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Further Details Regarding The DOJ’s Recent Individual FCPA Enforcement Action In Connection With PDVSA Procurement

By on December 29, 2015 in 2015 Enforcement Actions, Abraham Shiera, Anything of Value, DOJ Enforcement Action, Individual Enforcement Action, Oil and Gas Industry, Roberto Rincon, Venezuela
PDVSA

This previous post briefly mentioned the DOJ’s recent Foreign Corrupt Practices Act enforcement action against Roberto Rincon and Abraham Shiera for alleged improper business practices with officials at Petroleos de Venezuela S.A. (PDVSA), Venezuela’s alleged state-owned and state-controlled oil company.

This post goes in-depth regarding this recently unsealed criminal indictment.

In the indictment, Rincon is described as a U.S. lawful permanent resident and a resident of Texas who controlled, together with others, a number of closely held companies, including several U.S. companies, that he used to secure contracts with PDVSA.

Shiera is described as a Venezuelan national who resided in Florida who controlled, together with others, a number of closely held companies, including several U.S. companies, that he used to secure contracts with PDVSA.

Both Rincon and Shiera, along with their respective unnamed Texas or Florida-based companies, are alleged to be “domestic concerns.”

The “foreign officials” are described as follows.

Official A – employed by PDVSA, including as a buyer at PDVSA and a supervisor of other PDVSA buyers. Official A’s job responsibilities including assigning bidding panels to PDVSA buyers, including Official C and Official D, who would then be responsible for selecting companies for the bidding panels, which allowed those companies to submit bids on individual PDVSA projects.

Officials B – employed by PDVSA, including as a purchase analyst for PDVSA. Official B’s job responsibilities included selecting companies for bidding panels, which allowed those companies to submit bids on individual PDVSA projects.

Official C – employed by PDVSA, including as a purchasing manager and superintendent of purchasing at PDVSA. Official C’s job responsibilities included selecting companies for bidding panels, which allowed those companies to submit bids on individual PDVSA projects, and selecting which companies would win the economic portion of the bid process.

Official D – employed by PDVSA, including as a buyer for PDVSA. Official D’s job responsibilities included selecting companies for bidding panels, which allowed those companies to submit bids on individual PDVSA projects.

Official E – employed by PDVSA, including as a purchasing manager.  Official E’s job responsibilities included selecting companies for bidding panels, which allowed those companies to submit bids on individual PDVSA projects.

The indictment refers to various PDVSA entities collectively as PDVSA including PDVSA Services Inc. (a U.S. based affiliate of PDVSA located in Houston, Texas that was, at various times, responsible for international purchasing on behalf of PDVSA) and Bariven S.A. (a PDVSA procurement subsidiary responsible for equipment purchases).

The indictment alleges that Rincon and Shiera “referred to the PDVSA officials who were assisting them in obtaining and retaining contracts with PDVSA in exchange for the bribes as ‘aliados,’ which translates into English as ‘allies’ or “allieds.”

The indictment alleges a conspiracy between 2009 and 2014 in which Rincon, Shiera and others enriched themselves “by obtaining and retaining lucrative energy contacts with PDVSA through corrupt and fraudulent means, including by paying bribes to PDVSA officials.” The alleged bribes to PDVSA officials were to “influence acts and decisions of the PDVSA officials in their official capacities and to induce the PDVSA officials to do and omit to do certain acts, including, but not limited to:

  • assisting Rincon’s and Shiera’s companies in winning PDVSA contracts;
  • providing Rincon and Shiera with inside information concerning the PDVSA bidding process;
  • placing one or more of Rincon’s and Shiera’s companies on certain bidding panels for PDVSA projects;
  • helping to conceal the fact that Rincon and Shiera controlled more than one of the companies on certain bidding panels for PDVSA projects;
  • supporting Rincon’s and Shiera’s companies before an internal PDVSA purchasing committee;
  • preventing interference with the selection of Rincon’s and Shiera’s companies for PDVSA contracts;
  • updating and modifying contract documents, including change orders to PDVSA contracts awarded to Rincon’s and Shiera’s companies;
  • assisting Rincon’s and Shiera’s companies in receiving payment for previously awarded PDVSA contracts, including by requesting payment priority for projects involving Rincon’s and Shiera’s companies.

The indictment alleges that “in addition to monetary bribes, Rincon and Shiera, together with others, bribed PDVSA officials by providing things of value, including recreational travel (including stays at the Fontaineblue Hotel in Miami Beach), meals (including whiskey), and entertainment, in order to obtain and retain business on behalf of Rincon’s and Shiera’s companies.”

