… But Nobody Was Charged
James Stewart’s first Common Sense column for Business Day at the New York Times (here) profiles the February 2011 FCPA enforcement action against Tyson Foods involving Mexican veterinarians. (See here for the prior post).
The column is silent as to the relevant fact (as indicated in the DOJ’s charging document) that Mexican law permitted certain of the veterinarians at issue to charge the facility in which they work a fee for their services in addition to their official salary.
But that is besides the point, because Stewart’s column once again raises the valid issue that so many FCPA enforcement actions involve corporate resolutions only – with no related individual prosecutions.
Stewart writes as follows. “It would seem self-evident that if Tyson engaged in a conspiracy and violated the Foreign Corrupt Practices Act, then someone at Tyson did so as well.” Stewart further noted as follows. “But surely bribery, not to mention other forms of corporate wrongdoing, would be more effectively deterred if someone was actually held accountable for it.”
Spot on.
In my November 2010 prepared statement (here) to the Senate Judiciary Committee I stated as follows.
“Key to achieving deterrence in the FCPA context is prosecuting individuals, to the extent the individual’s conduct legitimately satisfies the elements of an FCPA anti-bribery violation. For a corporate employee with job duties that provide an opportunity to violate the FCPA, it is easy to dismiss corporate money being used to pay corporate FCPA fines and penalties. It is not easy to dismiss hearing of an individual with a similar background and job duties being criminally indicted and sent to federal prison for violating the FCPA.”
I further observed that during this era of the FCPA’s resurgence, the DOJ has consistently stated that prosecuting individuals is a “cornerstone” of its FCPA enforcement strategy. Yet, I asked, why is DOJ’s FCPA enforcement program largely a corporate fine-only program devoid of individual prosecutions?
As highlighted in this prior post, 70% of DOJ FCPA enforcement actions in 2010 have not involved (at least thus far) DOJ prosecutions of company employees.
What do the numbers look like thus far at the mid-point of 2011?
So far this year there have been six DOJ FCPA enforcement actions against companies (Maxwell Technlogies, Tyson Foods, Johnson & Johnson, Comverse Technologies, JGC of Japan, and Tenaris).
None of these FCPA enforcement actions have resulted (at least thus far) in DOJ prosecutions of company employees. Nor has the SEC brought civil charges against any employees of these companies. Nor has the SEC charged any employees (at least thus far) in the three SEC only FCPA enforcement actions this year (IBM, Ball Corporation, and Rockwell Automation).
As I noted in my Senate testimony, the high percentage of corporate FCPA enforcement actions that do not result in related enforcement actions against individuals legitimately causes one to wonder whether the conduct given rise to the corporate enforcement action was engaged in by ghosts.
Yet, I submit, there is an equally plausible reason why no individuals have been charged in some of the above-mentioned enforcement actions (and others) and that involves the quality of the corporate enforcement action.
Given the prevalence of NPAs and DPAs in the FCPA context and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies often agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. It is simply easier, more cost efficient, and more certain for a company to agree to a NPA or DPA than it is to be criminally indicted and mount a valid legal defense – even if the DOJ or SEC’s theory of prosecution is questionable. [See here for a prior post detailing a former DOJ prosecutor’s concern regarding NPAs and DPAs as to these issues].
Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ or SEC to satisfy its high burden of proof as to all FCPA elements.
Regardless of what you think about the possible reasons, the fact remains FCPA enforcement is, despite enforcement agency rhetoric, largely corporate enforcement only.
While on the topic of individual prosecutions, it must be noted that the bulk of such recent prosecutions are in the manufactured Africa Sting case where 22 individuals were criminally charged. Last week (see here for the prior post) Judge Richard Leon declared a mistrial in the trial of the first 4 defendants. The FCPA Blog had a stellar post yesterday (here) titled “Feds Should Forget Shot Show Defendants” and stated that instead of future sting operations to dig up FCPA individual defendants, the DOJ should focus “instead on the real bad apples [companies that have admitted violating the FCPA and paid big fines] who paid real bribes to real foreign officials.”
Spot on.
Report Cards
Imagine I give a test to the 37 students in my class. However, because of reasons uniquely relevant to many of the students, not all students are equally capable of passing the test.
I hope all would view this test to be a bit empty.
This post summarizes the OECD Working Group on Bribery Annual Report and Transparency International’s Annual Progress Report of the OECD Anti-Bribery Convention.
For reasons discussed below, these two report cards suffer from the same dynamic described in the above hypothetical.
