Closing Out The 70’s
[This post is part of a periodic series regarding “old” FCPA enforcement actions]
Previous posts (here and here) detailed FCPA enforcement actions from the 1970’s against: (i) Page Airways, Inc. (and six officers and/or directors of the company); and (ii) Kenny International Corporation and Finbar Kenny (Chairman of the Board, President and majority shareholder of Kenny International).
The 1970’s also witnessed: (i) a SEC civil complaint against Katy Industries, Inc. and its executives Wallace Carroll and Melvan Jones; and (ii) a DOJ civil complaint against Roy Carver and R. Eugene Holley; and (iii) a SEC civil complaint against International Systems & Controls Corporation and its executives J. Thomas Kenneally, Herman Frietsch, Raymond Hofker, Albert Angulo and Harlan Stein.
These enforcement actions are summarized below.
Katy Industries, Wallace Carroll and Melvan Jacobs
In August 1978, the SEC alleged in a civil complaint for permanent injunction that Katy Industries, Inc. (“Katy”), Wallace Carroll (Chairman of the Board and CEO of Katy) and Melvan Jacobs (Director and Member of Katy’s Executive Committee and also an attorney who acted as counsel to Katy as to the conduct at issue) “have engaged, are engaged and are about to engage in acts and practices” which constitute violations of various securities law provisions including the FCPA’s anti-bribery provisions.
According to the SEC complaint, Katy was interested in obtaining an oil exploration concession in Indonesia and retained a consultant who was a “close personal friend of a high level Indonesian government official.” The complaint alleges that Katy representatives and the consultant met with the official and his representative and during the meeting “the official agreed to assist Katy in obtaining an oil production sharing contract.” Katy agreed to compensate the consultant if it received the contract and the SEC alleged that Katy representatives were “told that the consultant would give a portion of such compensation to the official and the official’s representative.” According to the SEC, Katy entered into various agreements with the consultant and the official’s representative and thereafter “Katy entered into a thirty year Production Sharing Contract with Pertamina, the Indonesian Government-owned oil and gas enterprise.” The SEC alleged that “Katy, Carroll and Jacobs knew or had reason to know that the official and the official’s representative would directly or indirectly share in the payments to the consultant for the duration of the thirty year Contract.” In addition, the SEC alleged that Katy’s books and records did not reflect the true nature and purpose of the payments and that a “substantial portion” of the money paid by Katy to the consultant and the official’s representative “was expected by Katy to be given by the recipient to the official.”
Without admitting or denying the SEC’s allegations, Katy, Carroll and Jacobs consented to entry of final judgment of permanent injunction prohibiting future violations. Katy also agreed to establish a Special Committee of its Board “to review the matters alleged in the complaint and to conduct such further investigation as it deems appropriate into these and other similar matters” and to file the Special Committee’s findings publicly with the SEC.
See here for original source documents.
Roy Carver and R. Eugene Holley
In April 1979, the DOJ alleged in a civil complaint for permanent injunction that Roy Carver (Chairman of the Board and President of Holcar Oil Corporation) and R. Eugene Holley (Vice President of Holcar Oil Corporation) “have engaged, are engaged and are about to engage in acts and practices which constitute violations” of the FCPA’s anti-bribery provisions. The complaint alleges that on a trip to Doha, Qatar, Carver and Holley learned of “the possibility of engaging in the business of petroleum exploration in that country” if a “substantial payment of money were to be made to Ali Jaidah [an official of the government of Qatar – specifically the Director of Petroleum Affairs) for his official approval of a concession agreement.”
According to the complaint, the defendants agreed to proceed with the project by forming Holcar in the Cayman Islands “as a vehicle for the purpose of exploiting the concession.” The complaint alleges that the defendants further agreed “that an appropriate payment would be paid to Ali Jaidah to secure the necessary approval of the Government of Qatar.” During a subsequent meeting in Doha, the complaint alleges that Carver and Holley met with Ali Jaidah who requested a $1.5 million payment “into the account of his brother, Kasim Jaidah, at the Swiss Credit Bank of Geneva, Switzerland.” The complaint alleges that the defendants made the payment “knowing or having reason to know that all or a portion of such funds would be transferred to Ali Jaidah.” According to the complaint, thereafter, “as a result of the cooperation, influence and approval of Ali Jaidah, the government of Qatar entered into an oil drilling concession agreement with Holcar.” In addition, the complaint alleges that the defendants were willing to make additional payments to a new Director of Petroleum Affairs (Abdullah Sallat) when Holcar’s original concession agreement was under threat of termination given the company’s financing difficulties. However, the complaint asserts that “neither Director Sallat nor any other official of the government of Qatar has directly or indirectly received or solicited or been offered any payment in connection with renewal of Holcar’s oil concession.” Based on the above conduct, the DOJ charged that defendants “violated and may continue to violate” the FCPA’s anti-bribery provisions.
