Category: Petrobras

Friday Roundup

Wal-Mart related, quotable, spot-on, scrutiny alerts and updates and prosecutorial common law defeat. It’s all here in the Friday roundup.

Wal-Mart Related

In its recent 2Q FY2016 earnings call Wal-Mart stated:

“FCPA and compliance-related costs were approximately $30 million, comprised of approximately $23 million for the ongoing inquiries and investigations, and approximately $7 million for our global compliance program and organizational enhancements. Last year, FCPA and compliance-related costs were $43 million in the second quarter. We expect FCPA-related expenses to continue to trend down, so we now expect our full year FCPA-related expenses to range between $130 million and $150 million. This compares to our guidance in February of $160 to $180 million.”

Doing the math, Wal-Mart’s 2Q FCPA and compliance-related costs is approximately $470,000 per working day.

Over the past approximate four years, I have tracked Wal-Mart’s quarterly disclosed pre-enforcement action professional fees and expenses. While some pundits have ridiculed me for doing so, such figures are notable because, as has been noted in prior posts and in my article “Foreign Corrupt Practices Act Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.  Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.

While $470,000 per working day remains eye-popping, Wal-Mart’s recent figure suggests that the company’s pre-enforcement action professional fees and expenses have crested as the figures for the past seven quarters have been approximately $516,000, $563,000, $640,000, $662,000, $855,000, $1.1 million and $1.3 million per working day.

In the aggregate, Wal-Mart’s disclosed pre-enforcement professional fees and expenses are as follows.

FY 2013 = $157 million.

FY 2014 = $282 million.

FY 2015  = $173 million.

FY 2016 = $63 million (projections for the remainder of the FY of approximately $67 – $87 million)

Quotable

Regarding the recent BNY Mellon enforcement action, Jay Darden (Paul Hastings and recently the Assistant Chief of the DOJ’s Fraud Section) stated: “it’s not the U.S. government’s job to regulate hiring policy.” (See here).

*****

In this Corporate Crime Reporter, Lamia Matta (Miller & Chevalier) states:

“Companies are less aggressive in [voluntarily] reporting. Companies are finding that they don’t save a whole lot by going in and self-reporting as soon as they find a problem. They are still subject to extensive investigation. The cost is the same if they self-report and then cooperate as it would be if they just cooperate. The agencies say that is not the case. But if you look at the trends, that does seem to be the case.”

“The other thing is that the decision to self-report is taking a lot longer than it once used to. Companies might think — it may make sense to self-report, but we are going to wait it out a bit before we do so. The process is now much more considered than it once used to be.”

“And companies are not as inclined to buy into the agencies’ aggressive theories of jurisdiction as they might have once been. For all of these reasons, you are seeing companies being less quick to self report. I don’t know if the self-reporting numbers are down or not. They are difficult to track.”

Spot-On

This Bryan Cave alert regarding the recent order in the DOJ’s enforcement action against Lawrence Hoskins (see here for the prior post) is spot-on.

It states:

“This holding directly contradicts the “guidance” provided by the U.S. in its Resource Guide, published jointly by the Department of Justice and the Securities and Exchange Commission. That guidance states unequivocally:

‘Individuals and companies, including foreign nationals and companies, may also be liable for conspiring to violate     the FCPA—i.e., for agreeing to commit an FCPA violation—even if they are not, or could not be, independently charged with a substantive FCPA violation.

* * *

A foreign company or individual may be held liable for aiding and abetting an FCPA violation or for conspiring to violate the FCPA, even if the foreign company or individual did not take any act in furtherance of the corrupt payment while in the territory of the United States.’

This Order reminds companies and individuals that some of the legal principles surrounding the FCPA recently have been developed out of settlements with the government instead of through the courts. On issues as important as these, it can be worthwhile to test some of the government’s theories in the only place they can be adjudicated.”

To learn about other selective information, half-truths, and information that is demonstratively false in the FCPA Guidance see “Grading the Foreign Corrupt Practices Act Guidance.”

Scrutiny Alerts and Updates

Ford Motor Co.

Reuters reports:

“The [SEC] is helping German prosecutors to investigate the alleged payment of bribes by Ford to speed the passage of containers through Russian customs, a source at the U.S. carmaker said on Tuesday. Ford and Schenker, the freight business of state-owned German rail company Deutsche Bahn, have been under investigation in Germany since 2013 over suspected bribery and other offences related to the busy Russian port of St. Petersburg. The port is Russia’s European gateway with more than 2,000 companies using it for shipments, according to its website, but it is also known among customers for notoriously long delays. The [SEC] has now joined investigations by prosecutors in Cologne, where Ford’s European headquarters are based, a source at the carmaker told Reuters, confirming a report in Tuesday’s Sueddeutsche Zeitung newspaper. Two Ford employees, eight current and former workers at Schenker and one staffer from a Russian contractor are under investigation, a spokesman at the Cologne prosecutor’s office said.”

