In Depth On The Weatherford Enforcement Action
Last week, the DOJ and SEC announced (here and here) that Switzerland-based oil and gas services company Weatherford International agreed to resolve a Foreign Corrupt Practices Act enforcement action based primarily on alleged conduct by its subsidiaries in Angola, the Middle East, and in connection with the Iraq Oil for Food program. The enforcement action has been expected for some time (as noted in this prior post, in November the company disclosed that it had agreed in principle to the settlement announced last week).
The enforcement action involved a DOJ criminal information against Weatherford Services Ltd. resolved via a plea agreement, a criminal information against Weatherford International Ltd. (“Weatherford”) resolved via a deferred prosecution agreement, and a SEC settled civil complaint against Weatherford. [Note, the SEC enforcement action also alleged violations of the books and records and internal controls provisions in regards to commercial transactions with various sanctioned countries in violation of U.S. sanction and export controls laws. The DOJ – or other government entities – also alleged such conduct, but in resolution documents separate and apart from the FCPA resolution documents highlighted below].
Weatherford agreed to pay approximately $153 million to resolve its alleged FCPA scrutiny ($87 million to resolve the DOJ enforcement action and $66 million to resolve the SEC enforcement action). The Weatherford action is the 8th largest FCPA settlement of all-time (see here for the top ten FCPA settlements).
DOJ
Weatherford Services Ltd.
Weatherford Services (“WSL”), incorporated in Bermuda, is identified as a wholly-owned subsidiary of Weatherford International that “managed most of Weatherford’s activities in Angola.”
The conduct at issue involved “two schemes to bribe Sonangol officials to obtain or retain business.”
Sonangol is alleged to be a “government-owned and controlled corporation” of the Angolan government. The information specifically states:
“Sonangol was the sole concessionaire for exploration of oil and gas in Angola, and was solely responsible for the exploration, production, manufacturing, transportation, and marketing of hydrocarbons in Angola. Sonangol was run by a board of directors established by governmental decree in 1999. Each member of the board was also appointed or renewed in their position by governmental decree. Because Sonangol was wholly owned, controlled, and managed by the Angolan government, it was an ‘agency’ and ‘instrumentality’ of a foreign government and its employees were ‘foreign officials'” under the FCPA.
According to the information, the first bribery scheme “centered around a joint venture which WSL and other Weatherford employees established with two local Angolan entities.” The information alleges that “Angolan Officials 1, 2, and 3 (described as “high-level, senior officials of Sonangol” with influence over contracts) controlled and represented one of the entities” and that a “relative of Angolan Official 4 (described as a “high-level, senior official of Angola’s Ministry of Petroleum” with influence over contracts entered into by the Angolan government) controlled and represented the other.”
The information alleges that the “joint venture began because WSL sought a way to increase its share of the well screens market in Angola” and states that “WSL learned that Sonangol was encouraging oil services companies to establish a well screens manufacturing operations in Angola with a local partner.” Thereafter, “a high-level Weatherford executive sent Angolan Official 1 a letter expressing Weatherford’s intent to form a well screens manufacturing operation in Angola with a local partner and requesting Sonangol’s participation in the process.”
The information next alleges that “Angolan Official 1 advised WSL that Sonangol had selected local partners for WSL and that Sonangol would support the joint venture.” According to the information:
“… the parties agreed that two local Angolan entities (“Angolan Company A” and Angolan Company B”) would be WSL’s joint venture partners. Angolan Officials 1, 2 and 3 conducted all business with WSL on behalf of Angolan Company A. Angolan Company B was owned in part by the daughter of Angolan Official 4.”
According to the information, “certain WSL and Weatherford employees knew from the outset of discussions regarding the joint venture that the members of Angolan Company A included a Sonangol employee and Angolan Official 3’s wife, while Angolan Company B’s members included Angolan Official 4’s daughter and son-in-law.”
According to the information, “prior to entering into the joint venture, neither Weatherford nor WSL conducted any meaningful due diligence of either joint venture partner.” The information specifically alleges that Weatherford Legal Counsel A (a citizen of the U.S. and a Senior Corporate Counsel at Weatherford from 2004 to 2008) reached out to a law firm “to discuss whether partnering with the Angolan companies raised issues under the FCPA,” but that Weatherford Legal Counsel A “did not follow the advice” that had been provided to him. In addition, the information alleges that Weatherford Legal Counsel A “falsely told [another] outside counsel that the joint venture had been vetted and approved by another outside counsel, when, in fact, no outside law firm ever conducted such vetting or gave such approval.”
The information alleges that WSL signed the final joint venture agreement with Angolan Company A and Angolan Company B in 2005, but that “neither Angolan Company A nor Angolan Company B provided any personnel or expertise to the joint venture, nor did they make any capital contributions.”
According to the information:
“In 2008, Angolan Company A and Angolan Company B received joint venture dividends for 2005 and 2006, including on revenues received in 2005 [before the joint venture agreement was executed]. […] In total, the joint venture paid Angolan Company A $689,995 and paid Angolan Company B $136,901.”
The information alleges that “prior to the distribution of joint venture dividends, WSL executives knew that Angolan officials were directing the distribution of those dividends.”
According to the information, “WSL benefitted from the joint venture arrangement” in the following ways: “Sonangol began taking well screens business away from WSL’s competitors, even when a competitor was supplying non-governmental companies, and awarding it to WSL” and “WSL received awards of business for which its bids were, by its own admission, not price competitive.”
The second bribery scheme alleged in the information relates to the “Cabinda Region Contract Renewal” in which WSL allegedly “bribed Angolan Official 5 (described as “a Sonangol official with decision-making authority in Angola’s Cabinda region”) so that he would approve the renewal of a contract under which WSL provided oil services to a non-governmental oil company in the Cabinda region of Angola.” The information alleges that even though the contract was between WSL and a non-governmental company, Angolan law required “that it be approved by Sonangol before being finalized” and that “Angolan Official 5 was the Sonangol official responsible for approving or denying the renewal contract.”
The information alleges that Angolan Official 5 solicited the bribe and that “WSL executives agreed to pay the bribe Angolan Official 5 had demanded” even though a prior WSL Manager had refused to pay it. According to the information, WSL made the payments to Angolan Official 5 through the Freight Forwarding Agent (described as a Swiss Company who provided freight forwarding and logistics services in Angola) who had previously paid bribes on behalf of WSL.”
As to the Freight Forwarding Agent, the information alleges that WSL retained the agent via a consultancy agreement in which the agent rejected a specific FCPA clause, but that “WSL and Weatherford acquiesced by removing the FCPA clause and inserting a clause requiring the Freight Forwarding Agent to ‘comply with all applicable laws, rules, and regulations issued by any governmental entity in the countries of business involved.” According to the information, “WSL generated sham purchase orders for consulting services the Freight Forwarding Agent never performed, and the Freight Forwarding Agent, in turn, generated sham invoices for those non-existent services.” The information alleges that the Freight Forwarding Agent passed money on to Angolan Official 5.
Based on the above, the information charges WSL with one count of violating the FCPA’s anti-bribery provisions and specifically invokes the dd-3 prong of the statute applicable to “persons” other than issuers or domestic concerns.
Pursuant to the plea agreement, WSL agreed to pay a criminal fine in the amount of $420,000.
Weatherford International
The Weatherford information largely focuses on the company’s internal accounting controls and alleges as follows.
