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Plaintiffs Allege Harm At The Hands Of Terrorist Group Funded In Part By Corrupt Sales Practices Of Various Multinational Companies

Mahdi Army

Various courts have held that the Foreign Corrupt Practices Act does not confer a private right of action. However, as highlighted in “FCPA Ripples” and several other posts on this website, private plaintiffs with increasing frequency are using allegations of corruption to allege other substantive causes of action in what amounts to “offensive use” of the FCPA and related topics.

Recently, American service members and civilians and their families who were killed or wounded while serving in Iraq filed this 203 page civil complaint against AstraZeneca, General Electric, Johnson & Johnson, Pfizer and Roche claiming that the companies’ alleged acts of corruption in Iraq present viable civil claims under the federal Anti-Terrorism Act and for intentional infliction of emotional distress. Specifically, the plaintiffs allege that they or their family members were attacked by a terrorist group (Jaysh al-Mahdi) funded in part by the defendants’ corrupt sales practices.

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Of Note From The Weatherford Enforcement Action

This previous post went long and deep as to the Weatherford International enforcement action.  This post continues the analysis by highlighting additional notable issues.

Why Do FCPA Violations Occur?

The question has been explored numerous times on this site (see here for instance).

Why do Foreign Corrupt Practices Act violations occur?

Do companies subject to the FCPA do business in foreign markets: (i) intent on engaging in bribery as a business strategy; or (ii) subject to difficult business conditions, trade distortions and barriers which create conditions in which harassment bribery flourishes.

As Joseph Covington (a former DOJ FCPA Unit Chief) commented in this prior guest post, he has “rarely seen [companies subject to the FCPA] affirmatively offering bribes in the first instance.”  Rather, Covington observed that companies doing business in international markets are “reacting to a world not of their making” and that “as the world shrinks companies who seek to do the right thing can’t help but confront corrupt officials – as customers, regulator and adjudicators – and confront them often.”

Consider the allegations against Weatherford Services Ltd. in Angola.

Per the DOJ’s allegations, if the company wanted a well screens business in Angola, it needed to have a local sponsor.  That trade distortion and barrier funneled Weatherford into a situation in which alleged “foreign officials” were given the ability to suggest the local partner(s) … and the rest is history as they say.

Per the DOJ’s other Angola allegations, even if Weatherford wanted to do business with non-governmental customers in Angola, an alleged “foreign official” was given the ability under Angolan law to approve the business arrangement.  The alleged “foreign official” demanded a bribe … and the rest is history as they say.

The above discussion should not be interpreted as excusing Weatherford’s alleged conduct, but it is certainly relevant to addressing the key question of why do FCPA violations occur.

As highlighted in this recent post, the root causes of much bribery and corruption are trade barriers and distortions.  Simply put, trade barriers and distortions create bureaucracy. Bureaucracy creates points of contact with foreign officials. Points of contact with foreign officials create discretion. Discretion creates the opportunity for a foreign official to misuse their position by making demand bribes.

[Note:  the original version of this post discussed the Swiss Freight Forwarding Agent identified in both the DOJ and SEC resolution documents as being Panalpina.  A knowledgeable source has informed me that Panalpina was not the Swiss Freight Forwarding Agent identified in the resolution documents]

The Last Iraq Oil for Food Enforcement Action?

One circumstance that has contributed to the bulk of FCPA enforcement activity in recent years was the Iraq Oil for Food Program (see here for the statistics).  As noted in this July 2012 post, with the exception of the then-pending Weatherford action, Iraq Oil for Food Program enforcement actions had largely run their course.

The Weatherford enforcement action was the only Iraq Oil for Food related enforcement action since the April 2011 enforcement action against Johnson & Johnson (see here for the prior post).

Will the Weatherford action be the last Iraq Oil for Food related enforcement action?

Are a Significant Percentage of Issuers Engaged in Criminal Acts?

The question posed is the same as in this prior post.

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, in the Weatherford action the DOJ alleged, in support of criminal FCPA internal controls violations, in pertinent part that 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”

“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”

“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”

“did not have a dedicated compliance officer or compliance personnel” and “although [the Company] 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”

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 as survey after survey indicates that a significant percentage of companies, including issuer’s subject to the FCPA’s internal controls provisions, fail to do such things.

The DOJ’s allegations in the Weatherford enforcement action are all the more notable given that the time period relevant to the conduct at issue was generally prior to 2008.  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 Weatherford enforcement action?

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 Weatherfords 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%.