Both Carver and Holley consented to the entry of a final judgment of permanent injunction enjoining future FCPA violations. See here for original source documents.
International Systems & Controls Corp., J. Thomas Kenneally, Herman Frietsch, Raymond Hofker, Albert Angulo and Harlan Stein
In July 1979, the SEC filed a complaint against International Systems & Controls Corporation (“ISC”) and J. Thomas Kenneally (a director of ISC and its fomer CEO and Chairman of the Board), Herman Frietsch (Senior Vice President), Raymond Hofker (former General Counsel), Albert Angulo (former Treasurer) and Harlan Stein (Chief Engineer). The complaint alleged, among other things, that ISC “paid more than $23 million through one or more subsidiaries to certain foreign persons and entities in order to assist the company in securing certain contracts.” The complaint alleged that “in furtherance of this scheme, ISC disguised such payments on its books and records as consulting fees, consulting services, agent’s fees and commissions.” The complaint also alleged that “ISC violated the internal accounting controls provisions by failing to devise an adequate system of internal controls because it failed to require vouchers, expense statements, or similar documentation for the activities or services for which certain expenditures were made.”
According to various media reports, the payments at issue were made to government officials and members of ruling families in Iran, Saudi Arabia, Nicaragua, Ivory Coast, Algeria, Chile and Iraq in connection with contracts for engineering and construction projects.
The SEC’s complaint charged violations of the FCPA’s books and records and internal controls provisions, as well as antifraud, proxy, and reporting violations. In December 1979, ISC, Kenneally and Frietsch, without admitting or denying the SEC’s allegations, consented to the entry of a final order enjoining future violations. In addition, the final order directed ISC to, among other things, “appoint a special agent … who shall investigate and report on certain specific transactions.” Furthermore, Kenneally and Frietsch (for periods of four and two years respectively) agreed to be employed as an officer or director of an issuer only if that company “has a committee with duties and functions to those required of the ISC Audit Committee” as required by the consent degree.
See here for original source documents plus this packet of materials sent to me by a loyal reader.
*****
What are the take-away points from FCPA enforcement in the 1970’s? Clearly, the enforcement agencies were getting their feet wet enforcing an infant statute and, in many of the enforcement actions, the agencies were confronted with conduct that actually pre-dated enactment of the FCPA in December 1977. Thus, little can – or should be – taken away from the actual charging decisions in these early FCPA cases.
However, one meaningful take-away point is this. While one can question how the enforcement agencies held company employees accountable (i.e. criminal v. civil charges), one can not question that the enforcement agencies did hold company employees accountable. All five FCPA enforcement actions from the 1970’s involved company employees – a figure that stands in stark contrast to 2010 FCPA enforcement in which approximately 70% of corporate FCPA enforcement actions have not resulted (at least yet) in any DOJ charges against company employees. See here for the prior post.
The FCPA’s First Compliance Monitor
[This post is part of a periodic series regarding “old” FCPA enforcement actions]
A previous post (here) detailed the DOJ’ first criminal Foreign Corrupt Practices Act enforcement action against Kenny International in 1979. However, that action was not the first FCPA enforcement action.
In April 1978, the SEC filed a civil injunctive action against Page Airways, Inc. (“Page”) (a New York based company engaged in the sale and service of aircraft and traded on the over-the-counter market) and six officers and/or directors of the company: James Wilmot (Chairman); Gerald Wilmot (President); Douglas Juston (Executive Vice President); Ross Chapin (Vice President); James Lawler (Vice President) and Richard Olney (Vice President). The SEC’s complaint alleged that Page and the individual defendants “engaged in a scheme to sell Gulfstream II aircraft and other aircraft, products and services by, directly and indirectly, making payments to foreign government officials and employees and other corrupt, illegal, improper or unaccountable payments.”
