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%.
In A Way, It Is Like Gambling
Last week Penn National Gaming Inc. Chairman Peter Carlino spoke at the Baron Investment Conference in New York. This article by CNBC’s Lawrence Delevingne states:
“The U.S. government is too restrictive in trying to prevent its companies from corruption abroad and it’s hurting business expansion in Asia and elsewhere, according to Carlino. ‘There’s a little bit of overzealousness in this,’ Carlino said during a speech at the Baron Conference. ‘Those are limitations that American companies face that others don’t.’ Carlino said he wants to get into the lucrative Asian casino market—Las Vegas Sands already has a large presence in Macau, for example—but hasn’t been able to out of fear of violating U.S. rules. […] ‘There’s a problem for U.S. businesses, frankly. We had an interesting opportunity in a country that I won’t name; we were hampered in a major way by the American Foreign Corrupt Practices Act,’ he said. […] Carlino said Penn looked at expanding into the Asian country via an existing company but one of the line items of the business was to pay off the border guards. ‘It seems OK to me, frankly. If that’s the game, we’ll play it,’ Carlino said to chuckles from the mostly retiree Baron fund-shareholder audience. ‘There are problems for American companies trying to do business.’ ‘If it’s there, we’re looking at it. Problem is, the pickings are slim,’ he said of countries like Burma, India and Sri Lanka. ‘So finding the right opportunity, although we look and I trust we will, is tough,’ Carlino added.”
There are two ways to view Carlino’s comments.
The first is that Carlino meant that the FCPA – the law passed by Congress – is hurting U.S. business abroad. If so, well that is a correct policy decision that Congress knew and accepted when it passed the FCPA in 1977. For instance, as highlighted in “The Story of the Foreign Corrupt Practices Act,” during a Congressional hearing Representative John Moss stated:
“To think that no loss of business would occur in every instance would be unrealistic. Can we allow this to occur? Yes, if that is the small price we must pay to return morality to corporate practice. Yes, if that is the small price we pay to show that U.S. firms compete in terms of price, quality, and service and not in terms of the size of a bribe. Real competition works. The vast majority of American companies have operated successfully in foreign countries without the need to resort to bribery.”
Likewise, Treasury Secretary Michael Blumenthal stated:
“To the very, very small extent a particular company may lose a particular contract because it refuses to engage in this practice, I would be willing to say, all right, we will be at a slight competitive disadvantage and we will all sleep the better for it.”
The second way to view Carlino’s comments is that he conflated FCPA enforcement with the actual FCPA – as Donald Trump also did as highlighted in this prior post. In other words, Carlino confused FCPA enforcement with the FCPA.
Simply put, there is often a difference between FCPA enforcement and the FCPA.
For instance, Congress specifically exempted facilitation payments from the FCPA’s anti-bribery provisions. However, it is an open question whether the facilitating payments exception has any real meaning or whether the enforcement agencies have essentially repealed this exception through its enforcement theories. For instance, the SEC’s former Assistant Director of Enforcement has called the FCPA’s facilitating payment exception “illusory” and stated:
“The drafters of the FCPA recognized that such demands for ‘grease payments’ are a reality in many countries, and accordingly made clear that certain payments made to expedite the approval of permits or licenses, or to prompt the expeditious performance of similar low-level ministerial duties, fell outside the ambit of the statute’s anti-bribery provisions. Yet that exception for ‘facilitating payments’ […] is becoming harder and harder to rely on. […] The DOJ and SEC have pressed a narrow view of the exception in recent years … […] Of course, the fact that the FCPA’s twin enforcement agencies have treated certain payments as prohibited despite their possible categorization as facilitating payments does not mean a federal court would agree. But because the vast majority of enforcement actions are resolved through DPAs and NPAs, and other settlement devices, these cases never make it to trial. As a result, the DOJ and the SEC’s narrow interpretation of the facilitating payments exception is making that exception ever more illusory, regardless of whether the federal courts – or Congress – would agree.”