The indictment also alleges that money was transferred from a bank account in the name of one of Rincon’s companies “to pay off the balance of a mortgage loan in Official E’s name for a residence in the Southern District of Texas, in exchange for Official E’s assistance in connection with PDVSA contracts” as well as money to “a close personal associate of Official E, but over which Official E held power of attorney.”

According to the indictment, Rincon and Shiera “provided to certain PDVSA officials who were receiving bribes proposed bidding panel lists that would include more than one company controlled by Rincon or Shiera to create the false appearance that the bidding process was competitive.” The indictment also alleges that Rincon and Shiera “attempted to conceal the bribes to certain PDVSA officials, which they referred to as ‘commissions,’ by creating false justifications for the bribes, including requesting or receiving invoices for equipment that was not provided and services that were never rendered in order to disguise the bribe payments to PDVSA officials.”

In addition to the conspiracy charge, the indictment also charges: (i) Rincon with four substantive violations of the FCPA’s anti-bribery provisions; (ii) Shiera with five substantive violations of the anti-bribery provisions; and (iii) Rincon and Shiera with money laundering conspiracy as well as seven substantive money laundering offenses.

An Order of Detention Pending Trial against Rincon states that the DOJ’s investigation “covered 730 bank accounts; of those 108 were related to Rincon, his family and his companies.” According to the filing, “the indictment seeks forfeiture of three Swiss bank accounts” that the Government has “traced $100 million from the scheme.” The filing further states that “from 2009 to 2014, over one billion dollars was traced to this conspiracy.”

In response to the U.S. allegations, PDVSA released the below statement.

PDVSA2

 

 

 

 

 

Next Up – Bristol-Myers

By on October 6, 2015 in 2015 Enforcement Actions, Anything of Value, Bristol Myers Squibb, China, Healthcare Providers As Foreign Officials, Joint Venture, Pharmaceutical Industry, SEC Enforcement Action
BMS

First it was Johnson & Johnson (see here – $70 million enforcement action in April 2011).

Then it was Smith & Nephew (see here – $22 million enforcement action in February 2012).

Then it was Biomet (see here – $22.8 million enforcement action in March 2012).

Then it was Pfizer / Wyeth (see here  – $60 million enforcement action in August 2012).

Then it was Eli Lilly (see here – $29 million enforcement action in December 2012).

Then it was Stryker (see here – $13.2 million enforcement action in October 2013).

Then it was Mead Johnson (see here – $12 million enforcement action in July 2015).

The latest of the most recent Foreign Corrupt Practices Act enforcement actions (there are many more than those listed above) premised on the theory that physicians of certain foreign health care systems are “foreign officials” under the FCPA is Bristol-Myers Squibb Co. (“BMS”).

Some will say this enforcement action – like certain of the others mentioned above – merely involved the FCPA’s books and records and internal controls provisions, but make no mistake about it, this action – as well as the prior actions – was all about the alleged “foreign officials.”

Yesterday, the SEC announced this administrative cease and desist order in which BMS agreed, without admitting or denying the SEC’s findings, to pay approximately $14.7 million.

The order states in summary fashion as follows.

“These proceedings arise out of violations of the internal controls and recordkeeping provisions of the FCPA by BMS and its majority-owned joint venture in China. Between 2009 and 2014, BMS failed to design and maintain effective internal controls relating to interactions with health care providers (“HCPs”) at state-owned and state-controlled hospitals in China. Through various mechanisms during this period, certain sales representatives of the joint venture improperly generated funds that were used to provide corrupt inducements to HCPs in the form of cash payments, gifts, meals, travel, entertainment, and sponsorships for conferences and meetings in order to secure new sales and increase existing sales. BMS falsely recorded the relevant transactions as legitimate business expenses in its books and records.”

The findings focus on Bristol-Myers Squibb (China) Investment Co. Limited (“BMS China), a company through which BMS conducts business in China, and how BMS China, in turn, primarily operates in China through Sino-American Shanghai Squibb Pharmaceuticals Limited (“SASS”), a majority-owned joint venture.

According to the Order:

“BMS holds a 60% equity interest in SASS and has held operational control over this entity since 2009 when it obtained the right to name the President of SASS and a majority of the members of SASS’s Board of Directors.

BMS began operating in China in 1982 when it formed SASS, the first SinoAmerican pharmaceutical joint venture. Following a successful product launch in 2005, BMS China’s business grew quickly. By 2009, BMS China had 1490 full-time employees and net sales of more than $200 million. This upward trend continued through 2014 when the number of full-time employees expanded to 2464 and net sales reached nearly $500 million.

