First Enforcement Action of 2011 Involves a Former Executive Officer
In March 2010, Innospec Inc. was charged on both sides of the Atlantic in a joint DOJ / SEC / U.K. Serious Fraud Office enforcement action. (See here and here).
In August 2010, the SEC charged David Turner, the Business Director of Innospec’s TEL Group, and Ousama Naaman, the company’s agent, for their role in the bribery scheme. (See here). Naaman was also charged by the DOJ, pleaded guilty, and awaits sentencing. (See here).
Yesterday, in the first FCPA enforcement action of the year, the SEC charged Paul Jennings, Innospec’s former CFO and CEO, for his involvement in the bribery scheme. (See here). Jennings resigned from Innospec in March 2009 (see here).
Jennings name is now included on a rather short list of high-ranking executives of public companies (or affiliates) recently charged by the SEC in an FCPA enforcement action. In July 2009, Douglas Faggioli (the current President and CEO) and Craig Huff (the former CFO) of Nature’s Sunshine Products were charged (see here); in September 2008, Albert Jackson Stanley (the former CEO of Kellogg Brown & Root Inc.) was charged (see here); in December 2007, Robert Philip (the former Chairman/CEO of Schnitzer Steel was charged (see here); and in September 2007, Monty Fu (the former Chairman of Syncor International Corp. was charged (see here).
The facts of the underlying bribery scheme in the Jennings enforcement action are detailed in the prior posts linked above and this post details the allegations in the SEC’s complaint (here) regarding Jennings knowledge and involvement in the scheme.
In summary fashion, the complaint alleges as follows:
“This action arises from widespread bribery of foreign officials by Innospec, Inc., some of which occurred and was approved by Paul W. Jennings beginning in mid to late 2004 during his tenure as Chief Financial Officer (“CFO”) and continuing after he became Chief Executive Officer (“CEO”) in 2005.”
“Beginning in mid to late 2004, Jennings, who held various senior roles at Innospec, including CFO and CEO, actively participated in the bribery schemes in Iraq and Indonesia.”
“Jennings violated [the FCPA’s anti-bribery provisions] by engaging in widespread bribery of government officials in Iraq during the post-Oil for Food period in order to sell TEL to the Iraqi Ministry of Oil (“MoO”) and by engaging in bribery of Indonesian officials to sell TEL to state owned oil companies in Indonesia. Jennings aided and abetted Innospec’s violations of [the FCPA’s anti-bribery provisions] by substantially assisting in Innospec’s bribery of Iraqi and Indonesian government officials.”
“Innospec, a U.S. issuer, made use of U.S. mails and interstate commerce to carry out the scheme, and Jennings, a dual U.S. and U.K. national was complicit in the scheme. Jennings both sent and received e-mails to and from the United States to carry out the scheme. He also used interstate commerce and the mails as part of the scheme. Jennings obtained $116,092 in bonuses that were tied to the success of the TEL sales, which were procured through bribery.”
“Jennings also violated Section13(b)(5)of the Exchange Act and Rule 13b2-1 thereunder by falsifying documents as part of the bribery scheme. Jennings also violated Exchange Act Rule 13b2-2 by making false statements to accountants and violated Exchange Act Rule 13a-14 by signing false personal certifications required by the Sarbanes-Oxley Act of 2002 that were attached to annual and quarterly Innospec public filings.”
“Jennings also aided and abetted Innospec’s violations of [the FCPA’s books and records and internal control provisions] by substantially assisting in Innospec’s failure to maintain internal controls to detect and prevent bribery of officials in Iraq and Indonesia, and the improper recording of the illicit payments in Innospec’s books and records.”