Keeping FCPA Enforcement Statistics In Perspective

The below chart provides a summary of corporate FCPA enforcement data (DOJ and SEC combined) for the years 2007-2012, as well as notable circumstances that significantly skewed enforcement data statistics for a particular year.  (The below data was assembled using the “core” approach – see this prior post for an explanation).

Corporate FCPA Enforcement Actions (2007-2012)

Year

Enforcement Actions

Settlement Amounts

Of Note

2007

15

$149 million

Six   enforcement actions involved Iraq Oil for Food conduct and these enforcement actions comprised 40% of all enforcement actions and approximately 50% of the $149 million amount.

2008

10

$885 million

The   $800 million Siemens enforcement action comprised approximately 90% of the $885 million amount.

2009

11

$645 million

The   $579 million KBR / Halliburton Bonny Island, Nigeria enforcement action comprised approximately 90% of the $645 million amount.

2010

21

$1.4 billion

Six   enforcement actions, all resolved on the same day, centered on various oil   and gas companies use Panalpina in Nigeria.  Panalpina also resolved an enforcement action on the same day.Two enforcement actions (Technip and Eni / Snamprogetti) involved Bonny Island conduct.  In other words, there were 14 unique corporate enforcement actions in 2010.  Of further note, the two Bonny Island enforcement actions, Technip($338 million) and Eni/Snamprogetti ($365 million) comprised approximately 50% of the $1.4 billion amount.

2011

16

$503 million

The   $219 million JGC Corp. Bonny Island, Nigeria enforcement action comprised approximately 44% of the $503 million amount

2012

12

$260 million

None that significantly skewed the statistics.
TOTAL: 85 TOTAL: $3.9 billion

As demonstrated by the above chart, 2010 was the apex of FCPA enforcement, both in terms of the number of enforcement actions and settlement amounts.  FCPA enforcement in 2012 was less than in 2011, and FCPA enforcement in 2011 was less than in 2010.

Industry participants have offered various reasons for the decrease in FCPA enforcement in 2012 – all speculative and not empirically based.

What is not speculative and what is empirically based is an analysis of how just a few unique historical events had a significant impact on FCPA enforcement data between 2007 and 2011 and how these events place 2012 FCPA enforcement data in a proper context.

The events, as suggested by the above chart, are the following: (i) publication in 2005 of the so-called Volcker Report on the United Nations Iraq Oil for Food Program which served as a ready-made list of enforcement actions; (ii) in 2003 Georges Krammer, a former top official at Technip, shared information with French investigators concerning a $6 billion dollar project at Bonny Island, Nigeria; and (iii) several oil and gas companies utilized the services of Panalpina.

As indicated in the below charts, these unique historical events had a significant impact on FCPA enforcement data between 2007 and 2011.

Corporate FCPA Enforcement Actions Based on Iraq Oil For Food Conduct (2007-2011)

Enforcement Actions

Total Enforcement Action Percentage

 

Settlement Amounts

Total Settlement Amount Percentage

14

19%

$267 million

7%

Corporate Bonny Island, Nigeria FCPA Enforcement Actions (2007-2011)

Enforcement Actions

Total Enforcement Action Percentage

 

Settlement Amounts

Total Settlement Amount Percentage

4

5%

$1.5 billion

41%

Corporate Panalpina Related FCPA Enforcement Actions (2007-2011)

Enforcement Actions

Total Enforcement Action Percentage

 

Settlement Amounts

Total Settlement Amount Percentage

8

11%

$262 million

7%

As demonstrated by the above charts, the combined effect of just three unique historical events –  Iraq Oil for Food, Bonny Island conduct, and use of Panalpina – had a significant impact on FCPA enforcement data between 2007 and 2011.  These events served as the foundation for 35% of all corporate enforcement actions between 2007-2011 and resulted in 55% of the settlement amounts in corporate enforcement actions between 2007-2011.

Adding just the 2008 Siemens enforcement action to the settlement amount calculation, results in just four unique historical events accounting for 77% of settlement amounts in corporate enforcement actions between 2007-2011.

While the January 2012 FCPA enforcement action against Marubeni did involve Bonny Island conduct, the unique events identified above have run their course.  Recognizing these events and how they impacted FCPA enforcement data is important to understanding why FCPA enforcement has declined in recent years.

Even though FCPA enforcement has declined in recent years, unique events giving rise to FCPA enforcement actions have remained relatively constant between 2007 and 2012.  In 2007, corporate FCPA enforcement actions were the result of 15 unique events.  In 2008, corporate FCPA enforcement actions were the result of 10 unique events.  In 2009, corporate FCPA enforcement actions were the result of 11 unique events.  In 2010, corporate FCPA enforcement actions were the result of 14 unique events.  In 2011, corporate FCPA enforcement actions were the result of 16 unique events.  In 2012, corporate FCPA enforcement actions were the result of 12 unique events.