Petrobras

In regards to this recent media report, the company stated in this filing:

“Petrobras hereby declares that, in relation to news published in the media concerning the payment of a fine to the U.S. authorities, there are no ongoing negotiations regarding the eventual payment of a fine for the winding up of civil and criminal investigations in the United States regarding the violation of the anti-corruption legislation. Nor has there been any decision by the U.S. authorities regarding the merit of such an investigation or the eventual amounts involved.”

SciClone Pharmaceuticals

One of the longest instances of FCPA scrutiny concerns SciClone Pharmaceuticals.  As highlighted in this prior post, in August 2010 the company disclosed:

“On August 5, 2010 SciClone was contacted by the SEC and advised that the SEC has initiated a formal, non-public investigation of SciClone. In connection with this investigation, the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the DOJ indicating that the DOJ was investigating Foreign Corrupt Practices Act issues in the pharmaceutical industry generally, and had received information about the Company’s practices suggesting possible violations.”

Recently the company disclosed:

“In July 2015, SciClone reached an agreement in principle with the staff of the US Securities and Exchange Commission (SEC) for a proposed settlement for a range of matters, including without admitting or denying possible violations of the Foreign Corrupt Practices Act (FCPA). The agreement, which includes disgorgement, prejudgment interest, and penalties totaling $12.8 million, is contingent upon the execution of formal settlement documents and approval of the settlement by the SEC’s governing Commission. The Company has not yet reached a resolution of these matters with the Department of Justice (DOJ) and management continues to work diligently to obtain closure on this matter.”

Akamai Technologies 

The company updated its previous FCPA-related disclosure as follows:

“We are conducting an internal investigation, with the assistance of outside counsel, relating to sales practices in a country outside the U.S. that represented less than 1% of our revenue during the three and six months ended June 30, 2015, and in each of the years ended December 31, 2014, 2013 and 2012. The internal investigation includes a review of compliance with the requirements of the U.S. Foreign Corrupt Practices Act and other applicable laws and regulations by employees in that market.  In February 2015, we voluntarily contacted the U.S. Securities and Exchange Commission and Department of Justice to advise both agencies of this internal investigation. We are cooperating with those agencies. As of the filing of this quarterly report on Form 10-Q, we cannot predict the outcome of this matter. No provision with respect to this matter has been made in our consolidated financial statements.”

General Cable 

The company recently disclosed the following regarding its previously disclosed FCPA scrutiny.

“We have been reviewing, with the assistance of external counsel, certain commission payments involving sales to customers of our subsidiary in Angola. The review has focused upon payment practices with respect to employees of public utility companies, use of agents in connection with such payment practices, and the manner in which the payments were reflected in our books and records. We have determined at this time that certain employees in our Portugal and Angola subsidiaries directly and indirectly made or directed payments at various times from 2002 through 2013 to officials of Angola government-owned public utilities that raise concerns under the FCPA and possibly under the laws of other jurisdictions. Based on an analysis completed with the assistance of our external counsel and forensic accountants, we have concluded at this time, that we are able to reasonably estimate the profit derived from sales made to the Angolan government-owned public utilities in connection with the payments described above which we believe is likely to ultimately be disgorged. As a result, we recorded an estimated charge in the amount of $24 million as an accrual as of December 31, 2014. There was no change to the accrual in the second quarter of 2015. The accrued amount reflects the probable and estimable amount of the Angola-related profits that the Company believes is subject to being disgorged, and does not include any provision for any fines, civil or criminal penalties, or other relief, any or all of which could be substantial.

We also have been reviewing, with the assistance of external counsel, our use and payment of agents in connection with our Thailand and India operations and certain transactions in our Egypt and China businesses, which may have implications under the FCPA. We have voluntarily disclosed these matters to the SEC and the DOJ and have provided them with additional information at their request, including information in response to an SEC subpoena. The SEC and DOJ inquiries into these matters are ongoing. We continue to cooperate with the DOJ and the SEC with respect to these matters. At this time, we are unable to predict the nature of any action that may be taken by the DOJ or SEC or any remedies these agencies may pursue as a result of such actions. We are continuing to implement a third party screening process on sales agents that we use outside of the United States, including, among other things, a review of the agreements under which they were retained and a risk-based assessment of such agents to determine the scope of due diligence measures to be performed by a third-party investigative firm. We also have provided anti-corruption training to our global sales force, and ultimately will provide such training to all salaried employees. In addition, we have hired a Chief Compliance Officer, who is responsible for the day-to-day management of our compliance function. The Chief Compliance Officer reports to our Chief Executive Officer, and also has a reporting relationship with the Audit Committee.”