“Weatherford, which operated in an industry with a substantial corruption risk profile, grew its global footprint in large part by purchasing existing companies, often themselves in countries with high corruption risks. Despite these manifest corruption risks, Weatherford knowingly failed to establish effective corruption-related internal accounting controls designed to detect and prevent corruption-related violations, including FCPA violations, prior to 2008.
Prior to 2008, Weatherford failed to institute effective internal accounting controls, including corruption-related due diligence on appropriate third parties and business transactions, limits of authority, and documentation requirements. This failure was particularly acute when it came to third parties, including channel partners, distributors, consultants, and agents. Weatherford failed to establish effective corruption-related due diligence on third parties with interaction with government officials, such as appropriately understanding a given third party’s ownership and qualifications, evaluating the business justification for the third party’s retention in the first instance, and establishing and implementing adequate screening of third parties for derogatory information. Moreover, Weatherford failed to implement effective controls for the meaningful approval process of third parties. Weatherford also did not require, in practice, adequate documentation supporting retention and in support of payments to third parties, such as appropriate invoices and purchase orders.
Prior to 2008, Weatherford did not have adequate internal accounting controls and processes in place that effectively evaluated business transactions, including acquisitions and joint ventures, for corruption risks and to investigate those risks when detected. Moreover, following the establishment of joint ventures and certain other business transactions, Weatherford did not appropriately implement its policies and procedures to ensure an effective internal accounting control environment through proper integration.
Prior to 2008, Weatherford also did not have an effective internal accounting control system for gifts, travel, and entertainment. In practice, expenses were not typically adequately vetted to ensure that they were reasonable, bona fide, or properly documented.
These issues were exacerbated by the fact that, prior to 2009, a company as large and complex as Weatherford – with its substantial risk profile – did not have a dedicated compliance officer or compliance personnel. Although Weatherford promulgated an anti-corruption policy that it made available on its internal website, it did not translate that policy into any language other than English, and it did not conduct anti-corruption training.
Prior to 2008, Weatherford did not have an effective system for investigating employee reporting of ethics and compliance violations. If an employee’s ethics questionnaire response indicated an awareness of payments or offers of payments to foreign officials or of undisclosed or unallocated funds, Weatherford did not have a protocol in place to perform any further investigation into the alleged corruption. As a matter of practice, in fact, Weatherford did not conduct additional investigation of such allegations. Prior to 2004, Weatherford did not require any employee to complete any kind of ethics questionnaire.
Further, Weatherford lack effective mechanisms to control its many foreign subsidiaries’ activities to ensure that they maintained internal accounting controls adequate to detect, investigate, or deter corrupt payments made to government officials.”
Under the heading “corrupt conduct” the information alleges – in summary form – as follows:
“Due to Weatherford’s failure to implement such internal accounting controls, a permissive and uncontrolled environment existed within Weatherford in which employees of certain of its wholly owned subsidiaries in Africa and the Middle East were able to engage in various corrupt conduct over the course of many years, including both bribery of foreign officials and fraudulent misuse of the United Nations’ Oil for Food Program.”
Thereafter, the information contains nine paragraphs of allegations that track the Angola allegations in the WSL information.
In addition, the information contains allegations about another alleged “scheme, in the Middle East, from 2005 through 2011” in which “employees of another Weatherford subsidiary [Weatherford Oil Tool Middle East Limited (WOTME) – described as a British Virgin Islands corporation headquartered in Dubai that was a wholly-owned subsidiary of Weatherford and responsible for managing most of Weatherford’s activities in North Africa and the Middle East] awarded improper ‘volume discounts’ to a distributor who supplied Weatherford products to a government-owned national oil company, believing those discounts were being used to create a slush fund with which to make bribe payments to decision makers at the national oil company.”
According to the information, “officials at the national oil company had directed WOTME to sell goods to the company through this particular distributor” and the information alleges:
“Prior to entering into the contract with the distributor, neither WOTME nor Weatherford conducted any due diligence on the distributor, despite (a) the fact that the Distributor would be furnishing Weatherford goods directly to an instrumentality of a foreign government; (b) the fact that a foreign official had specifically directed WOTME to contract with that particular distributor, and (c) the fact that executives at WOTME knew that a member of the country’s royal family had an ownership interest in the distributor.”
According to the information, “between 2005 and 2011, WOTME paid approximately $15 million in volume discounts to the distributor” that were “recorded in WOTME’s general ledger under a heading titled “Volume Discount Account.”
The information next contains four paragraphs of allegations relevant to the Iraq Oil for Food program and how Weatherford’s “failure to implement effective internal accounting controls also permitted corrupt conduct relating” to the program.
In a summary allegation, under the heading “Profits from the Corrupt Conduct in Africa and the Middle East” the information states:
“Due to Weatherford’s failure to implement internal accounting controls, an environment existed within Weatherford in which employees of certain of its wholly owned subsidiaries in Africa and the Middle East were able to engage in various corrupt business transactions, which conduct earned profits of $54,486,410, which were included in the consolidated financial statements that Weatherford filed with the SEC.”
Based on the above conduct, the information charges Weatherford with violating the FCPA’s internal controls provisions – specifically – that Weatherford knowingly:
“(a) failed to implement, monitor, and impose internal accounting controls and to maintain their effectiveness; (b) failed adequately to train key personnel to implement internal accounting controls to detect and avoid illegal payments and to identify and deter violations of those controls; (c) failed to monitor and control the financial transactions of its subsidiaries, in a manner that provided reasonable assurances that its subsidiaries’ transactions were executed in accordance with management’s general and specific authorization; (d) failed to monitor and control the financial transactions of its subsidiaries, in a manner that provided reasonable assurances that its subsidiaries’ transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and any other criteria applicable to such statements; (e) failed to maintain a sufficient system for the selection and approval of, and performance of corruption-related due diligence on, third party business partners and joint venture partners, which, in turn, permitted corrupt conduct to occur at subsidiaries; (f) failed to investigate appropriately and respond to allegations of corrupt payments and discipline employees involved in making corrupt payments; (g) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed, including training employees, and performing monitoring to detect criminal conduct; (h) failed to maintain internal accounting controls sufficient to prevent a subsidiary from entering into a joint venture agreement to funnel improper benefits to, and receive preferential treatment from, foreign government officials; (i) failed to maintain internal accounting controls sufficient to prevent a subsidiary from making payments to a channel partner not authorized by contract knowing there was a substantial likelihood that those payments were used to make corrupt payments; and (j) failed to maintain internal accounting controls sufficient to prevent kickbacks paid to the government of Iraq by a subsidiary.”
The charge against Weatherford was resolved via a DPA in which the company admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees, and agents as charged in the information.