In many OECD member countries there is no such thing as corporate criminal liability – or even if there is – such corporate liability can only be based on the actions of high-ranking executives or officers. This of course is materially different than in the U.S. where, under respondeat superior principles, a business organization can face legal liability (civil and criminal) based on the actions of any employee to the extent the employee was acting within the scope of his or her duties and to the extent the conduct was intended to benefit, at least in part, the organization.
In most OECD member countries prosecuting authorities have two choices – to prosecute or not to prosecute – there is no such thing as non-prosecution or deferred prosecution agreements (NPAs/DPAs). Not so in the U.S. where the majority of these alternative resolution vehicles are used to resolve FCPA enforcement actions. As the OECD itself stated in its Phase 3 Report of U.S. enforcement of the FCPA – “it seems quite clear that the use of these agreements is one of the reasons for the impressive FCPA enforcement record in the U.S.” (See here for the prior post). Former DOJ FCPA enforcement chief Mark Mendelsohn was asked directly – if the DOJ “did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year,” and he stated as follows: “if the Department only had the option of bringing a criminal case or declining to bring a case, you would certainly bring fewer cases.”
In certain other OECD member countries, there is a compliance defense relevant to the prosecution of bribery and corruption offenses. (See here for the prior post).
Given these differing dynamics (among others), it is fairly obvious why OECD member countries have varying degrees of enforcement of bribery and corruption offenses.
With that in mind, on to the report cards.
Transparency International Progress Report 2011 – Enforcement of the OECD Anti-Bribery Convention
On May 24th, Transparency International (TI) released (here) its seventh annual Progress Report on Enforcement of the OECD Convention.
The report “shows no improvement in the enforcement of the OECD Anti-Bribery Convention in the past year and warns that this could signal a dangerous loss of momentum in the fight against corruption.”
The report covers 37 countries and “shows that there are still only seven countries with active enforcement, nine with moderate enforcement, and 21 with little or no enforcement.” Huguette Labelle, Chair of TI, stated that “the collective commitment to stamp out foreign bribery made by all OECD parties is undermined when a large number of countries have inadequate enforcement.”
The introduction of the report includes the following statement.
“Continued lack of enforcement in 21 countries a decade after the Convention entered into force, notwithstanding repeated OECD reviews, clearly indicates lack of political commitment by their governments. And in some of those with moderate enforcement, the level of commitment is also uncertain. This is a danger signal because the OECD Convention depends on the collective commitment of all parties to ending foreign bribery.”
The reports “major conclusions” include the following: “risk of loss of momentum” and “lack of political commitment.”
As to the former, the report states as follows. “The Convention has not yet reached the point at which the prohibition of foreign bribery is consistently enforced. With little or no enforcement by half of the signatory governments, backsliding by enforcing governments is a serious threat. This concern is aggravated in a troubled global economy in which companies are scrambling for business. Business organisations have increasingly criticised anti-bribery enforcement as a competitive obstacle. The present position of the Convention is unstable, and unless forward momentum is recovered, the progress made in the past decade could unravel.”
As to the “lack of political commitment”, the report states as follows. “Reviews conducted by TI experts indicate that the principal cause of lagging enforcement is lack of political commitment by government leaders. In countries where there is committed political leadership, the OECD’s rigorous monitoring programme has helped improve laws and enforcement programmes. However, in the absence of political will, even repeated OECD reviews have little effect.”
Once again, Canada received a public lashing from TI.
Under the heading “lack of progress in Canada,” the report states as follows. “Canada is the only G7 country in the little or no enforcement category, and has been in this category since the first edition of this report in 2005. It is also the only OECD member that does not provide nationality jurisdiction, which presents a serious obstacle to enforcement. […] TI welcomes that the government of Canada has publicly reported the number of investigations for the first time. It is promising that 23 foreign bribery investigations are under way. If these investigations lead to prosecutions, Canada may finally move out of the little or no enforcement category.” (A future post will summarize the recent Canadian enforcement action against Niko Resources).
TI’s 2010 report (see here for the prior post) included reference to many big picture enforcement issues such as the use of negotiated settlements (NPAs and DPAs), judicial scrutiny of enforcement actions, and the proper amount of fines and penalties. However, TI’s 2011 report was silent as to many big picture issues.
OECD Working Group on Bribery Annual Report
On April 20th, the OECD Working Group on Bribery released its annual report (here). The release (here) states as follows. “Most governments are not meeting their international commitments to clamp down on bribery and corruption in international business, with only five signatories to the OECD Anti-Bribery Convention having sanctioned individuals or companies in the past year.”
Friday Roundup
Another FCPA hearing on Capital Hill next week, news regarding Goldmann Sachs, questioning the use of NPAs and DPAs, an informative read regarding India, and something for your “foreign official” file.
