Globalized Corporate Prosecutions
Brandon Garrett (Professor of Law at the University of Virginia School of Law – here) has released a preliminary draft of an article scheduled to be published in the Virginia Law Review in December. The article (here) is titled, “Globalized Corporate Prosecutions” and the abstract is as follows.
“In the past, domestic prosecutions of foreign corporations were not noteworthy. This has changed dramatically. Federal prosecutors now advertise a muscular approach targeting major foreign firms and even entire industries. High-profile prosecutions of foreign firms have shaken the international business community. Not only is the approach federal prosecutors have taken novel, but corporate criminal liability is itself a form of American Exceptionalism, and few other countries hold corporations broadly criminally accountable. To study U.S. prosecutions of foreign firms, I assembled a database of publicly reported corporate guilty plea agreements from the past decade. I analyzed U.S. Sentencing Commission data archives on federal corporate prosecutions and also data concerning federal deferred and non-prosecution agreements with corporations. Not only are large foreign firms prosecuted with some frequency, but they typically plead guilty and are convicted. In this Article, I develop how foreign corporate convictions have become common in distinct substantive criminal areas, but the trends and types of foreign corporate prosecutions share important features in common. The prosecutions are concentrated in crimes prosecuted by Main Justice, and international treaties and cooperation agreements have facilitated extraterritorial prosecutions. Larger and public foreign firms are prosecuted, and the typical resolution involves not only higher than average fines, but also a guilty plea and not pre-indictment leniency. I argue that due to their new prominence, we should consider foreign corporation prosecutions as a group so that we can better evaluate and define the emerging prosecution approach.”
While not specific to the FCPA, Garrett’s data demonstrates that FCPA enforcement constitutes a large percentage of enforcement actions against foreign companies. (To learn more about recent FCPA enforcement actions against foreign companies visit the Foreign Issuer tab under the Search feature of this site). As previously highlighted on these pages (see here and here for instance), many of these enforcement actions are based on broad and novel jurisdictional theories. Accordingly, Garrett’s general observation (“foreign corporate prosecutions raise unexplored issues regarding scope of prosecutorial discretion, jurisdiction, and judicial review”) is particularly pertinent to FCPA enforcement actions against foreign companies.
FCPA enforcement actions against foreign companies are not expected to wane any time soon. If anything, they are likely to increase and I predict the increase will slowly shift away from Europe-based companies to China-based companies as more list on U.S. exchanges and otherwise do business outside of China’s borders – including in several corruption prone regions.
Garret’s existing database of NPAs and DPAs (here) is already a valuable resource and his new corporate plea database is expected to be as well.
“Rapid Multinational Expansion Through Mergers and Acquisitions” Leads to FCPA Enforcement Action Against Diageo
The Foreign Corrupt Practices Act is of course no laughing matter. Yet if an FCPA joke book is ever written there is surely to be an entry about the Indian and Korean military officials, a Thai lobbyist, and a Korean Customs official, who while on a purely recreational side-trip to Budapest, stopped in a bar, nibbled on some rice cakes, downed a Guinness and talked about product labeling, excise taxes, and transfer pricing.
Yesterday, the SEC announced (here) an FCPA books and records and internal controls enforcement action against Diageo PLC via an administrative cease and desist order. Diageo, headquartered in London, has American Depository Shares registered with the SEC and traded on the New York Stock Exchange and is thus an “issuer” under the FCPA.
In summary fashion, the Order (here) stated as follows.
“This matter concerns multiple violations of the Foreign Corrupt Practices Act (“FCPA”) by Respondent Diageo, one of the world’s largest producers of premium alcoholic beverages. Over more than six years, Diageo, through its subsidiaries, paid over $2.7 million to various government officials in India, Thailand, and South Korea in separate efforts to obtain lucrative sales and tax benefits.”
“In India, from 2003 through mid-2009 Diageo made over $1.7 million in illicit payments to hundreds of Indian government officials responsible for purchasing or authorizing the sale of its beverages. Increased sales from these payments yielded more than $11 million in ill-gotten gains. In Thailand, from 2004 through mid-2008, Diageo paid approximately $12,000 per month – totaling nearly $600,000 – to retain the consulting services of a Thai government and political party official. This official lobbied extensively on Diageo’s behalf in connection with multi-million dollar pending tax and customs disputes, contributing to Diageo’s receipt of certain favorable dispositions by the Thai government. With respect to South Korea, in 2004, Diageo paid 100 million won (KRW) (over $86,000) to a customs official as a reward for his role in the government’s decision to grant Diageo significant tax rebates. Diageo also paid over $100,000 in travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations. Separately, Diageo made hundreds of gift payments totaling over $230,000 to South Korean military officials in order to obtain and retain liquor business.”
“Diageo and its subsidiaries failed to account accurately for these illicit payments in their books and records. Exercising lax oversight, Diageo also failed to devise and maintain internal accounting controls sufficient to detect and prevent the payments.”
As set forth in the SEC’s order, “Diageo’s history of rapid multinational expansion through mergers and acquisitions contributed to defects in its FCPA compliance programs.” Indeed, the conduct at issue focused on Diageo India Pvt. Ltd. (“DI”) (a wholly-owned indirect subsidiary acquired as a result of a merger); Diageo Moet Hennessy Thailand (“DT”) (a joint venture Diageo acquired an indirect majority interest in as a result of a merger) and Diageo Korea Co. Ltd. (“DK”) (a wholly-owned indirect subsidiary acquired during an acquisition). According to the SEC, “at the times of these acquisitions, Diageo recognized that its new subsidiaries had weak compliance policies, procedures, and controls” but “nevertheless, Diageo failed to make sufficient improvements to these programs until mid-2008 in response to the discovery of illicit payments.”
India
As to India, the SEC stated as follows. “From at least 2003 through June 2009, DI paid an estimated $792,310 in improper cash payments through its third-party distributors to 900 or more employees of government liquor stores in and around New Delhi. DI also paid an estimated $186,299 (representing 23% of the payments) in “cash service fees” to the distributors as compensation for advancing the funds. DI made the payments to increase government sales orders of its products, and to secure favorable product placement and promotion within the stores.”
The SEC further stated as follows. “During the same six-year period (2003 – 2009), Diageo, through DI, also reimbursed an estimated $530,955, and made plans to reimburse an additional $79,364, in improper cash payments made by third-party sales promoters to government employees of the Indian military’s Canteen Stores Department (“CSD”). The payments, made with DI’s knowledge and authorization, were designed to: (i) foster the promotion of Diageo products in the CSD’s canteen stores (analogous to the U.S. military’s post exchanges); (ii) obtain initial listings and annual label registrations for Diageo brands, price revision approvals, and favorable factory inspection reports; (iii) secure the release of seized shipments of Diageo products; and (iv) promote good will through the distribution of Diwali and New Year’s holiday gifts to CSD employees.”
