Friday Roundup
Is ISO 37001 a flop?, scrutiny alerts and updates, and for the reading stack. It’s all here in the Friday roundup.
Is ISO 37001 a Flop?
Microsoft has been under FCPA scrutiny since March 2013.
This recent blog post by David Howard (Microsoft’s Corporate Vice President & Deputy General Counsel) titled “An Update on Microsoft’s Approach to Compliance” caught my eye. It begins:
Texas Supreme Court Dismisses Defamation Claim Against Shell And Concludes That Providing An Internal Investigation Report To The DOJ Is “Absolutely Privileged”
Shell Oil Company v. Writt is a civil defamation case that has been closely followed by the corporate community given its impact on conducting internal investigations and cooperating with government enforcement agencies.
This recent opinion by the Texas Supreme Court will be welcome news to the corporate community because the court concluded that providing an internal investigating report to the DOJ is “absolutely privilege” under the defamation laws.
In terms of background, as stated by the Texas Supreme Court:
“Shell Oil Company and Shell International,E&P,Inc.(collectively, Shell) received an inquiry from the Department of Justice (DOJ) regarding possible violations of the Foreign Corrupt Practices Act by one of its contractors. Shell met with the DOJ, agreed to perform an internal investigation and report the results to the DOJ, and then did so. Robert Writt, who was employed by Shell until his employment was terminated following the investigation, sued Shell for wrongful termination and for defamation. Writt’s defamation claim was based on Shell’s furnishing the DOJ its report that contained allegedly defamatory statements about him. [His defamation claim was based on allegations that in the report provided to the DOJ, Shell falsely accused him of approving bribery payments and participating in illegal conduct.] Shell asserted that it was absolutely privileged to provide the report to the DOJ and moved for summary judgment. The trial court granted Shell’s motion; the court of appeals reversed.”
In the words of the Texas Supreme Court, the court of appeals:
“[H]eld that the summary judgment evidence did not conclusively establish that at the time Shell provided its report to the DOJ a criminal judicial proceeding against either Shell or Writt was ongoing, actually contemplated, or under serious consideration by either the DOJ or Shell. Therefore, the report was only conditionally, not absolutely, privileged. The court reasoned that Shell cooperated with the DOJ during an ongoing investigation and created the report as a part of its own voluntary internal investigation, but that those actions were not enough to conclusively establish that Shell provided the report under a serious threat of prosecution; nor was the fact the DOJ eventually initiated a criminal proceeding against Shell conclusive evidence that such a proceeding was actually contemplated or under serious consideration by the DOJ as of the time Shell provided the report.”
The Texas Supreme Court addressed the following question: “whether the providing of a report regarding possible criminal activity to a government agency was an absolutely privileged communication or a conditionally privileged one.”
As noted by the court, Texas recognizes two classes of privileges applicable to defamation suits: absolute privilege and conditional or qualified privilege. “An absolute privilege is more properly thought of as an immunity because it is based on the personal position or status of the actor. . . . Such immunity, however, attaches only to a limited and select number of situations which involve the administration of the functions of the branches of government, such as statements made during legislative and judicial proceedings.”
Shell argued that an absolute privilege extends to the report and the statements in it because it was furnished to the DOJ preliminary to a proposed judicial proceeding. It argues that the information contained in its report, including information about Writt, was solicited by the DOJ during an ongoing FCPA investigation; Shell compiled and provided the report under serious and good faith contemplation of a judicial proceeding; and those circumstances are sufficient for an absolute privilege to apply.
Writt did not assert that Shell’s providing the report to the DOJ was not privileged; he simply urges that the court of appeals was correct in classifying Shell’s communication as being conditionally privileged. He argued that Shell’s report was provided during an ongoing investigation, but not as a communication preliminary to a judicial proceeding or as part of a quasi-judicial proceeding
The Texas Supreme Court concluded “that Shell’s statements were made preliminary to a proposed judicial proceeding and were absolutely privileged.”
According to the Texas Supreme Court:
“The summary judgment evidence establishes that at all relevant times, Shell was a target of the DOJ’s investigation.”