Friday Roundup

Making a difference, to FCPA Inc., and scrutiny alert.  It’s all here in the Friday roundup.

Making a Difference

In running this website, I sometimes feel like the captain of a small ship on a wide vast ocean.  My metrics tell me that many people are reading, but is the content on FCPA Professor making a difference?  Many people have told me that it is and I could cite several examples such as the most recent one.

On April 2nd, FCPA Professor published this post about the recent decision from the W.D. of Ark. in the Wal-Mart FCPA-related derivative actions.  The post highlighted two errors in the court’s decision.

“In a footnote, Judge Hickey’s order states: “The Foreign Corrupt Practices Act prohibits United States companies from bribing foreign officials to secure improper business advantage.”

This is an inaccurate statement of law.

Rather, the FCPA contains an “obtain or retain business” element that must be proved.  Indeed, the DOJ’s position that the FCPA captures payments to “secure an improper business advantage” wholly apart from the “obtain or retain business” element has been specifically rejected by courts. (See here for the prior post).

The inaccurate statement of law in the order is perhaps not surprising given that the Judge referred to the FCPA as the “Federal Corrupt Practices Act.”

I am happy to see that a day later, on April 3rd, the court issued an amended order to “reflect the correction of minor typographical errors.”

The above referenced footnote (and its substance) no longer appear in the decision and reference to the “Federal” Corrupt Practices Act has been removed.

 To FCPA Inc.

It happens so often it is difficult to keep track of, but I try my best.

Earlier this week, Morrison & Foerster announced:

“James Koukios, who served in the Fraud Section of the Criminal Division at the U.S. Department of Justice (DOJ), most recently as Senior Deputy Chief, has joined the firm’s Washington, D.C. office as a partner in the Securities Litigation, Enforcement & White-Collar Criminal Defense Practice Group.

Mr. Koukios is the second high-ranking DOJ prosecutor to join MoFo in the past year, following the 2014 arrival of former Fraud Section Deputy Chief Charles Duross, who served as head of the DOJ’s Foreign Corrupt Practices Act (FCPA) Unit. In his most recent position, Mr. Koukios oversaw the FCPA, Health Care Fraud, and Securities and Financial Fraud Units. With the addition of Mr. Koukios, who previously served as an Assistant Chief in the FCPA Unit and tried two of the most significant FCPA cases in the past decade, MoFo is the only law firm in the world with two former FCPA Unit managers.

[…]

During his tenure at DOJ, Mr. Koukios worked with domestic and foreign law enforcement authorities around the globe. He tried nearly two dozen jury cases, serving as a lead trial attorney in two landmark FCPA-enforcement trials: Esquenazi and Duperval.”

Not to dissect the MoFo press release too much, but the Duperval case was not an “FCPA-enforcement” trial. Rather, it was a non-FCPA case against the alleged “foreign official” in the Esquenazi case and directly related to the Esquenazi case.

Scrutiny Alert

The Wall Street reports on a bribery probe separate and distinct from the ongoing Petrobras probe.  According to the article:

“Prosecutors said 74 companies and 24 individuals are under investigation. None have been named publicly and no charges have been filed. But a leading investigator on the case said companies under investigation include Ford Motor Brazil, a unit of Ford Motor Co.; JBS, the world’s largest meatpacker, the Brazilian unit of the Spanish bank Banco Santander SA; and Brazil’s second largest private-sector bank, Bradesco SA.

[…]

Brazil’s tax system is among the most onerous and complex in the world. Penalties can be steep. That has fostered an environment where corruption can flourish, experts say.

“Taxes in Brazil are so high and complicated that it is easy for companies to get in trouble with the taxman,” the leading investigator told The Wall Street Journal. The investigator said frequent tax disputes created opportunities for ill-intentioned public servants to profit by helping firms circumvent red tape.”

Speaking of the Petrobras inquiry, the Wall Street Journal goes in-depth here.

*****

A good weekend to all.

Friday Roundup

Scrutiny alerts and updates, guilty pleas, across the pond, and admiration.  It’s all here in the Friday roundup.