The DPA has a term of three years and under the heading “relevant considerations” it states:
“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and the Company. Among the facts considered were the following: (a) the Company’s cooperation has been, on the whole, strong, including conducting an extensive worldwide internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department, including the production of more than 3.8 million pages of data; (b) the Company has engaged in extensive remediation, including terminating the employment of officers and employees responsible for the corrupt misconduct of its subsidiaries, establishing a Compliance Officer position that is a member of the Company’s executive board, as well as a compliance office of approximately 38 full-time compliance professionals, including attorneys and accountants, that the Compliance Officer oversees, conducting more than 30 anti-corruption compliance reviews in many of the countries in which it operates, enhancing its anti-corruption due diligence protocol for third-party agents and consultants, and retaining an ethics and compliance professional to conduct an assessment of the Company’s ethics and compliance policies and procedures designed to ensure compliance with the FCPA and other applicable anti-corruption laws; (c) the Company has committed to continue to enhancing its compliance program and internal accounting controls …; (d) the Company has already significantly enhanced, and is committed to continue to enhance, its compliance program and internal controls …; and (e) the Company has agreed to continue to cooperate with the Department in any ongoing investigation …”
Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $87.2 million to $174.4 million. The DPA states that the monetary penalty of $87.2 million “is appropriate given the facts and circumstances of this case, including the nature and extent of the Company’s criminal conduct, the Company’s extensive cooperation, and its extensive remediation in this matter.”
The DPA specifically states that “any criminal penalties that might be imposed by the Court on WSL in connection with WSL’s guilty plea to a one-count Criminal Information charging WSL with violations of the FCPA, and the plea agreement entered into simultaneously, will be deducted from the $87.2 million penalty agreed to under this Agreement.”
Pursuant to the DPA, Weatherford agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA and other applicable anti-corruption laws. The specifics are detailed in Attachment C to the DPA. The DPA also requires Weatherford to engage a corporate compliance monitor for ”a period of not less than 18 months from the date the monitor is selected.” The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA.
As is common in FCPA corporate enforcement actions, the DPA contains a “muzzle clause” prohibiting Weatherford or anyone on its behalf from “contradicting the acceptance of responsibility by the company” as set forth in the DPA.
In the DOJ’s release, Acting Assistant Attorney General Mythili Raman stated:
“Effective internal accounting controls are not only good policy, they are required by law for publicly traded companies – and for good reason. This case demonstrates how loose controls and an anemic compliance environment can foster foreign bribery and fraud by a company’s subsidiaries around the globe. Although Weatherford’s extensive remediation and its efforts to improve its compliance functions are positive signs, the corrupt conduct of Weatherford International’s subsidiaries allowed it to earn millions of dollars in illicit profits, for which it is now paying a significant price.”
Valerie Parlave, Assistant Director in Charge of the FBI’s Washington Field Office, stated:
“When business executives engage in bribery and pay-offs in order to obtain contracts, an uneven marketplace is created and honest competitor companies are put at a disadvantage. The FBI is committed to investigating corrupt backroom deals that influence contract procurement and threaten our global commerce.”
SEC
The SEC’s complaint (here) is largely based on the same core set of facts alleged in the above DOJ action.
In summary fashion, the complaint alleges:
“Between at least 2002 and July 2011, Weatherford and its subsidiaries authorized bribes and improper travel and entertainment intended for foreign officials in multiple countries to obtain or retain business or for other benefits. Weatherford and its subsidiaries also authorized illicit payments to obtain commercial business in Congo and authorized kickbacks in Iraq to obtain United Nations Oil for Food contracts. Weatherford realized over $59.3 million in profits from business obtained through the use of illicit payments.”
As to the additional Congo allegations, the complaint states:
“In addition to bribery schemes involving Angolan government officials, WSL made over $500,000 in commercial bribe payments through the Swiss Agent to employees of a commercial customer, a wholly-owned subsidiary of an Italian energy company, between March 2002 and December 2008.
[…]
WSL mischaracterized the bribe payments as legitimate expenses on its books and records. Bank account records and a U.S. brokerage account statement show that among the recipients were two employees of the commercial customer who were responsible for awarding contracts to WSL. Weatherford obtained profits of$1,304,912 from commercial business in Congo relating to payments made by Swiss Agent.”
The SEC complaint also contains allegations concerning conduct in Algeria and Albania.
Under the heading “Improper Travel and Entertainment in Algeria,” the complaint alleges:
Weatherford also provided improper travel and entertainment to officials of Sonatrach, an Algerian state-owned company, that were not justified by a legitimate business purpose. The improper travel and entertainment to Sonatrach officials include:
• June 2006 trip by two Sonatrach officials to the FIFA World Cup soccer tournament in Hanover, Germany;
• July 2006 honeymoon trip of the daughter of a Sonatrach official; and
• October 2005 trip by a Sonatrach employee and his family to Jeddah, Saudi Arabia, for religious reasons that were improperly booked as a donation
In addition, on at least two other occasions, Weatherford provided Sonatrach officials with cash sums while they were visiting Houston. For example, in May 2007, Weatherford paid for four Sonatrach officials, including a tender committee official, to attend a conference in Houston. Prior to the trip, a Weatherford finance executive sent an email to a Weatherford officer requesting $10,000 cash to be advanced to a WOTME employee without providing any explanation tor the cash advance. The request was approved and a portion of the funds was provided to the tender committee official. There is no evidence the cash was used for legitimate business or promotional expenses. In connection with a December 2007 trip by three Sonatrach officials traveling to Houston, a Weatherford finance employee questioned the propriety of a WOTME employee’s request for a $14,000 cash advance in connection with the trip. The finance employee’s concern was disregarded and the request was ultimately approved at high levels within Weatherford and a portion of the funds was provided to the officials. In total, Weatherford spent $35,260 on improper travel, entertainment and gifts for Algerian officials from May 2005 through November 2008 that were recorded in the company’s books and records as legitimate expenses.”
Under the heading “Improper Payments to Albanian Tax Authorites,” the complaint alleges:
“From 2001 to 2006, the general manager and financial manager at a Weatherford Italian subsidiary, WEMESP A, misappropriated over $200,000 of company funds, a portion of which was improperly paid to Albanian tax auditors. WEMESPA’s general manager and financial manager misappropriated the funds by taking advantage of Weatherford’s inadequate system of internal accounting controls. They misreported cash advances, diverted payments on previously paid invoices, misappropriated government rebate checks and received reimbursement of expenses that did not relate to business activities, such as golf equipment and perfume.
[…]
In addition to the cash payments, in 2005, after a regime shift in Albania, the Country Manager provided three laptop computers for the tax director and two members of Albania’s National Petroleum Agency, which the WEMESPA executives approved and misrecorded in the books and records.”
Under the heading “Misconduct During the Investigation and Subsequent Remediation Efforts,” the complaint states:
“Certain conduct by Weatherford and its employees during the course of the Commission staffs investigation compromised the investigation. These activities involved the failure to provide the staff with complete and accurate information, resulting in significant delay. In one instance, the staff sought information concerning the Iraq Country Manager who signed letters agreeing to pay bribes to Iraqi officials during the Oil for Food Program. The staff was informed that the Country Manager was missing or dead when, in fact, he remained employed by Weatherford. In at least two instances, email was deleted by employees prior to the imaging of their computers. On another occasion, Weatherford failed to secure important computers and documents and allowed potentially complicit employees to collect documents subpoenaed by the staff. Subsequent to the misconduct, Weatherford greatly improved its cooperation and engaged in remediation efforts, including disciplining employees responsible for the misconduct, establishing a high level Compliance Officer position, significantly increasing the size of its compliance department, and conducting numerous anti-corruption reviews in many of the countries in which it operates.”