Its all here in the Friday roundup.
House Hearing
Next Tuesday, June 14th, the Subcommittee on Crime, Terrorism and Homeland Security of the House Judiciary Committee will hold a hearing titled “Foreign Corrupt Practices Act.” According to this report by Christopher Matthews of Main Justice the hearing is expected to focus on the following issues: successor liability, a potential compliance defense, “foreign official,” and corporate mens rea issues.
The witness list for the hearing is as follows (see here).
Hon. Michael Mukasey (Former Attorney General, Partner, Debevoise & Plimpton LLP – see here); Mr. Greg Andres (Deputy Assistant Attorney General, Criminal Division, U.S. Department of Justice); Mr. George Terwilliger (Partner, White & Case LLP – see here); and Ms. Shana-Tara Regon (Director, White Collar Crime Policy, National Association of Criminal Defense Lawyers – see here).
Predictably, some are blasting the very existence of the hearing. For instance, Political Correction, a project of Media Matters Action Network (a self-described progressive research and information center dedicated to analyzing and correcting conservative misinformation in the U.S. media), describes the hearing here as “Rep. Lamar Smith’s Fight to Make Bribery Easier For Big Business.”
The House hearing follows a November 30th Senate hearing titled “Examining Enforcement of the Foreign Corrupt Practices Act.” See here for a prior post.
This post, prior to the 2010 hearing provided some guiding words, and if those were not enough, how about this statement from William Brock, U.S. Trade Representative, on April 18, 1983 during a hearing before the House Subcommittee on International Economic Policy and Trade of the Committee on Foreign Affairs.
“Mr. Chairman, no one minimizes the complexity of the issue before you today. Just because the Foreign Corrupt Practices Act spotlights a sensitive subject, some people wish to turn a ‘blind eye’ to its shortcomings rather than risk being accused of being ‘soft on bribery.’ That is too easy a way out. Retreating from controversy will not cure the law’s deficiencies. Such inaction will no more eliminate the need for FCPA reforms today than it can eliminate the criticism of the Act brought over the past several years. After five and on half years experience with this law, after legitimate problems have been identified and examined, we have a responsibility to respond. Is there any U.S. law that ought to be above such review and clarification – especially one as complex as the FCPA.”
Well said.
Goldman Inquiry
Yesterday, the Wall Street Journal reported – “Eyes on Goldman-Libya Dealings” – that the SEC is “examining whether Goldman Sachs Group Inc. and other financial firms might have violated bribery laws in dealings with Libya’s sovereign wealth fund.” The inquiry appears to be focused on a “$50 million fee Goldman initially agreed to pay [but one that was never paid to] the Libyan sovereign-wealth fund as part of a proposal … to help the fund recoup losses.”
A Goldman spokesman is quoted as follows. “We are confident that nothing we did or proposed was or could have been a breach of any rule or regulation. We retained outside counsel, as is our normal practice for any transaction to ensure that we were compliant with all applicable rules.”
Can the FCPA be implicated by payments never made?
Yes. The anti-bribery provisions prohibit “an offer, payment, promise to pay, or authorization of payment …”.
What about payments to foreign governments?
No. The anti-bribery provisions only apply to offers, payments, promises of payment, or authorizations of payments to “foreign officials.”
However, according to the WSJ article the inquiry appears to focus on whether the contemplated payment would have been passed on to an outside adviser firm “run at the time by the son-in-law of the head of Libya’s state-owned oil company.”
For more on the Goldman inquiry, see here from Ashby Jones (WSJ Law Blog) and here from Samuel Rubenfeld (WSJ Corruption Currents).
NPAs / DPAs
Non-prosecution and deferred prosecution agreements ought to be abolished. I’ve argued here and in other places that these agreements have traded one negative externality of white collar prosecution (the much over-hyped Arthur Anderson effect) for a host of others, including the alarming lack of any meaningful judicial scrutiny to ensure that NPAs and DPAs are truly based on facts and appropriate legal theories to support the charges “alleged.”
Mark Mendelsohn, the former head of the DOJ’s FCPA unit during its era of resurgence, stated in a September 2010 interview with Corporate Crime Reporter, that a “danger” with NPAs and DPAs “is that it is tempting” for the DOJ “to seek to resolve cases through DPAs or NPAs that don‟t actually constitute violations of the law.”
Asked directly – if the DOJ “did not have the choice of deferred or non prosecution agreements, what would happen to the number of FCPA settlements every year,” Mendelsohn stated as follows: “if the Department only had the option of bringing a criminal case or declining to bring a case, you would certainly bring fewer cases.”
