Category: 2014 Enforcement Actions

Further To The Clustering Phenomenon

Earlier this week, the DOJ announced that two additional individual defendants have been added to the Foreign Corrupt Practices Act (and related) enforcement action against individuals associated with broker dealer Direct Access Partners.  (See here for the original May 2013 enforcement action against Jose Hurtado and Tomas Clarke and here for an additional individual, Ernesto Lujan, being added to the enforcement action in June 2013).

Like in the previous enforcement actions, the additional defendants (Benito Chinea and Joseph DeMeneses, the Chief Executive Officer and a managing partner, respectively of Direct Access Partners) were criminally charged in connection with alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects).

As noted in the DOJ’s release, Chinea and DeMeneses were each charged with one count of conspiracy to violate the FCPA and the Travel Act, five counts of violating the FCPA, and five counts of violating of the Travel Act. Chinea and DeMeneses were also charged with one count of conspiracy to commit money laundering and three counts of money laundering. DeMeneses was further charged with one count of conspiracy to obstruct justice.  (See here for the SEC’s announcement of a related enforcement action against Chinea and DeMeneses.  Like the SEC’s prior enforcement actions against the other individuals, Chinea and DeMeneses are charged with various securities law violations, but not FCPA offenses as the individuals – while associated with a broker dealer –  are not associated with an issuer).

As noted in the DOJ’s release, in August 2013 Lujan, Hurtado and Clarke each pleaded guilty to conspiring to violate the FCPA, to violate the Travel Act and to commit money laundering, as well as substantive counts of these offenses.

The DOJ’s enforcement action against Chinea and DeMeneses is further to the curious clustering phenomenon clearly observable in FCPA enforcement.

As highlighted in this previous post (with statistics calculated through the end of 2013), 53% of the individuals charged by the DOJ with FCPA criminal offenses since 2008 have been in just four cases and 75% of the individuals charged by the DOJ since 2008 have been in just nine cases.

Of further note (and again with statistics calculated through the end of 2013), of the 89 individuals charged by the DOJ with FCPA criminal offenses since 2008, 61 of the individuals (69%) were employees or otherwise affiliated with private business entities (for instance – Haiti Teleco related enforcement actions, Control Components Inc. Latin Node, Nexus Technologies, BizJet, not to mention failed prosecutions against various Africa Sting defendants and individuals associated with Lindsey Manufacturing).

This is a striking statistic given that 48 of the 60 corporate DOJ FCPA enforcement actions since 2008 (80%) (again using statistics calculated through the end of 2013) were against publicly traded corporations.  In short, a private entity DOJ FCPA enforcement is approximately three times more likely to have a related DOJ FCPA criminal prosecution of an individual than a public entity DOJ FCPA enforcement action.

Thus far in 2014, the trends have been further magnified.  In addition to this week’s action:

  • 5 individuals associated with private company Group DF were charged with FCPA offenses (see here); and

  • 3 individuals associated with private company PetroTiger Ltd. were charged with FCPA offenses (see here)

HP And Related Entities Resolve $108 Million FCPA Enforcement Action

Hewlett-Packard Co. (“HP”) has over 300,000 employees worldwide.

Among the employees during a certain relevant time period, were 5 individuals in Russia employed by a subsidiary, 1 individual in Poland employed by a subsidiary, and a vaguely defined group of individuals in Mexico employed by a subsidiary that worked on one sales deal.

The above individuals engaged in conduct largely occurring 7-14 years ago.

The government alleges that all of these individuals were specifically trained on the FCPA by HP and that HP had other internal controls in place as relevant to these individuals.

Notwithstanding these controls, the government alleges that the individuals willfully circumvented HP’s controls to make alleged improper payments to alleged “foreign officials” by, among other things, creating secret slush funds, concealing certain other information, making false representations, and engaging in other covert means such as anonymous e-mail accounts and pre-paid mobile telephones.

So reads the latest Foreign Corrupt Practices Act enforcement action.

Yesterday the DOJ and SEC announced (here and here) a coordinated FCPA enforcement action against various HP and related entities based on alleged conduct in Russia, Poland and Mexico.  As noted in this previous post, HP has been under FCPA scrutiny since early 2010.

The enforcement action involved:

HP and related entities agreed to pay approximately $108.2 million (all guaranteed by HP) to resolve the alleged FCPA scrutiny (approximately $76.7 million in the DOJ actions; and approximately $31.5 million in the SEC action).

The enforcement action, in terms of settlement amount, is the 11th largest of all-time and the 2nd largest of all-time against a U.S. company (recognizing of course that HP’s foreign subsidiaries were a large focus of the enforcement actions).

This post summarizes both the DOJ and SEC enforcement actions based on a review of the original source documents (comprising approximately 175 pages in total).

DOJ Enforcement Action

The enforcement action involved a criminal information against HP Russia resolved via a plea agreement; a criminal information against HP Poland resolved via a DPA; and an NPA concerning HP Mexico.

HP Russia

According to the information, HP Russia is a wholly owned subsidiary of HP and was principally responsible for transacting business in Russia and the Commonwealth of Independent States (“CIS”).  During the relevant time period, the information alleges that HP Russia had approximately 315 and 55o employees and that HP Russia “was subject to HP’s internal accounting controls, and HP Russia’s financial results were included in the consolidated financial statements that HP filed with the SEC.”

The alleged conduct concerns five employees at HP Russia.

  • HP Russia Executive 1

  • HP Russia Executive 2

  • HP Russia Manager 1

  • HP Russia Manager 2

  • HP Russia Manager 3

The conduct at issue concerns “a project to automate the telecommunications and computing infrastructure of the Office of the Prosecutor General of Russia (“GPO” or “GP”),” a project valued at approximately $100 million.  According to the information, the Russian government used a state-owned entity organized under the Department of Affairs of the President of the Russian Federation, to manage the GPO project tender and execution.”

In pertinent part, the information alleges as follows.

“Between in or about 2000 and 2007, HP Russia and co-conspirators agreed to make and did make improper payments to secure, retain and implement the GPO project.  Members of the conspiracy structured the deal to create a secret slush fund, which by 2003 totaled approximately ($10 million at then-prevailing exchange rates), at least part of which was intended for bribes, kickbacks, and other improper payments.  To execute and hide the scheme, members of the conspiracy failed to implement internal controls intended to maintain accountability over HP’s assets, willfully circumvented existing internal controls, and falsified corporate books and records relied on by HP officers and external auditors to authorize the transaction and prepare HP’s consolidated financial statements.”

Regarding the slush fund, the information alleges that HP Russia “created million of dollars in excess margin for use as a slush fund” by selling product to an “often-used channel partner of HP” which in turn sold product to an intermediary at a mark-up. According to the information, “To keep track of the fund, which was concealed in the project’s financials, HP Russia maintained two sets of project pricing records:  off-the-books versions, known only to conspirators, which identified slush fund recipients, and sanitized versions of the same documents which were provided to HP credit, finance, and legal officers outside of HP Russia.” According to the information, “one example of an off-the-books document was an encrypted, password-protected spreadsheet.”

According to the information, various HP Russia employees concealed the slush fund during HP’s Solution Opportunity Approval and Review (“SOAR”) process which applied to “all-service related projects valued at greater than $500,000 anywhere in the world, including Russia.”  Among other things, the information alleges that HP Russia employees made false representations and falsely certified the adequacy of HP Russia’s internal controls, a certification the information alleges that “was relied upon by HP’s EMEA business to certify to HP’s headquarters in the United States that EMEA’s financial statements were accurate.”