According to the SEC, “beginning in 2005, Jennings, along with other members of Innospec’s management, approved bribery payments to officials at the Iraqi Ministry of Oil in order to sell TEL to Iraq. The complaint alleges that Innospec, with the approval of Jennings, used Naaman as its agent in Iraq to make improper payments and the complaint alleges that Jennings was copied on certain e-mails between Naaman and Turner discussing the bribery scheme. The complaint further alleges that Jennings approved certain payments to Naaman to facilitate the bribery scheme including certain payments Jennings approved “while in the United States.” Many of the SEC’s allegations as to the Iraqi conduct are phrased as Jennings had “general knowledge” or that Jennings was “generally aware” of the conduct at issue.
As to Indonesian payments, the complaint alleges that “Jennings became aware of and approved the improper payments to Indonesian government officials in order to win contracts for the sale of TEL to state owned oil and gas companies. Among other allegations, the complaint alleges that “in December 2004, Jennings and Executive B [the CEO of Innospec from 1998 to April 2005] discussed Innospec’s bribery scheme in Iraq and Indonesia on a flight from Denver to New York” and that “while Indonesian Agent was in the United States during the holidays, various e-mails were sent to and from the United States that discussed Jennings’ and Turner’s continued efforts to support Indonesian Agent’s payment of bribes on Innospec’s behalf.” The SEC also alleges that the “bribery scheme” was also discussed “during Jennings’ performance review in January 2005.”
As to Jennings false certifications, the complaint alleges as follows.
“From 2004 to February 2009, Jennings signed annual certifications that were provided to auditors where he falsely stated that he complied with Innospec’s Code of Ethics incorporating the company’s Foreign Corrupt Practices Act policy, and that he was unaware of any violations of the Code of Ethics by anyone else. During that time frame, Jennings actively participated in bribery of Iraqi and Indonesian officials as described above. Jennings also signed annual and quarterly personal certifications pursuant to the Sarbanes-Oxley Act of 2002 in which Jennings made false certifications concerning the company’s books and records and internal controls. Jennings also signed false management certifications to Innospec’s auditors indicating that the books and records were accurate and that Innospec had appropriate internal controls.”
As noted in the SEC release, without admitting or denying the SEC’s allegations, Jennings agreed to disgorge $116,092 plus prejudgment interest of $12,945 and pay a civil penalty of $100,000. The SEC stated that the figures take into consideration Jennings’s cooperation in this matter.
In the release, Cheryl Scarboro (Chief of the SEC’s FCPA Unit) 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.”
This & That
A bit of catch up with today’s post which discusses the recent sentence of Juan Diaz in the continuing Haiti Teleco saga (including an interesting post-enforcement action twist) and a DOJ release that flew under the radar.
Juan Diaz
Juan Diaz was recently sentenced to 57 months in prison after previously pleading guilty to a one-count information charging him with conspiracy to violate the Foreign Corrupt Practices Act and money laundering. (See here for the DOJ release). As noted in the release, Diaz was also ordered to: (i) serve three years of supervised release following his prison term; (ii) pay $73,824 in restitution; and (iii) forfeit $1,028,851.
In May 2009, (see here) Diaz pleaded guilty for his role in an improper payment scheme involving employees of Haiti Teleco, an alleged state-owned national telecommunications company. In the DOJ’s view, that would make the Director of International Relations and the General Director of Haiti Teleco, persons Diaz and others allegedly bribed, Haitian “foreign officials” under the FCPA.
The interesting twist is this.
If Diaz bribed these same employees today, he would be bribing (presumably in the DOJ’s view) not Haitian “foreign officials” but Vietnamese “foreign officials.”
Why?
Because in May, Viettel, a telecommunications company run by Vietnam’s military, purchased a 60% stake in Haiti Teleco. (See here).
The 57 month sentence Diaz received is similar to the 60 month FCPA sentence Charles Jumet received in April (see here). Jumet was sentenced to 87 months after pleading guilty to a two-count criminal information charging conspiracy to violate the FCPA and making false statements to federal agents. The false statements portion of the sentence was 20 months.
Civil Forfeiture Action Against Properties Owned by Former President of Taiwan
In July, the DOJ issued a release (see here) about a civil forfeiture complaint it filed against certain U.S. properties “that represent a portion of illegal bribes paid to the former president of Taiwan and his wife.”