Under the heading “Anti-Bribery Violations,” the complaint states in pertinent part:
“Weatherford’s conduct in the Middle East and Angola violated [the FCPA’s anti-bribery provisions]. From 2005 through 2011, Weatherford authorized $11.8 million in payments to national oil company officials through a distributor intended to wrongfully influence national oil company decision makers to obtain and retain business. Weatherford also violated [the anti-bribery provisions] when it retained the Swiss Agent to funnel bribes to a Sonangol official to obtain the Cabinda contract. Weatherford similarly violated [the anti-bribery provisions] by bribing other Sonangol officials via the joint venture in return for contracts and preferential treatment.”
Under the heading “Failure to Maintain Books and Records,” the complaint states in pertinent part:
“Weatherford, directly and through its subsidiaries, also violated [the books and records provisions] when it made numerous payments and engaged in many transactions that were incorrectly described in the companys books and records. In the Middle East, for example, the money given to a distributor to be used as bribes was reflected in Weatherford‘s books and records as legitimate volume discounts. In Angola and Congo, payments to foreign officials and others were described as legitimate consulting fees rather than bribe payments. Payments to Sonangol executives through the joint venture were misrecorded as legitimate dividend payments.”
Under the heading “Failure to Maintain Adequate Internal Controls,” the complaint states in pertinent part:
“Weatherford violated [the internal controls provisions] by failing to devise and maintain an adequate system of internal accounting controls. The violations were widespread and involved conduct at Weatherford’s headquarters as well as at numerous subsidiaries. Executives, managers and employees throughout the organization were aware of the conduct, which lasted a decade. Weatherford paid millions of dollars to consultants, agents and joint venture partners without adequate due diligence. Weatherford approved cash payments to Algerian officials traveling to Houston without any justification for the payments. Employees made payments to agents without regard to grants of authority and, on some occasions, without even receiving an invoice. In Italy, internal accounting controls were ineffective, allowing executives to embezzle and pay bribes for years.
In the Middle East, the company failed on several occasions to perform due diligence on the distributor it used, despite the fact that the agent was imposed upon them by a national oil company official and would be selling to a government entity. The use of large volume discounts was not routinely reviewed. […] Weatherford also failed to provide FCPA … training. While Weatherford did require certain employees to complete a yearly ethics questionnaire seeking instances of alleged misconduct, Weatherford failed to investigate or even review the responses.”
As noted in the SEC’s release, Weatherford agreed to pay approximately $65.6 million to the SEC, including an approximate $1.9 million penalty assessed in part for lack of cooperation early in the investigation.
In the SEC’s release, Andrew Ceresney (Co-Director of the SEC’s enforcement division) stated:
“The nonexistence of internal controls at Weatherford fostered an environment where employees across the globe engaged in bribery and failed to maintain accurate books and records. They used code names like ‘Dubai across the water’ to conceal references to Iran in internal correspondence, placed key transaction documents in mislabeled binders, and created whatever bogus accounting and inventory records were necessary to hide illegal transactions.”
Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:
“Whether the money went to tax auditors in Albania or officials at the state-owned oil company in Angola, bribes and improper payments were an accustomed way for Weatherford to conduct business. While the profits may have seemed bountiful at the time, the costs far outweigh the benefits in the end as coordinated law enforcement efforts have unraveled the widespread schemes and heavily sanctioned the misconduct.”
Joseph Warin (Gibson Dunn) represented Weatherford.
In this statement, Bernard Duroc-Danner (Weatherford’s Chairman, President and CEO) stated:
“This matter is now behind us. We move forward fully committed to a sustainable culture of compliance. With the internal policies and controls currently in place, we maintain a best-in-class compliance program and uphold the highest of ethical standards as we provide the industry’s leading products and services to our customers worldwide.”
On the day of the enforcement action, Weatherford’s shares closed up approximately 1.2%.
Foreign Military Sales Lead To FCPA Enforcement Action
[This post is part of a periodic series regarding “old” FCPA enforcement actions]
In 1989, the DOJ criminally charged Minnesota based military equipment and supplies company Venturian Corporation, along with its wholly-owned subsidiary NAPCO International, with conspiracy to violate the Foreign Corrupt Practices Act, substantive FCPA offenses (anti-bribery, books and records and internal controls), as well as various tax fraud offenses.
The conduct at issue was in connection with the Foreign Military Sales (FMS) program in which the U.S. government made loans to certain foreign governments to finance the purchase of defense items of U.S. origin. The Defense Security Assistance Agency (DSAA), an agency of the U.S. Department of Defense, was responsible for directing, administering, and supervising FMS loans. In connection with the FMS program, contractors and commercial suppliers were required to certify, among other things, that: (i) “commissions would be paid only to bona fide employees or agencies which neither exerted or proposed to exert improper influences to solicit or obtain the contact;” and (ii) “no rebates, gifts or gratutities contrary to U.S. law have been or would be given to officers, officials or employees of the purchaser …”.
The conduct at issue concerned the Republic of Niger, a foreign nation qualified to receive FMS loan assistance from the DSAA, specifically Tahirou Barke Doka (the First Counselor of the Embassy of Niger in Washington, D.C.) and Captain Ali Tiemogo (Chief of Maintenance for the air force component of the Niger Ministry of Defense).
According to the detailed 50-page information, Niger entered into a contract with Dornier GmbH (a West German aircraft maintenance company) to perform maintenance on Nigerien C-130’s. However, according to the indictment, “the Government of Niger had insufficient funds to pay for Dornier’s services and Dornier sought to affiliate with a U.S. contractor so that the Government of Niger could qualify” for the FMS program.
Thereafter, NAPCO, acting in cooperation with Dornier, began negotiations with the Government of Niger for a contract to furnish replacement parts and to perform maintenance on two C-130 transport aircraft owned by the airforce of the Government of Niger. Four contracts, in the approximate amount of $2.4 million, were entered into between NAPCO and the Government of Niger.
The information alleges that NAPCO conspired with others to violate the FCPA by making payments or authorizing payments of money to “officials of the Government of Niger, that is, Counselor Tahirou Barke Doka and Captain Ali Tiemogo” and “Fatouma Mailelel Boube and Amadou Mailele, both relatives of Tiemogo, while knowing that all or a portion of such money would be offered, given or promised, directly or indirectly, to foreign officials, namely Barke and Tiemogo” for the purpose of “influencing the acts and decisions of Barke and Tiemogo in their official capacities, and inducing them to use their influence with the Ministry of Defense.”
The information further alleged that NAPCO “falsely represent[ed] to DSAA the identifies of NAPCO’s agents, misrepresenting the percentages of contract funds paid and to be paid to non-U.S. suppliers and filing misdated invoices.”
According to the information, the aggregate amount of bribes paid to Barke and Tiemogo was approximately $131,000. In addition, the information alleges that Barke “traveled from Washington, D.C. to Niger for his wedding and subsequent honeymoon in Paris, Stockholm and London, using tickets charged to a NAPCO account.”
The information further alleges that NAPCO and others used various methods to conceal the conspiracy such as “preparing and using bogus commission agreements,” “creating a fictitious commission agent,” using the names of Mailele and Boube “in order to conceal the payment of bribes,” “falsely representing to DSAA that Mailele and Boube were NAPCO’s agents “when these persons were not its agents, had performed no services for NAPCO, and had acted solely as the intermediaries for Tiemogo and Barke for the purpose of concealing the bribe payments.
In addition to the conspiracy charge and a substantive FCPA charges, the information also alleges that NAPCO filed false and fraudulent U.S. tax returns which “falsely claimed certain deductions for the payment of agent commissions.”