According to the information, the alleged improper payments (approximately €8 million) were made through various intermediaries to “Russian Official A,” a director of a Russian government agency who assumed responsibility for the GPO Project as well as “Individual A,” an associate of Russian Official A, for things such as:

  • “expensive jewelry, luxury automobiles, travel, and other items typically associated with gifts”

  • “travel services, vehicles, tuition, electronic equipment, cotton, textiles, and various other items”

  • a “hotel bill: and “other luxury purchases” such as “expensive watches, swimming pool technology, and other items”

  • “furniture, vehicles, clothing, travel services, household appliances, hotel stays, and other items”

Based on the above alleged conduct, the information charges (i) conspiracy to violate the FCPA’s anti-bribery provisions and books and records and internal controls provisions; (ii) one count of violating the FCPA’s anti-bribery provisions; (iii) one count of violating the FCPA’s internal controls provisions; and (iv) one count of violating the FCPA’s books and records provisions.

The conduct alleged in the information allegedly occurred between December 2000 and February 2007.  As to U.S. jurisdictional allegations, the information alleges a 2001 meeting in Rockville, Maryland regarding the GPO project; a 2003 e-mail “which was routed through the United States;” and a 2003 certification “transmitted to HP’s offices in California.”

The above charges were resolved via a plea agreement in which HP Russia agreed to plead guilty to the four charges described above.  Pursuant to the plea agreement, HP Russia agreed to pay a criminal fine of approximately $58.8 million.  In the plea agreement, HP agreed to guarantee HP Russia’s payment as well as other conditions imposed upon HP Russia such as cooperation, and compliance obligations typical in corporate FCPA enforcement actions.  Among other things, the plea agreement imposed upon HP a three year reporting obligation to the DOJ regarding remediation and implementation of various compliance measures. As pertinent to the above allegations, in the plea agreement HP Russia and HP waived any and all statute of limitation defenses.

According to the plea agreement, the advisory fine range based on the alleged conduct at issue was $87 million to $174 million.   The plea agreement states that the approximate $58.8 million fine was appropriate based on the following factors:

“(a) monetary assessments that HP has agreed to pay to the SEC and is expected to pay to law enforcement authorities in Germany relating to the same conduct at issue …; (b) HP Russia’s and HP’s cooperation has been, on the whole, extraordinary, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (c) HP Russia and HP have engaged in extensive remediation, including by taking appropriate disciplinary action against culpable employees of HP and enhancing their internal accounting, reporting, and compliance functions; (d) HP has committed to continue enhancing its compliance program and internal accounting controls … (e) the misconduct identified … was largely undertaken by employees associated with HP Russia, which employed a small fraction of HP global workforce during the relevant period; (f) neither HP nor HP Russia has previously been subject of any criminal enforcement action by the Department or law enforcement authority in Russia or elsewhere; (g) HP Russia and HP have agreed to continue to cooperate with the Department and other U.S. and foreign law enforcement authorities, if requested by the Department …”

HP Poland

According to the information, HP Poland is a wholly owned subsidiary of HP and, among other functional responsibilities, HP Poland managed most of HP’s activities in Poland and had more than 200 employees during the relevant time period.   According to the information, HP Poland “was subject to HP’s internal accounting controls, and HP Poland’s financial results were included in the consolidated financial statements that HP filed with the SEC.”

The specific alleged conduct concerned “HP Poland Executive” (a citizen of Poland who was the District Manager of Public Sector Sales and Public Sector Sales Lead).

According to the information, HP Poland “(i) caused the falsification of HP’s books and records; and (ii) circumvented HP’s existing internal controls, in connection with a scheme to make corrupt payments to one or more foreign officials in Poland, including the Polish Official [the Director of Information and Communications Technology within the Polish National Police Agency (“KGP”) which was part of the Polish Ministry of the Interior and Administration].”

According to the information, “the conduct was related to HP Poland’s efforts to secure and maintain millions of dollars in technology contracts with the Polish government.”  The information alleges that HP Poland “resorted to corruption to foster a relationship with the Polish Official.”

Specifically, the information alleges that in 2006 the Polish Official attended a technology-industry conference in San Francisco and that the “weekend before the conference” HP Poland “paid for dinners, gifts, and sightseeing by the Polish Official in San Francisco.”  The information also alleges that HP Poland took the Polish Official on a side trip to Las Vegas “with no legitimate business purpose” and that while in Las Vegas HP Poland paid for the Polish Official’s “transportation and expenses … including lodging, drinks, dining, shows, other events on or near the Las Vegas Strip, and a private tour flight over the Grand Canyon.”  As to the above travel and entertainment allegations, the information also alleges that “another global technology company” (“Company A”) also wined and dined the Polish Official and paid for his expenses.

The information also alleges that “beginning in late 2006, HP Poland started providing technology products to the Polish Official for personal use.”  The information states:

“Early gifts included HP products, such as desktop and laptop computers, and later expanded to include additional HP computers, HP-branded mobile devices, an HP printer, iPods, flat screen televisions, cameras, a home theater system, and other items.”

According to the information, the above things of value were provided to the Polish Official “in circumvention of HP’s internal controls” and were not “properly reflected in HP’s books and records.”

The information also alleges that in early 2007, “shortly after receiving the first of these gifts, Polish Official signed a contract with HP Poland on behalf of the Polish government, valued at approximately $4.3 million.  A month later, the Polish Official signed another contract with HP Poland, valued at approximately $5.8 million.”

According to the information, “around the date of the second contract award, HP Poland expanded the bribes to include large cash payments to Polish Official from off-the-books accounts.  HP Poland agreed to pay Polish Official 1.2% of HP Poland’s net revenue on any contract awarded by KGP.”

The information then specifically alleges that in 2007 “Polish Official signed a KGP contract with HP Poland valued at approximately $15.8 million” and that “HP Poland Executive delivered to Polish Official’s personal residence a bag filled with approximately $150,000 in cash.”  The information also alleges another instance in which HP Poland Executive met Polish Official in a Warsaw parking lot and gave Polish Official another bag filled with approximately $100,000 in cash.  Further, the information alleges that in 2008, on at least four separate occasions, HP Poland Executive gave Polish Official bags of cash totaling at least $360,000.  According to the information, in 2008, Polish Official signed three contracts on behalf of KGP with HP Poland for approximately $32 million.

As to the above payments, the information alleges that HP Poland willfully circumvented HP’s internal controls and falsified corporate books and records relied on by HP’s officers and external auditors to prepare HP’s financial statements.  Moreover, the information alleges that HP Poland facilitated the corrupt relationship with Polish Official through covert means such an anonymous e-mail accounts, pre-paid mobile telephones, and other means to circumvent HP’s internal controls.

In total, the information alleges between 2006 and 2010 HP Poland “provided Polish Official cash worth the equivalent of approximately $600,000, gifts valued in excess of $30,000, and several thousand dollars in improper travel and entertainment benefits.” According to the information, “during this same time span, the Polish government awarded to HP Poland at least seven contracts for KGP-related information technology products and services, with a total value of approximately $60 million.

Based on the above conduct, the information charges HP Poland with violating the FCPA’s books and records and internal controls provisions.