An Update From Australia – AWB Wheat Kickbacks To Iraq Result In Sentences

Today’s post is from Robert Wyld (Partner, Johnson Winter & Slattery – here).  Wyld is the Australia Expert for FCPA Professor.

*****

Nearly 13 years after wheat sales to Iraq started under the much maligned United Nations Oil-For-Food Program and 5 years after Australia’s corporate regulator, the Australian Securities and Investments Commission (ASIC) commenced civil penalty proceedings against various former AWB directors and officers, the Supreme Court of Victoria  handed down on August 9th and 10th sentences against the former AWB Managing Director, Andrew Lindberg and the former AWB CFO, Paul Ingolby (see judgments at ASIC v Lindberg [2012] VSC 332 and ASIC v Ingolby [2012] VSC 339 available at www.austlii.edu.au).

Court sentences

The Victorian Supreme Court accepted the agreed submissions on facts and penalty as presented to it by ASIC and each defendant although the sentence imposed on Mr Ingolby was reduced.

The Court made the following orders:

  • as against Mr Lindberg, declarations that he had contravened his duties as a director and officer contrary to s180(1) of the Corporations Act 2001, fined him $100,000 and disqualified him from managing the affairs of a corporation until 14 September 2014;
  • as against Mr Ingolby, declarations that he had contravened his duties as an officer contrary to s180(1) of the Corporations Act 2001, fined him $10,000 and disqualified him from managing the affairs of a corporation until 31 December 2012.

The Court made certain observations about the conduct of each of Mr Lindberg and Mr Ingolby. The Court found that the admitted conduct was akin to an admission of negligence in the performance of their duties. The contraventions against each did not involve deliberate wrongful acts, dishonesty or any moral turpitude. The Court was satisfied that each contravention was serious, thereby warranting the imposition of a fine.

The Lindberg Contraventions

The Lindberg contraventions covered 4 matters, in that Mr Lindberg failed:

  • to make inquiries as to whether the recovery of what was known as the “Tigris Debt” was in accordance with the prevailing UN resolutions or had been approved by the UN;
  • to inform the AWB Board that the Tigris Debt had been recovered by inflating certain wheat contract prices and the AWB agreement with Tigris Corporation (a Gibraltar company run by a Norman Davidson Kelly, a former BHP Billiton executive) incorrectly stated the payment as a “service fee” rather than a debt and the payment to AWB of a success commission;
  • to inform the AWB Board that “Project Rose” (the internal AWB review of allegations from the United States that AWB had paid kickbacks to Iraq to secure wheat contracts) was limited as 3 former employees likely to have knowledge of the kickback scheme had not been interviewed; and
  • to inform the AWB Board of the evidence he learned from the UN IIC Inquiry into the Oil-For-Food Program that a Jordanian transport company, Alia For Transportation & General Trade (Alia Transport) had been used as a front to channel funds to Iraq and all suppliers, including AWB, had paid such funds to Alia Transport and then to the Iraq Government.

None of the contraventions save for one involved anything surprising to those who had experienced the Cole Royal Commission into AWB’s wheat sales to Iraq. AWB and all its senior executives had consistently given evidence that they knew nothing wrong and they believed everything they did was approved by the UN and/or the Australian Government. Commissioner Cole did not accept this evidence and delivered a damning indictment on AWB’s corporate conduct[1].

Interestingly, in relation to the Tigris Debt, both ASIC and Mr Lindberg in their Agreed Facts annexed to the judgment, use as a starting point a proposition that the Iraq Grains Board (IGB) owed BHP Ltd (as BHP Billiton then was) a debt of approximately US$8m for a shipment of wheat (at [19] of the judgment). This is in direct contrast to the findings of Commissioner Cole who, having heard evidence from executives of both BHP and AWB (but not Mr Kelly who as a resident outside Australia declined to volunteer any evidence to the Commission), concluded that[2]:

  • AWB concluded a sale to the IGB of 20,000 tonnes of wheat;
  • BHP paid for that wheat against an AWB invoice; and
  • BHP entered into the transaction on the basis that, according to the evidence from John Prescott, its former CEO, it was a gift, ostensibly given to the Iraq Government because BHP was dead keen to secure preferential treatment if certain Iraq oilfields were opened up for exploration.