[…]
“[W]hen the DOJ’s leverage over Shell vis-à-vis the FCPA and its somewhat draconian potential penalties are considered, it is manifest that Shell was, practically speaking, compelled to undertake its internal investigation and report its findings to the DOJ.”
“From the time Shell was first contacted by the DOJ to the time it provided its report to the DOJ, FCPA compliance was of great concern for U.S. businesses operating overseas and potential violations were not taken lightly. Moreover, businesses that chose not to cooperate were subjected to substantially greater punishments if a DOJ prosecution was successful.”
“In sum, the summary judgment evidence is conclusive that when Shell provided its internal investigation report to the DOJ, Shell was a target of the DOJ’s investigation and the information in the report related to the DOJ’s inquiry. The evidence is also conclusive that when it provided the report, Shell acted with serious contemplation of the possibility that it might be prosecuted.”
As noted in the Texas Supreme Court opinion:
“Six former United States Attorneys General, Michael B. Mukasey, Benjamin R. Civiletti, Edwin Meese, III, 1 Richard L. Thornburgh, William P. Barr, and Alberto R. Gonzales, submitted an amicus curiae letter in support of Shell. The Chamber of Commerce of the United States of America, the National Association of Manufacturers, and the American Petroleum Institute submitted an amicus curiae brief in support of Shell.”
See this prior post concerning the underlying 2010 FCPA enforcement action against Royal Dutch Shell.
Defamation Claims Increase Costs Of Cooperation With Government Investigations
A guest post today from Jeremy Byrum (McGuireWoods LLP). The post concerns a civil defamation claim relating to Royal Dutch Shell’s 2010 FCPA enforcement action. (See here for the prior post regarding the enforcement action).
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Defamation Claims Increase Costs of Cooperation with Government Investigations
Disclosing the results of a company’s internal investigation to government investigators is always fraught with potential problems. The most obvious is the danger of waiving attorney-client privilege and work product protections that would otherwise shield the internal investigation from discovery in parallel litigation. But another less heralded danger is the risk of defamation claims by employees identified through the investigation as having participated in illegal activity. The risk associated with such claims was on display in a recent ruling by a Texas court of appeals, which held that Shell Oil Company was only entitled to a conditional privilege, and not “immunity,” for statements it made in a written report to the Department of Justice (DOJ) regarding alleged violations of the FCPA.
On November 4, 2010, the DOJ announced more than $236 million in civil and criminal penalties from the settlement of alleged FCPA violations in Nigeria. The settlements followed a lengthy investigation of Panalpina Group, a Swiss logistics company, and several of its oil and gas clients, including Shell. According to the Texas court of appeals’ decision, the DOJ first requested a meeting to discuss Shell’s business with Panalpina in July 2007. Following that meeting, Shell agreed to conduct an internal investigation, which eventually culminated in a written report that was submitted to the DOJ in February 2009.
Following the 2010 settlements, a former employee sued Shell for defamation, claiming that Shell’s written report falsely stated that he recommended reimbursement to contractors for payments that he knew were bribes. The trial court granted summary judgment in favor of Shell, finding that Shell had an absolute privilege (i.e., immunity) for the statements it made to the DOJ. The Texas court of appeals reversed that finding on June 24, 2013, holding that Shell’s written report was only covered by a conditional privilege. Consequently, Shell is not immune from suit if the former employee can show that Shell’s actions were motivated by malice.
The key legal issue in the case was whether Shell’s statements were made in the context of an ongoing or proposed judicial or quasi-judicial proceeding. If so, then the statements would be absolutely privileged. But the appeals court rejected Shell’s argument that the DOJ’s solicitation and the resulting internal investigation were evidence of a proposed judicial proceeding. Likewise, the court rejected Shell’s argument that the 2010 settlement was evidence of a proposed judicial proceeding. In the absence of direct evidence that the DOJ was contemplating a judicial proceeding in February 2009, the court rejected Shell’s absolute privilege claim.