The SEC complaint specifically references payments to: (i) “Albert Bongo, President of the Republic of Gabon;” (ii) “Gaya House Sendirian Berhad” and entity controlled by “Datuk Harris bin Mohammad Salleh” who, during the relevant time period, was “State Minister of Industrial Development” for the “State Government of Sabah, Malaysia;” (iii) “the Washington D.C. bank account of Societe Ivoirienne de Development et de Financement” in which “Timothee Ahoua, the Ambassador to the United States of the Republic of the Ivory Coast” was secretary and signatory on the bank account; (iv) “foreign entities as conduits for the payment of funds to third parties in order to disguise the true recipients and amounts” in connection with sales of aircraft to Saudi International Airlines and Morocco; (v) the “Chief of State” of Uganda (who received a Cadillac Eldorado convertible). Based on the above payments, as well as allegations that the company and the individuals misrecorded and otherwise attemtped to disguise the payments, the SEC charged Page and the individuals defendants with FCPA books and records and internal control violations as well as violations of Sections 10(b) (antifraud) and 13(a) (reporting) of the Securities Exchange Act and Rules thereunder.
The SEC news digest indicates that a permanent injunction was entered enjoining the defendants from future securities law violations and that “in connection with the settlement, Page has undertaken to internally investigate matters alleged in the Commission’s complaint and retain a Review Person to evaluate the methods and procedures followed in this investigation.” For those of you scoring at home, the Page enforcement action would seem to be the first use of an FCPA compliance monitor. The SEC news digest also contains this interesting statement. “In reaching settlement of this action, the Commission and Page considered concerns raised by another agency of the United States Government regarding matters of national interest.”
Original source documents from the Page FCPA enforcement can be found here.
“Rapid Multinational Expansion Through Mergers and Acquisitions” Leads to FCPA Enforcement Action Against Diageo
The Foreign Corrupt Practices Act is of course no laughing matter. Yet if an FCPA joke book is ever written there is surely to be an entry about the Indian and Korean military officials, a Thai lobbyist, and a Korean Customs official, who while on a purely recreational side-trip to Budapest, stopped in a bar, nibbled on some rice cakes, downed a Guinness and talked about product labeling, excise taxes, and transfer pricing.
Yesterday, the SEC announced (here) an FCPA books and records and internal controls enforcement action against Diageo PLC via an administrative cease and desist order. Diageo, headquartered in London, has American Depository Shares registered with the SEC and traded on the New York Stock Exchange and is thus an “issuer” under the FCPA.
In summary fashion, the Order (here) stated as follows.
“This matter concerns multiple violations of the Foreign Corrupt Practices Act (“FCPA”) by Respondent Diageo, one of the world’s largest producers of premium alcoholic beverages. Over more than six years, Diageo, through its subsidiaries, paid over $2.7 million to various government officials in India, Thailand, and South Korea in separate efforts to obtain lucrative sales and tax benefits.”
“In India, from 2003 through mid-2009 Diageo made over $1.7 million in illicit payments to hundreds of Indian government officials responsible for purchasing or authorizing the sale of its beverages. Increased sales from these payments yielded more than $11 million in ill-gotten gains. In Thailand, from 2004 through mid-2008, Diageo paid approximately $12,000 per month – totaling nearly $600,000 – to retain the consulting services of a Thai government and political party official. This official lobbied extensively on Diageo’s behalf in connection with multi-million dollar pending tax and customs disputes, contributing to Diageo’s receipt of certain favorable dispositions by the Thai government. With respect to South Korea, in 2004, Diageo paid 100 million won (KRW) (over $86,000) to a customs official as a reward for his role in the government’s decision to grant Diageo significant tax rebates. Diageo also paid over $100,000 in travel and entertainment expenses for South Korean customs and other government officials involved in these tax negotiations. Separately, Diageo made hundreds of gift payments totaling over $230,000 to South Korean military officials in order to obtain and retain liquor business.”
“Diageo and its subsidiaries failed to account accurately for these illicit payments in their books and records. Exercising lax oversight, Diageo also failed to devise and maintain internal accounting controls sufficient to detect and prevent the payments.”
As set forth in the SEC’s order, “Diageo’s history of rapid multinational expansion through mergers and acquisitions contributed to defects in its FCPA compliance programs.” Indeed, the conduct at issue focused on Diageo India Pvt. Ltd. (“DI”) (a wholly-owned indirect subsidiary acquired as a result of a merger); Diageo Moet Hennessy Thailand (“DT”) (a joint venture Diageo acquired an indirect majority interest in as a result of a merger) and Diageo Korea Co. Ltd. (“DK”) (a wholly-owned indirect subsidiary acquired during an acquisition). According to the SEC, “at the times of these acquisitions, Diageo recognized that its new subsidiaries had weak compliance policies, procedures, and controls” but “nevertheless, Diageo failed to make sufficient improvements to these programs until mid-2008 in response to the discovery of illicit payments.”