Similarly, the FCPA’s books and records and internal controls provisions are qualified by the term “reasonable” and the only substantive judicial decision on these provisions (see here for the prior post) stated:
“The definition of accounting controls does comprehend reasonable, but not absolute, assurances that the objectives expressed in it will be accomplished by the system. The concept of ‘reasonable assurances’ contained in [internal control provisions] recognizes that the costs of internal controls should not exceed the benefits expected to be derived. It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs. It appears that Congress was fully cognizant of the cost-effective considerations which confront companies as they consider the institution of accounting controls and of the subjective elements which may lead reasonable individuals to arrive at different conclusions. Congress has demanded only that judgment be exercised in applying the standard of reasonableness. […] It is also true that the internal accounting controls provisions contemplate the financial principle of proportionality—what is material to a small company is not necessarily material to a large company.”
SEC guidance on the FCPA’s books and records and internal controls provisions stand for the following propositions:
- not all books and records are within the purview of the provisions;
- issuers should not face liability when its management was not aware and reasonably should not have known of the conduct at issue;
- the principal objective of the provisions is to reach knowing or reckless conduct;
- thousands of dollars ordinarily should not be spent conserving hundreds;
- the provisions are not an independent unrestrained mandate to establish novel or unprecedented corporate recordkeeping standards;
- if conduct was engaged in by a low-level employee, without the knowledge of top management, and with appropriate corrective action taken, an enforcement action against the issuer is not warranted; and
- the provisions do not require a company or its senior officials to be guarantors of all conduct of company employees.
Nevertheless, the enforcement agencies frequently bring FCPA enforcement actions against issuers without any allegation or suggestion that the conduct at issue was known or approved by top management (see here for example). In this new era of FCPA enforcement, the position of the enforcement agencies appear to be that indeed corporate officers are guarantors of all conduct of company employees and that fail-safe accounting and internal controls measures are indeed the standard (see here for example).
Against this backdrop, seeking to do business in challenging foreign markets through employees or agents may indeed be- based on the current enforcement theories – in a way like gambling.
If this is what Carlino meant, perhaps he has a point. The Congress that enacted the FCPA in 1977 and the Congress that amended the FCPA in 1988 certainly appeared to empathize.
Is Trust Prudent And Reasonable?
This new era of Foreign Corrupt Practices Act enforcement has resulted in many things, including FCPA Inc. marketing and selling the latest solution, software, or other strategy to purportedly achieve FCPA compliance. This previous post noted:
“Annual FCPA training, annual FCPA certifications, databases full of customers with government ownership, an automated process for this and that, periodic FCPA compliance reminders, FCPA compliance as an agenda item on each meeting, etc. All of these are considered best practices, but the question is asked – is too much FCPA compliance actually a net negative?”
This recent article “Trust: The Unwritten Contract in Corporate Governance” by David Larcker (the Morgan Stanley Director of the Center for Leadership Development and Research at the Stanford Graduate School of Business and senior faculty member at the Rock Center for Corporate Governance at Stanford University) and Brian Tayan (a researcher with Stanford’s Center for Leadership Development and Research) caught my eye.
The authors ask:
“Companies spend tens of millions of dollars annually on incentive compensation, director salaries, audit fees, internal auditors, and compliance efforts to satisfy a long list of rules, regulations, and procedures imposed by legislators and the market. Would corporate governance improve if companies instead had fewer controls. Would shareholders be better off if organizations instead demonstrated more trust in employees and executives?”
The authors state:
“Once established, a high-trust governance system allows for the reduction or elimination of many of the costs, controls, and procedures that characterize today’s governance systems. […] “[C]ompanies could eliminate many of the bureaucratic checks and controls that are often implemented to prevent and detect legal or regulatory violations. Instead, employees would self monitor, with line-managers responsible for reporting inadvertent legal or regulatory missteps to higher level executives.” […] “High-trust settings are characterized by lower bureaucracy, simpler procedures, and higher productivity. Would shareholders be better off if companies had fewer formal corporate governance requirements and instead devoted greater effort to fostering trust?”