Scrutiny Alerts and Updates

Airbus

The largest FCPA enforcement action of all-time (Siemens) began with a raid by Munich law enforcement on company offices.  Will this be the origin of another large FCPA enforcement action?  Reuters reports:

“Munich prosecutors are carrying out an investigation at Airbus’s defence unit over alleged corruption linked to contracts with Romania and Saudi Arabia […] The Munich prosecutor’s office said it was investigating EADS, as Airbus Group was formerly called, over suspicion of paying bribes to foreign officials and tax evasion in connection with business in the two countries. It said a small number of people were under investigation and that material confiscated from searches related to those people and different companies was now being evaluated. Prosecutors searched offices on suspicion that bribes were paid to enable the company to obtain contracts worth 3 billion euros (2.3 billion pounds) in Saudi Arabia and Romania […] Airbus said prosecutors were investigating irregularities in border security projects awarded to Airbus’s defence business, but declined to confirm details.”

Airbus has American Depositary Receipts that trad on U.S. exchanges.

Och-Ziff Capital Management Group

The Wall Street Journal recently reported:

“U.S. investigators probing Och-Ziff Capital Management Group LLC’s  dealings in Libya are focused on a multimillion-dollar payment by the big hedge-fund firm they believe was funneled in part to a friend of Col. Moammar Gadhafi’s son, said people briefed on the inquiry. The scrutiny is part of a broad, three-year foreign bribery investigation by the Justice Department and Securities and Exchange Commission into how Wall Street firms obtained investments from the regime of the former dictator, who was deposed and killed in the country’s 2011 revolution. A key part of the Och-Ziff investigation relates to a fee that Och-Ziff paid to the company of a London middleman for help winning a $300 million investment in Och-Ziff funds from the Gadhafi regime, the people briefed on the matter said.”

Petrobras

In Petrobras-related news and further to “Foreign Corrupt Practices Act Ripples,” Reuters reports:

“State-controlled oil company Petroleo Brasileiro SA and its top executives face a class-action lawsuit in a federal court in New York over an alleged contract fixing, bribery and kickback scheme that lawyers say inflated the value of the company’s assets. The suit was filed by law firm Wolf Popper LLP in the Southern District of New York on Monday on behalf of investors who bought U.S.-traded shares of the Brazilian company, commonly known as Petrobras, between May 20, 2010, and Nov. 21, 2014. […] The complaint alleges that Rio de Janeiro-based Petrobras “made false and misleading statements by misrepresenting facts and failing to disclose a culture of corruption at the company that consisted of a multi-billion dollar money-laundering and bribery scheme embedded in the company since 2006.”

Guilty Pleas

As highlighted in this prior post, in April 2014 two additional individual defendants (Benito Chinea and Joseph DeMeneses, the Chief Executive Officer and a Managing Partner, respectively of Direct Access Partners) were added to the FCPA (and related) enforcement action against individuals associated with broker dealer Direct Access Partners.  (See here for the original May 2013 enforcement action against Jose Hurtado and Tomas Clarke and here for an additional individual, Ernesto Lujan, being added to the enforcement action in June 2013). Like in the previous enforcement actions, the additional defendants Chinea and DeMeneses  were criminally charged in connection with alleged improper payments to Maria Gonzalez (V.P. of Finance / Executive Manager of Finance and Funds Administration at Bandes, an alleged Venezuelan state-owned banking entity that acted as the financial agent of the state to finance economic development projects).

The DOJ recently announced that:

Chinea and DeMeneses pleaded guilty to one count of conspiracy to violate the Foreign Corrupt Practices Act and the Travel Act.  Chinea and De Meneses have also agreed to pay $3,636,432 and $2,670,612 in forfeiture, respectively, which amounts represent their earnings from the bribery scheme.  Sentencing hearings are scheduled for March 27, 2015.

In the release, DOJ Assistant Attorney General Leslie Caldwell stated:

“Benito Chinea and Joseph DeMeneses are the fifth and sixth defendants to plead guilty in connection with this far-reaching bribery scheme, which ranged from Wall Street to the streets of Caracas. The guilty pleas and the forfeiture of assets once again demonstrate that the Department is committed to holding corporate executives who engage in foreign bribery individually accountable and to deny them the proceeds of their corruption.”

Across the Pond

Alstom-Related Charges

The recent FCPA enforcement action against Alstom and related entities was just one prong of the enforcement action.

The enforcement action also involved a United Kingdom component as the Serious Fraud Office announced charges against Alstom Power Limited, Nicholas Reynolds, and John Venskus for violating section 1 of the Prevention of Corruption Act 1906 and conspiracy in violation of section 1 of the Criminal Act 1977.