The SEC also stated as to India as follows. “Diageo failed to ensure that DI properly accounted for a number of additional, improper payments to government officials who controlled administrative functions vital to DI’s business. From at least 2003 through 2008, Diageo, through DI, reimbursed an estimated $98,310 in cash payments made by its third-party promoters and distributors to government officials in the North Region of India and in the State of Assam for the purpose of securing label registrations for Diageo products.” In addition, the SEC Order stated as follows. “… [F]rom at least 2003 through June 2009, Diageo, through DI, paid an estimated $78,622 in extra commissions to its distributors in the North Region to reimburse them for payments made to Excise officials to secure import permits and other administrative approvals.”
Thailand
As to Thailand, the SEC Order stated as follows. “From April 2004 through July 2008, Diageo, through DT, retained the services of a Thai government and foreign political party official (the “Thai Official”) to lobby other Thai officials to adopt Diageo’s position in several multi-million dollar tax and customs disputes. For this retainer DT paid approximately $12,000 per month for 49 months, for a total of $599,322. DT compensated the Thai Official through 49 direct payments to a political consulting firm (the “Consulting Firm”) for which the Thai Official acted as a principal. Most, if not all, of the $599,322 paid to the Consulting Firm was for the Thai Official’s services and accrued to his benefit. The Thai Official served as a Thai government and/or political party official throughout the relevant period (April 2004 – July 2008) in which he received compensation from DT. At various times the Thai Official served as Deputy Secretary to the Prime Minister, Advisor to the Deputy Prime Minister, and Advisor to the Ministry of Agriculture and Cooperatives. The Thai Official also served on a committee of the ruling Thai Rak Thai political party, and as a member and/or advisor to several state-owned or state-controlled industrial and utility boards. DT’s senior management knew that the Thai Official was a government officer during its engagement of the Consulting Firm. The Thai Official was the brother of one of DT’s senior officers at that time. Several members of Diageo’s global and regional management attended meetings with the Thai Official and senior members of the Thai government. The Thai Official provided extensive lobbying services on behalf of Diageo and DT in connection with several important tax and customs disputes that were pending between Diageo and the Thai government. For example, with respect to excise taxes, the Thai Official coordinated and attended numerous meetings between senior Thai government officials and senior Diageo and DT management, including two meetings in April and May 2005 with Thailand’s then Prime Minister. In May 2005, shortly following the meetings arranged by the Thai Official, the Prime Minister made a radio address publicly endorsing Diageo’s position in favor of a “specific” approach (based on quantity) rather than an “ad valorem” approach (based on price) to calculating excise taxes. On Diageo’s behalf, the Thai Official also met repeatedly with senior commerce, finance, and customs authorities in charge of the transfer pricing and import tax disputes, as well as with members of the Thai parliament. The Thai Official’s services contributed to Diageo’s successful resolution of several components of these disputes. For example, during 2004 and 2005 Diageo and DT were actively engaged in a dispute with the Thai government over the appropriate transfer pricing formula applied to One Liter bottles of Johnnie Walker Red Label and Black Label Scotch whiskey. Based in part on the Thai Official’s lobbying efforts, the Thai government accepted important aspects of DT’s transfer pricing method and released over $7 million in bank guarantees that DT had been required to post while the tax dispute was pending.”
South Korea
As to Korea, the SEC Order stated as follows. “Diageo had significant tax and customs issues in South Korea. In April 2003, DK, under Diageo’s direction, requested from South Korea a more advantageous formula for calculating the transfer pricing, for tax purposes, of Windsor Scotch whiskey that DK was importing into South Korea. As part of those negotiations, DK also sought tens of millions of dollars in tax rebates based on a claim that DK had overpaid under the then existing transfer pricing formula. In April 2004, following a year of intense negotiations and lobbying by DK, the South Korean government granted DK a rebate of approximately $50 million. In July 2004, three months after DK received the tax rebates, a DK manager (the “Manager”) paid an apparent reward of 100 million KRW ($86,339) to a Korean Customs Service official (the “Customs Official”) who had played a key role in the transfer pricing negotiations. With the approval of DK’s then chief financial officer, the Manager generated 60 million KRW ($51,802) of the payment by means of a surreptitious cash kickback scheme. The Manager solicited an inflated invoice from DK’s third-party customs brokerage firm (the “Customs Broker”), which had provided DK with consulting services during the transfer pricing negotiations. As orchestrated, DK paid an inflated invoice amount to the Customs Broker, which then gave 60 million KRW ($51,802) in cash back to the Manager. The Manager funded the remaining 40 million KRW ($34,537) of the total reward amount from personal sources. The Manager then provided the Customs Official with 100 million KRW ($86,339) in the form of ten bank checks of approximately 10 million KRW ($8,634) each.”
The SEC Order further stated as follows. “During the course of the transfer pricing negotiations in 2003 and 2004, DK also paid $109,253 in travel and entertainment costs for Korean customs and other government officials. Some of these expenses were unapproved and constituted improper inducements of the South Korean officials. For example, in December 2003, the Customs Official and several official colleagues traveled to Scotland with DK employees. The purported reason for the trip was to inspect Diageo’s Windsor Scotch production facilities as part of the transfer pricing negotiations. During the course of this apparently legitimate trip, DK’s chief financial officer and the Manager took the South Korean officials on a purely recreational side-trip to Prague and Budapest.”
In addition, the SEC Order stated as follows regarding gifts to Korean military officers. “From at least 2002 through at least 2006, Diageo, through DK, routinely made hundreds of small payments to South Korean military officers for the purpose of obtaining or maintaining business and securing a competitive business advantage. The payments assumed two forms: (i) holiday and vacation gifts known as “rice cake” payments; and (ii) business development gifts, called “Mokjuksaupbi” payments. Rice cake payments were customary and traditional presents that Diageo, through DK, provided to scores of military officers – many of whom were responsible for procuring liquor – several times each year during holidays and vacations. From 2002 through 2006, DK made approximately 400 rice cake payments, totaling at least $64,184, in the form of cash or gift certificates ranging in value between $100 and $300 per recipient. In October 2004, a senior officer within Diageo’s global compliance department explicitly approved the practice of making rice cake payments after a DK employee explained that the company would face a competitive disadvantage if it refrained. Over the same four-year period, Diageo, through DK, also spent approximately $165,287 on hundreds of non-traditional, non-seasonal gifts and entertainment for the military. Of these so-called “Mokjuksaupbi” payments (a term that was broadly intended by DK to refer to “payments for relationships with customers”), approximately $106,051 were for the purpose of influencing specific purchasing decisions. For example, in 2003, DK personnel requested approval of approximately $2,600 to entertain army personnel “for their cooperation” in connection with the re-selection of Windsor Scotch.”
Based on the above conduct, the SEC found FCPA violations, but only FCPA books and records and internal control violations. The absence of FCPA anti-bribery violations against Diageo and the referenced entities would seem to be the result of a lack of a U.S. nexus as to the payments. Even though the FCPA was amended in 1998 to provide an alternative nationality jurisdiction test as to U.S. issuers and domestic concerns, the FCPA retains a territorial U.S. nexus jurisdictional test as to non-U.S. issuers such as Diageo that are nevertheless subject to the FCPA.