Applied to the FCPA context, would FCPA compliance be better achieved if companies had fewer formal internal controls and instead devoted greater effort to fostering trust within a business organization?
Would such an approach even satisfy an issuer’s obligations under the FCPA’s internal controls provisions which require that issuers devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly authorized, recorded, and accounted for by the issuer?
The FCPA defines “reasonable assurances” as “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”
Relevant legislative history from 1988 when this definition was added to the FCPA states:
“The prudent [person] qualification [was adopted] in order to clarify that the current standard does not connote an unrealistic degree of exactitude or precision. The concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.”
The only substantive judicial decision concerning the FCPA’s internal controls provisions (SEC v. World-Wide Coin – see here for the prior post) states:
“The concept of ‘reasonable assurances contained in [the internal controls provision] recognizes that the costs of internal controls should not exceed the benefits expected to be delivered.”
Beyond this legal authority, in FCPA guidance issued in 1981, the SEC stated:
“The [FCPA] does not mandate any particular kind of internal controls system. The test is whether a system, taken as a whole, reasonably meets the statute’s specified objectives. ‘Reasonableness,’ a familiar legal concept, depends on an evaluation of all the facts and circumstances.” […] Private sector decisions implementing these statutory objectives are business decisions. And, reasonable business decisions should be afforded deference. This means that the issuer need not always select the best or the most effective control measure. However, the one selected must be reasonable under all the circumstances.”
Likewise in the 2012 FCPA Guidance the DOJ and SEC stated:
“Like the ‘reasonable detail’ requirement in the books and records provision, the Act defines ‘reasonable assurances’ as ‘such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.’”
“The Act does not specify a particular set of controls that companies are required to implement. Rather, the internal controls provision gives companies the flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.”
Imagine a situation in which an issuer becomes the subject of FCPA scrutiny based on the conduct of a foreign country manager or sales representative.
During a meeting with the DOJ and SEC, the enforcement attorneys ask company counsel what internal controls existed as relevant to the country manager or sales representative.
Company counsel responds – “we trusted” him or her. This would likely cause the enforcement attorneys to laugh out loud.
However, the relevant legal question is – was trust prudent and reasonable?
Does The DOJ Really Believe That A Significant Percentage Of Issuers Are Engaged In Criminal Acts?
The DOJ has stated that non-prosecution and deferred prosecution agreements “benefit the public and industries by providing guidance on what constitutes improper conduct.” (See here).
With that in mind, consider the recent Total enforcement action (see here for the prior post). The DOJ alleged, in support of criminal FCPA internal controls violations, as follows.
“Total: (a) failed to implement adequate anti-bribery compliance policies and procedures; (b) failed to maintain an adequate system for the selection and approval of consultants; (c) failed to conduct adequate audits of payments to purported consultants; (d) failed to establish a sufficiently empowered and competent corporate compliance office; (e) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed; (f) failed to evaluate regularly the effectiveness of the company’s compliance and ethics program; (g) failed to provide appropriate incentives to perform in accordance with the compliance and ethics program; (h) concealed the consulting agreements’ true nature and true participants; (i) performed no due diligence concerning the named or unnamed parties to these agreements; and (j) lacked controls sufficient to provide reasonable assurances that the consulting agreements complied with applicable laws.”
If the DOJ believes that each of the above constitutes a criminal violation of the internal controls provisions, then a significant percentage of issuers are engaged in criminal acts.
Survey after survey indicates that a significant percentage of companies, including issuer’s subject to the FCPA’s internal controls provisions, fail to maintain an adequate system for selection and approval of consultants, fail to conduct audits of payments to consultants, fail to conduct due diligence of third-parties, and fail to regularly evaluate the effectiveness of its compliance and ethics program.