Add W. Neil Eggleston, a former DOJ enforcement attorney currently a partner at Debevoise (here), to the growing list of former DOJ enforcement attorneys critical of these alternative resolution vehicles.
In this recent interview with Corporate Crime Reporter, Eggleston stated as follows. “I worry that [NPAs and DPAs] will become a substitute for a prosecutor deciding – this is not an appropriate case to bring – there is no reason to subject this corporation to corporate criminal liability. In the old days, they would have dropped the case. Now, they have the back up of seeking a deferred or non prosecution agreement, when in fact the case should not have been pursued at all. That’s what I’m worried about – an easy out.”
Well said.
India
If India is a country of concern or focus of yours, you will want to check out the most recent quarterly newsletter of the India Committee of the ABA Section of International Law. (See here).
Guest editor James Parkinson of BuckleySandler (here) provides the following articles, among others, in the newsletter: one devoted to the FCPA risks of doing business in India; another devoted to India’s demand-side statute – the Prevention of Corruption Act; another focused on reducing corruption risks in India through compliance programs; and another calling for India to join the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
“Foreign Official”
And finally, because your “foreign official” file would be incomplete without it, here is a transcript of the May 9th oral argument in the Carson “foreign official” challenge. See here and here for previous posts.
*****
A good weekend to all.
What Others Are Saying About The SEC’s First DPA
Non-prosecution and deferred prosecution agreements have been a staple of DOJ FCPA enforcement for years. 2010 saw 15 such resolution vehicles (4 NPAs) and (11 DPAs) (see here for the prior post) and these resolution vehicles are significantly different than a corporate entity being criminally charged or pleading guilty.
Last month, the SEC used a DPA for the first time in resolving the Tenaris FCPA enforcement action. See here for the prior post.
This post collects what others are saying about the SEC’s first DPA, including whether resolution via such a vehicle is all that different from traditional SEC resolution procedures.
In this publication, Shearman & Sterling noted as follows. “Prior to this settlement, the SEC had employed only two enforcement options: civil complaints seeking injunctive relief or administrative cease-and-desist orders. In both cases, even though the company could settle without admitting or denying the SEC’s allegations, the relevant adjudicator (either a judge or the Commission) necessarily made a formal finding that the company had indeed violated the law and that the injunction or order was necessary to prevent it from doing so again.” Shearman notes that “in the criminal context, DPAs and non-prosecution agreements, their slightly less formal cousins which do not involve filed charges, were first used in FCPA cases beginning in 2004” and further notes the benefits of a DPA compared to criminal charges. However, the Shearman publication states as follows. “It is not clear whether the benefits afforded by a civil DPA in a SEC enforcement action confer similar benefits. With due respect to the SEC, a civil enforcement adjudication is a much less fearsome matter than a criminal conviction. Further, although the issuance of an injunction or an order undoubtedly represents some finding of wrongdoing, since they are settled without the defendant company admitting or denying the relevant facts, they do not bar the company from contesting such facts in non-SEC proceedings. Further, they do not have the automatic collateral consequences of a criminal conviction. Thus, one must question what benefits a SEC DPA really affords.” As to the Tenaris DPA, Shearman states as follows. “Although the company was not required to pay a civil fine, the SEC has similarly forgone fines in some previous traditional settlements in the past, requiring the defendant company only to disgorge its illicit gains. Moreover, by tolling the statute of limitations, the company potentially extends its exposure and subjects itself to potential civil enforcement for a greater period of time than if it had settled the SEC matter in the traditional way. Finally, it is not clear that the company received any financial benefit from entering into a DPA as opposed to the usual consent judgment or administrative settlement. […] [T]he SEC appears to have exacted the full amount of disgorgement and interest in this matter.” The Shearman publication also contains an interesting discussion about the “concealed penalty” in the Tenaris DPA and states as follows. “The Tenaris DPA also reflects a disturbing development relating to the financial penalty, which may not be restricted to DPAs. Specifically, the SEC’s DPA with Tenaris provides that the company must “refrain from seeking or accepting a US federal or state tax credit or deduction for any monies paid pursuant to this Agreement.” Since the only monies paid related to disgorgement and prejudgment interest, this effectively precludes the company from recouping any taxes it might have paid on the profits it now has to disgorge, resulting in a hidden additional penalty.” Finally, Shearman touches upon an issue it has frequently raised in such FCPA alerts and that is the expansive jurisdictional theories frequently used by U.S. enforcement authorities to prosecute non-U.S. companies for FCPA offenses. As to Tenaris, the Shearman publication states as follows. “The Tenaris matter demonstrates the U.S. government’s continued aggressive approach to expanding the reach of the FCPA, no matter how attenuated or de minimis a non-U.S. company’s contact with the U.S. may be.”