As to the FCPA violations, the SEC order states as follows. “Diageo’s books and records did not accurately reflect illicit payments that it made, through its subsidiaries, to Indian, Thai, and South Korean government and military officials. Instead, Diageo, through DI, DT, and DK, disguised the improper payments as legitimate vendor expenses or recorded them under misleading rubrics such as “factory expenses,” “telephone expenses,” “shareholder stake,” and “sales support.” In several instances, the illicit payments were not recorded at all.” The SEC Order further states as follows. “As evidenced by the extent and duration of the wrongful payments and their improper recordation, Diageo failed to devise and maintain sufficient internal accounting controls.”
The SEC Order mentions Diageo’s cooperation and “certain remedial measures undertaken by Diageo, including employee termination and significant enhancements to its compliance program.”
As is common in all SEC FCPA enforcement actions, Diageo settled the matter without admitting or denying the SEC’s findings. Per the SEC Order, Diageo shall pay disgorgement of $11,306,081, prejudgment interest of $2,067,739, and a civil monetary penalty of $3,000,000.
In a press release (here) Diageo stated as follows. “Diageo takes the SEC’s findings seriously and regrets this matter. Systems and controls have been enhanced in an effort to prevent the future occurrence of such issues and to reinforce, everywhere the Company operates, a culture of compliance and commitment to the principles embodied in Diageo’s Code of Business Conduct.”
Diageo’s most recent Annual Report (Sept. 2010) stated as follows.
“As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators’ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo’s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations.”
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.
Assistant Attorney General Lanny Breuer On ….
Earlier this week, Assistant Attorney General Lanny Breuer spoke at the 3rd Russia and Commonwealth of Independent States Summit on Anti-Corruption. See here for his remarks.
Breuer’s remarks touched upon a number of topics including the following as excerpted below.
On Corruption Generally
“Corruption affects countries rich and poor, large and small, and it has particularly harmful effects on emerging economies. When a developing country’s public officials routinely abuse their power for personal gain, its people suffer. Roads are not built, schools lie in ruin, and basic public services go unprovided. And when corruption takes hold in any nation, its political institutions tend to lose legitimacy, threatening democratic stability and the rule of law. Corruption undermines the health of international markets, stifling competition and repelling foreign investment. Moreover, corruption is a ‘gateway crime, allowing money laundering, gang violence, terrorism and other crimes to thrive.”
On the FCPA’s Legislative History
“The FCPA was the first effort of any nation to specifically criminalize the act of bribing foreign officials. The statute was enacted in the wake of the “Watergate” scandal in the United States, which led to the resignation of President Richard Nixon in 1974 and resulted in a dramatic plunge in Americans’ overall trust in government. In 1976, following certain prosecutions for illegal use of corporate funds arising out of the Watergate scandal, the U.S. Securities and Exchange Commission, or S.E.C., which regulates the securities industry in the United States, issued a “Report on Questionable and Illegal Corporate Payments and Practices.” In its report, the S.E.C. determined that foreign bribery by U.S. corporations was “serious and sufficiently widespread to be a cause for deep concern.” S.E.C. investigations revealed that hundreds of U.S. companies had made corrupt foreign payments involving hundreds of millions of dollars. With this background, the U.S. Senate Banking Committee concluded that there was a strong need for anti-bribery legislation in the United States. “Corporate bribery is bad business,” the committee said in its Report. “In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet.””
“As the U.S. House of Representatives’ Report on the FCPA put it, a strong anti-bribery law can “help U.S. corporations resist corrupt demands.” In the words of the former chairman of a major oil company, quoted in the report, “If we could cite our law which says we just may not do it, we would be in a better position to resist” the pressure that sometimes comes from foreign officials. That was true in 1977, and it’s true now.”
On FCPA Enforcement
“The passage of the FCPA was a milestone. But the Act did not become a strong enforcement mechanism overnight. Indeed, in the first decades immediately following the law’s enactment, many saw the FCPA as a slumbering statute. That is no longer the case. In recent years, the Criminal Division has dramatically increased its FCPA enforcement efforts. To give you a sense: in 2004, we charged two individuals under the FCPA and collected around $11 million in criminal fines. In 2005, we charged five individuals and collected around $16.5 million. By contrast, in 2009 and 2010 combined, we charged over 50 individuals and collected nearly $2 billion.”
“The FCPA is a strong enforcement mechanism, and we are not shy about using it.”
On Holding Non-U.S. Actors Accountable
“We have traditionally also pursued foreign executives who work for U.S. corporations or for foreign corporations that trade on U.S. exchanges, as well as the foreign corporations themselves. For example, in 2007, Christian Sapsizian, a French citizen and former executive at Alcatel, pleaded guilty to two counts of violating the FCPA, and in 2008 he was sentenced to 30 months in prison on those charges. In addition, we recently resolved a wide-ranging investigation against the Swiss-based freight-forwarding company Panalpina World Transport (Holding) Ltd., its U.S. subsidiary, and several foreign and domestic oil and gas service providers. Thus, as the Sapsizian and Panalpina cases show, any Russian citizen working for an American company in Russia or for a Russian company that trades on an American exchange, as well as any Russian company that trades on such an exchange, are also within our reach.”
“We have on more than one occasion brought charges against foreign officials under U.S. money laundering statutes, alleging that those officials laundered the proceeds of foreign bribery through U.S. financial institutions. In 2009, for example, we indicted two former Haitian government officials on money laundering charges for their alleged roles in a scheme to bribe officials of Haiti’s state-owned national telecommunications company. Thus, as the Haiti Teleco case shows, Russian officials who launder the proceeds of foreign bribes through U.S. financial institutions could also be liable for FCPA-related offenses.”
On the Kleptocracy Asset Recovery Initiative
“… Last year our Asset Forfeiture and Money Laundering Section initiated a Kleptocracy Asset Recovery Initiative, which is designed to target and recover the proceeds of foreign official corruption that have been laundered into or through the United States. In November of 2009, at the Global Forum on Fighting Corruption and Safeguarding Integrity, in Qatar, Attorney General Holder pledged to redouble the United States’ commitment to recovering foreign corruption proceeds. The Kleptocracy Initiative represents a concrete step toward fulfilling that commitment; and once the initiative is fully implemented, it will allow the Justice Department to recover assets on behalf of countries victimized by high-level corruption.”
Analyzing Alcatel-Lucent
In 2006, Alcatel-Lucent, S.A. (“Alcatel”) was formed when an Alcatel S.A. subsidiary merged with Lucent Technologies, Inc. Prior to the merger, Alcatel was a worldwide provider of a wide variety of telecommunications equipment and services and other technology products. The company operated in more than 130 countries directly and through certain wholly owned and indirect subsidiaries including in Costa Rica, Honduras, Malaysia and Taiwan. From 1998 until late 2006, ADR shares of Alcatel were traded on the New York Stock Exchange.
