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

By on January 10, 2014 in 2014 Enforcement Actions, Alba, Alcoa, Aluminum Industry, Bahrain, DOJ Enforcement Action, SEC Enforcement Action, Statute of Limitations, Victor Dahdaleh

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.

Friday Roundup

By on October 12, 2012 in Alba, Alcoa, Beam Inc., Beverage Industry, Central European Distribution Co., Debarment, Double Standard, FCPA Statistics, Related Civil Litigation, World Bank

Beverage industry news, a long-running FCPA-related civil case settles, checking in on the World Bank, survey says, and on-point.  It’s all here in the Friday roundup.

Beverage Industry News

Disclosure by Central European Distribution Corp.

As noted in this Wall Street Journal Corruption Currents post, Central European Distribution Corp. (here – one of the world’s largest vodka producers) recently made an FCPA disclosure.  In this filing, the company (a Delaware company headquartered in New Jersey) stated as follows.

“It has […] been determined that there has been a breach of the books and records provisions of the Foreign Corrupt Practices Act (FCPA) of the United States and potentially other breaches of the FCPA. It was determined that payments or gifts were made in a foreign jurisdiction in which the Company operates, and that there was a failure to maintain documentation in respect of certain of these payments or gifts adequate to establish whether there was a valid business purpose in making the payments or gifts. Furthermore, our management also identified a material weakness in our internal control over financial reporting regarding the implementation of our policy on compliance with applicable laws as of December 31, 2011. Our conclusion that this deficiency is a material weakness in our internal control over financial reporting is not based on misstatements in our historical consolidated financial statements or our consolidated financial statements as of and for the period ended December 31, 2011, but instead on the determination that we did not design or maintain sufficient policies, procedures, controls, communications or training to deter or prevent the risk of violations of law, including the Foreign Corrupt Practices Act (“FCPA”) of the United States.”

Beam Inc. Investigating Possible FCPA Violations

In other beverage industry news, the Times of India reports (here) that Beam Inc.  (here) “has initiated investigations into whistleblower allegations of financial misdemeanours at its India unit.”  According to the report, the investigation covers possible violations of Foreign Corrupt Practices Act.

As noted in this previous post, in July 2011 the SEC brought an FCPA enforcement action against beverage company Diageo PLC.

Alba-Alcoa Civil Case Settles

Earlier this week, Alcoa announced (here) that it “entered into a settlement agreement with Aluminium Bahrain B.S.C. (“Alba”) resolving a civil lawsuit that had been pending … since 2008.  Without admitting any liability, Alcoa agreed to make a cash payment to Alba of $85 million payable in two installments.”

Alba was represented by Akin Gump which put out this release.   The release notes that “the settlement arises out of a claim brought by Alba under the Racketeer Influenced and Corrupt Organizations (RICO) Act against Alcoa, an Alcoa subsidiary and Canadian businessman Victor Dahdaleh alleging a “pattern of corrupt activities by the defendants and officials in Bahrain in order to obtain long-term contract and pricing advantages in the sale of raw materials.”  As noted in the release,  ‘the case was stayed for nearly four years while the U.S. Department of Justice pursued a criminal investigation under the Foreign Corrupt Practices Act” and the settlement “represents the first time that a foreign-owned corporation has successfully sued a U.S. company in a federal court to recover losses suffered due to allegations of corrupt activity. “

As highlighted in this previous post, Alcoa’s agent (Dahdaleh) has been criminally charged in the U.K.

The DOJ and SEC’s investigation of Alcoa concerning the conduct at issue in the civil lawsuit is ongoing.

In its most recent quarterly filing, Alcoa stated as follows.

“The DOJ’s and the SEC’s investigations are ongoing. Alcoa has been in dialogue with both the DOJ and the SEC and is exploring whether a settlement can be reached. Given the uncertainty regarding whether a settlement can be reached and what the terms of any such settlement would be, Alcoa is unable to estimate a range of reasonably possible loss with regard to any such settlement, However, Alcoa expects the amount of any such settlement would be material in a particular period to Alcoa’s results of operations. If a settlement cannot be reached, Alcoa will proceed to trial with the DOJ and the SEC and under those circumstances is unable to predict an outcome or to estimate a range of reasonably possible loss. There can be no assurance that the final outcome of the government’s investigations would not have a material adverse effect on Alcoa.”