The case is also noteworthy for the policy arguments made in the majority and dissenting opinions. The dissent takes on the key policy issue—the potential chilling effect of the court’s ruling: “If absolute privilege is not available, a cooperating party runs the risk of defamation actions by anyone identified as having involvement in a potentially prohibited transaction. This risk creates a disincentive for companies to conduct their own investigations, to make frank assessments of fault, and to communicate findings to DOJ.” The majority focused on a rival policy argument, however, suggesting that absolute immunity would “discourage, rather than encourage, truth-telling” because companies have a “strong motive to deflect blame.” The majority concluded that a conditional privilege was sufficient protection to encourage companies to cooperate with law enforcement.
The court’s ruling no doubt raises additional concerns for companies considering the already difficult decision whether to disclose the results of an internal investigation. As the dissent notes: “A company like Shell is, in the face of a DOJ inquiry, in a quandary: it can provide inculpatory statements regarding actions taken on its behalf by its employees, recognizing that it is exposed to a defamation claim. Or it can face criminal prosecution or penalization for a failure to comply and cooperate adequately with the DOJ’s investigation.” But this may be less of a dilemma than the dissent imagines. A company’s concerns about potential defamation claims ordinarily will pale in comparison to the high stakes risks associated with a criminal investigation by the DOJ. Thus, the feared chilling effect is likely overstated.
Although the Texas court’s decision increases the potential costs of cooperating with a government investigation, it probably will not alter the level of cooperation in most cases. In all likelihood, companies will continue to assess the appropriate level of cooperation necessary to avoid or minimize their exposure in a criminal investigation, and will simply accept the possibility of defamation claims as an unfortunate cost of doing business.
Troubling Trends and Problematic Patterns
That is the alternate title I’ve given to Shearman & Sterling’s “Recent Trends and Patterns in FCPA Enforcement” (here).
The periodic publication is always in my “must-read” category. The author group is first-rate and includes noted FCPA practitioners Philip Urofsky (former Assistant Chief of the DOJ Fraud Section responsible for FCPA enforcement) and Danforth Newcomb (a dean of the FCPA bar).
The Shearman & Sterling piece raises particularly pointed questions as to the Panalpina-related enforcement actions and the seemingly vanishing “obtain or retain business” element of an FCPA anti-bribery violation.
I have covered these issues extensively as well – see here for several posts on the Panalpina-related enforcement actions and here (pg. 971 “Just How Was that Business Obtained or Retained”) as to questions about the enforcement agencies’ “obtain or retain business” allegations or interpretations.
The Shearman & Sterling piece states that “some of the government’s cases appear to blur the lines or muddy the waters when it comes to the limits of the statute.” The authors state as follows:
“In several cases, such as Pride International, Panalpina, and Royal Dutch Shell, the theories used to hold parents accountable for the acts of subsidiaries and vice versa appear to be unclear. In others, such as Pride International and Tidewater, the connection of the alleged conduct to “obtaining or retaining business,” a critical element of the statute was not pleaded or, worse, was pled in a way that suggests that virtually any bribe that improves a company’s profitability is sufficient – a result that is not consistent with established precedent and the language of the statute.”
Under the heading “Enforcement Strategies” the authors state:
“As in years past, the enforcement actions brought in 2010 provide insight, albeit sometimes clouded, into the DOJ’s and the SEC’s views of the scope and meaning of certain aspects of the statute, as well as their enforcement priorities and strategies. In doing so they are at times helpful and at other times opaque or, even worse, disturbing. As always, however, it is important to remember that although these agreements may have been hotly negotiated, in the end each of the companies and individuals settled. Thus, none of the government’s interpretations, or its view of how the law applied to the facts, has been subjected to a searching judicial examination in the context of a contested adversary proceeding.”
Under the heading “The Business Nexus” the author state:
“The Panalpina cases and certain allegations in other cases are likely to reopen the debate as to the meaning of the “obtain or retain business” element. This element is recognized as a critical factor in narrowing the scope of the FCPA. How much it does so, however, has long been a matter of debate. In its 2004 decision in U.S. v. Kay, the Fifth Circuit appeared to have ended the debate, holding that the FCPA was not limited to bribes to obtain business from a foreign government or even to bribes that led “directly to the award or renewal of contracts.” Analyzing the indictment in that case, the court held that “bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA’s proscription.” (emphasis in original). The court warned, however, that the scope of the statute was not limitless, stating, “We hasten to add, however, that this conduct does not automatically constitute a violation of the FCPA: It still must be shown that the bribery was intended to produce an effect – here, through tax savings – that would ‘assist in obtaining or retaining business.’”