In 2007, the right side of the hyphen – Lucent Technologies – settled an FCPA enforcement action (see here and here).
In 2010, in what was the last FCPA enforcement action of the year, the left side of the hyphen – Alcatel and certain of its subsidiaries – settled an FCPA enforcement.
This post analyzes the Alcatel-Lucent enforcement action. The enforcement action (all 360 pages) is a FCPA feast. Principally based on the lack of due diligence of third-party agents, the enforcement action serves up the following: lots of alleged state-owned or state-controlled telecommunication entities; consultants hired after contracts were secured; a purported telecommunications consultant with only perfume experience; payments to legislators and political parties; things of value including excessive travel and entertainment expenses and crystal for the secretary; joint ventures; and payments from New York and Miami bank accounts.
The Alcatel-Lucent enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $137.4 million ($92 million criminal fine via DOJ plea agreements and a deferred prosecution agreement; $45.4 million in disgorgement via a SEC settled complaint).
DOJ
The DOJ enforcement action involved a criminal information against Alcatel-Lucent, S.A. (“Alcatel”) resolved through a deferred prosecution agreement and a criminal information against Alcatel-Lucent France S.A. (“Alcatel CIT”), Alcatel-Lucent Trade International A.G. (“Alcatel Standard”), and Alcatel CentroAmerica, S.A. (“ACR”) resolved through plea agreements. See here for the DOJ release.
Alcatel-Lucent S.A. Criminal Information
The information (here) begins with a heading “Background Regarding Alcatel’s Business Practices and the State of Its Internal Controls.”
It states as follows. “Starting in the 1990s and continuing through at least last 2006, Alcatel pursued many of its business opportunities around the world through the use of third-party agents and consultants. This business model was shown to be prone to corruption, as consultants were repeatedly used as conduits for bribe payments to foreign officials (and business executives of private customers) to obtain or retain business in many countries.”
The information also highlights Alcatel’s “de-centralized business structure” which permitted different Alcatel employees around the world “to initially vet the the third-party consultants, and then rely on Executive 1 [a French citizen who served as Chief Executive Officer of Alcatel Standard in Basel, Switzerland] at Alcatel to perform due diligence on them.” According to the information, “this de-centralized structure and approval process permitted corruption to occur, as the local employees were more interested in obtaining business than ensuring that business was won ethically and legally.”
Further, the information alleges that “Executive 1 performed no due diligence of substance and remained, at best, deliberately ignorant of the true purpose behind the retention of and payment to many of the third-party consultants.” Specifically, the information alleges that “Executive 1 made no effort, or virtually no effort, to verify the information provided by the consultant in the Consultant Profile [a form the consultant was supposed to complete with information concerning its ownership, business activities, capabilities, banking arrangements, and professional references], apart from using Dun & Bradstreet reports to confirm the consultant’s existence and physical address.” According to the information, “if the paperwork was completed, regardless of any obvious issues (such as close relationships with foreign officials or a clear lack of skill, experience or telecommunications expertise), Executive 1 authorized hiring and paying the third-party consultant.”
As to payments to the consultants, the information alleges that “Alcatel Standard [a wholly-owned subsidiary of Alcatel located and incorporated in Switzerland and an entity “responsible for entering into most agreements with consultants worldwide on behalf of Alcatel and certain other entities] would contract with the third-party consultant and then Alcatel CIT [a wholly owned subsidiary of Alcatel located and incorporated in France] would pay the consultant” including through a bank account at ABN Amro Bank in New York.
The information alleges as follows. “Often senior executives at Alcatel CIT, Alcatel Standard, and ACR [a wholly owned subsidiary of Alcatel located and incorporated in Costa Rica], among others, knew bribes were being paid, or were aware of the high probability that many of these third-party consultants were paying bribes, to foreign officials to obtain or retain business. For example, in a significant number of instances, the consultant contracts were executed after Alcatel had already obtained the customer business, the consultant commissions were excessive, and lump sum payments were made to the consultants that did not appear to correspond to any one one contract.”
According to the information, “Alcatel CIT, Alcatel Standard, ACR, and certain employees of Alcatel CIT, Alcatel Standard, and ACR knew, or purposefully ignored” that much of the consultant documentation “did not accurately reflect the true nature and purpose of the agreements” and that “many of the invoices submitted by various third-party consultants falsely claimed that legitimate work had been completed, while the true purpose of the monies sought by the invoices was to funnel all or some of the money to foreign officials, directly and indirectly.”
The information alleges that “these transactions were designed to circumvent Alcatel’s internal controls system and were further undertaken knowing that they would not be accurately and fairly reflected in Alcatel CIT, Alcatel Standard, and ACR’s books and records, which were included in the consolidated financial statements that Alcatel filed with the SEC.”
The information then contains ten separate sections: conduct in Costa Rica; conduct in Honduras; conduct in Malaysia; conduct in Taiwan; conduct in Kenya; conduct in Nigeria; conduct in Bangladesh; conduct in Ecuador; conduct in Nicaragua; and other consultancy agreements entered into without proper due diligence.
Costa Rica
The alleged conduct focuses on the actions of Christian Sapsizian and Edgar Valverde Acosta and consultancy agreements on behalf of Alcatel CIT with two Costa Rican consultants which were intended to make improper payments to Costa Rican government officials for telecommunications contracts. According to the indictment, Sapsizian (a French citizen) was a long-term employee of Alcatel and Alcatel CIT responsible for developing business in Latin America. Valverde (a Costa Rica citizen) served as the President of ACR and the Country Senior Officer of Costa Rica. See here for the prior enforcement actions against Sapsizian and Valverde.
According to the information, “both consultants had many personal contacts at ICE [Instituto Costarricense de Electricidad S.A. – a “wholly state-owned telecommunications authority in Costa Rica responsible for awarding and administering public tenders for telecommunications contracts].
According to the information, Sapsizian’s supervisor, the President of Area 1 who worked in Miami, approved more than $18 million in payments to the consultants notwithstanding that the President of Area 1, according to Sapsizian, “told him on several occasions that he knew he was ‘risking jail time’ as a result of his approval of these payments, which he understood would, at least in part, ultimately wind up in the hands of public officials.”
The information alleges that various Alcatel entities “conducted insufficient due diligence” on the consultants and that “neither Alcatel nor any of its subsidiaries took sufficient steps to ensure that the consultants were complying with the FCPA or other relevant anti-corruption laws.”
According to the information, the above described payments were ultimately used to provide money to various ICE officials, a Costa Rica executive branch official, and a Costa Rica legislator, that ultimately assisted Alcatel CIT obtain a $44 million contract, a $149.5 million contract, a $109.5 million contract.