With Attorney General Eric Holder’s recent announcement of the Kleptocracy Asset Recovery Initiative (see here), the release should be of interest to those who follow this initiative and the general issue of asset recovery.
Bribe recipients can not be prosecuted under the Foreign Corrupt Practices Act, but U.S. based assets (or other assets that flow through U.S. financial institutions) of bribe recipients can be subject to U.S. legal proceedings under other laws.
As noted in this post from November 2009, Attorney General Holder has called asset recovery a “global imperative” and announced a “redoubled commitment on behalf of the United States Department of Justice to recover” funds obtained by foreign officials through bribery.
The prior post discussed the January 2009 civil forfeiture action the DOJ filed in the aftermath of the Siemens enforcement action against bank accounts located in Singapore in the names of Zulfikar Ali, Fazel Selim, and ZASZ Trading and Consulting Pte Ltd. (“ZASZ”) (see here). According to the DOJ’s complaint (see here), these accounts were used by Siemens and another company to bribe foreign officials in violation of the FCPA, specifically Arafat Rahman (“Koko”), the son of former Bangladeshi Prime Minister Khaleda Zia. The DOJ alleges that the illicit funds in these accounts flowed through U.S. financial institutions thereby subjecting them to U.S. jurisdiction.
Similarly, in January 2010, the DOJ unsealed a criminal indictment against Juthamas Siriwan and Jittisopa Siriwan, the foreign official bribe recipient of the Green’s improper payments and her daughter. See here. Among other things, the indictment seeks forfeiture of approximately $1.7 million.
Thus, the DOJ’s July announcement that it is pursuing U.S. based assets of the former president of Taiwan and his wife very much continues a trend.
According to the DOJ release:
“The former president and his wife were convicted in Taiwan on Sept. 11, 2009, for bribery, embezzlement and money laundering. They are currently sentenced to 20 years in prison. Their convictions were upheld on appeal and are now pending before the Supreme Court in Taiwan. […] The former president and his wife are also currently under indictment in Taiwan for additional alleged acts of graft and money laundering.”
Director John Morton of U.S. Immigration and Customs Enforcement (ICE) stated that the enforcement action “serves as a warning to those corrupt foreign officials who abuse their power for personal financial gain and then attempt to place those funds in the U.S. financial system” and that “ICE’s Homeland Security Investigations agents will continue to work with our law enforcement partners both here and abroad to investigate and prosecute those involved in such illicit activities and hold corrupt foreign officials accountable by denying them the enjoyment of their ill ?gotten gains.”
What appears to make this recent civil forfeiture action different than the previously filed Siemens-related forfeiture action and the previously filed Siriwan enforcement action is that the bribe payor may be beyond the reach of the FCPA.
According to the DOJ release, the entity paying the bribes to the president of Taiwan and his wife was Yuanta Securities Co. Ltd. (YSC). The release notes that YSC “was attempting to increase its ownership share of Fuhwa Financial Holding Company Limited” and that “YSC paid a bribe of 200 million New Taiwan dollars, or approximately $6 million U.S. dollars, […] to ensure that the authorities on Taiwan would not interfere with its acquisition of additional shares and to attempt to establish a relationship with the head of the authorities on Taiwan.”
Neither YSC (here), nor its parent company, Yuanta Financial Holdings, appear to be U.S. issuers. Under 78dd-3 of the FCPA, foreign companies can be subject to the FCPA’s jurisdiction. However, this prong of the FCPA requires a U.S. nexus. A quick scan of the forfeiture complaint does not suggest a U.S. nexus in terms of making the bribe payments – although the complaint clearly does allege a U.S. nexus once the payments were received and used by the former president of Taiwan and his wife.
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Curious as to what happened in the above referenced Siemens-related enforcement action? In April 2010, U.S. District Court Judge John Bates granted the DOJ’s motion for default judgment and judgment of forfeiture against the subject properties.