India
As to India, the SEC stated as follows. “From at least 2003 through June 2009, DI paid an estimated $792,310 in improper cash payments through its third-party distributors to 900 or more employees of government liquor stores in and around New Delhi. DI also paid an estimated $186,299 (representing 23% of the payments) in “cash service fees” to the distributors as compensation for advancing the funds. DI made the payments to increase government sales orders of its products, and to secure favorable product placement and promotion within the stores.”
The SEC further stated as follows. “During the same six-year period (2003 – 2009), Diageo, through DI, also reimbursed an estimated $530,955, and made plans to reimburse an additional $79,364, in improper cash payments made by third-party sales promoters to government employees of the Indian military’s Canteen Stores Department (“CSD”). The payments, made with DI’s knowledge and authorization, were designed to: (i) foster the promotion of Diageo products in the CSD’s canteen stores (analogous to the U.S. military’s post exchanges); (ii) obtain initial listings and annual label registrations for Diageo brands, price revision approvals, and favorable factory inspection reports; (iii) secure the release of seized shipments of Diageo products; and (iv) promote good will through the distribution of Diwali and New Year’s holiday gifts to CSD employees.”
The SEC also stated as to India as follows. “Diageo failed to ensure that DI properly accounted for a number of additional, improper payments to government officials who controlled administrative functions vital to DI’s business. From at least 2003 through 2008, Diageo, through DI, reimbursed an estimated $98,310 in cash payments made by its third-party promoters and distributors to government officials in the North Region of India and in the State of Assam for the purpose of securing label registrations for Diageo products.” In addition, the SEC Order stated as follows. “… [F]rom at least 2003 through June 2009, Diageo, through DI, paid an estimated $78,622 in extra commissions to its distributors in the North Region to reimburse them for payments made to Excise officials to secure import permits and other administrative approvals.”
Thailand
As to Thailand, the SEC Order stated as follows. “From April 2004 through July 2008, Diageo, through DT, retained the services of a Thai government and foreign political party official (the “Thai Official”) to lobby other Thai officials to adopt Diageo’s position in several multi-million dollar tax and customs disputes. For this retainer DT paid approximately $12,000 per month for 49 months, for a total of $599,322. DT compensated the Thai Official through 49 direct payments to a political consulting firm (the “Consulting Firm”) for which the Thai Official acted as a principal. Most, if not all, of the $599,322 paid to the Consulting Firm was for the Thai Official’s services and accrued to his benefit. The Thai Official served as a Thai government and/or political party official throughout the relevant period (April 2004 – July 2008) in which he received compensation from DT. At various times the Thai Official served as Deputy Secretary to the Prime Minister, Advisor to the Deputy Prime Minister, and Advisor to the Ministry of Agriculture and Cooperatives. The Thai Official also served on a committee of the ruling Thai Rak Thai political party, and as a member and/or advisor to several state-owned or state-controlled industrial and utility boards. DT’s senior management knew that the Thai Official was a government officer during its engagement of the Consulting Firm. The Thai Official was the brother of one of DT’s senior officers at that time. Several members of Diageo’s global and regional management attended meetings with the Thai Official and senior members of the Thai government. The Thai Official provided extensive lobbying services on behalf of Diageo and DT in connection with several important tax and customs disputes that were pending between Diageo and the Thai government. For example, with respect to excise taxes, the Thai Official coordinated and attended numerous meetings between senior Thai government officials and senior Diageo and DT management, including two meetings in April and May 2005 with Thailand’s then Prime Minister. In May 2005, shortly following the meetings arranged by the Thai Official, the Prime Minister made a radio address publicly endorsing Diageo’s position in favor of a “specific” approach (based on quantity) rather than an “ad valorem” approach (based on price) to calculating excise taxes. On Diageo’s behalf, the Thai Official also met repeatedly with senior commerce, finance, and customs authorities in charge of the transfer pricing and import tax disputes, as well as with members of the Thai parliament. The Thai Official’s services contributed to Diageo’s successful resolution of several components of these disputes. For example, during 2004 and 2005 Diageo and DT were actively engaged in a dispute with the Thai government over the appropriate transfer pricing formula applied to One Liter bottles of Johnnie Walker Red Label and Black Label Scotch whiskey. Based in part on the Thai Official’s lobbying efforts, the Thai government accepted important aspects of DT’s transfer pricing method and released over $7 million in bank guarantees that DT had been required to post while the tax dispute was pending.”