Although some of the bribes in the Panalpina cases were made to obtain contracts and other specific business advantages, most of the payments were made to customs or tax officials to reduce duties and taxes, to expedite customs clearances, or to evade import regulations. In the latter cases, the government made very little effort to link such payments to obtaining or retaining business. For example, in Pride International, the DOJ alleged a number of what it termed “bribery schemes,” including payments to a Mexican Customs Official “to avoid taxes and penalties for alleged violations of Mexican customs regulations relating to a vessel leased by Pride International.” Similarly, in GlobalSantaFe, the SEC alleged that through a number of “suspicious payments” the company “avoided costs and gained revenue.” Without more explanation, such barebones allegations create the impression that the government equates gaining revenue or reducing costs generally with “obtaining or retaining business.” That, however, is the very opposite of the holding in Kay […].”
“Reading between the lines of the pleadings, we can, in many cases, construct some theory of how certain of the payments might have fallen within the Kay rule, e.g., some payments appear to have allowed the importers to bring in equipment and rigs without which they could not perform new or existing contracts. It is even possible that, similar to the facts in Kay, the importers could not have competed for existing or new business had they paid the full duties or taxes or complied with other local requirements. The pleadings, however, for the most part only hint at such an underlying rationale, leaving us to wonder exactly what does the government think the business nexus means today?”
When an author group including a former DOJ official responsible for enforcing the FCPA (in a more measured and disciplined era) uses words such as “disturbing” and phrases such as “not consistent with established precedent and the language of the statute” – well, I think we all should take notice.
Its All About Pancourier Services in Shell
The Nigerian customs services has a reputation for being notoriously corrupt. According to this recent report (jointly commissioned by the European Union, the UN Office on Drugs and Crime, Nigeria’s Economic and Financial Crimes Commission, and the National Bureau of Statistics) “in the case of clearance of goods through customs [in Nigeria], the percentage of business who were requested to pay a bribe is considerable.”
So, what happens when ….
A Nigerian company uses two United Kingdom contractors in connection with a Nigerian project. The U.K. contractors utilize a Swiss company that provides freight forwarding and logistics services. The Swiss company makes payments to Nigerian customs officials to “expedite the delivery of goods and equipment into Nigeria.” The U.K. contractors seek reimbursement from the Nigerian company. The Nigerian company records the payments as “local processing fees” and “administrative / transport charges” on its books and records. The Nigerian company is wholly-owned by a U.K. company based in the Netherlands. The U.K. company based in the Netherlands has ADRs traded on a U.S. exchange. A few low-ranking employees or contract employees located in the U.S. of another subsidiary of the U.K. company based in the Netherlands receive letters or e-mails regarding the payments.
Why of course, $48 million into the U.S. treasury via an FCPA enforcement action even though the FCPA specifically states that the anti-bribery provisions “shall not apply to any facilitating or expediting payment to a foreign official … the purpose of which is to expedite or to secure the performance of a routine governmental action …”
Next up in the analysis of CustomsGate enforcement actions is Shell.
See here for the prior post on the Transocean enforcement action, here for the prior post on the Tidewater enforcement action here for the prior post on the Noble enforcement action and here for the prior post on the GlobalSantaFe enforcement action.
The Shell enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $48.1 million ($30 million criminal fine via a DOJ deferred prosecution agreement; $18.1 million in disgorgement and prejudgment interest via a SEC administrative order).
DOJ
Criminal Information
The DOJ enforcement action included a criminal information (here) filed against Shell Nigeria Exploration and Production Company Ltd. (“SNEPCO”), a Nigerian wholly-owned subsidiary of Royal Dutch Shell (“RDS”) with headquarters in Nigeria. RDS is a U.K. company based in The Hague, The Netherlands, with ADRs traded on the New York Stock Exchange.