The above charges were resolved via a DPA in which HP Poland admitted and accepted responsibility for the above conduct.  The DPA has a term of three years and it lists the following relevant considerations considered by the DOJ;

“(a) HP Poland’s cooperation with the Department’s investigation; (b) HP Poland’s ultimate parent corporation, HP, has committed to maintain and continue enhancing its compliance program and internal accounting controls …; and (c) HP Poland and HP have agreed to continue with the Department and other U.S. and foreign law enforcement authorities in any ongoing investigation …”

Based on the advisory guidelines calculation in the DPA, the fine range for the alleged conduct at issue was $19.3 million to $38.6 million.  Pursuant to the DPA, HP Poland agreed to pay approximately $15.5 million, an amount deemed “appropriate” given the “nature and extent of HP Poland’s and HP’s cooperation and their extensive remediation in this matter.”

Like the HP Russia plea agreement, in the HP Poland DPA, HP agrees to guarantee the payment of HP Poland and to implement various compliance measures and report to the DOJ for a three year period.  As is typical in FCPA DPAs, the HP Poland DPA contains a so-called “muzzle clause.”

HP Mexico

The NPA with HP Mexico (a wholly-owned subsidiary of HP based in Mexico) states that beginning in 2008 “HP Mexico began presales activities and discussions with Pemex (Mexico’s alleged state-owned petroleum company) to sell to Pemex a suit of business technology optimization (“BTO”) software, hardware, and licenses.”  According to the NPA, BTO is a niche product that requires sophisticated knowledge to integrate with other software products and the contracts for this software sale were for approximately $6 million.

According to the NPA, “HP Mexico sales managers on the BTO Deal ultimately decided that they could not win the business without working with, and making payments to, a Mexican information-technology consulting company. (“Consultant”)”  According to the information, “HP Mexico sales managers knew that Pemex’s Chief Operating Officer (“Official A”) was a former principal of Consultant” and that “HP Mexico employees also knew that Official A supervised Pemex’s Chief Information Officer (“Official B”), who was a key signatory on behalf of Pemex for the BTO Deal.”

According to the NPA, while the Consultant had prior technical experience, “HP Mexico ultimately retained Consultant in connection with HP Mexico’s bid for the sale to Pemex primarily because of Consultant’s connections to Official A, Official B, and other senior Pemex officials.”  According to the information, as part of its agreement with Consultant, HP Mexico agree to pay Consulant a commission, “which HP Mexico also called an ‘influencer fee,’ equal to 25% of the licensing and support components of the BTO Deal.”

To circumvent HP’s internal controls regarding channel partners, the NPA states that “HP Mexico executives pursuing the BTO Deal arranged for another entity (“Intermediary”), which was already an approved HP Mexico channel partner, to join in the transactions” and that “HP Mexico executives recorded Intermediary as the deal partner in its internal tracking system.”

The NPA states “HP Mexico through the Intermediary, Consultant made a cash payment of approximately $30,000 to an entity controlled by Official B” and that “Consultant made three additional cash payments totaling approximately $95,000 to the Official B controlled entity.”

According to the NPA, “in total, HP Mexico received approximately $2,527,750 as its net benefit on the BTO Deal.”

According to the NPA, the DOJ agreed to enter it based on the following factors:

“(a) HP Mexico and HP’s cooperation, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the DOJ; (b) HP Mexico and HP have engaged in extensive remediation, including taking appropriate disciplinary action against culpable employees, enhancing their due diligence protocol for third-party agents and consultants, and enhancing their controls for payments of sales commissions to channel partners in Mexico; (c) HP Mexico’s and HP’s continued commitment to enhancing their compliance programs and internal controls; and (d) HP Mexico’s and HP’s agreement to continue to cooperate with the DOJ in any ongoing investigation.”

In the NPA HP Mexico admitted and acknowledged responsibility for the above conduct.  Pursuant to the NPA, HP Mexico agreed to pay a forfeiture of approximately $2.5 million.  Pursuant to the NPA, which has a term of 3 years, HP Mexico and HP agreed to various compliance obligations.  As is typical in FCPA NPAs, the NPA contains a so-called muzzle clause.

In the DOJ release, Deputy Assistant Attorney General Bruce Swartz states:

“Hewlett-Packard subsidiaries created a slush fund for bribe payments, set up an intricate web of shell companies and bank accounts to launder money, employed two sets of books to track bribe recipients, and used anonymous email accounts and prepaid mobile telephones to arrange covert meetings to hand over bags of cash.  Even as the tradecraft of corruption becomes more sophisticated, the department is staying a step ahead of those who choose to violate our laws, thanks to the diligent efforts of U.S. prosecutors and agents and our colleagues at the SEC, as well as the tremendous cooperation of our law enforcement partners in Germany, Poland and Mexico.”

Melinda Haag (U.S. Attorney for the N.D. of California) states:

“The United States Attorney’s Office, working alongside our colleagues in the Criminal Division, will vigorously police any efforts by companies in our district to illegally sell products to foreign governments using bribes or kickbacks in violation of the FCPA,  Today’s resolution with HP reinforces the fact that there is no double standard: U.S. businesses must respect the same ethics and compliance standards whether they are selling products to foreign governments or to the United States government.”

Valerie Parlave (Assistant Director in Charge of the FBI’s Washington Field Office) states:

“This case demonstrates the FBI’s ability to successfully coordinate with our foreign law enforcement partners to investigate and bring to justice corporations that choose to do business through bribery and off-the-book dealings.  I want to thank the agents who worked on this case in Washington, New York and in our Legal Attaché offices in Mexico City, Moscow, Berlin and Warsaw as well as the prosecutors.  Their work ensures a level playing field for businesses seeking lucrative overseas government contracts.”

Richard Weber (Chief of the Internal Revenue Service – Criminal Investigation) states:

“This agreement is the result of untangling a global labyrinth of complex financial transactions used by HP to facilitate bribes to foreign officials.  IRS-CI has become a trusted leader in pursuit of corporations and executives who use hidden offshore assets and shell companies to circumvent the law.  CI is committed to maintaining fair competition, free of corrupt practices, through a potent synthesis of global teamwork and our dynamic financial investigative talents.”

SEC Enforcement Action

The enforcement action involved an administrative cease and desist order against HP and is based on the same Russia, Poland and Mexico conduct described above.

Under the heading “Summary,” the order states:

“From approximately 2003 to 2010 (the “relevant period”), HP Co.’s indirect, wholly-owned subsidiaries in Russia, Mexico and Poland, by and through their employees, agents and intermediaries, made unlawful payments to various foreign government officials to obtain business. These payments were also falsely recorded in the subsidiaries’ books and records and, ultimately, in HP Co.’s books and records. In Russia, HP Co.’s subsidiary (“HP Russia”) made payments through HP Russia’s agents to a Russian government official to retain a multi-million dollar contract with the federal prosecutor’s office. The payments were made through shell companies engaged by the agents to perform purported services under the contract. In Poland, certain agents or employees of HP Co.’s Polish subsidiary (“HP Poland”) provided gifts and cash bribes to a Polish government official to obtain contracts with Poland’s national police agency. In Mexico, HP Co.’s Mexican subsidiary (“HP Mexico”) made improper payments to a third party in connection with a sale of software to Mexico’s state-owned petroleum agency. HP Co. and its consolidated subsidiaries (collectively, “HP”) earned approximately $29 million in illicit profits as a result of this improper conduct.

The payments and improper gifts to government officials made directly or through intermediaries were falsely recorded in the relevant HP subsidiaries’ books and records as legitimate consulting and service contracts, commissions, or travel expenses. In fact, the true purpose of the payments and gifts was to make improper payments to foreign government officials to obtain lucrative government contracts for HP. During the relevant period, HP lacked sufficient internal controls to detect and prevent the improper payments and gifts made by executives and representatives of certain of its foreign subsidiaries.”

As to HP Russia, the order also states under the heading “Additional Conduct,” as follows.