What’s happening in the Siriwan enforcement action? According to the docket, nothing since the indictment was unsealed in January 2010.
The Giffen Gaffe
Perhaps one day the true story will be told about the DOJ’s prosecution of James Giffen.
I don’t pretend to know what happened behind the scene other than to know that something significant occurred behind the scene.
That conclusion is compelled when an original indictment (see here) charging “Giffen with making more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions, in which the American oil companies Mobil Oil, Amoco, Texaco and Phillips Petroleum acquired valuable oil and gas rights in Kazakhstan” is resolved via a one-paragraph superseding information (see here) charging a misdemeanor tax violation.
Sure, DOJ can say that it prosecuted a functionally defunct entity, The Mercator Corporation – in which Giffen was the principal shareholder, board chairman, and chief executive officer – with violating the FCPA’s anti-bribery provisions. Yet that criminal information (see here) merely alleges that “Mercator caused the purchase of two snowmobiles that were shipped to Kazakhstan for delivery to KO-2” (a senior official of the Kazakh Government).
You read that correctly.
From an FCPA perspective this entire, nearly decade-long prosecution, was reduced to allegations about two snowmobiles for a Kazakh official.
So what was that something significant that occurred behind the scene?
I don’t know.
But I do know this.
Part of Giffen’s defense was that his actions were taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the Department of State and the White House. The DOJ did not dispute the fact that Giffen had frequent contacts with senior U.S. intelligence officials or that he used his ties within the Kazakh government to assist the United States. With the court’s approval, Giffen sought discovery from the government to support such a public authority defense and much of the delay in the case was due to the government’s resistance to such discovery and who was entitled to see such discovery.
Perhaps it was that public airing of the information in these documents would be embarrassing to the U.S. government or impact U.S. foreign relations with a key oil and gas producing country.
If so, it is troubling to think that our government condones bribery, when done with the approval or the wink and nod of government officials, while aggressively prosecuting commercial actors – often times based on untested and dubious legal theories.
For the record, Giffen pleaded guilty (see here) last Friday to a one-count criminal information charging him with willfully failing to supply information on tax returns regarding foreign bank accounts in violation of 26 USC 7203. The information charges, and Giffen pleaded guilty to, filing a U.S. individual income tax return which failed to report that he maintained an interest in, and signature and other authority over, a bank account in Switzerland in the name of Condor Capital Management, a British Virgin Islands corporation he controlled. In pleading guilty, Giffen also relinquished right, title and interest he may have had, directly or indirectly, in several named Swiss bank accounts.
Pursuant to the plea agreement, Giffen’s sentencing range will be 0 to 6 months and the applicable fine range will be $250 to $5,000.
For the record, Mercator also pleaded guilty (see here) last Friday to a one-count criminal information charging it with violating the FCPA’s anti-bribery provisions. According to the information, Mercator “advised Kazakhstan in connection with various transactions related to the sale by Kazakhstan of portions of its oil and gas wealth.” The information alleges that between 1995 and 2000 Mercator was paid approximately $67 million in success fees for its work in assisting the Kazakh Ministry of Oil and Gas Industries develop a strategy for foreign investment in the oil and gas sector and coordinating the negotiation of numerous oil and gas transactions. The information charges that certain senior officials of the Kazakh government (including KO-2) had the authority to hire and pay Mercator and that Mercator was therefore “dependant upon the goodwill” of the officials. The one-paragraph statutory allegation merely states that Mercator “caused the purchase of two snowmobiles that were shipped to Kazakhstan for delivery to KO-2.”
As indicated in the plea agreement, the DOJ and Mercator could not agree on whether the 1998 Sentencing Guidelines or the 2009 Sentencing Guidelines apply – an issue that will be left for the court to decide. If the 2009 guidelines apply, the plea agreement sets forth a fine range of $650,000 to $1.3 million. If the 1998 guidelines apply, the plea agreement sets forth a fine range of $30,000 to $60,000.