NAPCO pleaded guilty to the above charges (see here for the plea agreement). As noted in the plea agreement, the DOJ and the company settled on a fine amount in the “aggregate amount of $1 million in satisfaction of its criminal and civil fines, penalties, taxes and restitution.” The amount consisted of the following: $785,000 for the criminal charges set forth in the information, $140,000 in restitution “for full payment of its civil tax liability to the DSSA for appropriate crediting to the FMS account of Niger,” and $75,000 restitution to the IRS for full payment of all criminal and civil tax liabilities.
The plea agreement notes that the DOJ will not prosecute NAPCO for “Napco’s contracts with Egypt,” “alleged United States Customs violations arising from the sale of misidentified radios to the Government of Egypt and to other countries;” or “FCPA violations arising from the transactions evidenced in the documents Napco produced to the Yellow Grand Jury.”
The plea agreement further states:
“The Department of Justice will advise the Department of Defense, Defense Logistics Agency, which is the suspension and debarment authority in this matter, of the facts learned during the government’s investigation of Napco; Napco’ s cooperation during the investigation; and the importance of this prosecution in the government’s efforts towards eradicating fraud in the Foreign Military Sales program.”
The above settlement terms are set forth in this judgment.
According to original source media reports, the DSSA “uncovered the fraud when it checked the name of one of the agents with the government of Niger.” Media reports quoted Theodore Greenberg (Deputy Chief DOJ Fraud Section) as follows: “[money from the FMS program] is to be used for the military preparedness of certain governments; that, of course, is important to our national security.” Media reports quoted Peter Clark (DOJ FCPA Unit) as follows: “the object of the program is to be getting the biggest bank for the buck – not to pay illegal bribes.”
(See here for NAPCO’s current company website).
(The FMS program is still an active program of the Defense Department – see here).
In addition to the enforcement action against NAPCO / Venturian, the DOJ also brought an injunctive action against Dornier. Of note, the DOJ described Dornier (a German company) as an “agent of NAPCO” and thus a “domestic concern” under the FCPA. As to relevant jurisdiction allegations, the DOJ alleged that a Dornier employee Axel Kurth, had telephone conversations with NAPCO employees in Minnesota and that Kurth traveled in the U.S. “where he met with officers of NAPCO” to discuss the alleged improper payments. Without admitting or denying the DOJ’s allegations, Dornier consented to a permanent injunction prohibiting future FCPA violations.
In addition, the DOJ criminally charged the Vice President of the Aerospace Division of NAPCO. That individual exercised his constitutional right to a jury trial, put the DOJ to its burden of proof, and the results and ultimate outcomes will be explored in a future post.
The Impact Of Kiobel On FCPA Enforcement
Yesterday, the Supreme Court released its long-awaited opinion in Kiobel v. Royal Dutch Shell Petroleum.
The precise issue before the court was “whether and under what circumstances courts may recognize a cause of action under the Alien Tort Statute (“ATS”), for violations of the law of nations occurring within the territory of a sovereign other than the United States.”
The opinion, authored by Chief Justice Roberts, holds that “the presumption against exterritoriality applies to claims under the ATS, and that nothing in the statute rebuts that presumption.”
Accordingly, the court in a unanimous opinion (several justices authored concurring opinions) affirmed the Second Circuit’s dismissal of a lawsuit brought by a group of Nigerian nationals residing in the United State who filed suit in federal court against certain Dutch, British, and Nigerian corporations, alleging that the corporations aided and abetted the Nigerian government in committing violations of the law of nations in Nigeria.
This post analyzes the impact of Kiobel on FCPA enforcement.
While the ATS and Foreign Corrupt Practices Act are separated by 188 years in terms of enactment, the statutes have often being viewed by some as siblings, or at least distant cousins within the same family.
However, it is important to grasp that the ATS and FCPA are very different statutes in very material ways.
The jurisdictional issue the Supreme Court addressed in Kiobel – whether the canon of statutory interpretation known as the presumption against extraterritorial application – was necessitated because the ATS was silent on the jurisdiction issue. Indeed, Chief Justice Roberts stated that the canon “provides that when a statute gives no clear indication of an extraterritorial application it has none” (emphasis added).
In contrast, the FCPA is explicit as to its jurisdictional scope and provides as follows depending on the category of person (legal or natural) subject to the law’s anti-bribery provisions.
As to U.S. persons (legal or natural) the FCPA provides for two types of jurisdictional. The original statutory standard was (and is still part of the law) “use of the mails or any means of instrumentality of interstate commerce corruptly in furtherance” of a bribery scheme. However, in 1998 Congress amended the FCPA to also provide for so-called nationality jurisdiction as to U.S. persons. 15 USC 78dd-1(g) and 78dd-2(i) specifically state, in pertinent part, as follows: “It shall also be unlawful for [any issuer organized under the laws of the United States or for any United States person] to corruptly do any act outside the United States in furtherance [of a bribery scheme] irrespective of whether such [U.S. person] makes uses of the mails or any means or instrumentality of interstate commerce in furtherance [of the bribery scheme]. In short, as to U.S. persons, in 1998 Congress explicitly amended the FCPA to provide for extraterritorial jurisdiction thus negating the need for reference to the canon of statutory interpretation at issue in Kiobel.
As to foreign issuers subject to 78dd-1 of the FCPA (i.e. foreign companies with shares registered on U.S. exchanges or otherwise required to file periodic reports with the SEC), the 1998 amendment found in 78dd-1(g) did not apply to such companies. It can thus be inferred that Congress did not intend for the extraterritorial provisions of the 1998 amendments to apply to such entities. Here again, the need for the canon of statutory interpretation at issue in Kiobel is negated. For such foreign issuers, the FCPA explicitly provides only territorial jurisdiction as stated above.
As to persons other than U.S. persons (legal or natural) or foreign issuers, the FCPA was also amended in 1998 to create an entire new category of “person” subject to the FCPA’s anti-bribery provisions. See 78dd-3. This category applies to non-U.S. actors and non-foreign issuers such as foreign private companies and foreign nationals. This FCPA prong has explicit jurisdictional provisions. 78dd-3(a) states, in pertinent part, that it shall be unlawful for “any person” other than an issuer or domestic concern (that is a U.S. “person”) “while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance [of a bribery scheme.” Here again, because the FCPA is explicit, the need for the canon of statutory interpretation at issue in Kiobel is negated.
Just because the canon of statutory interpretation at issue in Kiobel is not directly applicable to the FCPA, it does not follow that Kiobel will not have an impact on FCPA enforcement. To the contrary, the logic and rationale of many justices in Kiobel has direct bearing on certain aspects of FCPA enforcement, and indeed can be viewed as Supreme Court disapproval of certain aspects of FCPA enforcement.
Despite the above jurisdictional provisions clearly set forth in the FCPA, in recent years the DOJ has advanced broad jurisdictional theories in enforcement actions against foreign entities and foreign nationals.
For instance in 2006, the DOJ brought its first criminal FCPA enforcement action a foreign company, Norway-based Statoil (see here for the information), for engaging in a bribery scheme in Iran. The sole jurisdictional allegation the DOJ hung its hat on was the notion that Statoil received an invoice from a U.K. consulting company instructing that money “be routed through a U.S. bank account in New York to a bank account in Switzerland” which the company paid.