The information also alleges that Sapsizian “approved the payment of approximately $25,000 in travel, hotel, and other expenses incurred by ICE officials during a primarily pleasure trip to Paris” – a trip that “was partially intended to reward these government officials for providing Alcatel with lucrative contracts …”.
Based on this conduct, the information alleges that “employees of Alcatel CIT, Alcatel Standard, and ACR knowingly circumvented Alcatel’s internal controls system and made inaccurate and false entries in the books and records of Alcatel CIT, Alcatel Standard, and ACR, whose financial results were included in the consolidated financial statements of Alcatel submitted to the SEC. As a result of the contracts won by Alcatel CIT in Costa Rica as a result of bribe payments, Alcatel earned approximately $23,661,000 in profits.”
Honduras
The information charges that “employees of ACR, along with Sapsizian, pursued business opportunities on behalf of Alcatel in Honduras with Hondutel [Empresa Hondurena de Telecomunicaciones – an alleged wholly state-owned telecommunications authority in Honduras responsible for providing telecommunications services in Honduras including evaluating and awarding telecommunications contracts on behalf of the government of Honduras] and Conatel [Comision Nacional de Telecouniciaciones – an alleged Honduran government agency that regulated the telecommunications sector in Honduras that issued licenses and concessions for fixed-line and wireless telephony, data transmission and internet services].”
According to the information, Alcatel CIT and Alcatel Mexico made large commission payments to at least one consultant, knowing that all or some of the money paid to that consultant would be paid to a close relative of a Honduran government official, with the high probability that some or all of the money would be passed on to the Honduran government official, in exchange for favorable treatment of Alcatel, Alcatel CIT, and Alcatel Mexico.”
According to the information, the consultant was retained at the request of a high-ranking government official in the Honduran executive branch; however, the consultant was an exclusive distributor of “brand name perfumes” and had no contacts in, or prior experience with, the telecommunications industry in Honduras or anywhere else.
The information alleges that in retaining the consultant, “Alcatel Standard knowingly failed to conduct appropriate due dligence” and “did not follow up on numerous, obvious red flags.”
The information alleges that by utilizing the services of the consultant, Hondutel awarded Alcatel a $1 million contract and four additional contracts for a combined value of approximately $47 million.
The information also alleges that “Alcatel CIT and ACR employees arranged for several other Honduran government officials to take primarily pleasure trips to France, which were paid by Alcatel CIT or ACR directly.” In addition, the information charges that a “high-ranking executive at Hondutel” also “received gifts and improper payments from Alcatel CIT and ACR employees” including $2,000 for an educational trip for the official’s daughter and a trip to Paris (along with the official’s spouse) that mostly consisted of “touring activities via a chauffeur-driven vehicle.” Further, the information alleges that “Alcatel CIT also made payments to a Hondutel attorney who worked” on a contract secured by Alcatel including paying for a trip by the attorney and the attorney’s daughter to Paris.
Based on this conduct, the information alleges that “employees of Alcatel CIT, Alcatel Standard, and ACR knowingly circumvented Alcatel’s internal controls system and caused inaccurate and false entries in the books and records of Alcatel CIT, Alcatel Standard, and ACR, whose financial results were included in the consolidated financial statements of Alcatel submitted to the SEC.” According to the information, “as a result of the bribe payments, Alcatel earned approximately $870,000 in profits.”
Malaysia
The information alleges that “in at least 17 instances in or around 2004 to in or around 2006, Alcatel Malaysia [a joint venture in which Alcatel owned a majority share of and exercised control of] employees, with the consent and approval of Alcatel Malaysia’s management, such as Executive 2 [Alcatel Malaysia’s Country Senior Officer] and Executive 3 [Alcatel Malaysia’s Chief Financial Officer], made improper payments to Telekcom Malaysia [an alleged state-owned and controlled telecommunications provider in Malaysia responsible for awarding telecommunications contracts 43% owned by the Malaysian Ministry of Finance] employees in exchange for nonpublic information relating to ongoing public tenders.” According to the information, “the documents purchased generally consisted of internal assessments by Celcom’s [Telekom Malaysia’s wholly owned subsidiary] tender committee of non-public pricing information.” According to the information, “eight of the 17 improper payments to Telekom Malaysia employees were made in connection with a single public tender that Alcatel Malaysia ultimately won …”. The information alleges that the payments were falsely characterized as “document fees” or accurately as “purchase of tender documents.”
The information further alleges that Alcatel Standard entered into a consulting agreement for more than $500,000 with a Malaysian consultant even though “Alcatel typically paid its agents and consultants commission rates based on the total value of a contract rather than pay a fixed fee for services.” According to the information, “at the time the payments were made to Malaysian Consultant 1, Alcatel Malaysia and Alcatel Standard were aware of a significant risk that Malaysian Consultant 1 would pass on all or a part of these payments to foreign officials.”
The information further alleges that Alcatel Standard entered into another consulting agreement with another consultant by which Alcatel Standard agreed to pay the consultant $500,000 for a “strategic intelligence report on Celcom’s positioning in the celluar industry in relation to its competitors.” According to the information, despite paying the consultant “half a million dollars for this report … there is no evidence that Malaysian Consultant 2 did any actual work for Alcatel Malaysia or ever produced the report.” The information states that “Alcatel Standard and Alcatel Malaysia were aware of a significant risk that Malaysian Consultant 2 was serving merely as a conduit for bribe payments to foreign officials.”
The information further alleges, in summary fashion, as follows. “Alcatel Malaysia lacked internal controls, such as formal policies covering expenditure for gifts, travel, and entertainment for customers, leading to Alcatel Malaysia employees giving lavish gifts to Telekom Malaysia officials.”
Based on this conduct, the information alleges that “Alcatel Standard and Alcatel Malaysia knowingly circumvented Alcatel’s internal controls system and caused inaccurate and false entries in the books and records of Alcatel Standard and Alcatel Malaysia, whose financial results were included in the consolidated financial statements of Alcatel submitted to the SEC.” The information states that “although Alcatel won the $85 million Celcom contract, Alcatel did not generate any profits from it.”
Taiwan
According to the information, Alcatel pursued business in Taiwan through its indirect subsidiary Alcatel SEL, a company located and incorporated in Germany. The information states that Executive 4 [a German citizen who served on Alcatel SEL’s director of international business ans sales] hired two third-party consultants to assist Alcatel SEL and Taisel, a joint venture 60% owned by an Alcatel subsidiary in obtaiing an axle counting contracts from the TRA [the Taiwan Railway Administration – an alleged wholly state-owned authority in Taiwan responsible for managing, maintaining, and running passenger freight services on Taiwan’s railroad lines].” According to the information, “both consultants claimed to have close ties to certain legislators in the Taiwanese government who were understood to have influence in awarding the contract due to their particular responsibilities in the legislature.”