Certain BMS China employees achieved their sales, in part, by providing HCPs and other government officials with cash and other inducements in exchange for prescriptions and drug listings.”

Under the heading “Failure to Respond to Red Flags,” the Order states:

“BMS China failed to respond effectively to red flags indicating that sales personnel provided improper payments and other benefits in order to generate sales from HCPs. In 2009, BMS China initiated a review of travel and entertainment expenses submitted for reimbursement by its sales personnel and found non-compliant claims, fake and altered invoices and receipts, and consecutively numbered receipts. Shortly thereafter, BMS China retained a local accounting firm to conduct monthly post-payment reviews of all claims for travel, entertainment, and meeting expenses to identify false, improperly documented, and unsubstantiated claims. BMS China brought this function in-house in early 2011 and the results of both the external and internal reviews were provided to management of BMS China as well as regional compliance and corporate business managers who reported directly to senior management of BMS.

During the period between mid-2009 and late 2013, BMS China identified numerous irregularities in travel and entertainment and event documentation, including fake and altered purchase orders, invoices, agendas, and attendance sheets for meetings with HCPs that likely had not occurred. BMS China inaccurately recorded the reimbursement of these false claims as legitimate business expenses in its books and records, which were then consolidated into the books and records of BMS.

Certain BMS China employees admitted that they had submitted false reimbursement claims and used the funds for the benefit of HCPs in support of sales by BMS China. They also alleged that the use of false reimbursement claims to fund payments to and for the benefit of HCPs in order to secure prescription sales was a widespread practice at BMS China. In emails to the BMS China President in November 2010 and January 2011, certain terminated employees wrote that they used the funds to pay rebates, provide entertainment, and fund gift cards for HCPs, as there was no other way to meet their sales targets. Citing the “open secret” that HCPs in China rely upon the “gray income” to maintain their livelihood, they said that they tried to meet the demands of the HCPs for the benefit of BMS China. Despite the widespread exceptions and serious allegations of potentially widespread bribery practices, BMS China did not investigate these claims.”

Under the heading “Compliance and Controls Environment,” the Order states:

“Despite its longstanding presence in China, BMS did not implement a formal FCPA compliance program until April 2006 when it adopted its first standalone anti-bribery policy and corresponding corporative directive. At approximately the same time, BMS began conducting compliance assessments and audits of BMS China that included a review of internal controls relating to anti-bribery risks. These internal reviews revealed weaknesses in the monitoring of payments made to HCPs, the lack of formal processes around the selection and compensation of HCPs as speakers, deficiencies in obtaining and documenting the approval of donations, sponsorships, and consulting arrangements with HCPs, and the failure to conduct post-event verification of meetings and conferences sponsored by sales representatives. Reports of these findings were provided to senior management of BMS China as well as members of BMS’s global compliance department.

These identified controls deficiencies were not timely remediated and compliance resources were minimal. The corporate compliance officer responsible for the Asia-Pacific region through 2012 was based in the U.S. and rarely traveled to China. There was no dedicated compliance officer for BMS China until 2008, and no permanent compliance position in China until 2010. In addition, the BMS sales force in China received limited training and much of it was inaccessible to a large number of sales representatives who worked in remote locations. For example, when BMS rolled out mandatory anti-bribery training in late 2009, 67% of employees in China failed to complete the training by the due date.

Annual internal audits of BMS China repeatedly identified substantial gaps in internal controls, and the results were reported to the Audit Committee and senior management of BMS. In connection with each audit, the audit team cited a lack of effective controls and documentation relating to interactions with HCPs and the monitoring of potential inappropriate payments to HCPs. Among Internal Audit’s conclusions were that BMS China’s controls around the review and approval of travel and entertainment expenses and gifts to HCPs were not effective and that it failed to track payments to HCPs, including high-risk payments, in its quarterly review of potential inappropriate payments, and to enforce controls relating to the documentation, approval, and payment of distributor rebates. Internal Audit also cited the lack of due diligence assessments of distributor compliance, including anti-bribery compliance, the failure to properly document and approve agreements with HCPs who served as speakers, and the lack of a mechanism to ensure that services were received in exchange for sponsorships. As a result, Internal Audit issued a series of qualified opinions in connection with its annual audits of BMS China between 2009 and 2013.”