For instance, the recently issued Kroll / Compliance Week Anti-Bribery and Corruption Benchmarking Report found “that 47 percent of all respondents say they conduct no anti-corruption training with their third parties” and “of the remainder who do train their third parties on anti-corruption, only 30 percent of that group believe their efforts are effective.”
Likewise, as noted in this recent post, according to a recent survey “only 30% of all survey respondents say their companies always conduct a risk review of existing business relationships and ties to agents in foreign countries.”
Further, as noted in this prior post, a survey found as follows. “Despite the significant risks and specified demands of regulators [as to third parties], our survey suggests that the corporate response to mitigating third-party risks is still inadequate. Many companies are failing to adopt even the most basic controls to manage their third-party relationships.” “Effective third-party management does not end at the performance of due diligence. Third parties also should be monitored on an ongoing basis, including regular compliance assessments and audits. It is therefore worrying that only 45% of respondents identified audit rights or regular audits of the third party as a process in place to monitor the relationship.”
Indeed, as even the DOJ and SEC recognized in the November 2012 FCPA guidance, “64% of general counsel whose companies are subject to the FCPA say there is room for improvement in their FCPA training and compliance programs.” (See here for the prior post).
The DOJ’s allegations in the Total enforcement action are all the more alarming given that the time period relevant to the conduct at issue was between 1995 to 2004. Is the DOJ suggesting that nearly every issuer during this time period was engaged in criminal acts given that issuers during that time period likely failed to engage in all of the compliance practices identified in the Total enforcement action?
Perhaps the Total enforcement action is the product of vague and sloppy pleading. Because there is little chance that the DOJ will ever have to prove its allegations, this tends to happen in many FCPA enforcement actions. Yet, if the DOJ truly believes that all of the above generic allegations in the Total enforcement action represent issuer criminal violations, then the DOJ is suggesting that a significant percentage of issuers are engaged in criminal acts.
If so, this is troubling.
In my article “Grading the Foreign Corrupt Practices Act Guidance” and in this prior post, I detailed how DOJ officials stated that the legal community can have confidence that the enforcement agencies will act consistently with the Guidance. I then observed that the FCPA Guidance can serve as a useful measuring stick for future enforcement agency activity and detailed various statements in the Guidance that can serve this purpose.
Certain statements concerned the FCPA’s book and records and internal controls provisions, including that the FCPA “does not specify a particular set of controls that companies are required to implement” and that the concept of reasonableness (a key statutory element) “of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.”
Friday Roundup
From the SEC Chairman, Congress is capable, adding to the list, scrutiny alerts, and for the reading stack. It’s all here in the Friday Roundup.
From the SEC Chairman
SEC Chairman Elisse Walter stated as follows earlier this week (see here) in opening a Foreign Bribery and Corruption Training Conference for law enforcement officials from around the world.
“[W]e have found that corrupt practices by a registered company are generally indicators of larger problems within the business – problems with the potential to harm that business’s shareholder-owners. Bribery and other corrupt practices may result in accounting fraud and falsified disclosures where shareholders are not getting an accurate picture of a company’s finances in their regulatory filings. Bribery means losing control of – or deliberately falsifying – books and records. Often, key executives or board members are kept in the dark, limiting their ability to make informed decisions about the company’s business. Obviously, engaging in corrupt practices means weakening or circumventing internal control mechanisms, leaving a company less able to detect and end not just corruption but other questionable practices. A company that has lost its moral compass is in grave danger of losing its competitive roadmap, as well – while shareholders are kept in the dark.”
Congress Is Capable
Well, at least as to certain issues.
Such as introducing and passing laws that expressly describe state-owned entities (“SOEs”). In reading my historical account of the FCPA’s legislative history, “The Story of the Foreign Corrupt Practices Act” or my “foreign official” declaration here, you will learn that despite being aware of SOEs, despite exhibiting a capability for drafting a definition that expressly included SOEs in other bills, and despite being provided a more precise way to describe SOEs, Congress chose not to include such definitions or concepts in S. 305, the bill that ultimately became the FCPA in December 1977.