World Bank

The World Bank’s fraud and corruption unit, the Integrity Vice Presidency (INT), recently released its annual report (see here for the full report). This release states as follows.  The INT “concluded another strong year in its preventive and investigative efforts, with 83 debarments of wrongdoing firms, new agreements with national law enforcement authorities to expand the impact of INT’s investigations, numerous referrals to law enforcement agencies, and robust preventive efforts to help ensure Bank-financed projects deliver results.”

Survey Says

This past July, FTI Consulting conducted an on-line survey of 571 executives in UK businesses in board-level, senior management and middle management positions.  As noted in this release, among the survey findings were the following.

  • 40% of UK businesses surveyed think the current economic climate is encouraging risk taking around compliance with the UK Bribery Act
  • 27% do not believe the government will prosecute offenders
  • 25% of board-level employees surveyed might breach Bribery Act regulations to win business
  • 63% of respondents believe the UK Bribery Act eventually will have a positive effect on prospects for UK business

Spot-On

In the aftermath of the Wall Street Journal’s FCPA Inc.: Business of Bribery series (see here), the WSJ published the following letter to the editor from Steve Travis of Mercer Island, WA.

“The Foreign Corrupt Practices Act makes it illegal to offer money or a gift to foreign government officials or employees to gain a business advantage. Yet in the U.S., every business worthy of its name has lobbyists whose sole job in Washington, D.C., is to do exactly that: give money or gifts to our elected officials or employees of our government in a position to steer contracts their way. Does anyone really think that things like flying government officials around on company private jets or putting them up in private homes on vacations don’t come with a quid pro quo? Who is naive enough to think that contributions to election campaigns don’t come with strings attached?”

Spot-on – see here for a prior post (as well as numerous previous posts embedded therein).

*****

A good weekend to all.

 

Friday Roundup

By on August 3, 2012 in Alba, Alcoa, Avon, Brazil, Declination Decisions, Deferred Prosecution Agreements, Foreign Issuers, Fresenius Medical Care, Innospec, Iraq, Paul Jennings, Related Civil Litigation, Sensata Technologies, Serious Fraud Office, Smith and Wesson, SOX Certification Issues, Teva Pharmaceuticals, Total S.A., Travel and Entertainment, United Kingdom, Victor Dahdaleh

Add two more companies to the list, a reply to a retort, Avon developments, Total S.A. perhaps nears a top-5 settlement, the reason for those empty Olympic seats, another FCPA-inspired derivative action is dismissed, Sensata Technologies and more on the meaning of “declination,” one of my favorite reads and additional material for the weekend reading stack.  It’s all here in the Friday roundup.

Recent Disclosures

As noted in this Wall Street Journal Corruption Currents post “German healthcare firm Fresenius Medical Care AG has opened an internal investigation into potential violations” of the FCPA.  The company’s recent SEC filing (here) states as follows.

“The Company has received communications alleging certain conduct that may violate the U.S. Foreign Corrupt Practices Act (“FCPA”) and other anti-bribery laws. In response to the allegations, the Audit and Corporate Governance Committee of the Company’s Supervisory Board is conducting an internal review with the assistance of counsel retained for such purpose. The Company has voluntarily advised the U.S. Securities and Exchange Commission and the U.S. Department of Justice that allegations have been made and of the Company’s internal review. The Company is fully committed to FCPA compliance. It cannot predict the outcome of its review.”

In addition, as noted in this Wall Street Journal Corruption Currents post, “the Securities and Exchange Commission is investigating Teva Pharmaceutical Industries Ltd, the world’s largest manufacturer of generic drugs, for possible violations” of the FCPA.   The Israel based company recently stated in an SEC filing (here) as follows.