“In June and July 2006, several European HP subsidiaries, including HP Russia, arranged for a high-profile customer marketing event in connection with the FIFA World Cup soccer tournament in Germany. Despite managerial directives not to invite representatives of government customers, certain HP sales employees arranged for a number of government or state-owned customers to attend the event. In all, HP Russia and other European subsidiaries of HP paid tens of thousands of dollars in travel and entertainment expenses for these government customers, and HP Co.’s internal controls failed to detect or prevent the conduct.

Finally, in June 2005, HP Russia paid more than $2.5 million to a third party distributor for the supply of software and implementation services to a Russian state-owned enterprise. HP Russia’s records do not reflect what, if any, work was actually performed by the distributor for these payments, and communications among HP Russia employees suggest that the distributor may have played an influential role in connection with obtaining the contract. The payments to the distributor were recorded in HP Russia’s books and records as a payment for providing software and services, even though there was minimal evidence concerning what was actually provided for these payments.”

Based on the above, the order finds violations of the FCPA’s books and records and internal controls provisions.  Specifically, the order states:

“HP’s global operations are organized by geographic regions and sub-regions, as well as business units. Employees in HP’s foreign subsidiaries may report to a supervisor in both their geographic region and their business unit. During the relevant period, HP’s foreign subsidiaries operated pursuant to compliance policies and directives developed by HP and implemented at the local subsidiary level by the country or regional management. Although HP had certain anti-corruption policies and controls in place during the relevant period, those policies and controls were not adequate to prevent the conduct described herein and were insufficiently implemented on the regional or country level. Further, HP failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that: (1) access to assets was permitted only in accordance with management’s authorization; (2) transactions were recorded as necessary to maintain accountability for assets; and (3) transactions were executed in accordance with management’s authorization.

[…]

As described above, HP Co. violated Section 13(b)(2)(A) of the Exchange Act. Its subsidiaries in Russia, Poland and Mexico falsely recorded the payments made to agents as payments for legitimate services or commissions, when the true purpose of these payments was to make corrupt payments to government officials to obtain business. The false entries were then consolidated and reported by HP in its consolidated financial statements. HP Co. also violated Section 13(b)(2)(B) by failing to devise and maintain sufficient accounting controls to detect and prevent the making of improper payments to foreign officials and ensure that payments were made only to approved channel partners.”

Under the heading “Remedial Efforts,” the order states:

“In response to the Commission’s investigation, HP retained outside counsel to assist it in conducting an internal investigation into improper conduct in the jurisdictions that were the subject of the staff’s inquiry, as well as in other jurisdictions where HP identified additional issues. HP cooperated with the Commission’s investigation by voluntarily producing reports and other materials to the Commission staff summarizing the findings of its internal investigation. HP also cooperated by, among other things, voluntarily producing translations of numerous documents, providing timely reports on witness interviews, and by making foreign employees available to the Commission staff to interview.

HP has also undertaken significant remedial actions over the course of the Commission’s investigation, including by implementing a firm-wide screening process for its channel partners, training its public sector sales staff on its policies for dealing with business intermediaries, increasing compliance-related training for its global work force, and implementing additional enhancements to its internal controls and compliance functions. In addition, HP took disciplinary actions against certain of its employees in response to the conduct identified by the Commission staff and by the company through its internal investigation.”

In resolving the matter, the SEC ordered HP to cease and desist from committing future violations of the FCPA’s books and records and internal controls provisions and to pay disgorgement of $29 million and prejudgment interest of $5 million. According to the order, approximately $2.5 million of the disgorgement amount will be satisfied by HP’s payment of $2.5 million in forfeiture in connection with the HP Mexico DOJ action.  The order also requires HP to report to the SEC for a three year period regarding the status of its remediation and implementation of various compliance measures.

In the SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) states:

“Hewlett-Packard lacked the internal controls to stop a pattern of illegal payments to win business in Mexico and Eastern Europe. The company’s books and records reflected the payments as legitimate commissions and expenses.  Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf.”

Gibson Dunn attorneys Joseph Warin and John Chesley represented the HP entities.

In this release (a release HP had to consult with the DOJ before issuing) HP Executive Vice President and General Counsel John Schultz states:

“The misconduct described in the settlement was limited to a small number of people who are no longer employed by the company.  HP fully cooperated with both the Department of Justice and the Securities and Exchange Commission in the investigation of these matters and will continue to provide customers around the world with top quality products and services without interruption.”

HP’s stock closed yesterday up approximately .8%

DOJ Alleges Wide-Ranging Conspiracy To Bribe Indian Officials To Secure Mining Licenses

Yesterday the DOJ announced the unsealing of a criminal indictment charging six individuals “with participating in an alleged international racketeering conspiracy involving bribes of state and central government officials in India to allow the mining of titanium minerals.”

According to the indictment, Dmitry Firtash, a Ukrainian businessman who was arrested in March in Austria (see here for the DOJ’s prior release), was the leader of a criminal enterprise, through his group of companies Group DF, that included:

  • Andras Knopp (a Hungarian businessman)

  • Suren Gevorgyan (of Ukraine)

  • Gajendra Lal (an Indian national and permanent resident of the U.S.)

  • Periyasamy Sunderalingam (of Sri Lanka)

  • K.V.P. Ramachandra Rao (a Member of the Parliament in India who was an official of the state government of Andra Pradesh and a close advisor to the now-deceased chief minister of the State of Andhra Pradesh, Y.S. Rajasekhara Reddy)

According to the indictment, the illegal activities of the enterprise included, but were not limited to: “utilizing United States financial institutions to engage in the international transmission of dollars for the purpose of bribing Indian public officials in connection with obtaining approval of the necessary licenses for [a mining project within Andhra Pradesh], which project was forecast to generate more than $500 million in revenues per year …”

According to the indictment:

“Licenses were required for the project before mining could begin.  These licenses required the approval of both the State Government of Andhra Pradesh and the Central Government prior to their issuance.  The approval and issuance of such licenses were discretionary, non-routine governmental actions.”

The indictment charges all defendants with racketeering conspiracy; money laundering conspiracy; and two counts of interstate travel in aid of racketeering.

In addition, all defendants except Rao (the alleged Indian “foreign official”) were charged with conspiracy to violate the FCPA’s anti-bribery provisions.

The absence of Rao from this charge is, no doubt, a result of U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991). In that case involving Canadian “foreign officials,” the DOJ acknowledged that it could not charge the officials with direct FCPA violations since the FCPA did not criminalize the receipt of bribes by a foreign official.  However, the DOJ charged the Canadian officials with conspiring to violate the FCPA.  The court dismissed this charge and rejected the DOJ’s position that a “foreign official” could be charged with conspiring to violate the FCPA.  Based on the language and legislative history of the FCPA, the court found a “legislative policy to leave unpunished a well-defined group of persons [i.e., “foreign officials] who were necessary parties to the acts constituting a violation of the substantive law.”

As to the FCPA conspiracy charge, Lal is charged as a domestic concern and the other defendants are charged as “persons” under the 78dd-3 prong of the statute which contains the following jurisdictional element – “while in the territory of the U.S., corruptly … make[s] use of the mails or any means or instrumentality of interstate commerce or to do any act in furtherance” of an improper payment. The indictment contains various allegations relevant to this jurisdictional prong including use of U.S. bank accounts, travel in the U.S., use of e-mail accounts hosted on computer servers located within the U.S., and use of cell phones operating on interstate networks.

Among other things, the indictment seeks forfeiture of approximately $10.6 million from the defendants.