In announcing this action, which resulted in $21 million flowing into the U.S. Treasury, the DOJ stated (here) as follows.
“Although Statoil is a foreign issuer, the FCPA applies to foreign and domestic public companies alike, where the companies stock trades on American exchanges. This prosecution demonstrates the [DOJ’s] commitment vigorously to enforce the FCPA against all international businesses whose conduct falls within its scope.”
Many similar DOJ enforcement actions against foreign companies have been brought since. In fact, the majority of cases in the FCPA’s “Top Ten” in terms of fine and penalty amounts are against foreign companies including the Bonny Island, Nigeria enforcement actions in which the DOJ (and SEC) alleged that Dutch, French, and Japanese companies bribed Nigerian foreign officials. The jurisdictional allegations in these cases, which resulted in approximately $1.1 billion flowing into the U.S. Treasury, all hinged on wire transfers through New York based accounts and faxes and e-mails to the U.S. FCPA enforcement against foreign companies has been so prominent as to gain the attention of main-stream media such as the New York Times in this story.
In short, while the above FCPA enforcement actions against foreign actors (and several other examples could also be cited) did not rely on extraterritorial jurisdiction – because indeed there is none under the FCPA as to foreign actors – they did rely on what I’ve called de facto extraterritorial jurisdiction given the scant connection the bribery schemes had to the U.S.
It is here where the logic and rationale of many justices in Kiobel has direct bearing on this aspect of FCPA enforcement, and indeed can be viewed as Supreme Court disapproval of this aspect of FCPA enforcement.
For starters, Chief Justice Roberts recognized the delicate foreign policy consequences of the issue before the court – an issue that is present when the U.S. government alleges that foreign companies are bribing foreign officials on foreign lands.
It was also refreshing to see Chief Justice Roberts reference the “historical background against which the ATS was enacted” in giving meaning to the statute and how these historical events provided no support to the petitioner’s position. I have long argued (see here for “The Facade of FCPA Enforcement“) that certain aspects of FCPA enforcement are inconsistent with Congressional intent – a notion that becomes all the more apparent when reading “The Story of the FCPA” – the most extensive piece ever written on the FCPA’s history that I published this past December upon the FCPA’s 35th anniversary.
The concurring opinion of Justice Alito, joined by Justice Thomas, is also instructive in that it states when the ATS “claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritoriality.” Applying this to the FCPA context, can it truly be said that the above FCPA enforcement actions against foreign actors touched and concerned the territory of the U.S. with “sufficient force”?
Even the concurring opinion of Justice Breyer, joined by Justices Ginsburg, Sotomayor and Kagan, is instructive. This opinion did not invoke the presumption against exterritoriality in concluding that the claims should be dismissed, but rather found that jurisdiction was lacking for another reason. Namely that the foreign corporations, while having shares traded on U.S. exchanges, had an insufficient presence in the U.S. such that it would be “farfetched to believe, based solely upon the defendants’ minimal and indirect American presence, that this legal action helps to vindicate a distinct American interest.” The parallels to FCPA enforcement actions against foreign actors for alleging bribing foreign officials in foreign lands are obvious.
If FCPA enforcement actions against foreign actors are based on aggressive and dubious territorial jurisdictional theories – why don’t the companies aggressively litigate?
This highlights the second key difference between the ATS and the FCPA. The only reason the Kiobel case made it to the Supreme Court is because the plaintiffs in ATS cases have little leverage against the corporate defendants. ATS actions are civil actions brought by private plaintiffs and are thus actually litigated. I know, it seems a bit old-fashioned doesn’t it.
In contrast, certain courts have held (although by no means is the argument that the FCPA ought to have a private right of action a fait accompli) that the FCPA does not have a private right. The FCPA is thus only enforced by the DOJ (or the SEC as to issuers). These government enforcement agencies, unlike ATS plaintiffs, have big and sharp sticks that corporate defendants (and individuals as well) are mindful of in deciding how to proceed when subject to FCPA scrutiny.
Indeed, as explained in this prior post, when the above referenced Japanese company charged for making bribe payments to Nigerian officials raised jurisdictional issues, the DOJ stated that the company was not cooperating. Specifically the resolution document states as follows. “After initially declining to cooperate with the Department based on jurisdictional arguments, [the company] began to cooperate.” A company doesn’t cooperate with the DOJ in an FCPA enforcement, the chances are higher that the company will be indicted as opposed to being offered one of the resolution vehicles discussed below.
In short, to challenge a “plaintiff” in an FCPA enforcement action first requires a company to be criminally indicted by the DOJ or in the SEC context to be charged by the company’s primary government regulator. The impact on the company’s market capitalization upon indictment or civil charging is likely to be much greater than the FCPA fines or penalties the DOJ and/or SEC are seeking.
Indeed, in the FCPA’s 35 year history only two companies have put the DOJ to its burden of proof at trial and both companies ultimately prevailed. The first instance, involving an issuer occurred in 1991, and the second instance, involving a private company, occurred in 2011.
To make matters worse, per DOJ policy, all FCPA enforcement shall originate from Main Justice in Washington, D.C. This means from a discretion and supervision standpoint that a very small group of individuals are in the charge of an entire area of law. Contrast this with DOJ insider trading cases, financial fraud cases, etc. that can originate from any U.S. Attorneys office in the country
To make matters even worse, in 2004 the DOJ introduced non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs) to the FCPA context. These agreements have the practical effect of insulating DOJ FCPA enforcement theories in corporate enforcement actions from any judicial scrutiny.
These dynamics of FCPA enforcement are simply not present in ATS cases and for this very simple reason the ATS, unlike the FCPA, has been the subject of much litigation over the past decade. Imagine if the ATS was only enforced by the government, consolidated entirely in one office in Washington D.C., and that the government used NPAs and DPAs to resolve the cases.
The Supreme Court would have never heard the Kiobel case, nor would the Supreme Court have heard the Sosa ATS case in 2004, nor would various appellate courts have heard ATS cases over the past decade or so.
Returning to the original question – will Kiobel have an impact on FCPA enforcement? The logic and rationale of many justices in Kiobel would sure seem to have direct bearing on certain aspects of FCPA enforcement, and indeed can be viewed as Supreme Court disapproval of certain aspects of FCPA enforcement.
However, in order for judicial logic and rationale to be triggered, the judiciary needs to play a role, and in the FCPA context the judiciary rarely gets to play a role because of government enforcement policies.
Will The DOJ Also Bring An Enforcement Action Against Griffiths Energy?
Last month, in an event widely reported, Canadian authorities brought an enforcement action against Griffiths Energy International Inc. (“GEI”) under Canada’s Corruption of Foreign Public Officials Act (“CFPOA”)
This post summarizes that enforcement action, including allegations in the Statement of Facts concerning conduct in the U.S. that would seem to provide a basis for the U.S. Department of Justice to also bring a Foreign Corrupt Practices Act (“FCPA”) enforcement action against GEI.
Indeed, in GEI’s press release announcing resolution of the CFPOA matter, the company stated that it voluntarily disclosed the conduct at issue to both Canadian and U.S. authorities in November 2011 and specifically noted as follows. “Since its voluntary disclosure Griffiths Energy has been cooperating and working with the Royal Canadian Mounted Police, the Public Prosecution Service of Canada (“PPSC”) and the U.S. Department of Justice to bring the matter to a close.”