Under the heading “Internal Documents Reveal Improper Benefits Provided to HCPs,” the Order states:

“Emails and other BMS China documents detail, among other things, proposed “activity plans,” “action plans,” and plans for “investments” in HCPs to increase prescription sales. These contemporaneous documents were prepared at the direction of, and sometimes transmitted to, district and regional sales managers of BMS China, and show that sales representatives used funds derived from travel and expense claims to make cash payments to HCPs and to provide gifts, meals, entertainment, and travel to HCPs in order to induce them to prescribe products sold and marketed by BMS China. The sales representatives provided a variety of benefits to HCPs, ranging from small food and personal care items to shopping cards, jewelry, sightseeing, and cash payments, in exchange for prescription sales. This kind of conduct was captured in a July 2013 email from a sales representative to a regional manager. The sales representative explained that a former sales representative had offered cash for sales to HCPs at a local hospital and “the attitude of the director of the infectious diseases department was extremely clear when I took over: ‘No money, no prescription.’” Similarly, the work plans prepared by other sales representatives also identified correlations between the value of the benefits provided to specific HCPs and the volume of prescription sales expected.

Certain documents within BMS China were replete with references to “investments” made in order to obtain sales, such as offering speaking engagements and sponsorships for domestic and international conferences and meetings in exchange for prescriptions. Some sales representatives also sought to increase prescription sales and maintain drug listings at pharmacies by hosting cash promotions and events for pharmacy employees. Based on the volume of prescriptions, certain BMS China sales representatives gave cash, shopping cards, and foodstuffs as promotional prizes to pharmacy employees; at least one sales representative characterized the expenses as a “departmental development fee” in contemporaneous documents.”

Based on the above, the Order finds:

“As described herein, BMS, through the actions of certain BMS China employees, violated [the FCPA’s books and records provisions] by falsely recording, as advertising and promotional expenses, cash payments and expenses for gifts, meals, travel, entertainment, speaker fees, and sponsorships for conferences and meetings provided to foreign officials, such as HCPs at state-owned and state-controlled hospitals as well as employees of state-owned pharmacies in China, to secure prescription sales. BMS also violated [the FCPA’s internal controls provisions] by failing to devise and maintain a system of internal accounting controls relating to payments and benefits provided by sales representatives at BMS China to these foreign officials. As identified in various internal reviews, audits, and investigations conducted since at least 2009, BMS lacked effective internal controls sufficient to provide reasonable assurances that funds advanced and reimbursed to employees of BMS China were used for appropriate and authorized purposes.”

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

“BMS has implemented significant measures to enhance its anti-bribery and general compliance training and policies and to strengthen its accounting and monitoring controls relating to interactions with HCPs, including travel and entertainment expenses, meetings, sponsorships, grants, and donations funded by BMS China. BMS took numerous steps to improve the internal controls and compliance program at BMS China. Examples include a 100% pre-reimbursement review of all expense claims; the implementation of an accounting system designed to track each expense claim, including the request, approval, and payment of each claim; and the retention of a third-party vendor to conduct surprise checks at events sponsored by sales representatives. Additionally, BMS terminated over ninety employees, and disciplined an additional ninety employees, including sales representatives and managers of BMS China, who failed to comply with or sufficiently supervise compliance with relevant policies. In addition, BMS replaced certain BMS China officers as part of an overall effort to enhance “tone at the top” and a culture of compliance. Further, BMS revised the compensation structure for BMS China employees by reducing the portion of incentive-based compensation for sales and distribution, eliminated gifts to HCPs, implemented enhanced due diligence procedures for third-party agents, implemented monitoring systems for speaker fees and third-party events, and incorporated risk assessments based on data analytics into its compliance program.”

As stated in the Order:

“Without admitting or denying the findings, Bristol-Myers Squibb consented to the order and agreed to return $11.4 million of profits plus prejudgment interest of $500,000 and pay a civil penalty of $2.75 million.  Bristol-Myers Squibb also agreed to report to the SEC for a two-year period on the status of its remediation and implementation of FCPA and anti-corruption compliance measures.”

In the SEC’s release Kara Krockmeyer (Chief of the SEC’s FCPA Unit stated):

“Bristol-Myers Squibb’s failure to institute an effective internal controls system and to respond promptly to indications of significant compliance gaps at its Chinese joint venture enabled a widespread practice of providing corrupt inducements in exchange for prescription sales to continue for years.”

Yesterday Bristol-Myers’s stock closed down .47%.

According to reports, Bristol-Myers was represented by F. Joseph Warin of Gibson Dunn.

Hyperdynamics Resolves FCPA Enforcement Action For $75,000, But Spends $12.7 Million To Get There

By on September 30, 2015 in 2015 Enforcement Actions, Guinea, Hyperdynamics Corporation, Investigative Fees, Lobbying, Oil and Gas Industry, SEC Enforcement Action
Surprise

Not that Foreign Corrupt Practices Act are conveniently timed or anything like that, but the SEC’s fiscal year ends on September 30th and for the second consecutive day, the SEC announced an FCPA enforcement action (in the past two days the SEC has announced 22 other enforcement actions).