The charges were based on the following allegation.

Alstom Power Limited, Nicholas Reynolds, John Venskus and others, between February 14, 2002 and March 31, 2010 “did corruptly give or agree to give an official or officials or other agents of AB Lietuvos Elektrine, gifts or consideration, namely money, disguised as payments in respect of a Consultancy Agreement with Vilmentrona UAB as an inducement or reward for showing favour to the Alstom Group in relation to the award or performance of a contract between Alstom Power Limited and said AB Lietuvos Elektrine for the Low NOx Burners project at the Elektrenai Power Plant in Lithuania.”

See here for Alstom’s January 2012 release regarding the project.

According to a SFO release, “Alstom Power Ltd, Nicholas Reynolds and John Venskus’ case has been formally sent from Westminster Magistrates’ Court, for a Preliminary Hearing at Southwark Crown Court on 5 January 2015.”

Smith and Ouzman Ltd., et al

Earlier this week, the SFO announced:

“Smith and Ouzman Ltd and two employees were convicted today at Southwark Crown Court as a result of a Serious Fraud Office investigation into corrupt payments made for the award of business contracts to the company.  The corrupt payments totalling £395,074 were made to public officials for business contracts in Kenya and Mauritania. The company, Smith and Ouzman Ltd, a printing firm based in Eastbourne which specialises in security documents such as ballot papers and certificates, was convicted of three counts of corruptly agreeing to make payments, contrary to section 1(1) of the Prevention of Corruption Act 1906. Christopher John Smith, former chairman of Smith and Ouzman, age 71, from East Sussex, was convicted of two counts of corruptly agreeing to make payments. Nicholas Charles Smith, former sales and marketing director of Smith and Ouzman, age 43, from East Sussex was convicted of three counts of corruptly agreeing to make payments. Timothy Hamilton Forrester, former international sales manager of Smith and Ouzman, age 57, from East Sussex was acquitted of all three counts of corruptly agreeing to make payments. Mr Abdirahman Mohamed Omar, a sales agent for Smith and Ouzman, age 38, from London, was acquitted of one count of corruptly agreeing to make payments in relation to a contract in Somaliland.”

Director of the SFO, David Green commented:

“This is the SFO’s first conviction, after trial, of a corporate for offences involving bribery of foreign public officials. Such criminality, whether involving companies large or small severely damages the UK’s commercial reputation and feeds corrupt governance in the developing world. We are very grateful to the Kenyan authorities for their assistance in this case.”

Sentencing is due to take place on 12 February 2015.

Anti-Corruption Plan

The U.K. government recently released this “Anti-Corruption Plan.” It is described as “bring[ing] together, for the first time, all of the UK’s activity against corruption in one place.”

The pamphlet-style document is so general in nature, it is difficult to offer any constructive comments.

Admiration

My admiration for Judge Jed Rakoff (S.D.N.Y.) continues.

In this recent piece titled “Why Innocent People Plead Guilty,” Judge Rakoff writes:

“The criminal justice system in the United States today bears little relationship to what the Founding Fathers contemplated, what the movies and television portray, or what the average American believes. To the Founding Fathers, the critical element in the system was the jury trial, which served not only as a truth-seeking mechanism and a means of achieving fairness, but also as a shield against tyranny. As Thomas Jefferson famously said, “I consider [trial by jury] as the only anchor ever yet imagined by man, by which a government can be held to the principles of its constitution.” The Sixth Amendment guarantees that “in all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury.” The Constitution further guarantees that at the trial, the accused will have the assistance of counsel, who can confront and cross-examine his accusers and present evidence on the accused’s behalf. He may be convicted only if an impartial jury of his peers is unanimously of the view that he is guilty beyond a reasonable doubt and so states, publicly, in its verdict. The drama inherent in these guarantees is regularly portrayed in movies and television programs as an open battle played out in public before a judge and jury. But this is all a mirage. In actuality, our criminal justice system is almost exclusively a system of plea bargaining, negotiated behind closed doors and with no judicial oversight. The outcome is very largely determined by the prosecutor alone.”

Job Opening

Sig Sauer Inc. (based in Newington, NH) is actively looking for an Associate General Counsel and Chief Compliance Officer with corporate compliance experience. If interested, please contact Jeff.Chartier@sigsauer.com.

*****

A good weekend to all.

Potpourri

Wal-Mart Related

Here is what Wal-Mart said in its recent 3Q FY 2015 earnings call.