Given that the above release was unclear as to whether the DOJ investigation is active or closed, I asked GEI this precise question, and the response from the company’s external public relations advisor last week was as follows. “Griffiths Energy’s management is not available to comment.” That answer would seem to suggest that the DOJ investigation is not closed.
The Statement of Facts in the CFPOA matter (see here) focuses on GEI’s efforts to obtain a production sharing contract (“PSC”) with the African nation of Chad to provide GEI with the exclusive right to explore and develop oil and gas reserves and resources in the Borogop and Doseo blocks in southern Chad. In sum, GEI agreed that it “directly agreed to provide, and indirectly provided, improper benefits to a Chadian public official in order to further the business objectives of GEI and its subsidiaries.” The public official is Chad’s Ambassador to Canada, Mahamoud Adam Bechir (the “Ambassador”), and by extension his wife Ms. Nouracham Niam. Because Chad had no embassy located in Canada, the Ambassador resided in Washington D.C.
The Statement of Facts highlights a number of attempts by GEI to obtain the blocks in Chad as well as various consulting agreements designed to facilitate that process. The first consulting agreement in August 2009 was signed by GEI and the Ambassador, on behalf of a Maryland-based entity wholly-owned by the Ambassador, and it provided for a $2 million fee payable to the entity if “GEI was awarded the Doseo and Borogop blocks on or before December 31, 2009.” According to the Statement of Facts, “the services to be provided under the consulting agreement by the consultant were generally described as providing advisory, logistics, operational other assistance with respect to implementing GEI’s oil and gas projects in Chad.”
The Statement of Facts indicates however that “GEI’s outside legal counsel advised … that the Ambassador was a government official and that GEI could not make an offer or give an advantage or do anything directly or indirectly with him. The agreement was terminated and no payments were made by GEI pursuant to this agreement.”
However, a second consulting agreement, “with identical terms” was entered into in September 2009 between GEI and a Nevada entity wholly-owned by the Ambassador’ wife. According to the Statement of Facts, “a subscription agreement associated with the grant of 1,600,000 founders shares in GEI” to the Ambassador’s wife was also entered into and accompanied by a Western Union payment for the share price. The Statement of Facts also indicates that “two other individuals” nominated by the Ambassador’s wife also were given the opportunity to purchase founders shares. These individuals included the wife of the Deputy Chief of the Chadian Embassy in Washington D.C.
The Statement of Facts next discuss a meeting in Washington D.C. arranged by the Ambassador’s wife between “high-level officials from both GEI and the Government of Chad” to sign a memorandum of understanding (MOU) in relation to the blocks. The MOU was not signed at this meeting, but was shortly thereafter. During a change in Chad’s government, a final production sharing agreement was delayed, and a new MOU was signed in November 2010. According to the Statement of Facts, in January 2011, “GEI engaged new external legal counsel and transferred PSC-related documents for review” and GEI “also instructed new external legal counsel to either extend or redo the original consulting agreement” referenced above. In mid-January 2011, the renewed consulting agreement was signed by GEI and the Ambassador’s wife.
Thereafter, “GEI and its outside legal advisors then travelled to Chad to complete the negotiations for the PSC” and on January 19, 2011, the PSC was signed. Shortly thereafter, the $2 million payment from GEI to the Maryland entity wholly-owned by the Ambassador’s wife was made and deposited in the entity’s bank account in Washington D.C.
However, the Statement of Facts noted that even though the payments were made to persuade the “Ambassador to exercise his influence to assist GEI entering Chad,” no “influence was actually realized.”
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GEI is a privately-held Canadian company and as such the FCPA’s dd-3 prong could apply if (in the words of the FCPA) GEI “or any officer, director, employee, or agent … while in the territory of the United States, corruptly [made] use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance of” the payment scheme.
It is also interesting to note the relevance of the two “domestic concerns” (in the words of the FCPA) – namely the Maryland entity and Nevada entity – in the conduct at issue.
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Returning to the CFPOA action, this is only the third instance Canadian authorities have brought corporate charges under the CFPOA. (See this prior post with an analysis of the Nikko Resources enforcement action and general reference to the Hydro Kleen enforcement action). The Statement of Facts provide a useful description by the Canadian authorities of facts and circumstances they considered when arriving at the ultimate fine amount of $9 million (plus the 15% victim fine surcharge) for a total amount of $10.35 million.
Under the heading “Full and Extensive Cooperation with Authorities” the Statement of Facts indicates as follows.
- An entirely new management team was hired within GEI between July 2011 and August 2011 and six new independent directors were appointed to GEI’s board. “No current member of GEI’s management team or board of directors was involved with or knowledgeable about the consulting agreements that are issue in this case.”
- GEI’s current board and management learned of the consulting agreements “in the course of conducting due diligence in anticipation of its initial public offering which was to take place prior to Dec. 31, 2011. “Immediately” thereafter, a Special Committee comprised entirely of the independent members of GEI’s board was created and engaged outside legal counsel and forensic accounting experts.
- GEI “disclosed the existence of the issues [and the results of its internal investigation] to representatives of the Public Prosecution Service of Canada” as well as “enforcement authorities in the U.S.”
- “Hard costs paid to GEI’ legal and accounting advisors on the internal investigation currently stand at CAD $5.0 million.
- “GEI made the further decision to withdraw its IPO, causing GEI to write off approximately CAD $1.8 million in sunk pre-IPO expenses” and “causing GEI to incur significantly higher costs of capital through private placements in order to be able to continue its operations.”
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As to GEI’s “current development and exploration activities in Chad” see this recent company release.
Friday Roundup
Out with the tide, a former DOJ Fraud Section Chief speaks on voluntary disclosure, guidance issues, will candy fall from the pinata, schooled in the FCPA, a Section 1504 development, and “Minegolia.”
Tidewater Derivative Complaint Dismissed
As highlighted in this previous post, in November 2010 Tidewater Inc. was one of several companies to resolve a “CustomsGate” case. The conduct at issue focused on Azeri tax officials and Nigerian temporary import permits and the company resolved DOJ and SEC enforcement actions by agreeing to pay $15.7 million in fines and penalties.
As if on cue in this new era of FCPA enforcement, along came the private plaintiff firms representing shareholders who filed a derivative complaint alleging that officers and members of the Board of Directors of Tidewater breached their fiduciary duties “in that they: (1) knew or recklessly disregarded the fact that employees, representatives, agents and/or contractors were paying, had paid and/or had offered to pay bribes to Azerbaijani and Nigerian government officials to obtain favorable treatment for Tidewater; (2) caused Tidewater to pay bribes and to disguise the bribe payments as legitimate expenses in Tidewater’s books and financial disclosures; and (3) failed to maintain adequate internal controls to ensure compliance with the FCPA and Exchange Act.”
Earlier this week, the case was swept out with the tide as U.S. District Court Judge Jane Triche Milazzo dismissed the complaint – see here for the decision. In short, Judge Milazzo found that “Plaintiff did not adequately plead demand futility.” Judge Milazzo utilized various tests in reaching her decision such as director interest and independence and whether the board could impartially consider the merits of the demand without being influenced by improper considerations.
As to interest, Judge Milazzo stated as follows.
