian state. Ecopetrol also functions as an instrumentality of the state through its administrative functions in connection with association contracts entered into prior to December 31, 2003, including the Mansarovar contract at issue in this case. Ecopetrol also manages public resources.
Carlos Mantilla McCormick
Mr. Mantilla is the Vice President of Hydrocarbon Contracts of the NHA, and he has been in this position since 2014. Mr. Mantilla’s testimony is based on his training, education, and experience as described in his curriculum vitae, including his experience at NHA, as well as his review of relevant material including, but not limited to, Colombian laws and regulations and NHA materials. If called as a witness, Mr. Mantilla would generally testify about the history and structure of the NHA since its inception in 2003 to present, as well as the history and background of Ecopetrol as further described above in the description of Mr. Linares’s anticipated testimony. Mr. Mantilla would also testify about the Colombian government’s control of Ecopetrol and the functions that Ecopetrol and the NHA have performed and continue to perform, as described in greater detail above. More specifically, if called as a witness, we anticipate Mr. Mantilla would testify to the following:
In 2003, Colombia created the NHA and granted the NHA authority over, among other things, the design, promotion, negotiation, conclusion, tracking, and management of new exploration and exploitation of Colombian hydrocarbon resources.
After December 31, 2003, Ecopetrol continued to administer substantial hydrocarbon resources covered by association contracts with third parties, and it remained the government’s principal instrument of engaging in commercial and industrial activity in the hydrocarbon market. The NHA took over certain administrative and regulatory functions from Ecopetrol in the upstream sector, except as to those resources covered by Ecopetrol’s association contracts entered into prior to December 31, 2003. Ecopetrol has retained certain administrative functions with regard to association contracts it entered into prior to December 31, 2003, including the Mansarovar contract at issue in this case.
As a state-controlled entity, Ecopetrol is charged with exploring, extracting, processing, transporting, and marketing Colombia’s hydrocarbon resources. It is also charged with the administration of hydrocarbon resources related to association contracts entered into prior to December 31, 2003, as well as exploiting those resources and others administered by other agencies as an operator in the commercial sphere as an instrumentality of the Colombian government.
Ecopetrol is still a counterparty to the contracts that it signed before January 1, 2004, including the Mansarovar contract at issue in this case. Those contracts have clauses providing, at Ecopetrol’s sole option, for extensions. If Ecopetrol were to refuse to extend one of those contracts, the right to exploit the hydrocarbon reserves that are the subject of the contract would revert to Ecopetrol, and Ecopetrol would have the right to exploit those reserves for an indefinite period at no additional cost to it.
After NHA was created, Ecopetrol continued to perform administrative functions with regard to association contracts and performed many of the same governmental functions with respect to those contracts after NHA was created that it had performed before NHA was created.
NHA sets oil prices for exploration and production contracts that it controls, but has no role in setting prices for association contracts controlled by Ecopetrol. With regard to exploration and production contracts, NHA establishes plans related to drilling, budget, extraction, general rules, and contracting. In association contracts maintained by Ecopetrol, Ecopetrol carries out those functions, and NHA has no role in those decisions.
NHA plays no part in approving contracts with service providers with respect to association contracts, and it has no role in ensuring that private companies that sign association contracts with Ecopetrol adhere to their agreements. Ecopetrol had that responsibility before NHA was created and has retained that responsibility. NHA has certain authority over all oil fields, and thus has limited functions with respect to association contracts, including: NHA conducts technical inspections of all oil fields in Colombia. Once an association contract ends, Ecopetrol may continue to maintain the oil fields that the contract covered. To do so, Ecopetrol must submit a petition for NHA’s approval to continue to administer the oil fields covered by the contract. Ecopetrol is the only company that may submit such a petition. Royalties that are paid for oil extraction are set by NHA.
NHA has significant authority over exploration and production contracts signed after December 31, 2003.
In this letter, Sigelman’s defense counsel provides notice of the expert testimony it intends to offer. In pertinent part, the letter states:
Justice Carlos G. Arrieta
We anticipate that Justice Arrieta will offer testimony regarding Ecopetrol, including the functions it performed between 2009 and 2010 and its relationship with the Republic of Colombia (“Colombia”) during that period. This testimony is expected to include Ecopetrol’s history, the laws and regulations bearing on its functions and its relationship with Colombia, Ecopetrol’s internal governance and operations, and the role of Ecopetrol’s employees. Justice Arrieta has already provided one declaration in this matter, […] and we expect that his testimony at trial will be consistent with and supplemental to that declaration.
Justice Arrieta is qualified to offer this testimony on the basis of his education, professional training, academic research, and experience in administrative law. His extensive judicial experience includes terms as Justice on Colombia’s State Council (Colombia’s highest court for administrative law disputes) and as adjunct Justice on Colombia’s Constitutional Court (Colombia’s highest court for constitutional law matters). In addition, he served for four years as Colombia’s Attorney Inspector General. Justice Arrieta’s private practice experience includes litigation and client advisory services related to administrative law issues prevalent in the oil and gas industry. He also acts as an arbitrator in disputes arising from public and commercial contracts. Additionally, Justice Arrieta was a professor of law at the Los Andes School of Law in Bogota, Colombia, for many years and served as the school’s Dean from 1986-89.
Professor David R. Mares
We anticipate that Professor Mares will offer testimony regarding the characteristics and relative autonomy of various nationally-owned and private oil and gas companies, including Ecopetrol. Professor Mares is also expected to provide testimony regarding the political, social, and economic factors influencing the creation and/or privatization of national oil companies. Professor Mares is qualified to offer this testimony on the basis of his extensive academic research of Latin American energy issues. In addition to his current teaching position at the University of California, San Diego, Professor Mares is the Baker Institute Scholar for Latin American Energy Studies at Rice University. Professor Mares has also held teaching posts at El Colegio de Mexico; the Universidad de Chile; FLACSO Ecuador; Harvard University; Stanford University; and a fellowship at the Oxford Institute for Energy Studies. In the course of his scholarship, Professor Mares has written or edited nine books, as well as hundred journal articles, book chapters, and reports. Professor Mares’s teaching includes classes on energy politics.
Justice Jorge A. Gomez
We anticipate that Justice Gomez will offer testimony regarding Colombia’s criminal laws and procedure, including the effects of certain criminal penalties. Justice Gomez is expected to provide testimony as to the penalty of debarment from performing public functions as well as to the effect of such penalty on crimes against the public administration of Colombia, such as bribery. Justice Gomez is qualified to offer this testimony on the basis of his education, professional training, academic research, and experience. His professional background includes extensive judicial experience, including terms on the Criminal Section of Colombia’s Supreme Court of Justice (Colombia’s highest court for criminal matters) as well as appellate and trial courts with jurisdiction over criminal matters. In addition, Justice Gomez’s private practice experience focuses on criminal law matters. He has taught Colombian criminal law at several universities and published academic articles in Colombian legal journals.
Sigelman’s trial in U.S. District Court, District of New Jersey – Camden, is scheduled to begin on June 1st.