In this publication, Gibson Dunn observes as follows. “One question raised by this case is where the SEC draws the line between use of a DPA and an NPA. Based on comments by the Commission staff in announcing the DPA, Tenaris was a DPA candidate because of its immediate disclosure and exceptional cooperation. However, it appears not to have been an NPA candidate because of the alleged underlying violation.” Gibson Dunn asks – “the key question now is how a defendant benefits from receiving an NPA or DPA from the SEC over a traditional settled enforcement action” and states as follows. “Turning to a DPA, the defendant agrees to what appear to be remedies very similar to those historically obtained by the SEC in a settled enforcement action, but potential defendants need to consider the risks and benefits of a DPA more carefully. Optically, for a company that does not go on to violate the agreement, a DPA can be favorably described as the SEC’s decision not to take an enforcement action against the defendant. This distinction is meaningful for a defendant’s public image and reputation. […] A second potential advantage of a DPA is avoidance of the collateral consequences. Some collateral consequences, such as disclosure obligations or disqualifications from participation in the securities industry, arise from the entry of an injunction, which a DPA avoids.” Gibson Dunn further states as follows. “On the other hand, the DPA’s model is untested. One reason parties settle SEC proceedings is to avoid the collateral estoppel effect of adverse findings of fact and conclusions of law in contested litigation which an adversary may use in a claim for damages or other relief. Generally, courts have concluded that they will not impose collateral estoppel based on factual recitations contained in settled SEC enforcement actions and that settled SEC complaints or administrative orders are not evidence. Because DPAs are new, there is less precedent on how courts will view similar factual recitations.” Finally, Gibson Dunn observes that “companies considering a DPA may wish to consider confirming that their insurance carriers will not construe a DPA as an admission that could adversely affect coverage for a company and/or its directors and officers.”
In this alert, Dewey & LeBoeuf stated as follows. “The Tenaris DPA is significant insofar as it shows the SEC’s willingness to cut a break to those companies that demonstrate “high levels of corporate accountability and cooperation” with SEC enforcement investigations. Tenaris was credited for “immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training.” These great lengths allowed it to obtain a more lenient sanction than it may have otherwise received. As companies under investigation by the SEC tend to go to such lengths in order to settle rather than litigate SEC cases, it is likely that we will see more DPAs from the SEC in the future. This is especially true with respect to SEC cases involving allegations of FCPA violations, which are routinely settled rather than litigated.”
In this alert, Debevoise & Plimpton states as follows. “… [T]he nature and circumstances of the settlement call into question how beneficial the settlement overall, and particularly the SEC’s novel form of resolution, actually was for Tenaris. The company, even by the government’s account, did everything right after discovering potentially improper conduct: It immediately and voluntarily disclosed the conduct at issue, retained outside counsel to conduct a worldwide investigation, cooperated extensively and in “real time” with the SEC and DOJ, and implemented substantial remedial measures and compliance enhancements. Yet Tenaris still had to pay millions in disgorgement and fines, adopt wide-ranging compliance requirements (including certification by all directors and members of management regarding compliance with a revised code of conduct) on top of the extensive reforms and enhancements the company had already implemented, commit to notify the DOJ during the two-year term of the NPA of any conduct by any Tenaris employee that violates U.S. federal or state criminal law or any non-U.S. fraud or anticorruption law (or even any investigation of such conduct) that comes to the attention of the company’s senior management, and, perhaps most significantly, agree not to dispute detailed accounts of the company’s conduct that include express statements that the conduct was “illegal” and “improper.” For example, although the DPA includes a pro forma recitation that Tenaris was not “admitting or denying” the SEC’s allegations, Tenaris agreed not to dispute a statement of facts that describes the payments as “illegal payments to OAO officials” and identifies those OAO employees as “‘foreign officials’ within the meaning of [the FCPA].” The SEC’s resolution of the Tenaris investigation by means of a DPA reflects the adoption by the SEC of aggressive techniques and practices employed by the DOJ in criminal matters – a trend that may continue as the SEC increases the vigor of its FCPA enforcement efforts.”
In this alert, Foley & Lardner noted as follows. “The agreement also does not contain an injunction or an order of a court, which reduces the risk of collateral actions (securities class actions, shareholder breach of fiduciary duty actions). Undoubtedly, Tenaris’s full disclosure and cooperation played a major role in SEC’s deciding to use a deferred prosecution agreement for the first time.”