“FCPA and compliance-related costs were approximately $41 million, which represents approximately $30 million for the ongoing inquiries and investigations and approximately $11 million for our global compliance program and organizational enhancements. Last year, FCPA and compliance-related costs were $69 million for the third quarter.  Through the third quarter of this year, we have spent $137 million on FCPA  and compliance-related costs, versus our guidance of between $200 and  $240 million. We expect to be near the low end of the guidance for the full  year.”

Doing the math, that is approximately $640,000 in FCPA-related expenses per working day.

Over the past approximate two years, I have tracked Wal-Mart’s quarterly disclosed pre-enforcement action professional fees and expenses. While some pundits have ridiculed me for doing so, such figures are notable because, as has been noted in prior posts and in my article “Foreign Corrupt Practices Act Ripples,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from corporate FCPA scrutiny.  Pre-enforcement action professional fees and expenses are typically the largest (in many cases to a degree of 3, 5, 10 or higher than settlement amounts) financial hit to a company under FCPA scrutiny.

While $640,000 per working day remains eye-popping, Wal-Mart’s recent figure suggests that the company’s pre-enforcement action professional fees and expenses have crested as the figures for the past four quarters have been approximately $662,000, $855,000, $1.1 million and $1.3 million per working day.

In the aggregate, Wal-Mart’s disclosed pre-enforcement professional fees and expenses are as follows.

FY 2013 = $157 million.

FY 2014 = $282 million.

FY 2015 (first three quarters) = $137 million.

*****

Another ripple of FCPA scrutiny and enforcement highlighted in “Foreign Corrupt Practices Act Ripples” is shareholder litigation in connection with FCPA scrutiny.

On that score, plaintiffs firm Robbins Geller Rudman & Dowd LLP recently sued the SEC in federal court seeking certain documents in the SEC’s possession concerning Wal-Mart’s FCPA scrutiny.  In the complaint, Robbins Geller alleges that the SEC has improperly denied its Freedom of Information Act document requests.  The complaint alleges that the SEC’s reliance on a FOIA exemption concerning documents “compiled for law enforcement purposes” does not apply because the documents sought “were provided by and retained by Walmart, the subject of the SEC investigation, and therefore not “compiled for law enforcement purposes.”

*****

India’s Economic Times reports:

“The Indian arm of American retail giant Walmart has terminated a mid-level manager amid investigations into alleged violations of U.S. anti-bribery laws in the country. Two years ago, when the company was known as Bharti Wal-Mart, it had sacked its chief financial officer and the entire legal team in connection with the same probe. The mid-level manager, who received a termination notice last week, is also required to be available for questioning by the U.S. Department of Justice in the next five years.”

Petrobras

Petrobras, an oil and gas company in Brazil, has been the focus of much recent news.

Recently, the Financial Times reported that the DOJ and SEC have opened investigations into the company and reported that “U.S. authorities are looking into whether Petrobras or its employees, middlemen, or contractors, violated the FCPA.”  It was reported that there is also an open investigation in Brazil and the Financial Times noted that “prosecutors in Brazil allege that Petrobras and its contractors overinflated the cost of capital expenditure projects and acquisitions by hundreds of millions of dollars and paid part of the proceeds to politicians from the ruling Workers’ Party coalition.”  According to the Financial Times, the “ruling coalition politicians received 3 percent of all contracts.”

The apparent FCPA scrutiny of Petrobras is interesting on many levels.

For starters, certain FCPA enforcement actions have involved Petrobras employees – not as a payor of alleged improper payments – but as the recipient of alleged improper payments.  The enforcement theory of course is that the company making the alleged improper payments violated the FCPA’s anti-bribery provisions because Petrobras was an alleged “instrumentality” of the Brazilian government and thus Petrobras employees were “foreign officials” under the FCPA.

On the flip side of course is the fact that Petrobras has ADRs listed on a U.S. exchange and thus would be considered by the enforcement agencies to be an “issuer” subject to the FCPA.

In short, the enforcement theory that employees of SOEs are “foreign officials” results in an interesting paradox of sorts should there be an FCPA enforcement action against Petrobras as Petrobras employees would have been on “both sides” of the FCPA – an occurrence that has likely never happened before.  Taking the enforcement theory to its logical conclusion also means that the U.S. government is apparently investigating whether the Brazilian government has engaged in corruption.  A host of legal and policy issues would seem to arise.

Another interesting issue to ponder from Petrobras’s apparent FCPA scrutiny is whether any alleged improper payments by Petrobras – either directly or indirectly through others – to Brazilian officials would truly represent payments to ‘foreign officials.”