The information alleges that the “purpose behind Alcatel’s hiring of Taiwanese Consultant 1 was so that Alcatel SEL could make improper payments to three Taiwanese legislators who had influence in the award of the TRA axle counting contract.” According to the information, after Taisel has been awarded the contract, “Alcatel SEL paid Taiwanese Consultant 1 a commission of approximately $921,413 by wire transfer from Alcatel SEL’s ABN Amro bank account in New York” and that Taiwanese Consultant 1, in turn, “made improper payments to two Taiwanese legislators: Legislator 2 and Legislator 3 – both members of the Legislative Yuan, the unicameral legislative assembly of the Republic of China. Among other things, the information alleges: that the the consultant promised approximately $180,000 in campaign funds for Legislator 3’s 2004 election campaign and then paid Legislator 3 approximately $90,000 after Alcatel SEL won the bid; that Executive 4 and the consultant “spent approximately $8,000 on trips to Germany” that were “primarly for personal, entertainment purposes, with only nominal business justification;” that Alcatel SEL paid the consultant “approximately $3,000 to reimburse it for a set of crystal given to the secretary of the Taiwan Transportation and Communications Minister.”
The information also alleges that Executive 4 also hired another consultant because “Taiwanese Consultant 2’s owner was the brother of Legislator 4, who had influence with respect to TRA matters.” The information alleges that “to bribe Legislator 4, Alcatel SEL arranged for a bogus consulting agreement between Taisel and Taiwanese Consultant 2.”
The information alleges as follows. “Neither Taiwanese Consultant 1 nor Taiwanese Consultant 2 provided legitimate services to Alcatel or Alcatel SEL. Their only function was to pass on improper payments to three Taiwanese legislators on behalf of Alcatel SEL and Taisel. On or about December 30, 2003 Taisel’s bid was accepted by the TRA, which granted Taisel a supply contract worth approximately $19.2 million …”.
According to the information, “Alcatel SEL’s financial results were included in the consolidated financial statements of Alcatel submitted to the SEC” and “as a result of contracts won by Alcatel in Taiwan as a result of bribe payments, Alcatel earned approximately $4,342,600 in profits.”
Kenya
The information describes a Kenyan joint venture (“Kenyan JV”) formed by a French telecommunications company (“French Telecom”) and a Kenyan company (“Kenyan Company”) to apply for a mobile telecommunications license that the Kenyan JV was awarded for approximately $55 million. Several companies, including Alcatel CIT, bid to provide approximately $87 million in infrastructure and services to the Kenyan JV. The information alleges that Alcatel CIT was informed by French Telecom that Alcatel CIT “would win the bid under one condition: an Alcatel entity had to make improper payments to an intermediary in the approximate amount of $20 million.”
The information then describes the intermediary and payments made to it and concludes with the following paragraph. “After entering into the various contracts, the intermediary provided monthly reports and economic intelligence on the telecommunications market in Africa, but never provided any information related to the 2nd GSM license or the Kenyan telecommunications market. In light of the huge amounts of the payments, the fact that the intermediary performed little legitimate work in connection with the 2nd GSM license, and the fact that Company Z [another company suggested by the intermediary] was an offshore holding of Kenyan Company, there is a high probability that all or a portion of the approximately $20 million in payments made by Alcatel CIT to the intermediary and the related entities was passed on to Kenyan Company, which in turn passed on the funds to Kenyan government officials who had played a role in awarding the original contract to French Telecom.”
Nigeria
The information states that between 1999 and 2007, Alcatel pursued business with various Nigerian customers and alleges as follows.
“Certain Alcatel subsidiaries made improper payments to government officials in Nigeria in the following contexts: (a) payments made to government officials for the purpose of reducing tax or other liabilities; (b) payments made to government officials to obtain security services from the Nigerian police; (c) a payment of approximately $75,000 to a former Nigerian Ambassador to the United Nations for the purpose of arranging meetings between Alcatel representatives and Nigerian Senior Government Official 1, a high-ranking official in the Nigerian executive branch; (d) payments made to government officials for the purpose of securing recovery of a debt totaling approximately $36.5 million owed by the government of Nigeria to ITT Nigeria [an Alcatel entity]; and (e) a payment to a People’s Democractic Party official. These payments were not described accurately and fairly on Alcatel’s books and records.”
The information also alleges as follows. “Alcatel personnel also made improper payments via a consultant to a Senior Executive at Nigerian Telecommunications Company 1” and “Alcatel also made large improper payments to two other consultants which were owned at least in part by a relative of the Senior Executive at Nigerian Telecommunications Company 1.” “These payments were not described accurately and fairly on Alcatel’s books and records.” There is nothing in the information to suggest that Nigerian Telecommunications Company 1 was a state-owned or controlled enterprise and the information refers to payments to the Senior Executive as “commercial bribe payments.”
Bangladesh
The information generally alleges that “Alcatel generated a significant portion of its revenue in Bangladesh from Bangladesh Telegraph and Telephone Board, the state-controlled telecommunications services provider” and that Alcatel used an agent in Bangladesh but “Alcatel Standard did not conduct adequate due diligence” on the consultant. In addition, the information alleges that Alcatel Standard retained the agent in connection with a submarine cable project connecting fourteen countries – Alcatel’s portion of the contract was approximately $258 million. According to the information, Alcatel CIT paid the consultant approximately $626,492 in compensation for services provided in connection with the project and approximately $2,524,939 in connection with various upgrades to a predecessor of the project “aware of a significant risk that Bangladsh Consultant would pass on all or a part of these payments to foreign officials.”
Ecuador
According to the information, “Alcatel conducted business in Ecuador with three major telecommunicatios customers, all of which were state-owned: Andinatel, Pacifictel, and Empresa Municipl de Telecomunicaciones, Aqua Potable, Alcantarillados y Saneamiento. The information alleges that Alcatel retained a consultant in Ecuador (“a wealthy businessman”), but that the consultant and the entities he controlled “did little legitimate work for Alcatel.” The information alleges as follows. “Instead, it was anticipated that Ecuadorian Consultant would funnel a portion of the funds Alcatel paid him to officials of the Ecuadorian state-owned telecommunications companies in order to secure business and other benefits for Alcatel. Improper payments were anticipated to be made or offered in connection with at least nine contracts with government-owned telecommunication companies.”
According to the information, at least some of Alcatel’s payments to the consultant wre made to bank accounts in Miami.
In addition, the information alleges as follows. “Alcatel also paid for trips taken by officials of the three telecommunications companies that were principally for pleasure. For example, both the Vice-President and the Chairman of the Board of Pacifictel received improper all-expenses paid trips to France.”
Nicaragua
According to the information, “Alcatel’s only customer in Nicaragua was Empresa Nicaraguense de Telecomunicaciones S.A. (“Enitel”) which was state-owned during the relevant time period.” The Ecuadorian consultant referenced above, also served as Alcatel’s consultant in Nicaragua. According to the information, “with the assistance of Ecuadorian Consultant, Alcatel CIT secured two contracts with Enitel” valued at approximately $1.6 million and $370,000. The information alleges that Alcatel CIT made payments totaling approximately $229,3822 to the Miami bank account of the consultant and that the consultant “likely used a portion of these payments to bribe certain key Enitel officials in order to influence Enitel to award the two contracts to Alcatel, to obtain confidential information about competing bids, and to secure favorable financial terms.” The information alleges that payments to the consultant were “identified in Alcatel’s books and records as consulting fees, and thus the description of those payments did not accurately and fairly reflect those transactions.”