In the DOJ’s release, Acting Assistant Attorney General David O’Neil states:

“Fighting global corruption is part of the fabric of the Department of Justice.  The charges against six foreign nationals announced today send the unmistakable message that we will root out and attack foreign bribery and bring to justice those who improperly influence foreign officials, wherever we find them.”

U.S. Attorney for the N.D. of Illinois Zachary Fardon states:

“Criminal conspiracies that extend beyond our borders are not beyond our reach.  We will use all of the tools and resources available to us to ensure the integrity of global business transactions that involve U.S. commerce.”

Special Agent in Charge of the FBI’s Chicago Office Robert Holley states:

“This case is another example of the FBI’s willingness to aggressively investigate corrupt conduct around the globe.  With the assistance of our law enforcement partners, both foreign and domestic, we will continue to pursue those who allegedly bribe foreign officials in return for lucrative business contracts.”

As noted in the release, other than Firtash, all other defendants remain at large.  When Firtash was arrested in March, he released this statement through Group DF.  As highlighted here, Firtash paid approximately $172 million to be released on bail.

For more on the enforcement action, see here from the Chicago Tribune, here from Reuters and here from Bloomberg.

As noted in this article, while several FCPA enforcement actions have been brought in connection with foreign license and permitting issues, the government has an overall losing record when put to its burden of proof in FCPA enforcement actions outside the context of foreign government procurement.

Marubeni Enforcement Action Specifics

A post last week mentioned the $88 million Foreign Corrupt Practices Act enforcement action (the 12th largest of all-time in terms of settlement amount) against Marubeni (a Japanese company).  In 2012, Marubeni resolved a $55 million FCPA enforcement action (see here for the prior post) involving Bonny Island, Nigeria conduct.

This post highlights specifics from the enforcement action in the original source documents – the criminal information and plea agreement.  [Previously, the DOJ released original source documents relevant to an FCPA enforcement action at the same time as announcing the enforcement action.  However, according to a knowledgeable source, the DOJ has a new policy of releasing original source documents only when those documents have been filed-stamped by the relevant court.  While an understandable policy, the end result will likely be that the majority of reporting of FCPA enforcement actions will be reporting exclusively from DOJ press releases, not original source documents.  Not on this website] 

The Marubeni enforcement action is a virtual carbon copy of the April 2013 FCPA enforcement action against various current and former employees of Alstom concerning the Tarahan power project in Indonesia.  Indeed, as highlighted in the previous post, Marubeni is the “Consortium Partner” in the prior enforcement action and those associated with Alstom previously charged (Lawrence Hoskins, Frederic Pierucci, William Pomponi and David Rothschild) are mentioned prominently in the Marubeni enforcement action.

Information

The information alleges that Marubeni and its subsidiaries, including Marubeni Power Systems Corporation (“MPSC”), partnered with Alstom (simply referred to in the Information as Power Company) and its subsidiaries in bidding and carrying out of the Tarahan Project in Indonesia, a $118 project to provide power-related services to the citizens of Indonesia that was bid and contracted through Indonesia’s state-owned and state-controlled electricity company, Perusahaan Listrik Negara (“PLN”). According to the information, Marubeni managed all work on the project, including auxiliary equipment and civil building and installation work.

According to the information, Marubeni and Alstom retained two consultants (the same consultants as in the prior 2013 enforcement action) and the “consultant’s primary purpose was not to provide legitimate consulting services to Marubeni and Alstom but was instead to pay bribes to Indonesian officials who had the ability to influence the award of the Tarahan Project contract.”  The Indonesian officials are the same as the officials in the prior enforcement action.

“Official 1 … a member of Parliament in Indonesia [who] had influence over the award of contracts by PLN, including on the Tarahan Project”

“Official 2 … a high-ranking official at PLN [who] had broad decision-making authority and influence over the award of contracts by PLN, including on the Tarahan Project”

“Official 3 … an official at PLN [who] was a high-ranking member of the evaluation committee for the Tarahan Project. Official 3 had broad decision-making authority and influence over the award of the Tarahan contract.”

According to the information, Marubeni, through its employees and agents made payments to a consultant’s bank account in Maryland, knowing that a portion of the payments to the consultant was intended for Indonesian officials in exchange for their influence and assistance in awarding the Tarahan Project to Marubeni and Alstom.  In addition, the information alleges that Marubeni, through its employees and agents, attended meetings in Connecticut in connection with the Tarahan Project.

There are no specifics in the information concerning the Marbueni employees such as rank, title or position of the employees (as noted in the information, Marubeni has approximately 24,000 employees in over 70 countries).

Based on the above allegations, the information charges Marubeni with conspiracy to violate the FCPA’s anti-bribery provisions. As to jurisdiction, the information alleges that Marubeni, through its employees, together with others, while in Connecticut discussed in person, via telephone and via e-mail the need to obtain the Tarahan Project and making bribe payments to various alleged foreign officials in order to obtain the contract, and offered to pay, promised to pay, and authorized the payment of bribes to obtain the contract.  The information alleges approximately 60 separate overt acts in furtherance in the conspiracy and the vast majority of these allegations concerning the alleged co-conspirators associated with Alstom.  There are relatively few specific overt acts allegations concerning Marubeni employees other than the following.

In 2002 and 2004 employees of Marubeni traveled to Connecticut “to attend meetings … in connection with the Tarahan Project”

Between 2002 – 2004, e-mails were sent to Marubeni employees from co-conspirators or from Marubeni employees to co-conspirators in connection with the project and bribery scheme

Twice in 2005 and once in 2008 “Marubeni caused” wire transfers from a bank account in New York to a consultant’s bank account in Maryland in furtherance of the bribery scheme

The “most recent” allegation supporting Marubeni’s conspiracy charge allegedly occurred in November 2008.

In addition to the conspiracy charge, the information also alleges 7 substantive FCPA anti-bribery violations under the 78dd-3 prong of the statute.  The jurisdictional element of 78dd-3 is “while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance …” of a bribery scheme.

Two of the 7 FCPA anti-bribery charges are Marubeni specific (the above mentioned 2005 and 2008 wire transfers).  The other 5 FCPA anti-bribery charges are based on the conduct of Alstom employees.

Plea Agreement

In the plea agreement, Marubeni admitted to the factual allegations in the information and agreed that it was responsible for the acts of its present and former employees described in the information.

As set forth in the plea agreement, the advisory sentencing guidelines range for the conduct at issue was $63.7 million to $127.4 million.  Pursuant to the plea agreement, Marubeni agreed to pay $88 million.  This is a relatively rare situation of an FCPA corporate defendant paying a criminal fine amount within the guidelines range.

The plea agreement states that the DOJ believes that the fine amount was the appropriate disposition based on:  “(1) the nature and seriousness of the offense; (2) the Defendant’s failure to voluntarily disclose the conduct; (3) the Defendants refusal to cooperate with the Department’s investigation when given the opportunity to do so; (4) the lack of an effective compliance and ethics program at the time of the offense; (5) the Defendant’s failure to properly remediate: and (6) the Defendant’s history of prior criminal misconduct.”

As is typical in corporate FCPA resolutions, Marubeni agreed to a host of compliance requirements and the plea agreement also contains a muzzle clause.

DOJ Release

In this release, Acting Assistant Attorney General Raman stated:

“Marubeni pleaded guilty to engaging in a seven-year scheme to pay – and conceal – bribes to a high-ranking member of Parliament and other foreign officials in Indonesia.  The company refused to play by the rules, then refused to cooperate with the government’s investigation.  Now Marubeni faces the consequences for its crooked business practices in Indonesia .”