In this alert, Bryan Cave noted as follows. “It is telling that the SEC’s first use of a DPA occurred in an investigation involving alleged violations of the Foreign Corrupt Practices Act (“FCPA”). Such investigations, which typically require reviews of detailed financial records, e-mails and other documents in numerous jurisdictions, often in languages other than English, present substantial challenges to the SEC and other authorities. In these situations, what the SEC describes as “extraordinary cooperation” on the part of a corporation has particular value.”
In this alert, Dechert stated as follows. “It is noteworthy that the SEC chose to offer a DPA to Tenaris but an NPA to Carter’s. The SEC has offered no public explanation why it used different cooperation tools, and in fact the instructions in the SEC manual for the use of the two types of agreements are similar. The SEC press releases for both use similar language to describe the cooperation from the respective companies. One explanation for this different treatment may lie in the seriousness with which the SEC views FCPA violations. While NPAs are typically reserved for those viewed by the charging agency as witnesses with little or no criminal exposure, DPAs are often accompanied by a formal charging document, are filed with a court, and generally include a rigorous set of corrective measures that the cooperating company must undertake in order for the prosecution to remain deferred. Thus, the DPA is likely to remain a favored agreement in the FCPA context, where there will invariably be additional measures for the corporate defendant to undertake in the area of compliance and/or monitoring. Moreover, there are potentially additional adverse consequences if the DPA is violated, so it is a more rigorous enforcement tool.”
In this alert, Cahill Gordon & Reindel note as follows. “Significantly, the DPA does not require Tenaris to make an admission of wrongdoing, or admit to a statement of facts detailing the misconduct, as is common in agreements of this type in the criminal context. Such admissions can be used against a company by criminal authorities or by private plaintiffs, neither of whom are bound by the DPA.”
Tenaris Resolves FCPA Enforcement – SEC Uses a DPA For the First Time
Once upon a time there was a law enforcement system in this country where companies that committed crimes or engaged in other wrongdoing were prosecuted criminally and/or civilly and where companies that did not commit crimes or did not engage in other wrongdoing were not prosecuted. That system has to a large extent been abandoned by the DOJ years ago – particularly in the FCPA context – and now that system appears to be crumbling at the SEC as well.
In December 2010, the SEC entered into its first non-prosecution agreement – albeit not in the FCPA context (see here for the prior post) and yesterday the SEC announced its first deferred prosecution agreement – of any kind – against Tenaris to resolve an FCPA enforcement action.
As has generally happened with the DOJ’s enforcement of the FCPA, the SEC’s enforcement of the FCPA will now be even further removed from judicial scrutiny and resolutions will now more frequently be negotiated over private conference room tables.
This is a troubling development on many fronts and it gives the public little confidence that our laws are enforced in a consistent and transparent manner or that regulators and companies are being held accountable.
With that introduction, let’s take a look at the Tenaris enforcement action.
Tenaris (here) “is a leading supplier of tubes and related services for the world’s energy industry and certain other industrial applications.” Tenaris is headquartered in Luxembourg and its American Depository Receipts (“ADRs”) are listed on the New York Stock Exchange. In FCPA-speak, that makes Tenaris an “issuer.”
The enforcement action involved both a DOJ and SEC component. Total settlement amount was $8.9 million ($3.5 million criminal penalty via a DOJ non prosecution agreement; $5.4 million in disgorgement and prejudgment interest via a SEC deferred prosecution agreement … its feels odd just writing that).
Both enforcement actions involve commission payments to an Uzbekistan agent to receive confidential bidding documents in connection with tenders conducted by alleged Uzbekistan state-owned or state-controlled companies. The enforcement actions state that Tenaris employees “were aware or substantially certain that all or a portion” of the commission payments would be offered by the Agent to employees at the SOEs and that certain of the payments were paid via a wire transfer through a New York bank account.
DOJ
The NPA (here – dated March 14, 2011) begins as follows.
The DOJ “will not criminally prosecute” Tenaris and its subsidiaries and affiliates for any crimes “related to Tenaris’s knowing violations of the anti-bribery and books and records provisions of the FCPA … arising from and related to the making of improper payments by employees and agents of Tenaris to officials of OJSC O’ztashqineftgaz (“OAO”), an Uzbekistan state-controlled oil and gas production company, and the accounting and record-keeping associated with these improper payments.”
The NPA has a term of two years and Tenaris admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Tenaris agreed “not to make any public statement contradicting” the described conduct.