South Korea
As to Korea, the SEC Order stated as follows. “Diageo had significant tax and customs issues in South Korea. In April 2003, DK, under Diageo’s direction, requested from South Korea a more advantageous formula for calculating the transfer pricing, for tax purposes, of Windsor Scotch whiskey that DK was importing into South Korea. As part of those negotiations, DK also sought tens of millions of dollars in tax rebates based on a claim that DK had overpaid under the then existing transfer pricing formula. In April 2004, following a year of intense negotiations and lobbying by DK, the South Korean government granted DK a rebate of approximately $50 million. In July 2004, three months after DK received the tax rebates, a DK manager (the “Manager”) paid an apparent reward of 100 million KRW ($86,339) to a Korean Customs Service official (the “Customs Official”) who had played a key role in the transfer pricing negotiations. With the approval of DK’s then chief financial officer, the Manager generated 60 million KRW ($51,802) of the payment by means of a surreptitious cash kickback scheme. The Manager solicited an inflated invoice from DK’s third-party customs brokerage firm (the “Customs Broker”), which had provided DK with consulting services during the transfer pricing negotiations. As orchestrated, DK paid an inflated invoice amount to the Customs Broker, which then gave 60 million KRW ($51,802) in cash back to the Manager. The Manager funded the remaining 40 million KRW ($34,537) of the total reward amount from personal sources. The Manager then provided the Customs Official with 100 million KRW ($86,339) in the form of ten bank checks of approximately 10 million KRW ($8,634) each.”
The SEC Order further stated as follows. “During the course of the transfer pricing negotiations in 2003 and 2004, DK also paid $109,253 in travel and entertainment costs for Korean customs and other government officials. Some of these expenses were unapproved and constituted improper inducements of the South Korean officials. For example, in December 2003, the Customs Official and several official colleagues traveled to Scotland with DK employees. The purported reason for the trip was to inspect Diageo’s Windsor Scotch production facilities as part of the transfer pricing negotiations. During the course of this apparently legitimate trip, DK’s chief financial officer and the Manager took the South Korean officials on a purely recreational side-trip to Prague and Budapest.”
In addition, the SEC Order stated as follows regarding gifts to Korean military officers. “From at least 2002 through at least 2006, Diageo, through DK, routinely made hundreds of small payments to South Korean military officers for the purpose of obtaining or maintaining business and securing a competitive business advantage. The payments assumed two forms: (i) holiday and vacation gifts known as “rice cake” payments; and (ii) business development gifts, called “Mokjuksaupbi” payments. Rice cake payments were customary and traditional presents that Diageo, through DK, provided to scores of military officers – many of whom were responsible for procuring liquor – several times each year during holidays and vacations. From 2002 through 2006, DK made approximately 400 rice cake payments, totaling at least $64,184, in the form of cash or gift certificates ranging in value between $100 and $300 per recipient. In October 2004, a senior officer within Diageo’s global compliance department explicitly approved the practice of making rice cake payments after a DK employee explained that the company would face a competitive disadvantage if it refrained. Over the same four-year period, Diageo, through DK, also spent approximately $165,287 on hundreds of non-traditional, non-seasonal gifts and entertainment for the military. Of these so-called “Mokjuksaupbi” payments (a term that was broadly intended by DK to refer to “payments for relationships with customers”), approximately $106,051 were for the purpose of influencing specific purchasing decisions. For example, in 2003, DK personnel requested approval of approximately $2,600 to entertain army personnel “for their cooperation” in connection with the re-selection of Windsor Scotch.”
Based on the above conduct, the SEC found FCPA violations, but only FCPA books and records and internal control violations. The absence of FCPA anti-bribery violations against Diageo and the referenced entities would seem to be the result of a lack of a U.S. nexus as to the payments. Even though the FCPA was amended in 1998 to provide an alternative nationality jurisdiction test as to U.S. issuers and domestic concerns, the FCPA retains a territorial U.S. nexus jurisdictional test as to non-U.S. issuers such as Diageo that are nevertheless subject to the FCPA.