“Teva received a subpoena dated July 9, 2012 from the SEC to produce documents with respect to compliance with the Foreign Corrupt Practice Act (“FCPA”) in Latin America. Teva is cooperating with the government. Teva is also conducting a voluntary investigation into certain business practices which may have FCPA implications and has engaged independent counsel to assist in its investigation. These matters are in their early stages and no conclusion can be drawn at this time as to any likely outcomes.”

U.K. DPAs

In this previous post, I discussed my letter to the U.K. Ministry of Justice urging the MoJ to just say no to deferred prosecution agreements.  Over at thebriberyact.com (a site that has lead discussion of the issue) the authors disagree with me (see here).  That’s all fine and dandy and healthy to the discussion, but the substance of the retort is not persuasive.

The retort is  basically that the SFO “frequently has to fight its corner in court” and that “sometimes it loses” whereas in the U.S. “the accepted wisdom [is] that an FCPA investigation would result in a corporate settlement” and the “DOJ simply [does] not have to test its legal theories in court.”  In short, the authors state “statistically in the US corporates and their counsel often fold in the face of a DOJ investigation” but “in the UK this is not so.”

Contrary to the suggestion in the retort, I did not ignore the Bribery Act’s Section 7 offense – rather it is all the more reason to reject DPAs.

The retort closes as follows.  “Sadly, as it stands, the UK enforcement agencies do not have equality of arms when it comes to their enforcement toolkit.  Put another way the DOJ can end run UK enforcement agencies because it does have the potential to enter into DPA’s.  This reason alone is justification enough for putting in place a system which delivers a similar result to the US system.”

This confirms in my mind that the UK’s desire for DPAs has little to do with justice and deterring improper conduct, but more to do with enforcement statistics and posturing in an emerging “global arms race” when it comes to “prosecuting” corruption and bribery offenses.

Avon Developments

Avon was in the news quite a bit this week.

On Monday, the Wall Street Journal reported (here) that “federal prosecutors looking into possible bribery of foreign officials by Avon have asked to speak to Andrea Jung, the former chief executive and current full-time chairman.”

On Wednesday, the company filed its quarterly report and stated, among other things, as follows.  “We are in discussions with the SEC and DOJ regarding mutually resolving the government investigations. There can be no assurance that a settlement will be reached or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on us.”  During the Q2 earnings call, company CEO Sheri McCoy stated as follows.   “We are in discussion with the SEC and DOJ regarding mutually resolving the government investigations.”

On Thursday, the Wall Street Journal reported (here) that McCoy “frustrated with the pace of Avon’s internal probe, has pushed to bring in a second law firm for advice on the progress of the investigation.   The company has held discussions with law firm Allen & Overy LLP for that role.”  Arnold & Porter has been leading Avon’s investigation.  According to the article, Avon’s “probe has turned up millions of dollars of payments in Brazil and France made to consultants hired to assist with Avon’s tax bills in those countries.”

What to make of the above information?

It is unusual for the enforcement agencies to want to speak to a former CEO and current chairman in connection with an FCPA inquiry.  But then again, prosecutors have reportedly spoken to several other Avon executives in connection with the probe.  Given Avon’s disclosure that it has begun settlement discussions, this would suggest that the factual portion of the enforcement agencies investigation is over.

Avon’s FCPA scrutiny has perhaps been most notable for the amount of pre-enforcement action professional fees and expenses – approximately $280 million.  Thus, yesterday’s report that the company is considering bringing in a second law firm nearly four years into the investigation is interesting and unusual.

Even though Avon has disclosed it is in settlement talks, an enforcement action in 2012 is not certain.  In many cases, companies have disclosed the existence of FCPA settlement discussions, but the actual enforcement action did not happen for 6-12 months (or longer).

Whenever the enforcement action occurs, and whatever the ultimate fine and penalty is, Avon’s greatest financial hit  has likely already occured – its pre-enforcement action professional fees and expenses.  For instance, assuming a settlement amount would match the $280 million, this would be the sixth largest FCPA settlement of all time, and none of the enforcement actions in the top 5 were outside the context of foreign “government” procurement.

Total Settlement Near?