Two days ago, it was Hitachi (see here for the prior post).

Yesterday, it was Hyperdynamics Corp  – an oil and gas company with shares quoted by the OTCQX, an over-the-counter marketplace operated by OTC Market Group, Inc.

If there was ever an inconsequential FCPA enforcement this would be it. In fact, the SEC’s normally chatty press office didn’t even issue a release. However, as relevant to the title of this post, tell Hyperdynamics shareholders that this episode was inconsequential and they are likely to have a different opinion.

In this slim administrative action (the specific factual allegations are a mere four paragraphs) the SEC states:

“Hyperdynamics was founded in 1996 as a commercial computer and communications service provider. In 2001, the company transitioned to the oil and gas industry, and one year later, Hyperdynamics purchased contract rights from a small oil company which owned the exclusive drilling rights offshore the Republic of Guinea. Company executives began travelling to Guinea in 2005, and eventually opened a wholly-owned subsidiary in Conakry to facilitate ongoing operations.

From July 2007 through October 2008, Hyperdynamics, through its subsidiary, paid $130,000 for public relations and lobbying services in the Republic of Guinea to two supposedly unrelated entities – $55,000 to BerMia Service SRL, and $75,000 to Africa Business Service (“ABS”). The subsidiary’s books and records were consolidated with Hyperdynamics’s books and records, and these payments were recorded as public relations and lobbying expenses, even though the company lacked sufficient supporting documentation to determine whether the services were actually provided and to identify the ultimate recipient of the funds.

In late 2008, Hyperdynamics discovered that a Guinean-based employee controlled BerMia and ABS. Hyperdynamics also learned that this employee was the sole signatory on the ABS account. But Hyperdynamics could not determine how, if at all, BerMia or ABS spent the funds they had received, or whether any services actually were provided. Moreover, the company could not recover the funds. There is no evidence that these funds were in fact spent on legitimate public relations and lobbying activities, yet Hyperdynamics’s books and records continued to reflect that the funds were spent for these purposes.

Hyperdynamics lacked adequate internal accounting controls over its disbursement of funds through its Guinean subsidiary, as well as its recording of such disbursements. In addition, the company did not have a due diligence and monitoring process in place for vetting third-party vendors; accordingly, it failed to conduct due diligence on BerMia and ABS. As a result, Hyperdynamics did not timely discover that the payments were made to companies controlled by its employee, nor could it ascertain the true purpose for which these funds were spent. The inadequate controls also led Hyperdynamics to record these disbursements as public relations and lobbying expenses without any supporting documentation that such services were provided.”

Based on the above, the SEC found that Hyperdynamics violated the FCPA’s books and records and internal controls provisions.

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

“Beginning in July 2009, Hyperdynamics replaced its senior management team and its entire Board of Directors. The company also hired its first in-house lawyer, who implemented a number of training programs and revised company policies related to its Guinean operations. Hyperdynamics also increased the number of its accounting personnel, and instituted a series of procedures to more strictly control and identify transfers of funds to Guinea, including the transfer of signature authority over Guinean accounts to Houston-based employees, as well as requiring corporate pre-approval for all Guinean expenditures.

In determining to accept the Offer, the Commission considered remedial acts undertaken by Respondent and cooperation afforded the Commission staff.”

Without admitting or denying the SEC’s findings, Hyperdynamics agreed to pay a $75,000 penalty.

In this disclosure, the company states:

“As previously disclosed, the SEC had issued a subpoena to Hyperdynamics concerning possible violations of the FCPA.  This settlement fully resolves the SEC’s investigation.  As previously disclosed in May 2015, the DOJ closed its investigation into possible FCPA violations by Hyperdynamics without bringing any charges against the Company.

The allegations in the Order relate to certain issues concerning the company’s books and records and internal controls in 2007-2008. Hyperdynamics consented to the SEC Order without admitting or denying the SEC’s findings and agreed to pay a $75,000 penalty to the SEC.

In reaching this resolution, the Commission considered remedial acts undertaken by the company and cooperation afforded the Commission staff.  The SEC Order recognizes that, beginning in July 2009, Hyperdynamics replaced its senior management team and its entire Board of Directors, revised its policies, implemented training programs, increased its legal and accounting personnel, and instituted a series of procedures to more strictly control transfers of funds.”

According to the company’s most recent annual report:

“We incurred approximately $7.5 million in legal and other professional fees associated with the FCPA investigations in the year ended June 30, 2014, and another $5.2 million in the year ended June 30, 2015, for a total of $12.7 million.”