The information further alleges that “Alcatel CIT also provided a trip to Paris and Madrid to two Enitel officials in late 2001 in order to encourage the execution of one of the two contracts” and that the “purpose of the trip was largley for pleasure, and it appears that Alcatel CIT covered all travel costs and a large portion of the expenses.”
The substantive portion of the information ends with a section titled “Other Consultancy Agreements Entered Into Without Proper Due Diligence.” The allegations concern consultants in Angola, the Ivory Coast, Burkina Faso, Uganda, and Mali. The customers associated with the consultants were either allegedly state-owned or private companies.
Based on all of the above conduct, the information charges Alcatel with violations of the FCPA’s internal control provisions. The information alleges that Alcatel “knowingly: (a) failed to implement sufficient anti-bribery compliance policies and procedures; (b) failed to maintain a sufficient system for the selection and approval of consultants, which, in turn, permitted corrupt conduct to occur at certain subsidiaries; (c) entered into purported business consulting agreements with no apparent basis, and without performing any due diligence, sometimes after the cmpany had already won the relevant project; (d) failed to verify information provided by consultants, including failing to follow up in circumstances in which managers knew or were substantially certain illicit activity was taking place; (e) failed to prevent consultants from using multiple shell companies to receive commissions in excess of 10% knowing there was a substantial likelihood those consultants were acting as conduits for corrupt payments; (f) failed to conduct appropriate audits of payments to purported business consultants; (g) failed to prohibit lump sum payments being made to consultants that did not correspond to any contract; (h) failed to prohibit payments to consultants and public officials pursuant to an oral ‘gentlemen’s agreement’; (i) failed to appropriately investigate and respond to allegations of corrupt payments and discipline employees involved in making corrupt payments; (j) failed to establish a sufficiently empowered and competent Corporate Compliance Officer; (k) failed to exercise due diligence to prevent and detect criminal conduct; (l) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed, including monitoring and internal audits to detect criminal conduct; (m) failed to evaluate regularly the effectiveness of the company’s compliance and ethics program; and (n) failed to provide appropriate incentives to perform in accordance with the compliance and ethics program.”
Based on the above conduct, the information also charges Alcatel with FCPA books and records violations for (a) drafting sham business consulting agreements to justify third party payments; (b) mis-characterizing bribes in the corporate books and records as consulting fees and other seemingly legitimate expenses; (c) justifying payments to purported business consultants based on false invoices; and (d) entering into purported business consulting agreements with no basis, sometimes after Alcatel had won the relevant project.
Alcatel-Lucent DPA
The DOJ’s charges against Alcatel were resolved via a deferred prosecution agreement (see here).
Pursuant to the DPA, Alcatel admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, agents, and those of Alcatel’s subsidiaries as described above.
The term of the DPA is three years and it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and Alcatel-Lucent. Among the factors stated are the following.
(a) following press reports concerning bribery by Alcatel, S.A., in Costa Rica, the company investigated and disclosed over the course of several years to the Department and the United States Securities and Exchange Commission the misconduct described above;
(b) Alcatel-Lucent conducted a global internal investigation concerning bribery and related misconduct;
(c) Alcatel-Lucent reported its findings to the Department and the SEC;
(d) after limited and inadequate cooperation for a substantial period of time, Alcatel-Lucent substantially improved its cooperation with the Department’s investigation of this matter, as well as the SEC’s investigation;
(e) Alcatel-Lucent undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures as contemplated by the DPA;
(f) on its own initiative and at a substantial financial cost, Alcatel-Lucent determined as matter of company policy to no longer use third party sales and marketing agents in conducting its worldwide business; and
(g) Alcatel-Lucent agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of Alcatel-Lucent and its employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.
As stated in the DPA, the fine range for the above describe conduct under the U.S. Sentencing Guidelines was $86.58 – $173.16 million. Pursuant to the DPA, Alcatel-Lucent agreed to pay a monetary penalty of $92 million – a rather rare instance of an FCPA criminal fine actually being within the Guidelines range and not below even the minimum range suggested by the Guidelines. Also relevant is that Alcatel’s culpability score was reduced only by -1, reflecting that Alcatel did not receive cooperation credit as many FCPA corporate defendants do receive.
The DPA states that above fine is appropriate given, among other things, “penalties related to the same conduct in Costa Rica [see here], and the extraordinary remedial step of terminating use of third-party sales and marketing agents.”
Pursuant to the DPA, Alcatel agreed to a host of compliance undertakings including the retention of an independent compliance monitor “who is a French national” for a three year term. Corporate Monitors used to be common in FCPA enforcement actions (circa 2005-2008), but required use of corporate monitors has become less common over the past few years.
As is standard in FCPA DPAs, Alcatel agreed not to make any public statement “contradicting the acceptance of responsibility by Alcatel-Lucent as set forth” in the DPA and Alcatel-Lucent further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.
As to potential debarment issues, the DPA states as follows. “The Department agrees to bring to the attention of governmental and other debarment authorities the facts and circumstances relating to the nature of the conduct underlying this Agreement, including the nature and quality of Alcatel-Lucent’s cooperation and remediation. By agreeing to provide this information to debarment authorities, the Department is not agreeing to advocate on behalf of Alcatel-Lucent, but rather is providing facts to be evaluated independently by the debarment authorities.”
Alcatel-Lucent France S.A., Alcatel-Lucent Trade International A.G. and Alcatel CentroAmerica, S.A. Criminal Information
The criminal information against the above Alcatel subsidiaries is virtually identical to the above-described criminal information against Alcatel, albeit it is limited to Costa Rica, Honduras, Malaysia, and Taiwan conduct. Based on this conduct, the information charges the entities with conspiracy to violate the FCPA’s anti-bribery and books and records and internal control provisions. According to the information, the purpose of the conspiracy was to “secure the assistance of officials of various governments, including those in Costa Rica, Honduras, Malaysia, and Taiwan, in obtaining and retaining lucrative telecommunications business through the offer, promise, and payment of bribes.”
Alcatel-Lucent France S.A., Alcatel-Lucent Trade International A.G. and Alcatel CentroAmerica, S.A. Plea Agreements
The above described charges were resolved via separate plea agreements with Alcatel-Lucent France (here), Alcatel-Lucent Trade International (here) and Alcatel CentroAmercia (here). Each plea agreement states that in light of the overall dispositions with the other Alcatel-Lucent entities and “the interrelationship among the charges and conduct underlying those dispositions” the agreed upon fine is $500,000.
SEC
The SEC’s civil complaint (here) alleges in summary fashion as follows.