Whether Mercator’s and/or Giffen’s actions were indeed taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the Department of State and the White House, the following paragraph from the Mercator plea agreement would seem relevant:
“Because the offense involved an elected official or a public official in a high-level decision-making or sensitive position, the offense level is increased 4 levels pursuant to U.S.S.G. 2C1.1(b)(3).”
That provision (see here) defines “public official” to include, among other categories, an individual “in a position of public trust with official responsibility for carrying out a government program or policy; acts under color of law or official right; or participates so substantially in government operations as to possess de facto authority to make governmental decisions.”
DOJ releases in FCPA enforcement actions are typically peppered with get-tough, this sends a message type of language. The release (see here) in the Giffen / Mercator enforcement action does not contain any quotes from DOJ officials.
William Schwartz of Cooley Godward Kronish LLP (here), a former Assistant United States Attorney in the United States Attorney’s Office for the Southern District of New York where he was Deputy Chief of the Criminal Division, represented both Giffen and Mercator.
So, what to make of the Giffen Gaffe.
It seems that Giffen prevailed not because of the facts or the law, but because he possessed significant leverage over the government in that he asserted his actions were taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the State Department and the White House.
Few FCPA defendants can make a similar claim. Thus, resolution of the Giffen case would seem to have little or no effect on the nuts and bolts of future FCPA enforcement actions.
Yet, resolution of the Giffen case does raise some troubling issues as to the DOJ’s enforcement of the Foreign Corrupt Practices Act.
For starters, the Giffen case and the Frederick Bourke case (see here for prior posts) generally marked the beginning of the FCPA’s resurgence. Regardless of the outcome of Bourke’s Second Circuit appeal, the trial phase ended with the sentencing judge saying:
“After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.”
In both the Giffen and Bourke cases, the DOJ made spectacular allegations only to see these enforcement actions end with a whimper.
The Giffen resolution would also seem embarrassing for the Justice Department which actively preaches the transparency and anti-corruption gospel message around the world while calling on other countries to increase enforcement of their own bribery laws.
However, what does it say about transparency in our country when a case that begins with criminal allegations of more than $78 million in unlawful payments to senior Kazakh officials ends with a misdemeanor tax violation and a largely meaningless FCPA enforcement action against a functionally defunct entity focused merely on two snowmobiles?
The Giffen resolution should further enrage segments of the business community that justifiably see a double standard in that certain business practices seem tolerated when done in connection with government business or policy, yet aggressively prosecuted, often times based on untested and dubious legal theories, when done in connection with a purely commercial transaction.
The Giffen Gaffe is troubling enough in isolation.
Coupled with another bribery blunder from approximately six months ago, it is an open question whether the government’s enforcement of the FCPA, to borrow a parliamentary phrase, would survive a no-confidence vote.
In February, the DOJ alleged (see here) that BAE, the largest defense contractor in Europe and the fifth largest in the U.S. as measured by sales, “provided substantial benefits” “through various payment mechanisms both in the territorial jurisdiction of the U.S. and elsewhere” to a Saudi official “in a position of influence” to award fighter jet deals. The DOJ stated that BAE “provided support services to the [Saudi official] while in the territory of the U.S.” and that these benefits “included the purchase of travel and accommodations, security services, real estate, automobiles and personal items.” The DOJ alleged that over $5 million in invoices for benefits provided to the Saudi official were submitted by just one BAE employee during a one year period. Yet resolution of the BAE enforcement action contained no FCPA charges.
Sure the U.S. may prosecute the most bribery cases in terms of shear numbers compared to other countries.
Yet, as is becoming increasingly obvious, many of those cases are settled via privately negotiated resolution vehicles that are not subjected to any meaningful judicial scrutiny and are based on dubious and untested legal theories.
On the flip side, when allegations of egregious or widespread bribery are alleged, the charges are not even FCPA anti-bribery violations.
Before another U.S. government official goes abroad to spread the anti-corruption gospel, preach transparency, and question other countries commitment to prosecuting bribery, it would seem that our government and Justice Department first need to examine its own enforcement of the FCPA.