This prior post highlighted Congress’s capability in capturing SOEs in Dodd-Frank Section 1504 and along comes another example which demonstrates that Congress is capable of legislating as to SOEs. Recently, H.R.491 – the Global Online Freedom Act of 2013 was introduced in the House. The purpose of the bill is “To prevent United States businesses from cooperating with repressive governments in transforming the Internet into a tool of censorship and surveillance, to fulfill the responsibility of the United States Government to promote freedom of expression on the Internet, to restore public confidence in the integrity of United States businesses, and for other purposes.”
The bill defines “foreign official” as follows.
The term ‘foreign official’ means– (A) any officer or employee of a foreign government or of any department; and (B) any person acting in an official capacity for or on behalf of, or acting under color of law with the knowledge of, any such government or such department, agency, state-owned enterprise, or instrumentality.” (emphasis added).
It is a basic premise of statutory construction that Congress is presumed not to use redundant or superfluous language. Granted, H.R.491 is not yet law, but let’s assume it becomes law as introduced. If instrumentality includes SOEs (as the enforcement agencies maintain), then Congress will violate this legislative maxim by using redundant or superfluous language in H.R. 491.
Adding To The List
The Heritage Foundation recently published (here) a speech by Peter Hansen titled “Unleashing the U.S. Investor in Africa: A Critique of U.S. Policy Toward the Continent.” Hansen critiqued U.S. government thinking about African development, including Ambassador statements that it is important to raise incentives for overly “cautious” U.S. companies to invest in Africa. Hansen stated that this “mistaken assumption” assumed that “mainstream U.S. companies will be motivated more by the prospect of higher rewards than by the diminishment of risks.” He noted that this view is not just wrong, but counterproductive and stated as follows.
“The problem with Africa is not a lack of attractive prospects, but rather Africa’s risk profile. With few exceptions, sensible U.S. direct investors (that is, those who run projects, not just take portfolio positions) have steered clear of Africa for the simple reason that Africa’s risks often exceed their risk tolerance. The African market has been left largely to non-Americans, to the unsophisticated seekers of El Dorado, and to a legion of “chancers” who seek sweetheart deals with no money down. The resulting tales of woe coming out of Africa, due largely to poor investment planning or thwarted get-rich-quick schemes, serve wrongly to tarnish Africa’s reputation. By exclusively raising incentives and failing to reduce risks, Ambassador Carson’s approach simply encourages those already prone to failure, without inspiring broad-spectrum investment by serious U.S. companies. Such bedrock U.S. firms do not need higher incentives. Africa already presents high-return opportunities. What serious U.S. firms need instead is for Africa’s risks to be reduced. Rewards that cannot be obtained are, after all, just mirages. The easiest way for the U.S. government to reduce risks for U.S. investors in Africa is to provide them with legal protection. The basic legal tools for protecting U.S. investors are double tax treaties (DTTs), often called double tax agreements (DTAs) and bilateral investment treaties (BITs).”
Query whether an FCPA compliance defense should be added to this list? See here to download my article “Revisiting a Foreign Corrupt Practices Act Compliance Defense.”
Scrutiny Alerts and Updates
This previous post highlighted the scrutiny Brookfield Asset Management (a Toronto based global asset management company with shares traded on the NYSE) was facing in Brazil concerning allegations that its subsidiary paid bribes to win construction permits. As the Wall Street Journal recently reported (here), Sao Paulo, Brazil prosecutors filed civil charges against the company’s Brazilian subsidiary, two of its top executives and a former employee. The prosecutor is quoted in the WSJ as saying that “Brookfield has created a high system of bribery in order to obtain approval for its projects quickly and with irregularities.” A spokesman for the company stated as follows. “These are unproven allegations made by a former employee. We don’t believe Brookfield did anything wrong and we are cooperating with authorities.”