As to the FCPA violations, the SEC order states as follows. “Diageo’s books and records did not accurately reflect illicit payments that it made, through its subsidiaries, to Indian, Thai, and South Korean government and military officials. Instead, Diageo, through DI, DT, and DK, disguised the improper payments as legitimate vendor expenses or recorded them under misleading rubrics such as “factory expenses,” “telephone expenses,” “shareholder stake,” and “sales support.” In several instances, the illicit payments were not recorded at all.” The SEC Order further states as follows. “As evidenced by the extent and duration of the wrongful payments and their improper recordation, Diageo failed to devise and maintain sufficient internal accounting controls.”
The SEC Order mentions Diageo’s cooperation and “certain remedial measures undertaken by Diageo, including employee termination and significant enhancements to its compliance program.”
As is common in all SEC FCPA enforcement actions, Diageo settled the matter without admitting or denying the SEC’s findings. Per the SEC Order, Diageo shall pay disgorgement of $11,306,081, prejudgment interest of $2,067,739, and a civil monetary penalty of $3,000,000.
In a press release (here) Diageo stated as follows. “Diageo takes the SEC’s findings seriously and regrets this matter. Systems and controls have been enhanced in an effort to prevent the future occurrence of such issues and to reinforce, everywhere the Company operates, a culture of compliance and commitment to the principles embodied in Diageo’s Code of Business Conduct.”
Diageo’s most recent Annual Report (Sept. 2010) stated as follows.
“As previously reported, Diageo Korea and several of its current and former employees have been subject to investigations by Korean authorities regarding various regulatory and control matters. Convictions for improper payments to a Korean customs official have been handed down against two former Diageo Korea employees, and a former and two current Diageo Korea employees have been convicted on various counts of tax evasion. Diageo had previously voluntarily reported the allegations relating to the convictions for improper payments to the US Department of Justice and the US Securities and Exchange Commission (SEC). The SEC has commenced an investigation into these and other matters, and Diageo is in the process of responding to the regulators’ enquiries regarding activities in Korea, Thailand, India and elsewhere. Diageo’s own internal investigation in Korea, Thailand, India and elsewhere remains ongoing. The US Foreign Corrupt Practices Act (FCPA) and related statutes and regulations provide for potential monetary penalties, criminal sanctions and may result in some cases in debarment from doing business with governmental entities in connection with FCPA violations.”
Armor Holdings Resolves Enforcement Action / BAE Avoids Successor Liability
In February 2009, Richard Bistrong a former employee of Armor Holdings Inc. (a former publicly-traded company, currently a subsidiary of BAE Systems) pleaded guilty to charges he conspired with others to, among other things, obtain United Nations body armor contracts valued at $6 million by causing his employer to pay $200,000 in commissions to an agent while knowing that the agent would pass along a portion of that money to a United Nations procurement officer (a “foreign official” under the FCPA) to cause the officer to award the contracts. (See here and here for the prior posts).
Bistrong then became an informant for the government and helped the FBI manufacture an entirely different case – the Africa Sting case – against, among others, Jonathan Spiller (the former CEO and President of Armor Holdings and Bistrong’s boss) and Stephen Gerard Giordanella (formerly associated with Armor Holdings). Spiller, who testified at the first Africa Sting trial that resulted in a mistrial (see here for the prior post) is one of the Africa Sting defendants that has pleaded guilty. Giordanella is scheduled for a September trial.
Yesterday, in a related development, the DOJ and SEC announced an FCPA enforcement against Armor Holdings. Total fines and penalties are approximately $16 million ($10.3 million via a DOJ non-prosecution agreement and $5.7 million via a settled SEC civil complaint).
That the DOJ would resolve the matter solely against Armor Holdings without also holding BAE accountable stands in stark contrast to other recent FCPA enforcement actions where the DOJ has used successor liability theories against acquiring companies (see here for the 2010 enforcement action against Alliance One International for instance). But then again, in 2010 the DOJ resolved an enforcement action against BAE – one that per the DOJ’s own allegations directly implicated the FCPA’s anti-bribery provisions – without FCPA charges. See here for the prior post.
This post analyzes both the DOJ and SEC enforcement actions against Armor Holdings.
DOJ
The NPA (here) begins as follows.