“From December 2001 through June 2006, Alcatel, S.A., now called Alcatel-Lucent, S.A. (“Alcatel” or the “company”), through its subsidiaries and agents, violated the Foreign Corrupt Practices Act by paying more than $8 million in bribes to foreign government officials. Alcatel made these payments to influence acts and decisions by these foreign government officials to obtain or retain business, with the knowledge and approval of certain management level personnel of the relevant Alcatel subsidiaries. Alcatel lacked sufficient internal controls to prevent or detect such improper payments, and improperly recorded the payments in its books and records.”
“During this period, Alcatel’s agents and/or subsidiaries paid bribes to foreign government officials in several countries to obtain or retain business:
• From December 2001 to October 2004, Alcatel’s agents and/or subsidiaries paid at least $7 million in bribes to government officials of Costa Rica to obtain or retain three contracts to provide telephone services in Costa Rica totaling approximately $303 million.
• From December 2002 to June 2006, Alcatel’s agents and/or subsidiaries paid bribes to government officials of Honduras to obtain or retain five telecommunications contracts totaling approximately $48 million.
• From October 2003 to May 2004, Alcatel’s agents and/or subsidiaries paid bribes to government officials of Taiwan to obtain or retain a railway axle counting contract valued at approximately $27 million.
• From October 2004 to February 2006, Alcatel’s agents and/or subsidiaries paid bribes to government officials of Malaysia to obtain or retain a telecommunications contract valued at approximately $85 million.”
“All of these payments were undocumented or improperly recorded as consulting fees in the books of Alcatel’s subsidiaries, and then consolidated into Alcatel’s financial statements. A lax corporate control environment aided Alcatel’s improper conduct. Alcatel failed to detect or investigate numerous red flags suggesting that its business consultants were likely making illicit payments and gifts to government officials in these countries at the direction of certain Alcatel employees. The respective heads of several Alcatel subsidiaries and geographical regions, some of whom reported directly to Alcatel’s executive committee, authorized extremely high commission payments under circumstances in which they failed to determine whether such payments were, in part, to be funneled to government officials in violation of the FCPA. These high-level employees therefore knew, or were severely reckless in
not knowing, that Alcatel paid bribes to foreign government officials.”
The SEC complaint contains allegations about the same “Costa Rica Bribery Scheme,” “The Honduras Bribery Scheme,” “The Taiwan Bribery Scheme,” and “The Malaysia Bribery Scheme” referenced above. Typically, SEC complaints in FCPA matters are more broad than DOJ resolution documents, yet in this case the SEC complaint is more narrow than the DOJ resolution documents in that the SEC complaint does not contain any allegations as to conduct in Kenya, Nigeria, Bangladesh, Ecuador, Nicaragua, Angola, the Ivory Coast, Burkina Faso, Uganda, and Mali – as does the DOJ information.
Based on the above conduct, the SEC charged Alcatel with FCPA anti-bribery and books and records and internal control violations and knowingly failing to implement a system of internal controls and knowingly falsifying books and records.
As to books and records the complaint alleges as follows.
“Specifically, A1catel failed to keep accurate books and records by (1) entering into consulting agreements retroactively; (2) establishing and using a system of intermediaries to obscure the source and destination of funds; (3) making payments pursuant to business consulting agreements that inaccurately described the services provided; (4) generating false invoices and other false documents to justify payments; (5) disbursing funds in cash with inaccurate documentation authorizing or supporting the withdrawals; (6) recording illicit payments as legitimate consulting fees; and (7) recording bribes as payment for legitimate services.”
As to internal controls, the complaint alleges as follows.
“Alcatel failed to implement adequate internal controls to comply with the
company’s NYSE listing, including the detection and prevention of violations of the FCPA. First, Alcatel and/or its subsidiaries falsified books and records, entered into agreements retroactively, and obscured the purpose for, and ultimate recipient of, illicit payments. Alcatel used business consultants and intermediaries to funnel bribes in at least four countries. Alcatel created and used false invoices and payment documentation under business consulting agreements that described services that were never intended to be rendered. Illicit payments were falsely recorded as expenses for consulting fees.”
“Second, Alcatel also routinely circumvented the internal controls the company had in place. Although the company in theory had a policy of “checks and balances” to authorize the retention of business consultants, which required several signatures to approve the retention of, and payment to, business consultants, Alcatel employees often violated that policy. In numerous instances, Alcatel officials responsible for reviewing due diligence reports on consultants failed to conduct any review of the documents or could not read the language in which the documents were written. Alcatel employees also entered into agreements retroactively and obscured the amounts paid to business consultants by splitting the payments among separate
agreements (to conceal the high commissions Alcatel paid). Finally, Alcatel Standard’s due diligence on business consultants was inadequate, and Alcatel CIT often paid business consultants without adequate proof of services rendered. Alcatel CIT failed to establish robust controls over cash disbursements, allowed manual payments without documentation, and Alcatel’s FCPA compliance function was understaffed and lacked independence. Alcatel also failed to conduct thorough anti-bribery and corruption training.”
Without admitting or denying the SEC’s allegations, Alcatel agreed to an injunction prohibiting future FCPA violations and agreed to pay disgorgement of $45.372 million.
In a relese (here), Robert Khuzami (Director of the SEC’s enforcement division) stated as follows. ““Alcatel and its subsidiaries failed to detect or investigate numerous red flags suggesting their employees were directing sham consultants to provide gifts and payments to foreign government officials to illegally win business. Alcatel’s bribery scheme was the product of a lax corporate control environment at the company.” Glenn Gordon (Associate Director of Enforcement in the SEC’s Miami office) added, “the serious sanctions Alcatel has agreed to, including paying back all net profits made on the contracts Alcatel illegally obtained, should serve as a reminder that we are committed to enforcing the FCPA and a level playing field for companies seeking to obtain or retain business in other countries.”
In a company press release (here), Steve Reynolds, Alcatel-Lucent General Counsel, stated as follow. “We take responsibility for and regret what happened and have implemented policies and procedures to prevent these violations from happening again. The violations largely occurred prior to the merger of Alcatel and Lucent Technologies and involved improper activities in several countries. These settlements resolve the company’s FCPA liability with the DOJ and SEC. We are pleased to have reached these settlements and look forward to putting these matters behind us. Alcatel-Lucent, created as a result of the merger of Alcatel and Lucent Technologies at the end of 2006, is a radically different company today: It has different management, including a new CEO, a new executive committee and a different Board of Directors; It has a zero-tolerance policy regarding bribery and corruption and has a system in place with strong processes and Internet-based and live training designed to prevent these types of situations in all aspects of our business; and as the first in its industry to do so, Alcatel-Lucent announced in 2008 that it would terminate the use of sales agents and consultants — the primary means by which certain former employees made the improper payments involved in the violations described in the DOJ and SEC settlement papers.”
Martin Weinstein (here) of Willkie Farr & Gallagher represented the Alcatel entities.