As highlighted in this prior post concerning the first FCPA enforcement action against a foreign issuer (albeit not charging violations of the anti-bribery provisions), according to a knowledgeable source at the SEC at the time, there was a belief that there were no “foreign” officials involved because Montedison, an Italian company, allegedly bribed Italian officials.

This dynamic has not been present in other foreign issuer FCPA enforcement actions (for instance Siemens did not allegedly bribe German “officials,” Technip did not allegedly bribe French “officials”, etc.) but would be present in any FCPA enforcement action against Petrobras.

Regarding the potential FCPA scrutiny of Petrobras, it appears that the subject of inquiry concerns potential payments made by third parties on behalf of Petrobras or at least with the knowledge of Petrobras employees.  As I indicated to the Wall Street Journal in this story:

“The vast majority of FCPA enforcement actions are indeed based upon indirect payments. If Petrobras paid an inflated amount to a contractor, the questions will be why, were they aware it was inflated, and what steps did they take to remedy the situation, or did they just accept the inflated amount with an inkling or suspicion that it would go somewhere else?”

More recently, the story continues to evolve and as highlighted in this recent Wall Street Journal article:

“Federal police [in Brazil last week] arrested 18 people, including Renato Duque, former director of engineering and services at Petrobras. Authorities allege he and others were part of a bribery and money-laundering scheme that has siphoned hundreds of millions of dollars from the state-owned oil firm into the pockets of employees, contractors and politicians. Police also served dozens of search warrants and raided the offices of 11 companies they suspect of participating in a scam. The companies, which include Brazilian multinationals Odebrecht SA, Camargo Corrêa SA, Construtora OAS SA and others, are suspected of colluding to inflate the costs of work performed for Petrobras. Prosecutors allege some of the resulting profits were funneled to Petrobras executives and high-level politicians, including some members of the president’s ruling Workers’ Party, a charge the party has repeatedly denied.”

As a result of the controversy swirling about the company, Petrobras recently announced that it was “unable to release its third quarter 2014 financial statements at this time.”

Separately, Reuters reported:

“Petrobras said on Monday it had received a subpoena from the U.S. Securities and Exchange Commission asking for documents relating to an investigation it is pursuing. […]  Petrobras did not provide details as to what documents the SEC had requested. The company is also under investigation by the U.S. Department of Justice, according to a person familiar with the matter who was not authorized to speak publicly about the matter. […] The U.S. investigation, conducted by both the SEC and the DOJ, is “broad” in nature and has been ongoing since at least the start of 2014, the person said.”

In short, the apparent FCPA scrutiny of Petrobras raises several interesting issues worthy of pondering.  Should there be an enforcement action against the company for violating the FCPA’s anti-bribery provisions, it would be historic for the reasons discussed above.

Whistleblower Statistics

The Dodd-Frank Act enacted in July 2010 contained whistleblower provisions applicable to all securities law violations including the Foreign Corrupt Practices Act.  In this prior post from July 2010, I predicted that the new whistleblower provisions would have a negligible impact on FCPA enforcement.  As noted in this prior post, my prediction was an outlier (so it seemed) compared to the flurry of law firm client alerts that predicted that the whistleblower provisions would have a significant impact on FCPA enforcement.  So anxious was FCPA Inc. for a marketing opportunity to sell its compliance services, some even called the generic whistleblower provision the FCPA’s “new” whistleblower provisions.

So far, there has not been any whistleblower award in connection with an FCPA enforcement action.  Given that enforcement actions (from point of first disclosure to resolution) typically take between 2-4 years, it still may be too early to effectively analyze the impact of the whistleblower provisions on FCPA enforcement.

Whatever your view, I previously noted that the best part of the new whistleblower provisions were that its impact on FCPA enforcement can be monitored and analyzed because the SEC is required to submit annual reports to Congress.  Recently, the SEC released (here) its annual report for FY2014.

Of the 3620 whistleblower tips received by the SEC in FY2014, 4.4% (159) related to the FCPA. As noted in this similar post from last year, of the 3,238 whistleblower tips received by the SEC in FY2013, 4.6% (149) related to the FCPA.  As noted in this similar post from 2012, of the 3,001 whistleblower tips received by the SEC in FY2012, 3.8% (115) related to the FCPA.  In FY2011 (a partial reporting year)  3.9% of the 334 tips received by the SEC related to the FCPA.

Yes, in the future there will be a whistleblower award made in the context of an FCPA enforcement action.  Yes, there will be much ink spilled on this occasion and wild predictions about this “new trend.”  Yet, I stand by my prediction – now 4.5 years old, that Dodd-Frank’s whistleblower provisions will have a negligible impact on FCPA enforcement.