“This Court finds that the Complaint is completely devoid of any allegations of an interested director. There is no allegation that any director appeared on both sides of a transaction or expected to derive a personal financial benefit from it. Nowhere in the Complaint can it be found that any one of the directors, much the less a majority of them, benefitted from the bribes themselves, benefitted from failing to establish and maintain adequate internal controls, benefitted from enforcing policies and programs designed to prevent violations, benefitted from improperly recorded payment of bribes in Tidewater’s books and records or benefitted from inadequately training their employees, agents, representatives and/or contractors with respect to compliance with the FCPA.”
As to alleged director participation or knowledge , Judge Milazzo stated that the “Complaint falls woefully short of pleading facts that are sufficient to show that there was any knowledge or conscious disregard on behalf of the directors.”
As to whether the directors exhibited bad faith sufficient to overcome business judgment rule presumptions, Judge Milazzo stated as follows. “While Plaintiff’s allegations are sufficient to show that Tidewater was evidently violating both the FCPA and the Exchange Act, nowhere in the Complaint do Plaintiff’s allegations meet the specificity to show that the Individual Defendants were acting with the intent to violate these laws. ‘[T]he mere fact that a violation occurred does not demonstrate that the board acted in bad faith. Alleging that ‘upon information and belief’ the ‘Headquarters’ made the decision to avoid tax assessments in violation of the FCPA falls woefully short of the pleading requirements. Nowhere can this Court find who made this decision, how this decision was made or that there was an intent to violate any law. Moreover, the Court finds it significant that Tidewater’s directors voted and voluntarily initiated an FCPA investigation and advised the federal government of their violations before the government even suspected any violations.”
Tyrell on Voluntary Disclosure
You know the talking points. The DOJ wants companies to voluntarily disclose, not ifs, ands or buts about it. It’s interesting though how this becomes less of a black and white issues when individuals leave the DOJ.
In this recent Q&A in The Metropolitan Corporate Counsel, Steven Tyrell (a former DOJ Fraud Section Chief and current partner at Weil Gotshal – here) was asked the following question – “what is the role of voluntary reporting in establishing a good relationship with the regulatory and enforcement authorities?”
He stated as follows.
“In the first instance, if a company has a legal obligation to disclose – for example, government contractors are obliged to disclose fraud – then the analysis begins and ends there. Assuming there is no legal obligation that compels disclosure or no imminent threat of disclosure by an outside party, such as a newspaper, then I typically advise clients to take credible allegations of wrongdoing seriously, look into those allegations in a manner that is appropriate under the circumstances, and assess the nature and extent of the company’s exposure and the pros and cons of disclosure. Then, and only then, should a disclosure be made if it is in the best interest of the company – or, for a public company, if the securities laws require it. Of course, it often will not be in a company’s best interest to disclose if, for example, the allegations prove not to be credible or if it is unclear whether the conduct even amounts to a violation of law. Under those circumstances, a disclosure could unnecessarily embroil the company in a lengthy and costly government investigation and result in other repercussions such as triggering civil litigation and harm to a company’s reputation that could otherwise be avoided. It’s a challenging calculus. I can tell you from past experience that there are companies that have strong reputations for compliance with regulators and others that do not. However, the fact that a company doesn’t disclose a problem that ultimately comes to DOJ’s attention is not necessarily going to damage the company’s credibility with DOJ. Regulators recognize that not every allegation should be of interest to them – and, frankly, having counsel that knows when they’ll be interested and when they won’t is really important.”
Guidance Issues
As highlighted in this previous post, soon after Assistant Attorney General Lanny Breuer announced in November 2011 that FCPA guidance would be forthcoming in 2012, Senator Grassley sought guidance on the guidance and asked Attorney General Holder several follow-up questions for the record. For a copy of Holder’s responses, see here.
In this previous post, among others, I commented that non-binding DOJ guidance is not the best way to accomplish real and meaningful FCPA reform.
Thus, I completely agree with former DOJ Deputy Attorney General George Terwilliger and former DOJ attorney and Senate counsel Matthew Miner (both currently at White & Case, see here and here) when they state as follows in this article.
“The fact that the Justice Department recognizes the need for such guidance underscores the existence of blurry lines and fuzzy standards surrounding the FCPA. US businesses trying to compete successfully in the international commercial arena deserve better. Justice Department ‘guidance’ is neither enough, nor is it properly the role of prosecutors to be definitive interpreters of ambiguities in criminal laws. Congress writes the laws and, as the US Supreme Court has firmly established, has a responsibility to set clear standards for what is permissible and what is not. It should not stand aside in deference to the Justice Department’s plan to craft guidance, especially when that guidance will have no effect in court.”
Yara Fertilizer
It has been said before that anytime a foreign company is the subject of a corruption probe, the U.S. enforcement agencies are like children at a birthday party waiting for some candy to fall from the pinata. Think what you will of the analogy.
The Wall Street Journal recently reported (here) that “Norwegian fertilizer producer Yara International ASA’s chief executive, Jorgen Ole Haslestad, apologized Friday to the company’s employees after an investigation uncovered millions of dollars in ‘unacceptable’ payments in India and Switzerland, as well as ‘unacceptable offers of payments’ in Libya.” According to the article, the “unacceptable offers of payments” in Libya involve “a consultant related to the establishment of the company Libyan Norwegian Fertilizer Co., or Lifeco, in Libya, a joint venture with the Libyan National Oil Corp. and the Libyan Investment Authority.”
As noted on the company’s website here, Yara “has a sponsored Level 1 ADR program for American Depositary Receipts (ADRs), which represent ownership in shares of foreign (non-US) companies that trade on US financial markets.” Whether foreign companies, including those with Level 1 ADR’s can become subject to the FCPA, see this excellent piece “When Does an ADR Program Give U.S. Authorities FCPA Jurisdiction Over a Foreign Issuer?”
Time will tell if the candy falls.
Checking in on Wynn Resorts
Previous posts here, here and here focused on the Wynn-Okada dispute including Wynn’s $135 million charitable contribution to the University of Macau. On that topic, this recent Wall Street Journal article focused on the “web of political ties” between a Macau company paid by Wynn and government officials. Regarding Wynn’s FCPA compliance in expanding in Macau, company CEO Steve Wynn stated as follows. “This whole business of the Foreign Corrupt Practices Act—we were schooled in this.”
Final grade is pending.
Section 1504 Development
Several prior posts, see here for example, discussed Section 1504 of Dodd-Frank, the so-called Resource Extraction Disclosure Provisions and the long delay in SEC final rules. As noted in this Corruption Current post by Samuel Rubenfeld, the SEC recently announced here that on August 22nd, “the Commission will consider whether to adopt rules regarding disclosure and reporting obligations with respect to payments to governments made by resource extraction issuers to implement the requirements of Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“Minegolia”
There has been only one FCPA enforcement concerning, at least in part, business conduct in Mongolia (see here for the 2009 UTStarcom action). This is hardly surprising, as few companies subject to the FCPA have traditionally engaged in business in the country. However, as noted in this recent Al Jazerra article, Mongolia or “Minegolia” as the country is sometimes called, “is undergoing a rapid transformation, due to its incredible resource wealth in minerals such as coal, copper, and gold.” At the same time, the article notes that “Transparency International placed Mongolia 120th out of 183 nations on its corruption perception index” and that “90 percent of Mongolians believe politicians are benefitting from ‘special arrangements’ with foreign enterprises over mining rights.”
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A good weekend to all.