The information alleges that “SNEPCO’s agents, including employees of its U.S. affiliates, while in the territory of the United States, used and caused the use of the mails and means and instrumentalities of interstate commerce and performed other acts for SNEPCO’s benefit in furtherance of the payment of bribes to foreign government officials for the purpose of assisting in obtaining or retaining business for, or directing business, to SNEPCO and others.”
The criminal information relates to “an express door-to-door courier service” called “Pancourier” provided by Panalpina “that expedited the delivery of goods and equipment into Nigeria.” [The Transocean enforcement action here also involved, in part, Pancourier services]. According to the information, “the Pancourier service involved the payment of bribes by [Panalpina] to [Nigerian Customs Service] officials to expedite the delivery of materials by inducing the officials to circumvent the official Nigerian customs clearance process and to provide an improper advantage with respect to the importation of certain tools and materials that were imported into Nigeria.” The information states: “as a result of the payment of bribes, SNEPCO employees knew that official Nigerian duties, taxes, and penalties would not [be] paid when the items were imported.”
According to the information, Panalpina invoiced the “Subsea EPIC Contractor” (a U.K. corporation and SNEPCO’s engineering, procurement, installation and commissioning contractor for subsea services) and the “Topsides EPIC Contractor (a U.K. corporation that provided project management, engineering design, and fabrication services) “for the bribes that it paid to the NCS officials and characterized the payments as, among other things, ‘local processing fees’ or ‘administrative/transport charges.'” The contractors, in turn sought reimbursement from SNEPCO for these charges.
According to the information:
(i) in approximately March 2004 “SNEPCO and SIEP [Shell International Exploration and Production Inc. – a wholly-owned subsidiary of RDS based in Houston] employees … knew, or were substantially certain, that all or a portion of the money paid by the Subsea EPIC Contractor and the Topsides EPIC Contractor to [Panalpina] for the Pancourier service was being paid as bribes to NCS officials to secure an improper advantage with respects to the importation of certain tools and materials that were imported into Nigeria. SNEPCO and SIEP employees were aware that as a result of the payment of bribes, official Nigerian duties, taxes, and penalties were not paid when the items were imported;
(ii) in approximately March 2004 to approximately March 2006 “certain other SNEPCO employees repeatedly authorized the Subsea EPIC Contractor and the Topsides EPIC Contractor to use the Pancourier service. This resulted in the payment of over $2 million to reimburse the subcontractors for charges submitted by [Panalpina]. SNEPCO intended that some or all of this money was to reimburse the subcontractors for the bribes made to NCS officials. The benefit to SNEPCO resulting from the bribes exceeded $7 million.”
(iii) “throughout the relevant time period, SNEPCO recorded the reimbursements for the improper payments to the NCS officials in its books, records, and accounts as ‘local processing fees’ and ‘administrative/transport charges’ among other terms.”
(iv) “at the end of SNEPCO’s fiscal years 2004 through 2006, the books and accounts of SNEPCO containing the false characterizations of the payments to the NCS officials, were incorporated into the books, records and accounts of RDS for purposes of preparing RDS’s consolidated year-end financial statements filed with the SEC.”
Based on the above conduct, the DOJ charged SNEPCO with conspiracy to violate the FCPA’s anti-bribery provisions and to knowingly falsify books and records; and aiding and abetting false books and records violation.
In terms of a U.S. nexus, the information charges as follows:
(i) “the Subsea Contract Manager [a U.S. citizen and employee of SIEP] located in Houston, Texas, sent an email to SNEPCO employees in Nigeria authorizing the Subsea EPIC Contractor to use Pancourier to transport electrical equipment, with knowledge of facts indicating that a bribe would be paid through [Panalpina] to the NCS officials to expedite the delivery of materials by inducing the officials to circumvent the Nigerian customs clearance process and which resulted in the non-payment of official Nigerian duties, taxes, and penalties.”