World Cup Puts Focus on Complex Compliance Issues In Brazil

Today’s post is from Gregory Paw (Pepper Hamilton LLP).

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Tomorrow afternoon, Brazil begins what many hope will be a month-long showcase of “joga bonito” – the Brazilian passion for football summarized by Pelé as “play beautifully” – with the opening game of the 2014 World Cup pitting the host team against Croatia in São Paulo.  Yet the days leading to the opening have been filled with anxious scenes of subway strikes by groups of laborers, social advocates and students, and the accompanying snarls of traffic clogging the streets of the nation’s biggest city.  The protests are not as large as those of last spring, but nonetheless put into context the issues of the past year as Brazil adjusts to a post-boom economy and debates the public spending priorities that favored sports venues over other public works projects.  All of these events are of importance to compliance professionals watching the Brazilian business landscape for important anti-corruption trends and a better understanding of the current risk environment.

The past year has seen passage of landmark anti-corruption legislation, and the growing pains that can come with implementing a law that ushers important change.  Brazil currently lacks a centralized enforcement infrastructure for its powerful new anti-corruption law.  Brazil’s 27 states and its municipalities, as well as each branch of national government, all can launch investigations and render interpretations on open issues under the new law, such as the critical issue of whether any liability cap exists.  The inevitable inconsistencies will make compliance an ongoing challenge.

Equally important is the persistent culture of corruption that continues to dominate the Brazilian business news.  Many of the recent stories have focused on infrastructure projects in preparation for the World Cup and the 2016 Olympics.  Cost overruns for Brazil’s 12 World Cup host stadiums are soaring.  For example, an audit from the Court of Accounts of the Brazilian Federal District demonstrated a near-doubling from the $312 million 2012 estimated cost, with overpriced construction work alone accounting for $196 million of this overrun.  Political donations from connected companies “are making corruption in this country even worse and making it increasingly difficult to fight,” said an Audit Court arbiter in recent local press reports.  “These politicians are working for those who financed campaigns.”  At least a dozen other federal investigations are underway.

The problems are not limited to sports stadiums.  A scandal involving as many as 15 public transportation systems is said to have revealed corruption by several multi-national companies and inflated project costs in an area of vital public need.  The multi-nationals mentioned as part of the probe, Siemens, Alstom and Bombardier, have denied wrongdoing and pledged cooperation.  But in January 2014, a federal court banned Siemens from bidding on new government work, and a public prosecutor in São Paulo is said to have sought to cancel Alstom’s corporate registration.

Touching deeper to the core of the Brazilian economy are corruption investigations at Petrobras, the state-run oil and gas company.  Swimming under a mountain of debt and declining stock value, Petrobras has launched an internal review of alleged bribery by a Dutch company that serviced off-shore oil rigs.  The Brazilian Congress also has launched a probe into two deals that have turned very expensive – one involving the purchase of a refinery in Texas and the other involving a refinery in the northeastern Brazilian coastal town of Recife.  Both deals cost many times more than their expected prices.  Petrobras’ president recently met federal police personally to turn over company files pursuant to a court order.  Petrobras says the cost overruns come from insufficient infrastructure in Brazil’s poor-but-growing northeast, but critics focus on mismanagement and an alleged culture of graft as these issues play out in advance of a presidential election in October.  The arrest in March of the former head of the company’s refining and supply unit in a money laundering probe has added to the swirl of rumors.  For her part, President Dilma Rousseff – also the former chair of Petrobras – has defended the company, explaining in April 2014 local press reports that “Petrobras will never be stained with any wrongdoing.  Whatever needs to be investigated will be investigated with maximum rigor.”

Against this backdrop, Brazilian economic growth has slowed by more than half of its peak 2010 rate, and a March 2014 poll by a Brazilian news organization found that more than two-thirds of the population thought corruption was lower during Brazil’s time of dictatorship.  Perhaps part of that feeling comes from the current greater media transparency on corruption probes.  But companies operating in Brazil can expect that the focus on anti-corruption issues will only continue to remain a complicated compliance challenge.  Most important is a continuing focus on compliance fundamentals:

• Leadership setting clear expectations on ethics and compliance
• Risk awareness, coupled with controls designed to address those risks
• Due diligence and monitoring of business partners
• Nurturing the compliance commitment through training and communications
• Promptly follow up if potential issues arise

These fundamental steps will best protect companies operating in Brazil, where hope runs high that the attention from the World Cup will highlight the Brazilian spirit and creativity which has proven so resilient through past eras of change.