The evidence before Commissioner Cole was clear – the Australian Government had told AWB and BHP that any credit offer to sell wheat in return for payment, even deferred payment outside the UN sanction regime, was not permissible. Mr Prescott said this in his evidence[3]I did not believe or understand that the grant approved by me was a loan to Iraq. There was no obligation on Iraq to repay any amount to BHP.

In light of this evidence, ASIC’s starting point, accepted by the Court, appears very peculiar. It must be acknowledged that these events occurred long before Mr Lindberg became AWB’s Managing Director. By the time he was in charge at AWB, the “Tigris Debt”, once a gift had transmogrified into a debt and then a payment for services rendered, involving an undisclosed success fee. Some might think this gets very close to a secret commission involving the creation of false or misleading documents, while others may legitimately say no, particularly as the intent of the parties to the Tigris Debt is still hotly contested and before the Victorian Court. Perhaps it was sufficient for ASIC to start from a base upon which it could secure a successful result. After all, a regulator needs to win, even if by winning only half the story is told.

The Ingolby Contraventions

In contrast to Mr Lindberg, the Ingolby contraventions appeared more prosaic.

Mr Ingolby was subjected to one alleged contravention – that between December 2001 and September 2004, as AWB’s CFO, he failed to discharge his duties as an officer of the company, in that he:

  • co-authorised payments to Alia Transport for inland transport fees;
  • had information available to him that questioned the legitimacy of those fees and that they were ultimately being paid to the Iraq Government;
  • took no steps to ascertain the true position;
  • took no or no reasonable steps to inform the AWB Board of the information available to him,

in circumstances where he knew that the Oil-For-Food Program prohibited direct payments  to Iraq and payments from the escrow account controlled by the UN could only be made for the purposes of the Program.

The Court took into account the role actually played by Mr Ingolby within AWB and the nature of how AWB conducted its wheat sale business. In short, Ingolby admitted that he failed to “join the dots” and had he done so with the benefit of hindsight, he would have realised that AWB was acting in breach of the UN sanctions (which did not, at that time, give rise to any direct civil or criminal offence in Australia). The Court accepted, in particular, that Mr Ingolby:

  • acted with the degree of care and diligence consistent with his statutory obligations;
  • he was not involved in making the wheat contracts;
  • his areas of responsibility concerned areas outside the sales and marketing of wheat contracts; and
  • he had cooperated with ASIC.

The Court therefore reduced the proposed penalty from $40,000 to $10,000 and shortened the period of disqualification.

The question still remains what would have Mr Ingolby or any other AWB executive done had they “joined the dots” – continue a very lucrative commercial relationship with Iraq selling Australian wheat to the benefit of the company and Australian wheat farmers with bumper wheat crops, or investigating and reporting the conduct to the UN with the risk of losing out on future wheat sales – therein lies the moral barometer!

In one sense, Mr Ingolby was in the classic position of a corporation CFO – not directly involved in the sales relationship with the customer, but was sufficiently across the financing processes that he was “involved” in the transactions by co-authorising payments. It is this salutary lesson to CFO in any large corporation engaged in trade in “high risk” jurisdictions – know your customer and know your business. Whether you can rely on what others tell you will depend upon the circumstances, but the more complex and lucrative the commercial pressures are, the greater the personal risk if it all goes pear-shaped.

General observations

In both judgments, the Court made it clear that it treated the allegations and contraventions as serious, and worthy of a penalty that acted to provide sufficient general deterrence to others committing similar offences. The Court’s attitude to directors and officers who are found to have contravened their clear statutory duties is best described by Justice Robson[4]:

The obligation imposed by s 180(1) demands a standard of care and diligence in directors and other officers of the corporation in managing the affairs of the corporation…The obligation is important in ensuring that proper standards of care and diligence are maintained in our corporations…The punishment determined by the Court may appear harsh in light of a career of honest and loyal conduct particularly where the personal and family hardship experienced by the defendant (Lindberg) is taken into account. Nevertheless, there is a significant public importance in appropriate standards being expected of directors and other officers of corporations. These standards of conduct are not unduly high…The contraventions…involved a lack of care and diligence in the performance of his duties that a reasonable director or other person would exercise in his position.

The ASIC proceedings continue on against the remaining defendants although for how long the war of attrition will continue, is anyone’s guess!


 

[1] A copy of the 5 volume report can be found at www.oilforfoodinquiry.gov.au.

[2] Cole Report, Vol 3, page 163, para 27.84.

[3] Cole Report, Vol 3, page 162, para 27.79.

[4] Justice Robson delivered the 2 sentencing judgments, at [68] to [73] of ASIC v Lindberg and [56] to [61] of ASIC v Ingolby:

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