Acting U.S. Attorney Michael Gustafson (D. Conn.) stated:

“For several years, the Marubeni Corporation worked in concert with a Connecticut company, among others, to bribe Indonesian officials in order to secure a contract to provide power-related services in Indonesia.  Today’s guilty plea by Marubeni Corporation is an important reminder to the business community of the significant consequences of participating in schemes to bribe government officials, whether at home or abroad.”

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

“Companies that wish to do business in the United States or with U.S. companies must adhere to U.S. law, and that means bribery is unacceptable.  The FBI continues to work with our international law enforcement partners as demonstrated in this case to ensure that companies are held accountable for their criminal conduct.  I want to thank the agents, analysts and prosecutors who brought this case to today’s conclusion.”

Marubeni’s Release

In this release, Marubeni stated:

“[The enforcement action follows the successful completion by Marubeni of its obligations under a January 2012 Deferred Prosecution Agreement entered with the DOJ relating to the liquid natural gas project in Nigeria. That Agreement required Marubeni to retain a corporate compliance consultant for two years to review and enhance its anticorruption compliance program to ensure that it satisfies standards specified by the DOJ, and to report to the DOJ regarding the results of this review. This was completed in January 2014, and at the request of the DOJ the related proceeding was dismissed on February 26, 2014.

The Tarahan conduct pre-dates the execution of Marubeni’s 2012 Deferred Prosecution Agreement with the DOJ. Marubeni has undertaken extensive efforts to enhance its anti-corruption compliance program, and believes that its current program is robust and effective. Although the agreement reached with DOJ today does not require Marubeni to further engage a compliance consultant, Marubeni is taking this matter seriously and commits to continue to thoroughly implement and enhance its anti-corruption compliance program.”

Marc Weinstein (Hughes Hubbard & Reed) represented Marubeni.  Weinstein also represented Marubeni in connection with the 2012 FCPA enforcement action.

Alcoa Resolves A “Legacy Legal Matter” By Agreeing To Pay $384 Million In An FCPA Enforcement Action

Given the importance statute of limitations have in our legal system (see here for a recent Supreme Court decision), there is something odd in reading a Foreign Corrupt Practices Act enforcement action concerning allegations from a time when I was in 8th grade.  It is even more odd reading of an FCPA enforcement (not to mention the fourth largest FCPA enforcement action of all-time in terms of a settlement amount) when the alleged consultant at the center of the alleged bribery scheme was criminally charged by another law enforcement agency, put the law enforcement agency to its burden of proof at trial, and the law enforcement agency dismissed the case because there was no “realistic prospect of conviction” (see here for the prior post concerning the U.K. enforcement action of Victor Dahdaleh).

So begins this post concerning the Alcoa FCPA enforcement action announced yesterday by the DOJ and SEC (see here and here).

The enforcement action involved a DOJ criminal information against Alcoa World Alumina LLC resolved via a plea agreement and an SEC cease and desist order against Alcoa Inc.

Alcoa entities agreed to pay approximately $384 million to resolve alleged FCPA scrutiny (a criminal fine of $209 million and an administrative forfeiture of $14 million to resolve the DOJ enforcement action and $175 million in disgorgement to resolve the SEC enforcement action – of which $14 million will be satisfied by the payment of the forfeiture in the criminal action).

The $384 million settlement amount is the fourth largest in FCPA history.

This post summarizes both the DOJ and SEC enforcement actions.

DOJ

Criminal Information Against Alcoa World Alumina LLC

The enforcement action centers on Consultant A (no doubt Victor Dahdaleh) and his alleged interactions on behalf of Alcoa entities with Aluminium Bahrain B.S.C. (Alba), an aluminium smelter operating in Bahrain.”  (See this 2010 post “What is Alba”).

The Alcoa entity charged is Alcoa World Alumina LLC, an entity that beginning in 2000 “assumed primary responsibility for all of Alcoa World Alumina and Chemicals (AWAC’s) relationships with global alumina customers, including Alba.”  According to the information, Alcoa World Alumina LLC “personnel responsible for these functions reported indirectly to Alcoa personnel in New York.”

Alba is described in the information as follows.

“The state holding company of the Kingdom of Bahrain, the Mumtalakat, which was controlled by the Ministry of Finance, held 77% of the shares of Alba.  The Saudi Basic Industries Corp. (SABIC), which was majority-owned and controlled by the government of the Kingdom of Saudi Arabia, held a 20 percent minority stake in Alba, and three percent of Alba’s shares were held by a German investment group.  The majority of profits earned by Alba belonged to the Mumtalakat, through part of the profit was permitted to be used by Alba for its operations.  The Ministry of Finance had to approve any change in Alba’s capital structure and had to be consulted on any major capital projects or contracts material to Alba’s operations.  Members of the Royal Family of Bahrain and representatives of the government sat on the Board of Directors of Alba, controlled its board, and had primary authority in selecting its chief executive and chief financial officer.”

The alleged “foreign officials” are described as follows.

“Official A was a member of Bahrain’s Royal Family and served as a member of the board of directors of Alba from 1982 to 1997.  From 1988 to 1990, Official A was also a member of Alba’s tender committee, which was responsible in part for awarding major contracts to Alba’s suppliers, such as Alcoa entities supplying alumina to Alba.”

“Official B served on Alba’s board from at least 1986 to 2000 as a representative of SABIC.  From 1988 to 1990, Official B also served on Alba’s tender committee with Official A.”

“Official C was a senior member of Bahrain’s Royal Family, a senior government official of Bahrain from at least 1995 to 2005, and served as a high-ranking officer of Alba from 1995 to 2005.  As a high-ranking officer of Alba, Official C was extremely influential over the assignment of contracts to Alba’s suppliers.  Official C relied on Consultant A to assist him in opening international bank accounts using various aliases or shell entities for the purpose of receiving corrupt funds from kickbacks from Alba’s suppliers.”

“Official D was a senior member of Bahrain’s Royal Family and a senior government official of Bahrain for many decades.  Official C was a close associate of Official D.  Official D’s office was required to be consulted before Alba could commit to a long term alumina supply contract with Alcoa.”

According to the information, “beginning in or around 1989, at the request of certain Bahraini government officials who controlled Alba’s tender process, Alcoa of Australia retained Consultant A’s shell companies as purported sales agents and paid them purported sales commissions.”

The information alleges as follows.

“In or around 1988, an Alcoa of Australia sales manager for the Alba account received a request from certain Alba officials to retain Consultant A as ‘Alcoa’s agent’ and pay him a ‘commission.’  The request was made in part at the behest of Official A, a member of Alba’s board and tender committee.  The sales manager subsequently told his supervisor that Alcoa of Australia would lose the supply contract if Consultant A was not retained as its agent, and that supervisor, in turn, conveyed that information to an individual who was both an Alcoa of Australia Board member and an Alcoa employee based in Pittsburgh.  The individual approved the retention of Consultant A as a agent.”

Under the heading “Consultant A Channeled Millions in Corrupt Payments to Government Officials From 1991 Through 1996,” the information alleges:

“From 1993 through 1996, Consultant A made over $1 million in corrupt payments to Official A …”.

“From 1993 through 1996, Consultant A made over $2 million in corrupt payments to Official B …”.

Under the heading “Consultant A Channeled Million in Corrupt Payments to Government Officials From 1997 Through 2001,” the information alleges:

“From 1997 through 2001, Consultant A made over $5 million in corrupt payments to Official A …”.

“From 1997 through 2001, Consultant A made approximately $2.2 million in corrupt payments to Official B …”.