According to the NPA, Tenaris has more than 24,000 employees around the world and it conducts operations in 12 countries and its customers include the world’s leading oil and gas companies. The NPA states that Tenaris’s operations included supplying steel pipe and related servics in the Caspian Sea region, including Uzbekistan. This region accounted for approximately 1% of Tenaris’s total global sales and services from 2003 to 2008. Tenaris’s Caspian Sea business was run from offices in Azerbaijan and Kazakhstan.
According to the NPA, “Tenaris obtained oilfeld services business in the Caspian Sea region in part by bidding on contracts solicited by state-owned companies or governmental agencies to provide pipeline used in the development and production of oil and natural gas. Tenaris often used agents to assist in biddig on government contracts in the Caspian Sea region.”
The conduct at issue focused on OAO contracts between 2006 and 2007. According to the NPA, OAO “was a wholly owned subsidiary of Uzbekneftegaz, the state holding company of Uzbekistan’s oil and gas industry” and during the relevant time period “Uzbekneftegaz and OAO were wholly owned by the Government Uzbekistan.” The NPA then states, “OAO was an agency and instrumentality of the Government of Uzbekistan and its employees were foreign officials within the meaning of the FCPA.”
According to its website (here) the current ownership of OAO is as follows: “government’s share – 51%; foreign investors’ share – 37.27%; free market trade share – 11.73%.”
According to the NPA, in December 2006, Tenaris “was introduced to a potential agent (“OAO Agent”) to help Tenaris bid on additional contracts with OAO” and “as an incentive to retain the OAO Agent, the OAO Agent offered Tenaris access to confidential bidding information of competitors obtained from officials in OAO’s tender department, who would allow Tenaris to submit revised bids after reviewing the confidential information.” The NPA states that “Tenaris would use the confidential competitor bid information to submit revised bids in order to increase the likelihood of Tenaris being awarded the underlying contract.”
According to the NPA, Tenaris “agreed to pay the OAO Agent a fee of 3.5% for these services” and that Employees A, B, C, and D (non-U.S. citizens but “employees and agents” of Tenaris) “were aware or substantially certain that all or a portion of such money would be offered by the OAO Agent to one or more OAO employees.”
The NPA then lists approximately $19.4 million in contracts Tenaris obtained using this system and states that certain of the commission payments to the OAO Agent were paid via wire transfer through a New York bank account.
Under the heading “Additional Improper Conduct to Avoid Detection,” the NPA states that in November 2007 the above referenced employees learned of complaints from company competitors as to the bidding process on certain of the contracts and that an investigation by Uzbekekspertiza JSC (a Uzbekistani government agency) might commence. According to the NPA, “in an effort to avert the potential investigation of the bidding process, the OAO Agent recommended to Tenaris that the OAO Agent make an improper payment to Uzbekekspertiza officials to refrain from recommending the investigation against Tenaris or re-opening the bidding process to Tenaris’s competitors” and that the employees “agreed to pay the recommended payment” to the officials to avert the investigation. However, the NPA states as follows: “the investigation did not uncover evidence that any such payment was made.”
As to books and records, the NPA states that “the books, records and accounts reflecting Tenaris’s transactions … were incorporated into Tenaris’s consolidated year-end financial statements” and that “Tenaris knowingly failed to make and keep books, records, and accounts that accurately and fairly reflected Tenaris’s transactions … and the payments to the OAO Agent.”
Based on the above conduct, Tenaris agreed to pay a $3.5 million criminal penalty. The NPA states as follows. “This substantially reduced monetary penalty reflects the DOJ’s determination to meaningfully credit Tenaris for its extraordinary cooperation with the Department, including its timely and voluntary disclosure, its subsequent investigation, and the effective manner in which Tenaris conveyed information to the [DOJ and the SEC].”
Inquiring minds want to know – how much was the penalty “substantially reduced?”
According to the NPA, the DOJ agreed to resolve the action via an NPA based, in part, on the following factors.
(a) Tenaris’s timely, voluntary, and complete disclosure of the conduct at issue;
(b) Tenaris’s extensive, thorough, real-time cooperation with the DOJ and the SEC;
(c) subsequent to its voluntary disclosure of certain conduct unrelated to Uzbekistan, but prior to discovery of the unlawful conduct related to Uzbekistan, Tenaris’s voluntary investigation of the Company’s business operations throughout the world, specifically including the thorough and effective manner in which this investigation was carried out and information was disclosed to the DOJ and SEC;
(d) Tenaris’s remedial efforts already undertaken and to be undertaken, including voluntary enhancements to its compliance program; and
(e) Tenaris’s commitment to implement enchanced compliance measures described in the NPA.
Based on (c) above, inquiring minds want to know – what did Tenaris originally voluntarily disclose?