Honest Services Fraud and the FCPA
While much of the white-collar bar awaits the Supreme Court’s decisions in the trio of honest services fraud cases on its docket (Jeffrey Skilling, Conrad Black and Bruce Weyhrauch) why not talk about the FCPA and honest services fraud!
What is honest services fraud? Stay tuned for the Supreme Court’s decisions.
For present purposes, honest services fraud is part of the mail and wire fraud statutes and is found at 18 USC 1346 which simply states that the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services.
What does this have to do with the Foreign Corrupt Practices Act?
It turns out, not much, but that is not how the DOJ saw it when charging James Giffen in 2004. (For more on the Giffen case see here).
The Giffen superceding indictment focuses on charges that he made unlawful payments totaling more than $78 million to the former Prime Minister and Oil Minister of Kazakhstan in violation of the FCPA.
In addition to the FCPA charges, the indictment also alleged that Giffen’s actions violated 18 USC 1346 by depriving the citizens of Kazakhstan of the honest services of their government officials.
Yes, you did read that correctly – the DOJ alleged that Giffen deprived the citizens of Kazakhstan of the honest services of their government officials. That is why the Giffen honest services fraud charge is one of the more curious “tag-a-long” charges ever in an FCPA enforcement action.
Unlike most FCPA defendants (corporate and individual) Giffen mounted, and still is mounting, an aggressive legal defense.
In 2004, Giffen moved to dismiss portions of the charges that alleged a scheme to deprive the citizens of Kazakhstan of the honest services of their government officials. He asserted that application of the honest services fraud theory of Section 1346 to Kazakhstan impermissibly extended the mail and wire fraud statutes to cover activities beyond Congress’ original intent.
Judge William Pauley of the Southern District of New York agreed with Giffen and granted his motion to dismiss portions of the charges that alleged a scheme to deprive the citizens of Kazakhstan of the honest services of their government officials. See U.S. v. Giffen, 326 F.Supp.2d 497 (S.D.N.Y. 2004).
In so holding, Judge Pauley stated that the DOJ offered “the slenderest of reeds to support its expansive interpretation.” Among other things, Judge Pauley noted that the DOJ could not point to “any decision where a court upheld application of the honest services theory in an international setting involving a foreign government and its citizens.”
When the DOJ pointed to “two 25-year old indictments” charging a similar theory, Judge Pauley noted that the DOJ “has not unearthed any published decision on the issue” and that the DOJ “conceded that there were no court decisions addressing the validity of the two 25-year old indictments.” Judge Pauley further stated that just because certain U.S. Attorneys were able to obtain indictments “under an intangible rights theory, grounded between a foreign government and its citizenry, is not the kind or quality of precedent this Court need consider.”
Accordingly, Judge Pauley concluded that “Congress did not intend that the intangible right to honest services encompasses bribery of foreign officials in foreign countries” and that “application of Section 1346 to Giffen [was] unconstitutional.”
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As FCPA practitioners well know, many current FCPA legal theories are aggressive, untested and not supported by any case law or other meaningful precedent or guidance.
If challenged, would a judge (like Judge Pauley in Giffen) conclude that the DOJ offered the “slenderest of reeds” to support its expansive interpretations?
What case law would the DOJ cite to support certain of its aggressive interpretations (such as employees of seemingly “commercial” enterprises being “foreign officials” under the FCPA)? Would DOJ not have to concede that there are no court decisions addressing the validity of its interpretations?
All interesting (and important) questions to ponder while awaiting the Supreme Court’s honest services fraud decisions.
Innospec Gets Hit on Both Sides of the Atlantic
Last month (see here) Innospec, Inc. disclosed that it accured $40.2 million for potential settlement of corruption investigations on both sides of the Atlantic. Yesterday, on both sides of the Atlantic, it was announced that Innospec agreed to resolve these enforcement actions by, among other things, paying $40.2 million in combined fines and penalties. How’s that for an accurate corporate disclosure!