(ii) “the Subsea Contract Engineer [a SIEP contract employee] located in Houston, Texas sent an e-mail to SNEPCO employees in Nigeria authorizing the Subsea EPIC Contractor to use Pancourier to transport miscellaneous parts, with knowledge of facts indicating that a bribe would be paid through [Panalpina] to the NCS officials to expedite the delivery of materials by inducing the officials to circumvent the Nigerian customs clearance process and which resulted in the non-payment of official Nigerian duties, taxes, and penalties.”
(iii) “a Subsea EPIC Contractor employee drafted and sent an e-mail from Nigeria to … the Subsea Contract Manager and Subsea Contract Engineer, in Houston, Texas advising that Pancourier was ‘illegal.'”.
The criminal charges against SNEPCO were resolved via a deferred prosecution agreement (here) between the DOJ, SNEPCO and RDS “on behalf of its wholly-owned subsidiary SNEPCO.”
Deferred Prosecution Agreement
Pursuant to the DPA, SNEPCO admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, subsidiaries, and agents as set forth above.
The term of the DPA is three years and seven months and it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and SNEPCO. Among the factors stated are the following.
(a) SNEPCO and RDS cooperated with the Department’s investigation of SNEPCO and RDS entities; (b) SNEPCO and RDS undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures …; (c) SNEPCO and RDS agreed to continue to cooperate with the Department in any ongoing investigation …; and (d) the impact on SNEPCO and other RDS entities, including collateral consequences, of a guilty plea or criminal conviction.”
As stated in the DPA, the fine range for the above describe conduct under the U.S. Sentencing Guidelines was $34.2 million to $68.4 million. Pursuant to the DPA, SNEPCO and RDS agreed that SNEPCO shall pay a monetary penalty of $30 million – approximately 15% below the minimum guideline amount.
Pursuant to the DPA, SNEPCO and RDS agreed to a host of compliance undertakings and to report to the DOJ on an annual basis (during the term of the DPA) “on its progress and experience in maintaining and, as appropriate, enhancing its compliance policies and procedures.”
As is standard in FCPA DPAs, SNEPCO and RDS agreed not to make any public statement “contradicting the acceptance of responsibility by SNEPCO as set forth” in the DPA and SNEPCO and RDS further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.
SEC
The SEC’s administrative order against RDS and SIEP (here) concerns “violations of the anti-bribery provisions of the FCPA” by SIEP and “the record keeping and internal controls provisions of the FCPA” by RDS.
Both violations concern the same core set of facts as set forth in the DOJ’s DPA. The SEC order states as follows.
“From September 2002 through November 2005, SIEP, on behalf of Shell, authorized the reimbursement or continued use of services provided by a company acting as a customs broker that involved suspicious payments of approximately $3.5 million to officials of the Nigerian Customs Service in order to obtain preferential treatment during the customs process for the purpose of assisting Shell in obtaining or retaining business in Nigeria on Shell’s Bonga Project. As a result of these payments, Shell profited in the amount of approximately $14 million. None of the improper payments was accurately reflected in Shell’s books and records, nor was Shell’s system of internal accounting controls adequate at the time to detect and prevent these suspicious payments.”
According to the SEC, “the Nigerian customs clearance process was routinely delayed, often taking weeks or even months to clear equipment through customs.” Use of the Pancourier service “expedited shipments into Nigeria by about 20 to 39 days.” “A shipment that would take 30 days to clear Nigerian customs using regular air freight could clear customs in as quickly as 10 days using” the Pancourier service.
In summary fashion, the SEC’s order states as follows:
“Shell benefitted through these payments by bypassing the normal customs process and importing equipment into Nigeria faster than Shell would have had the payments not been made. Ultimately, this accelerated Shell’s ability to reach First Oil and provided Shell with the value of its oil production profits sooner than it would have had it not made the payments. By avoiding the payment of certain customs duties through these payments, Shell also benefited by having the use of those funds when Shell would have otherwise had to wait to be reimbursed from the proceeds of oil production. As a result of these payments, Shell profited in the amount of $14,153,536.”
The SEC’s administrative order requires, among other things, the payment of $14,153,536 in disgorgment and $3,995,923 in prejudgment interest.
Ralph Ferrara (here) and Christopher Clark, a former DOJ attorney, (here), both at Dewey & LeBoeuf, represented Shell.