Calculating the ratio between pre-enforcement action professional fees and expenses and settlement amounts, this represents a whopping 170 to 1 ratio. (To learn more about such ratios see “FCPA Ripples“).

If I were a Hyperdynamics shareholder, I would be asking some serious questions.

Nancy Kestenbaum, Lanny Breuer and Barbara Hoffman of Covington & Burling reportedly represented Hyperdynamics.

Hitachi Inspires The Next FCPA Enforcement Action Against A Foreign Company

By on September 29, 2015 in 2015 Enforcement Actions, Foreign Issuers, Hitachi, SEC Enforcement Action, South Africa
Hitachi

What happens when a Japanese company has a German-based subsidiary, which in turn has a South African subsidiary, that both allegedly make improper payments to a South African political party?

Why of course, $19 million to the U.S. treasury because the Japanese company just happened to have American Depositary Shares traded in the U.S.

In the latest Foreign Corrupt Practices Act enforcement action against a foreign company, yesterday the SEC announced an enforcement action against Tokyo-based Hitachi, Ltd.  for violating the FCPA “when it inaccurately recorded improper payments to South Africa’s ruling political party in connection with contracts to build two multi-billion dollar power plants.”

As alleged in this settled SEC civil complaint:

“In 2005, Hitachi created a subsidiary in South Africa for the purpose of establishing a local presence in that country to pursue lucrative public and private contracts, including government contracts to build two new major power stations.

Hitachi sold 25% of the stock in the newly created subsidiary to Chancellor House Holdings (Pty) Ltd. (“Chancellor”), a local South African company that was a front for the African National Congress (“ANC”), South Africa’s ruling political party. Hitachi’s arrangement gave Chancellor- and by proxy the ANC- the ability to share in the profits from any power station contracts secured by Hitachi. Hitachi also entered into an undisclosed “success fee” arrangement with Chancellor, wherein Chancellor would be entitled to “success fees” in the event that the contract awards were “substantially as a result” of Chancellor’s efforts.

During the bidding process, Hitachi was aware that Chancellor was a funding vehicle for the ANC. Hitachi nevertheless continued to partner with Chancellor and encourage Chancellor’s use of its political influence to help obtain the government contracts.

As a result, Hitachi was awarded power station contracts in South Africa worth approximately $5.6 billion. In April and July 2008, Hitachi paid the ANC- through Chancellor- “success fees” totaling approximately $1 million.

Hitachi’s South African subsidiary inaccurately recorded its “success fee” payments to Chancellor as “consulting fees” in its books and records for the year ended December 31, 2008. The inaccurate books and records of Hitachi’s subsidiary were consolidated into Hitachi’s financial statements for the fiscal year ended March 31, 2009, which were filed with the Commission.

In 2010, Hitachi’s South African subsidiary also inaccurately recorded a dividend worth over a million dollars to be paid to Chancellor, its 25% shareholder. The journal entry recorded this dividend as “Dividends Declared” in the subsidiary’s books and records for the year ended December 31, 2010. The books and records did not reflect that the dividend was, in fact, an amount due for payment to a foreign political party in exchange for its political influence in assisting Hitachi land two government contracts. The subsidiary’s inaccurate books and records were consolidated into Hitachi’s financial statements for the fiscal year ended March 31, 2011, which were filed with the Commission.”

Based on the above allegations, the SEC charged Hitachi with violating the FCPA’s books and records and internal controls provisions.

The conduct at issue focused on:

  • Hitachi Power Europe GmbH (“HPE”), during the relevant time period a wholly-owned subsidiary of Hitachi based in Germany, that was an international supplier of boilers for power stations; and
  • Hitachi Power Africa (Pty) Ltd. (“HPA”), during the relevant time period, a majority-owned subsidiary of HPE based in South Africa, that executed power station orders in South Africa.

The SEC’s complaint alleges as follows regarding Chancellor House:

“Chancellor House Holdings (Pty) Ltd. is a South African investment finn created by the ANC as a funding vehicle. Chancellor was named after a building in downtown Johatmesburg that in the 1950s housed the law finn of Nelson Mandela and Oliver Tambo, two future ANC presidents. From 2005 to at least 2008, Chancellor’s parent organization, Chancellor House Trust, was administered by a member of the ANC National Executive Committee and a director of Eskom Enterprises, an Eskom subsidiary.”

Eskom is described as follows.

“Eskom Holdings SOC Ltd. (“Eskom”) is a government-owned and government-run public utility established by the Government of South Africa. Eskom supplies approximately 95% of all electricity in South Africa and the Government of South Africa is Eskom’s sole shareholder. Thus, Eskom is an instrumentality of a foreign government. From 2006 to at least 2008, Eskom’s chainnan simultaneously served as a member of the ANC’s National Executive Committee.”