For some time, there has been speculation that Total S.A. (you better sit down for this) would actually mount a defense and put the DOJ and SEC to its burden of proof in an enforcement action.  Information in a recent company press release suggests that this is unlikely to occur.  In this recent release, Total stated as follows.  “Total has been cooperating with the … SEC and DOJ in connection with an investigation concerning gas contracts awarded in Iran in the 1990’s.  Total, the SEC, and the DOJ have conducted discussions to resolve issues arising from the investigation.  In light of recent progess in these discussions, Total has provisioned 316 million euros [$389 million]  in its accounts in the second quarter of 2012.”

A $389 million settlement would be a top five FCPA settlement in terms of fine and penalty amounts.  For additional coverage, see here from Reuters.

Empty Olympic Seats

A reason, perhaps, for those empty Olympic seats?  According to a recent study (see here) by the Society for Corporate Compliance and Ethics  “tighter than anticipated corporate entertainment and gift policies.”

Smith & Wesson Derivative Action Dismissed

Even against the backdrop of generally frivolous plaintiff derivative claims in the FCPA context, the action against Smith & Wesson (“S&W”) stood out.  After S&W employee Amaro Goncalves was criminally indicted in the manufactured Africa Sting case, certain investors filed a derivative claim in U.S. District Court in Massachusetts suing members of the board of S&W and company officers derivatively on behalf of the corporation for failing to have effective FCPA controls and oversight, thereby breaching their duty of care.

In dismissing the complaint (see here for the decision) Judge Michael Ponsor characterized the complaint as follows. “[I]n essence, that the company enjoyed an increase in international sales and then had an employee indicted for FCPA violations. This indictment, later dropped, supposedly evidenced a failure to implement proper controls.”

For another recent dismissal of an FCPA inspired derivative claim against Tidewater, see this prior post.  See also this recent post from Kevin LaCroix at The D&O Diary blog.

Sensata Technologies

In October 2010, Sensata Technologies disclosed in a quarterly report (here) as follows.

“An internal investigation has been conducted under the direction of the Audit Committee of the Company’s Board of Directors to determine whether any laws, including the Foreign Corrupt Practices Act (“FCPA”), may have been violated in connection with a certain business relationship entered into by one of the Company’s operating subsidiaries involving business in China. The Company believes the amount of payments and the business involved was immaterial. The Company discontinued the specific business relationship and its investigation has not identified any other suspect transactions. The Company has contacted the United States Department of Justice and the Securities and Exchange Commission to begin the process of making a voluntary disclosure of the possible violations, the investigation, and the initial findings. The Company will cooperate fully with their review.”

In its most recent quarterly report (here), the company disclosed as follows.

“During 2012, the DOJ informed us that it has closed its inquiry into the matter but indicated that it could reopen its inquiry in the future in the event it were to receive additional information or evidence. We have not received an update from the SEC concerning the status of its inquiry.”

Did Sensata “win a declination” as the FCPA Blog suggested here?

Since August 2010 (see here for the prior post) I have proposed that when a company voluntarily discloses an FCPA internal investigation to the DOJ and the SEC, and when the DOJ and/or SEC decline enforcement, the DOJ and/or the SEC should publicly state, in a thorough and transparent manner, the facts the company disclosed to the agencies and why the agencies declined enforcement on those facts.

Perhaps then we would know if the DOJ concluded it could prove beyond a reasonable doubt all the necessary elements of an FCPA charge, yet decided not to pursue Sensata – which is my definition of declination as noted in this prior post.  Anything else, is what the law commands, not a declination.

Favorite Read

One of my favorite reads is always Shearman & Sterling’s “Recent Trends and Patterns in the Enforcement of the Foreign Corrupt Practices Act.”  See here for the most recent edition.

As to “foreign official,” the report states as follows. “[T]he government does not appear to have been deterred by the [foreign official] debate. In most of the cases brought in 2012, the relevant government officials were employed by “instrumentalities” such as state health insurance plans (Orthofix), a state-owned nuclear plant (Data Systems & Solutions), government hospitals (Biomet and Smith & Nephew), a state-owned real estate development company (Peterson) a state-owned oil company (Marubeni), and state-owned airlines (NORDAM).”