“From 1999 through 2001, Consultant A made over $19 million in corrupt payments to Official C …”.

Under the heading “Consultant A Channeled Millions in Corrupt Payments to Government Officials From 2002 Through 2004,” the information alleges:

“In 2002, Consultant A made over $1 million in corrupt payments to Official B …”.

“From 2002 through 2004, Consultant A made approximately $29 million in corrupt payments to Official C …”.

Under the heading “Additional Corrupt Payments to Government Officials,” the information alleges:

“From 2005 through 2006, Consultant A made almost $13 million in corrupt payments … to accounts that were beneficially owned by Official C under client code names …”.

“On or about April 3, 2006, Consultant A transferred $17 million … to an account owned by Official D …”.

Based on the above allegations, the information charges Alcoa World Alumina LLC with one count of violating the FCPA’s anti-bribery provisions and states:

“Alcoa World Alumina LLC caused Alcoa of Australia to enter into a sham distributorship agreement with Alumet and AAAC that facilitated the funneling of millions of dollars of bribes indirectly through Consultant A to senior officials of the Kingdom of Bahrain in order to obtain and retain a long-term alumina supply agreement between Alcoa of Australia and Alba.”

Plea Agreement

The above charge was resolved via a plea agreement in which Alcoa agreed to “guarantee, secure and ensure delivery” by Alcoa World Alumina LLC “of all payments due from the Defendant under the Agremenet.”  The advisory Sentencing Guidelines calculation set forth in the plea agreement based on the alleged conduct was $446 million to $892 million.

The plea agreement states that a $209 million criminal fine was an “appropriate disposition” of the case “because immediate payment of the entire fine would pose an undue burden” on Alcoa and the agreement lists the following factors:

the impact of a penalty within the guidelines range on the financial condition of Alcoa and its potential to substatially jeopardize Alcoa’s ability to compete, including, but not limited to, its ability to fund its sustaining and improving capital expenditures, its ability to invest in research and development, its ability to fund its pension obligations, and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.

The plea agreement also references:

“(b) the significant remedy being imposed on the Defendant’s majority shareholder, Alcoa, by the U.S. Securities and Exchange Commission for Alcoa’s conduct in this matter; (c) after learning allegations of FCPA violations, Alcoa’s Board of Directors appointed a Special Committee of the Board of Directors to oversee an internal investigation by independent counsel; (d) the substantial cooperation provided to the Department by the Defendant’s majority shareholder, Alcoa, including conducting an extensive internal investigation, voluntarily making employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (e) the remedial efforts already undertaken and to be undertaken by the Defendant’s majority shareholder, Alcoa, which affect both the Defendant’s operations and those of Alcoa, including the hiring of new senior legal and ethics and compliance officers and the implementation of enhanced due diligence reviews of the retention of third-party agents and consultants; and (f) Alcoa’s separate commitment to ensuring that its anti-corruption compliance program will be maintained to continue to satisfy the minimum elements” set forth in an attachment to the agreement.

In this “Agreed Motion to Waive the Presentence Report,” the DOJ condenses the extensive allegations in the information as follws under the heading “Charged Conduct.”

“The charge is based on the Defendant’s role in 2004 in procuring a ten-year agreement to sell approximately 1.7 million metric tons of alumina to Alba from AWAC’s Australian refineries. The Defendant caused Alcoa of Australia to enter into a purported distributorship with a shell company owned by Consultant A, an international middleman who had close contacts with certain members of Bahrain’s Royal Family, rather than contract directly with Alba. The Defendant consciously disregarded that the mark-up imposed by Consultant A on sales of alumina to Alba was facilitating corrupt payments to certain Bahraini government officials who controlled Alba’s tender process.”

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

“Alcoa World Alumina today admits to its involvement in a corrupt international underworld in which a middleman, secretly held offshore bank accounts, and shell companies were used to funnel bribes to government officials in order to secure business.  The law does not permit companies to avoid responsibility for foreign corruption by outsourcing bribery to their agents, and, as today’s prosecution demonstrates, neither will the Department of Justice.”

David Hickton (U.S. Attorney for the W.D. of Pa) stated:

“Today’s case shows that multinational corporations cannot get away with using middlemen to structure sham business arrangements that funnel kickbacks to government officials.”

Richard Weber (Chair of the IRS Criminal Division) stated:

“This case is the result of unraveling complex financial transactions used by Alcoa World Alumina LLC’s agent to facilitate kickbacks to foreign government officials.  IRS-CI will not be deterred by the use of sophisticated international financial transactions as we continue our ongoing efforts to pursue corporations and executives who use hidden offshore assets and shell companies to circumvent the law.”

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

“Corrupt kickback payments to foreign government officials to obtain business diminish public confidence in global commerce.  There is no place for bribery in any business model or corporate culture.   Today’s plea demonstrates the FBI and our law enforcement partners are committed to curbing corruption and will pursue all those who try to advance their businesses through bribery.”

The DOJ release further states:

“The plea agreement and related court filings acknowledge Alcoa’s current financial condition as a factor relevant to the size of the criminal fine, as well as Alcoa’s and Alcoa World Alumina’s extensive cooperation with the department, including conducting an extensive internal investigation, making proffers to the government, voluntarily making current and former employees available for interviews, and providing relevant documents to the department.   Court filings also acknowledge subsequent anti-corruption remedial efforts undertaken by Alcoa.   The department acknowledges and expresses its appreciation for the cooperation and assistance of the Office of the Attorney General of Switzerland, the Guernsey Financial Intelligence Service and Guernsey Police, the Australian Federal Police, the U.K.’s Serious Fraud Office, and other law enforcement authorities in the department’s investigation of this matter.”

 SEC

The SEC enforcement action is based on the same core set of facts alleged in the DOJ enforcement action and the cease and desist order states in summary fashion as follows.

“These proceedings arise from violations of the Foreign Corrupt Practices Act by Alcoa concerning alumina sales to Aluminium Bahrain B.S.C. (“Alba”), an aluminum manufacturer owned primarily by the Kingdom of Bahrain.

Between 1989 and 2009, Alcoa of Australia (“AofA”) and Alcoa World Alumina LLC (“AWA”) (collectively, the “AWAC Subsidiaries”) retained a consultant to act as their middleman in connection with sales of alumina to Alba and knew or consciously disregarded the fact that the relationship with the consultant was designed to generate funds that facilitated corrupt payments to Bahraini officials. The consultant was paid a commission on sales where he acted as an agent and received a markup on sales where he acted as a purported distributor. On sales where the consultant acted as a purported distributor, no legitimate services were provided to justify the role of the consultant as a distributor. The consultant used these funds to enrich himself and pay bribes to senior government officials of Bahrain.

The commission payments to the consultant and the alumina sales to the consultant made pursuant to the distribution agreements were improperly recorded in Alcoa’s books and records as legitimate commissions or sales to a distributor and did not accurately reflect the transactions. The false entries were initially recorded by the AWAC Subsidiaries which were then consolidated into Alcoa’s books and records. During the relevant period, Alcoa also lacked sufficient internal controls to prevent and detect the improper payments.”

In pertinent part, the order states as follows.

“Despite the red flags inherent in this arrangement [between the AWAC Subsidiaries and Consultant A], AofA’s in-house counsel approved the arrangement without conducting any due diligence or otherwise determining whether there was a legitimate business purpose for the use of a third party intermediary.”

[…]

“Employees at AWA and AofA either knew or were willfully blind to the high probability that Consultant A would use his commissions and markup to pay bribes.”