According to the SEC:

“While its political com1ections were extensive, Chancellor lacked any engineering or operational capabilities that could assist Hitachi with contract perfotmance should it secure the Eskom contracts. Chancellor differed in this respect from at least one other local South African entity that Hitachi initially considered for partnership with HPA.

Hitachi was fully aware of Chancellor’s operational shortcomings, and sought a partnership with Chancellor precisely because Chancellor would not provide it operational support. From an internal profile of Chancellor prepared in 2005, HPE’s senior management was advised that Chancellor “has a lean HQ staff and it does not get involved in the operational business of the companies in which it invests. Supp0rt for invested companies is provided via networking at board level.” The internal profile also specifically highlighted Chancellor’s “good connections within Eskom.”

The SEC further alleged:

“[I]n total, Chancellor – the ANC’s funding vehicle – received approximately $10.5 million from Hitachi, a return of over 5,000% on its investment in HPA.”

As to internal controls, the SEC specifically alleged:

“During the time it was registered with the Commission, Hitachi failed to devise and maintain an adequate system of internal accounting controls. HPE and HPA were able to enter into a shareholders’ agreement and an undisclosed “success fee” arrangement with Chancellor- a front for the ANC- to pay that entity for exerting its political influence. Although HPE had a code of conduct in place before the success fees were paid that specifically prohibited contributions to political parties, HPA paid Chancellor more than $1.1 million pursuant to this side-arrangement. HPA was able to do so despite a stream of reporting in the South African media that publicized the fact that HPA’s 25% shareholder was a funding vehicle for the ANC.

HPA also was able to record Chancellor’s invoices for success fee payments as “consulting” expenses, which they were not, without proper documentation or reasonable detail. Hitachi’s intemal accounting controls failed again when Hitachi declared and recorded as dividends to be paid to Chancellor transactions that, in fact, would instead be payments to a foreign political party for its assistance in securing govemment contracts. Among other further intemal accounting controls deficiencies, Hitachi failed to conduct adequate due diligence of Chancellor, a potential agent and a potential shareholder of HPA, and to keep records of such due diligence, even though Hitachi intended for Chancellor to use its political influence to help obtain government contracts.

Hitachi’s intemal accounting controls, or lack thereof, also were inadequate to provide reasonable assurances that Hitachi would not violate its own codes of conduct and compliance policies, the FCPA, or South African law. For example, Hitachi failed to adequately supervise and ensure compliance with its policies and procedures, and neither HPE nor HP A conducted any FCPA-specific compliance training during the time period in which Hitachi through HPE and HPA- was seeking lucrative contracts with an instrumentality of a foreign government and authorizing the payments of”success fees” to a foreign political party.”

As noted in the SEC’s release, without admitting or denying the SEC’s allegations, Hitachi agreed to settlement that requires it to pay a $19 million penalty and to be enjoined from future FCPA books and records and internal controls violations.

Hitachi was represented by Linda Chatman Thomsen (a former SEC Director of Enforcement, currently at Davis Polk & Wardwell).

DOJ Announces FCPA And Related Actions In Connection With Russian Nuclear Industry Bribe Scheme – Additional Actions Likely

By on September 2, 2015 in 2015 Enforcement Actions, Boris Rubizhevsky, Daren Condrey, DOJ Enforcement Action, Individual Enforcement Action, Nuclear Industry, Russia, Transport Logistics International, Vadim Mikerin, Westerman Cos, Worthington Cylinders, Worthington Industries
TENEX

It’s not often the DOJ announces a Foreign Corrupt Practices Act enforcement action via a one sentence statement in a press release about another enforcement action.

But that is what the DOJ did earlier this week when it announced in this press release that Daren Condrey (50, of Glenwood, Maryland) pleaded guilty on June 17, 2015, to conspiring to violate the FCPA and conspiring to commit wire fraud.

This June 2015 criminal information sets forth the DOJ’s allegations.

According to the information, Condrey was an owner and executive of Transportation Corporation A (a Maryland headquartered company in the business of providing logistical support services for the transportation of nuclear materials to customers in the United States and to foreign customers) from August 1998 through in or about October 2014.

According to this Wall Street Journal, Transportation Corporation A is Transport Logistics International (TLI).  In November 2014, TLI released this statement concerning the DOJ’s investigation.

The Condrey information alleges various bribe payments made to “Foreign Official One” to secure business with TENEX.