As to FCPA guidance, the report states as follows. “We understand that this guidance will be issued before October, when the US is scheduled to issue a written progress report on its implementation of the OECD Working Group on Bribery’s recommendations.”

A final kudos – Shearman & Sterling keeps its FCPA enforcement statistics the best way.  As it explains – “we count all actions against a corporate “family” as one action. Thus, if the DOJ charges a subsidiary and the SEC charges a parent issuer, that counts as one action.”  This is consistent with my “core” approach (see here), but unlike many others in the industry.

Weekend Reading Stack

An interesting and informative article (here) in Fortune about the Alba-Alcoa tussle and the role of Victor Dahdaleh.  For more on the underlying civil suit between Alba and Alcoa see this recent Wall Street Journal Corruption Currents post.

SOX’s executive certification requirements were supposed to be a panacea for corporate fraud.  It has not happened.  See here from Alison Frankel (Reuters) and here from Michael Rapoport (Wall Street Journal).  As noted in this prior post concerning the Paul Jennings (former CFO and CEO of Innospec) enforcement action, SOX certification charges were among the charges the SEC filed against Jennings.  Then SEC FCPA Unit Chief Cheryl Scarboro stated, “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”  Speaking of Jennings, as noted in this recent U.K. Serious Fraud Office, Jennings recently pleaded guilty to one charge of conspiracy to corrupt Iraqi public officials and other agents of the Government of Iraq.

*****

A good weekend to all.

Friday Roundup

By on February 17, 2012 in Alba, Alcoa, Angola, Bruce Hall, Compliance, Congressional Activity, FCPA Reform, Halliburton, Innospec, Miltos Papachristos, Serious Fraud Office, United Kingdom, Victor Dahdaleh

Dear Attorney General Holder, U.K. developments not involving News Corp., and Halliburton updates its disclosure … it’s all here in the Friday roundup.

*****

Senators Klobuchar and Coons Write to Attorney General Holder On FCPA Guidance

As noted in this previous post, in November 2011, Senator Charles Grassley (R-IA) asked Attorney General Holder for detailed information about the DOJ’s promised upcoming FCPA guidance.

Earlier this week, Senators Amy Klobuchar (D-MN) and Chris Coons (D-DE) sent Attorney General Holder this letter regarding the DOJ’s forthcoming FCPA guidance.  From my perspective, the most notable paragraph of the letter was as follows.  “[I]t has become apparent that too many companies are devoting a disproportionate amount of resources to FCPA compliance and internal investigations.  To be clear, it is both necessary and desirable that companies pay adequate attention to compliance efforts, and in certain cases, adequate anti-corruption initiatives may require a significant corporate committment.  Over-compliance, however, can have a negative effect on product development, export promotion, and workforce expansion.”

I agree and devoted an entire section of “The Facade of FCPA Enforcement” (see here pages 997-1009) to why the facade of FCPA enforcement matters including the breeding of overcompliance and time-consuming internal investigations.  See also here pages 8-9 of my Senate FCPA testimony.

In addition, Senator Klobuchar and Coons encouraged the DOJ “to seek out the participation of U.S. corporate stakeholders when formulating its guidance.”  The Senators stated as follows.  “Engagement with the stakeholder community ought to occur prior to the release of guidance.  In the alternative, guidance should be issued in draft form and finalized after a comment period of sufficient length.”

U.K. Developments

Some recent U.K. developments that do not involve News Corp.

In this release, the U.K. Serious Fraud Office announced that Bruce Hall was charged with corruption offenses based on his alleged receipt of bribes while an employee of Aluminium Bahrain B.S.C. (“Alba”).  The charges against Hall relate to previous SFO charges against Victor Dahdaleh, an agent for Alcoa, who allegedly made bribe payments to Alba – see here for the prior post.  In recent years, the DOJ has likewise brought non-FCPA charges against bribe recipients.  See here for instance.