Under the heading, “Disclosure and Investigation of Improper Activity,” the NPA states as follows.
“In or about March 2009, a third party disclosed to Tenaris information indicating that certain sales agency payments were made by Tenaris in relation to business in a country other than Uzbekistan. These payments appeared to be for an improper purpose. In response to this information, Tenaris’s Audit Committee retained outside counsel to investigate the allegations. Thereafter, in a Form 20-F filed with the SEC on or about June 30, 2009, Tenaris disclosed information related to these allegations. Tenaris also made a prompt, full disclosure of the information to the [DOJ] and the [SEC] concerning the allegations. In or around July 2009, counsel for Tenaris met with the [DOJ and SEC] and disclosed preliminary findings of the internal investigation. Such disclosure was related to facts known to Tenaris at the time but was not related to transactions in Uzbekistan. Tenaris’s counsel also informed the [DOJ and the SEC] that it would conduct a thorough, world-wide investigation of its business operations and internal controls and would report the findings to the [DOJ and SEC]. Tenaris’s investigation plan included significant collection and review of a substantial quantity of electronic and paper records from the company and third parties from multiple locations around the world, translation of all relevant materials into English, subsequent interviews of relevant personnel including senior executives and third parties, and review and testing of internal controls and compliance procedures. In or around June 2010, Tenaris disclosed the factual findings from its internal investigation in a thorough, complete and useful manner to the [DOJ and SEC]. As a result of its internal investigation, Tenaris discovered facts and transactions in Uzbekistan that constitute the violations set forth above. Tenaris voluntaly engaged in certain remediation efforts to include termination and disciplinary measures of the persons involved. Tenaris also thoroughly reviewed its pre-existing compliance program and applicable internal controls, and undertook voluntary, affirmative steps to update and improve its compliance program and to implement enhanced compliance measures and controls. Tenaris also agreed to provide real and meaningful cooperation with the [DOJ and SEC] and any law enforcement agency in connection with this matter.”
Again, inquiring minds want to know – what did Tenaris originally voluntarily disclose?
See here for the DOJ’s release announcing the enforcement action.
SEC
The SEC DPA (here) is based on the same core conduct described above.
As to internal controls, the SEC DPA states as follows.
“… Tenaris’s system of internal controls failed to detect or prevent payments to OAO officials in an effort to obtain and retain business in Uzbekistan, including a failure to ensure that proper and effective due diligence was conducted on the Agent for the OAO contracts, and that the review process for authorization or approval of payments to the Agent failed to detect or prevent the illegal payments to OAO officials. Tenaris’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time warranted further strengthening to ensure effective compliance with the related laws.”
One of the undertakings Tenaris agreed to in the DPA was the following.
“To conduct effective training regarding anticorruption and compliance with the FCPA for (1) all current officers and managers, (2) all employees working in Finance, Accounting, Internal Audit, Sales, and Government Relations, (3) all other employees working in positions Tenaris deems to involve activities implicated by Tenaris’s policies regarding anticorruption and compliance with the FCPA, on or before December 31, 2011, and (4) all such future employees within 90 days oftheir affiliation with Tenaris.”
Under the terms of the two-year DPA, Tenaris, without admitting or denying the SEC’s allegations (the same way defendants are ordinarly allowed to resolve SEC enforcement actions), agreed to pay $5.4 million in disgorgement and prejudgment interest.
Pursuant to the DPA, Tenaris agreed “not to contest or contradict the factual statements” supporting the Statement of Facts. As noted in this prior post when the SEC announced its intention to make use of NPAs and DPAs, “[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses” is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.
Like the SEC’s prior NPA, the Tenaris DPA is very similar to DOJ DPAs and NPAs.
In a release (here) the SEC touted its first use of a DPA.
Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows. “The Tenaris foreign bribery scheme was unacceptable and unlawful, but the company’s response demonstrated high levels of corporate accountability and cooperation. The company’s immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training made it an appropriate candidate for the Enforcement Division’s first Deferred Prosecution Agreement. Effective enforcement of the securities laws includes acknowledging and providing credit to those who fully and completely support our investigations and who display an exemplary commitment to compliance, cooperation, and remediation.”
Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated as follows. “Tenaris’s conduct was clearly in violation of the FCPA. The company’s employees bribed government officials in Uzbekistan to obtain government contracts. But when Tenaris discovered the illegal conduct, it took noteworthy steps to address the violations and significantly enhance its anti-corruption policies and practices to remediate weaknesses in its internal controls.”
Robert Giuffra, Jr. of Sullivan & Cromwell (here) represented Tenaris.