This previous post highlighted scrutiny of EADS subsidiary, GPT Special Management Systems in the U.K. The Financial Times recently reported here that the FBI is also probing corruption allegations against GPT “relating to a contract in Saudi Arabia.” The article states as follows. “The FBI has interviewed a witness and taken possession of documents in connection with allegations that GPT bribed Saudi military officials with luxury cars and made £11.5m of unexplained payments – some via the US – to bank accounts in the Cayman Islands.”
This recent Reuters article reports that Italian police arrested the head of defense group Finmeccanica SpA (Giuseppe Orsi) on a warrant alleging that he paid bribes to win an Indian contract. According to the report, Prosecutors accuse Orsi of paying bribes to intermediaries to secure the sale of 12 helicopters in a 560 million euro ($749 million) deal when he was head of the group’s AgustaWestland unit. Finmeccanica, which is approximately 30% owned by the Italian government, has ADRs registered with the SEC and AgustaWestland does extensive business in the U.S. (see here), including with the U.S. government. According to this Wall Street Journal article, Italian prosecutors are also “investigating [Finmeccanica] on suspicion that it engaged in corrupt activities to win various types of contracts in Latin America, Asia, and at home.”
This recent Bloomberg article reports that “Eni SpA Chief Executive Officer Paolo Scaroni is being investigated for alleged corruption in an Italian probe of contracts obtained by its oil services company, Saipem SpA, in Algeria.” Eni has ADRs registered with the SEC. In 2010, Eni resolved (see here) an SEC FCPA enforcement action concerning Bonny Island, Nigeria conduct. In resolving the action, Eni consented to the entry of a court order permanently enjoining it from violating the FCPA’s books and record and internal controls provisions.
NCR Corporation stated in a recent release here, in pertinent part, as follows concerning its FCPA scrutiny.
“Update regarding OFAC and FCPA Investigations
The Company and the Special Committee of the Company’s Board of Directors have each completed their respective internal investigations regarding the anonymous allegations received from a purported whistleblower regarding certain aspects of the Company’s business practices in China, the Middle East and Africa. The principal allegations relate to the Company’s compliance with the Foreign Corrupt Practices Act (“FCPA”) and federal regulations that prohibit U.S. persons from engaging in certain activities in Syria.
[…]
The Company has made a presentation to the staff of the Securities and Exchange Commission(“SEC”) and the U.S. Department of Justice (“DOJ”) providing the facts known to the Company related to the whistleblower’s FCPA allegations, and advising the government that many of these allegations were unsubstantiated. The Company’s investigations of the whistleblower’s FCPA allegations identified a few opportunities to strengthen the Company’s comprehensive FCPA compliance program, and remediation measures were proposed and are being implemented. As previously disclosed, the Company is responding to a subpoena of the SEC and requests of the DOJ for documents and information related to the FCPA, including matters related to the whistleblower’s FCPA allegations.”
Investigating the purported whistleblower’s allegations has been a costly exercise for NCR. In a recent earnings conference call, company CFO Bob Fishman stated that the “overall cost” has been approximately $4.8 million.
Reading Stack
See here for the New York Times DealBook writeup of oral arguments in SEC v. Citigroup – an appeal which focuses of Judge Jed Rakoff’s concerns about common SEC settlements terms, including neither admith nor deny.
FCPA enforcement statistics are over-hyped for compliance assessments says Ryan McConnell (Morgan Lewis) in this Corporate Counsel article. In this Corporate Counsel article, McConnell and his co-author compare 2012 to 2011 numbers in terms of facilitation payments data found in corporate policies.
The three types of employees one encounters when conducting FCPA training – here from Alexandra Wrage (President, Trace International).
If for no other reason, because of the picture associated with this recent post on thebriberyact.com.
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A good weekend to all.