In this release, the U.K. Serious Fraud Office announced charges against a fourth person in connection with the Innospec enforcement action.  (See here for more on the corporate enforcement action).  Miltos Papachristos, a former Regional Sales Director for the Asia Pacific Region for Innospec, was charged with “conspiracy to corrupt in that he gave or agreed to give corrupt payments to public officials and other agents of the Government of Indonesia as inducements to secure, or as rewards for having secured, contracts from the Government of Indonesia for the supply of Innospec Ltd products including Tetraethyl Lead.”  For more on the other three individuals charged – see here.

Halliburton Updates Disclosure

Yesterday’s post (here) touched upon FCPA disclosures and how it seems like every week there is new disclosure to report.

Halliburton’s disclosure yesterday was not new, but it stated as follows.  “We are conducting an internal investigation of certain areas of our operations in Angola, focusing on compliance with certain company policies, including our Code of Business Conduct (COBC), and the FCPA and other applicable laws. In December 2010, we received an anonymous e-mail alleging that certain current and former personnel violated our COBC and the FCPA, principally through the use of an Angolan vendor. The e-mail also alleges conflicts of interest, self-dealing and the failure to act on alleged violations of our COBC and the FCPA. We contacted the DOJ to advise them that we were initiating an internal investigation with the assistance of outside counsel and independent forensic accountants. During the third quarter of 2011, we met with the DOJ and the SEC to brief them on the status of our investigation and provided them documents. We are currently responding to a subpoena from the SEC regarding this matter and are producing all relevant documents. We understand that one of our employees has also received a subpoena from the SEC regarding this matter. We expect to continue to have discussions with the DOJ and the SEC, and we intend to continue to cooperate with their inquiries and requests as they investigate this matter. Because these investigations are at an early stage, we cannot predict their outcome or the consequences thereof.”

In 2009, Halliburton (and related entities) resolved a $579 million DOJ/SEC FCPA enforcement action concerning conduct at Bonny Island, Nigeria.  (See here).

*****

A good weekend to all.

Alcoa Agent Charged in the U.K.

By on October 25, 2011 in Alba, Alcoa, Bahrain, Serious Fraud Office, United Kingdom, Victor Dahdaleh

As detailed in Alcoa Inc’s most recent quarterly SEC filing (here):

In 2008, Aluminium Bahrain BSC (“Alba”) (see here) filed a civil lawsuit against Alcoa Inc. and others in U.S. District Court for the Western District of Pennsylvania.  The complaint alleged that certain Alcoa entities and their agents, including Victor Phillip Dahdaleh, engaged in a conspiracy over a period of 15 years to defraud Alba. The complaint further alleged that Alcoa and its employees or agents (1) illegally bribed officials of the government of Bahrain and (or) officers of Alba in order to force Alba to purchase alumina at excessively high prices, (2) illegally bribed officials of the government of Bahrain and (or) officers of Alba and issued threats in order to pressure Alba to enter into an agreement by which Alcoa would purchase an equity interest in Alba, and (3) assigned portions of existing supply contracts between Alcoa and Alba for the sole purpose of facilitating alleged bribes and unlawful commissions. The complaint alleged that Alcoa and others violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and committed fraud.

Soon thereafter in 2008, Alcoa advised the DOJ and SEC that it became aware of these claims, had already begun an internal investigation, and that it intended to cooperate in any DOJ and SEC investigation.  In March 2008, the DOJ notified Alcoa that it had opened a formal investigation, the DOJ intervened in the civil lawsuit, and a court ordered the Alba lawsuit stayed so that the DOJ could fully conduct its investigation without the interference and distraction of the civil litigation.

In a related development yesterday on the other side of Atlantic,  the U.K. Serious Fraud Office (“SFO”) announced (here) that Dahdaleh (a British and Canadian national) has been arrested and charged “with corruption offences relating to contracts for the supply of aluminium to Bahrain.”  According to the SFO release, Dahdaleh is alleged to have made bribe payments to Alba.

Dahdaleh was charged under the U.K.’s “old” bribery statutes, not the new U.K. Bribery Act.

For more on Alba, see this prior post.

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