See here for the DOJ release and criminal information, here for the SEC release and complaint, and here for the SFO release and supporting documents.
If you are looking for additional evidence / validation that the DOJ and SFO cooperate in enforcement actions, this would be it!
As explained more fully below, the Innospec enforcement action is part Iraqi Oil for Food, part payment of excessive travel and entertainmet expenses, part Cuba, part Indonesia and it involves U.S. companies, U.K. entities, Swiss entities, U.S. citizens, British citizens, German citizens, South African citizens, and Iraqi citizens.
Innospec manufacturers and sells speciality chemicals and is apparently the “world’s only manufacturer of the anti-knock compound tetraethyl lead, used in leaded gasoline.”
DOJ
According to the DOJ criminal information (here), Innospec, Innospec Limited (a wholly-owned U.K. subsidiary), Alcor Chemie Vertriebs GmbH (a wholly-owned Swiss subsidiary), Ousama Naaman (an agent for Innospec and Alcor in Iraq and elsewhere), and others, knowingly conspired: (i) to defraud the U.N. Oil for Food Program; (ii) to violate the FCPA’s antibribery provisions; and (iii) to violate the FCPA’s books and records provisions.
According to the information, the primary purpose of the conspiracy was to “obtain and retain lucrative business with the government of Iraq through payment and promise of payment of kickbacks and bribes to the Iraqi government and its officials.
In addition to the “standard” Oil for Food allegations found in previous enforcement actions (i.e. inflated commission payments to an agent which were then used to pay kickbacks to the government of Iraq), the information further alleges that “Naaman, on behalf of Innospec, paid approximately $150,000 in bribes to officials of the [Ministry of Oil (“MoO”)] to ensure” that a competitor’s product “failed a field trial test and therefore would not be used by the [MoO]…”
In addition, the information alleges that “Innospec and Naaman agreed to pay and promise to pay bribes, including but not limited to money, travel, gifts, and entertainment, to officials of the MoO to obtain and retain contracts.”
Among other overt acts, the information details an e-mail Naaman sent to, among others, Executive B (a U.S. citizen and former senior Innospec executive) that indicates “with [Director’s (a U.K. citizen and former Innospec Division Managing Director)] instructions, we proceeded, as we don’t want to discuss this issue in writing any further because it is so delicate, and as per [Director’s] instructions that we don’t elaborate in writing, for which I agree.”
According to the information, Innospec paid Naaman over $700,000 to reimburse him for payments to Iraqi officials.
The information also contains “travel” allegations including: that Innospec paid approximately $35,000 for eight Iraqi officials to travel to Switzerland for a morning meeting and “four days of sightseeing” complete with “9,000 in pocket money” for the officials;” that Naaman arranged for cash filled envelopes to be given to Iraqi officials visiting the U.K.; that Innospec paid for an Iraqi official’s “vacation with his wife in Thailand” a trip with cost approximately $13,000 including “pocket money” for the official; and that Alcor reimbursed Naaman $35,000 “to cover the cost of the travel of the three Iraqi MoO officials to Lebanon for the half-day meeting to finalize the 2008 Long Term Purchase Agreement, including hotel accomodations for six days, $1,800 for ‘entertainment, lunches, & dinners in Lebanon,’ $1,650 for ‘mobile phone cards for international calling + 3 cameras’ and $15,000 in ‘pocket money.'”
According to the information, all of these payments were improperly recorded on Alcor’s books and records (which were consolidatd with Innospec’s for purposes of financial reporting) as “commissions” or “sales promotion expenditures.”
In addition to the above described conspiracy charge, the information also charges five counts of wire fraud, five counts of FCPA antibribery violations and an FCPA books and records violation.
The DOJ release notes that, pursuant to a yet to be released plea agreement, “Innospec also admitted to selling chemicals to Cuban power plants in violation of the U.S. embargo against Cuba.” The DOJ release further notes that Innospec acknowledged paying “approximately $2.9 million in bribes to officials of the Indonesian government to secure sales.”