[…]

“The AWAC Subsidiaries knew or consciously disregarded the fact that Consultant A was inserted into the Alba sales supply chain to generate funds to pay bribes to Bahraini officials. Ultimately, these funds facilitated at least $110 million in corrupt payments to Bahraini officials. The vast majority of those funds were generated from the markup between the price Consultant A sold to Alba and the price that AofA sold to Consultant A. Those funds were also generated from the commissions that AofA paid to Consultant A.

The recipients of the corrupt payments included a senior Bahraini official, members of the board of directors of Alba, and senior management of Alba. Examples of the corrupt payments include:  In August 2003, Consultant A’s shell companies made 2 payments totaling $7 million to accounts for the benefit of a Bahraini government official who Consultant A had been retained to lobby. Two weeks later, Alcoa and Alba signed an agreement in principle to have Alcoa participate in Alba’s plant expansion.  In October 2004, Consultant A’s shell company paid $1 million to an account for the benefit of that same government official. Shortly thereafter, Alba agreed in principle to Alcoa’s offer for the 2005 Alba Supply Agreement. In or around the time of the execution of the final 2005 Alba Supply Agreement, Consultant A-controlled companies paid another Bahraini government official and/or his beneficiaries $41 million in three payments.”

The order then states as follows.

“This Order contains no findings that an officer, director or employee of Alcoa knowingly engaged in the bribe scheme. As described above, Alcoa violated [the FCPA’s anti-bribery provisions] by reason of its agents, including subsidiaries AWA and AofA, indirectly paying bribes to foreign officials in Bahrain in order to obtain or retain business. AWA, AofA, and their employees all acted as “agents” of Alcoa during the relevant time, and were acting within the scope of their authority when participating in the bribe scheme. As described above, Alcoa exercised control over the Alumina Segment, including the AWAC Subsidiaries. Alcoa appointed the majority of seats on the AWAC Strategic Council, and the head of the Global Primary Products group served as its chair. Alcoa and AofA transferred personnel between them, including alumina sales staff; Alcoa set the business and financial goals for AWAC and coordinated the leg al, audit, and compliance functions of AWAC; and the AWAC Subsidiaries’ employees managing the Alba alumina business reported functionally to the global head of the Alumina Segment. Alba was a significant alumina customer for Alcoa’s Alumina Segment and during the relevant period, members of Alcoa senior management met both with Alba officials and Consultant A to discuss matters related to the Alba relationship, including a proposed joint venture between Alcoa and Alba. During this time, Alcoa was aware that Consultant A was an agent and distributor with respect to AofA’s sales of alumina to Alba and that terms of related contracts were reviewed and approved by senior managers of Alcoa’s Alumina Segment in the United States.”

[…]

“Alcoa violated [the books and records provisions] by improperly recording the payments, to Consultant A, as agent commissions when the true purpose of these payments was to make corrupt payments to Bahraini officials. Alcoa violated [the books and records provisions] when Alcoa recorded the sales to Consultant A as a distributor. The false entries were initially recorded by the AWAC Subsidiaries which were then consolidated and reported by Alcoa in its consolidated financial statements. Alcoa also violated [the internal controls provisions] by failing to devise and maintain sufficient accounting controls to detect and prevent the making of improper payments to foreign officials.”

Under the heading “Alcoa’s Remedial Measures,” the order states:

“Alcoa made an initial voluntary disclosure of certain of these issues to the Commission and Department of Justice in February 2008, and thereafter Alcoa’s Board of Directors appointed a Special Committee of the Board of Directors to oversee an internal investigation by independent counsel. Alcoa’s counsel regularly reported on the results of the investigation and fully cooperated with the staff of the Commission.  Alcoa also undertook extensive remedial actions including: a comprehensive compliance review of anti-corruption policies and procedures, including its relationship with intermediaries; enhancing its internal controls and compliance functions; developing and implementing enhanced FCPA compliance procedures, including the development and implementation of policies and procedures such as the due diligence and contracting procedure for intermediaries; and conducting comprehensive anti-corruption training throughout the organization.”

In the SEC’s release, George Canellos (Co-Director of the SEC Enforcement Division) stated:

“As the beneficiary of a long-running bribery scheme perpetrated by a closely controlled subsidiary, Alcoa is liable and must be held responsible.  It is critical that companies assess their supply chains and determine that their business relationships have legitimate purposes.”

Kara N. Brockmeyer (Chief of the SEC Enforcement Division’s FCPA Unit) stated:

“The extractive industries have historically been exposed to a high risk of corruption, and those risks are as real today as when the FCPA was first enacted.”

The SEC release further states:

“The SEC appreciates the assistance of the Fraud Section of the Criminal Division at the Department of Justice as well as the Federal Bureau of Investigation, Internal Revenue Service, Australian Federal Police, Ontario Securities Commission, Guernsey Financial Services Commission, Liechtenstein Financial Market Authority, Norwegian ØKOKRIM, United Kingdom Financial Control Authority, and Office of the Attorney General of Switzerland.”

In this release (which per the plea agreement, the company needed to consult with the DOJ before issuing), Alcoa stated as follows.

“Alcoa Inc. [has] announced the resolution of the investigations by the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC) regarding certain legacy alumina contracts with Aluminium Bahrain B.S.C. (Alba).  The settlement with the DOJ was reached with Alcoa World Alumina LLC (AWA). AWA is a company within Alcoa World Alumina and Chemicals (AWAC), the unincorporated bauxite mining and alumina refining  venture between Alcoa Inc. and Alumina Limited.   […]  There is no allegation in the filings by the DOJ and there is no finding by the SEC that anyone at Alcoa Inc. knowingly engaged in the conduct at issue.  […]  Alcoa welcomes the resolution of this legacy legal matter with the U.S. Government.”

The Alcoa release also details the drawn out nature of the settlement payments (an unusual feature in an FCPA enforcement action).  The release states:

“As part of the DOJ resolution […] AWA will pay a total of $223 million, including a fine of $209 million payable in five equal installments over four years. The first installment of $41.8 million, plus a one-time administrative forfeiture of $14 million, will be paid in the first quarter of 2014, and the remaining installments of $41.8 million each will be paid in the first quarters of 2015-2018.”

“Under the terms of the settlement with the SEC, Alcoa Inc. agreed to a settlement amount of $175 million, but will be given credit for the $14 million one-time forfeiture payment, which is part of the DOJ resolution, resulting in a total cash payment to the SEC of $161 million payable in five equal installments over four years. The first installment of $32.2 million will be paid to the SEC in the first quarter of 2014, and the remaining installments of $32.2 million each will be paid in the first quarters of 2015-2018.”

As to the reason for the drawn-out settlement amounts, the SEC release states:

“In light of the impact of the disgorgement payment upon Respondent’s financial condition and its potential to substantially jeopardize Alcoa’s ability to fund its sustaining and improving capital expenditures, its ability to invest in research and development, its ability to fund its pension obligations, and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities, Alcoa shall pay the disgorgement in five equal payments …”.

Alcoa World Alumina was represented in the criminal matter by Jonathan R. Streeter, Robert J. Jossen and Diane Nicole Princ of Dechert LLP and Alcoa was represented in the SEC matter by Evan Chesler of Cravath Swaine & Moore LLP.

Yesterday, Alcoa’s stock price closed down approximately 1.3%.

As highlighted in this post, in October 2012 Alcoa announced (here) that it entered into a settlement agreement with Alba resolving a civil lawsuit that had been pending since 2008 concerning the same alleged core facts in the DOJ and SEC enforcement action.Alcoa agreed to make a cash payment to Alba of $85  million payable in two installments.