JSC Techsnabexport (“TENEX”) is described as a supplier of “uranium and uranium enrichment services to nuclear power companies throughout the world on behalf of the government of the Russian Federation.”  According to the information, “TENEX was indirectly owned and controlled by, and performed functions of, the government of the Russian Federation, and thus was an “agency” and “instrumentality” of a foreign government, as those terms are used in the FCPA.”  The information further states:

“TENEX established a wholly-owned subsidiary company located in the United States in or about October 2010, TENAM Corporation (“TENAM”). TENAM was TENEX’s official representative office in the United States. TENAM was indirectly owned and controlled by, and performed functions of, the government of the Russian Federation, and thus was an “agency” and “instrumentality” of a foreign government, as those terms are used in the FCPA.”

“Foreign Official One”[Vadim Mikerin – see below] is described in the information as follows:

“[A] national of the Russian Federation, was a Director of TENEX from at least 2004 through in or about October 2010, and was the President of TENAM from in or about October 2010 through in or about October 2014. Foreign Official One was a”foreign official,” as that term is used in the FCPA. From in or about December 2011 through in or about October 2014, Foreign Official One was a resident of Maryland.”

According to the information, Condrey and others:

“with the knowledge of Foreign Official One, caused Transportation Corporation A to provide quotations and invoices to TENEX hiding the cost of the bribe payments promised to Foreign Official One within Transportation Corporation A’s pricing”;

“at the direction of Foreign Official One, attempted to conceal the payments to Foreign Official One by making the bribe payments to bank accounts in Cyprus, Latvia, and Switzerland”;

“sent email communications and used other forms of communication in which they used terms like “lucky figure,” “LF,” “cake,” and “remuneration” as code words to conceal the true nature of the bribe payments, and utilized fraudulent invoices which did not truthfully describe the services provided or the purpose of the payments”;

“caused Transportation Corporation A to act as a conduit for a bribe payment another company made to Foreign Official One in order to conceal that bribe payment;” and

“wired, and caused to be wired, payments from Transportation Corporation A’s bank account in Maryland to bank accounts in Cyprus, Latvia, and Switzerland for the purpose of making bribe payments to Foreign Official One.”

Based on the above allegations, Condrey was charged with conspiracy to violate the FCPA and to commit wire fraud.

In this June plea agreement, Condrey pleaded guilty. The statement of facts attached to the Condrey plea agreement also refers to the following company:

“Cylinder Corporation A was a company, based in Ohio, which engaged in the manufacture of tanks and vessels for the oil and gas, nuclear, and marine markets. Cylinder Corporation A secured contracts with TENEX to supply storage and transportation cylinders. In or about September 2012, Cylinder Corporation A was acquired by another company headquartered in Ohio (“Ohio Corporation”).”

According to this Wall Street Journal article:

“People familiar with the investigation identified that company as Westerman Cos., which was acquired by [publicly traded] Worthington Industries, Inc. in 2012 and now operates as Worthington Cylinders. Court records refer to the company as Cylinder Corporation A and identify its location as Bremen, Ohio.”

According to the DOJ’s release, Condrey will be sentenced on Nov. 2, 2015. Condrey is represented by Robert Bonsib.

Back to the DOJ’s press release earlier this week which made brief mention of the above FCPA enforcement action.  As noted in the release:

“[Vadim Mikerin] a Russian official residing in Maryland pleaded guilty today to conspiracy to commit money laundering in connection with his role in arranging over $2 million in corrupt payments to influence the awarding of contracts with the Russian state-owned nuclear energy corporation. According to court documents, Mikerin was the president of TENAM Corporation and a director of the Pan American Department of JSC Techsnabexport (TENEX).  TENAM, based in Bethesda, Maryland, is a wholly-owned subsidiary and the official representative of TENEX in the United States.  TENEX, based in Moscow, acts as the sole supplier and exporter of Russian Federation uranium and uranium enrichment services to nuclear power companies worldwide.  TENEX is a subsidiary of Russia’s State Atomic Energy Corporation.”

According to the release, Mikerin is to be sentenced on Dec. 8, 2015.  See here for the Mikerin plea agreement.  Mikerin is represented by former FCPA Unit Assistant Chief William Jacobson and Jonathan Lopez (both with Orrick, Herrington & Sutcliffe).

As noted in the release, “Boris Rubizhevsky, 64, of Closter, New Jersey, pleaded guilty on June 15, 2015, to conspiracy to commit money laundering and will be sentenced on Oct. 19, 2015.” Rubinzhevsky is described in the Mikerin plea agreement as the owner and sole employee of “Consulting Corporation Two,” which was based in New Jersey.

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