According to the DOJ release, as part of the plea agreement, “Innospec agreed to pay a $14.1 million criminal fine and to retain an independent compliance monitor for a minimum of three years to oversee the implementation of a robust anti-corruption and export control compliance program and report periodically to the DOJ.” According to the release, “Innospec also agreed to fully cooperate with the DOJ and other U.S. and foreign authorities in ongoing investigations of corrupt payments by Innospec employees and agents.”
In other words, stayed tuned for more. Previously, Naaman (the agent) was indicted (see here).
In annoucing the charges, Assistant Attorney General Lanny Breuer noted that “[t]oday’s case is a win for law-abiding companies trying to compete fairly in the marketplace” and that “fraud and corruption cannot be viewed simply as a cost of doing business.”
For more on the Innospec plea hearing, including Judge Ellen Segal Huvelle’s concern about the compliance monitor, see here for Christopher Matthew’s piece from Main Justice. For more on compliance monitors, and the controversy often associated with them, see here.
SEC
In its complaint (here), the SEC alleges that “[f]rom 2000 to 2007, Innospec violated the anti-bribery, books and records and internal control provisions of the FCPA when it routinely paid bribes in order to sell Tetra Ethyl Lead (“TEL”) … to government owned refineries and oil companies in Iraq and Indonesia.”
According to the SEC, “Innospec’s former management did nothing to stop the bribery activity, and in fact authorized and encouraged it.” The SEC alleges that “Innospec’s internal controls failed to detect the illicit conduct, which continued for nearly a decade.”
According to the SEC, “[i]n all, Innospec made illicit payments of approximately $6,347,588 and promised an additional $2,870,377 in illicit payments to Iraqi ministries, Iraqi government officials, and Indonesian government officials in exchange for contracts worth $176,717,341 in revenues and profits of $60,071,613.”
The SEC’s charges relating to Iraqi are substantively similar to the DOJ’s allegations in the criminal information and include both Iraqi Oil for Food conduct as well as additional improper conduct after the Oil for Food Program was terminated in late 2003.
The SEC’s complaint has more detail than the DOJ’s criminal information concerning Indonesia and alleges: (i) that “[f]rom 2000 until approximately 2005, Innospec used [a] Indonesian Agent [an Indonesian citizen] and his company to pay bribes of approximately $1,323,507 to Official X [a senior official at BP Migas, an Indonesian state owned oil and gas company … who previously was a senior official at the Ministry of Energy and Mineral Resources]”; (ii) that “in 2000 and 2001, Innospec also made payments [totaling $700,000] to government officials at Pertamina, another state owned oil compay related to BP Migas” through a “privately owned bank in Geneva, Switzerland;” and (iii) that Innospec “also bribed other officials at Pertamina in order to influence their decisions regarding TEL purchases.”
The SEC charged that “at least one U.S. person and officer was complicit in the scheme” and that “[m]any of the bribes were mischaracterized as legitimate commissions, travel and legal fees in Innospec’s books and records.”
According to the SEC, “as evidenced by the extent and duration of the improper payments to foreign officials made by Innospec, the improper recording of these payments in Innospec’s books and records, and the significant involvement of certain members of management at the highest levels of the company, Innospec failed to devise and maintain an effective system of internal controls to prevent or detect these anti-bribery and books and records violations.
The SEC release (here) notes that Innospec, without admitting or denying the SEC’s allegations, was ordered to pay $60,071,613 in disgorgement, but because of Innospec’s “sworn Statement of Financial Condition” all but $11,200,000 of that disgorgement will be waived. The release states that “[b]ased on its financial condition, Innospec offered to pay a reduced criminal fine of $14.1 million to the DOJ and a criminal fine of $12.7 million to the SFO. Innospec will pay $2.2 million to OFAC for unrelated conduct concerning allegations of violations of the Cuban Assets Control Regulations.
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Stay tuned for additional analysis of the SFO – U.K. prong of this enforcement action.