The DOJ “will not criminally prosecute Armor Holdings, Inc., or any of its present or former parents, subsidiaries, or affiliates for any crimes … related to the making of, and agreement to make, improper payments by Armor employees and agents to a procurement official of the United Nations in connection with efforts to obtain and retain body armor contracts for an Armor subsidiary from the U.N. in 2011 and 2003, and related accounting and record-keeping associated with these improper payments …”.
The NPA has a term of two years. As is typical in FCPA NPAs or DPAs, Armor agreed “not to make any public statement contradicting” the described conduct.
According to the NPA, the DOJ agreed to resolve the action via an NPA based, in part, on the following factors.
(a) Armor’s complete disclosure of the facts at issue;
(b) Armor’s self-investigation and cooperation with the DOJ and SEC;
(c) “the fact that all of the conduct [at issue] took place prior to the acquisition of Armor by BAE Systems; and
(d) “the extensive remedial efforts undertaken by Armor, before and after Armor’s acquisition by BAE Systems, including but not limited to terminating the Armor employees who were involved in the misconduct; terminating approximately 1,700 international sales representatives and distributors of Armor Holdings Products LLC immediately after the acquisition closed; conducting extensive FCPA compliance training for over 1,000 Armor employees; implementing BAE Systems’ due diligence protocols and review processes for any new Armor foreign sales representatives and distributors; and applying BAE Systems’ compliance policies and internal controls to all Armor businesses.”
According to the Statement of Facts in the NPA, “Armor manufactured security products, vehicle armor systems, protective equipment and other products for use, primarily, by military, law enforcement, security and corrections personnel.” The conduct at issue focuses on Armor Holdings Products Group (“Products Group”), which was a wholly owned division of Armor, Bistrong (Product Group’s Vice President for International Sales) and Armor Products International Ltd. (“API”), which was a wholly owned subsidiary of Armor that was a part of the Products Group and headquartered in the U.K.
Under the heading “Improper Conduct” the NPA states as follows. From 2001 to 2006, “API and its employees and agents made corrupt payments to a United Nations procurement official to induce that official to provide non-public, inside information to API, and to cause the U.N. to award body armor contracts to API.” The NPA further states that “Armor employees falsely recorded the nature and purpose of these improper payments, as well as other payments, in Armor’s books and records.”
Under the heading “Books and Records” the NPA states as follows. From 2001 to 2006, “Bistrong, Products Employee A and others caused the Products Group to keep off Armor’s books and records approximately $4.4 million in payments to agents and other third-party intermediaries used by the Products Group to assist it it obtaining business from foreign government customers.”
Pursuant to the NPA, the DOJ agreed not to prosecute Armor based on the above described conduct if it complies with the compliance-related obligations set forth in the NPA. In an interesting sentence similar to the recent Tenaris DOJ NPA, the DOJ also agreed not to prosecute Armor for conduct “Armor specifically disclosed to the DOJ in meetings during its voluntary disclosure from March 2007 to December 2010.” This sentence suggests that Armor disclosed other conduct to the DOJ in addition to the conduct described above.
See here for the DOJ’s release announcing the enforcement action. Among other things, the release states as follows. “Due to Armor’s implementation of BAE’s due diligence protocols and review processes, its application of BAE’s compliance policies and internal controls to all Armor businesses, its extensive remediation and improvement of its compliance systems and internal controls, as well as the enhanced compliance undertakings included in the agreement, Armor is not required to retain a corporate monitor. Armor will be required to report to the department on implementation of its remediation and enhanced compliance efforts every six months for the duration of the agreement.”
SEC
The SEC’s settled civil complaint (here) is based on the same core conduct described above.
In summary, the complaint states as follows. “From 2001 through 2006, certain agents of Armor Holdings participated in a bribery scheme in which corrupt payments were authorized to be made to an official of the United Nations (“U.N.”), for the purpose ofobtaining and retaining U.N. business. Armor Holdings generated more than $7.1 million in improper revenues, and realized over $1.5 million in improper profits, through the award of U.N. body armor contracts to its subsidiary during this period. From 2001 through June 2007, another Armor Holdings subsidiary employed an accounting practice that disguised in its books and records approximately $4,371,278 in commissions paid to intermediaries who brokered the sale of goods to foreign governments. By virtue of this conduct, Armor Holdings violated the anti-bribery, books and records, and internal controls provisions of the FCPA and the Exchange Act.”
In an SEC release (here), Robert Khuzami (Director of the SEC’s Division of Enforcement) stated that “illicit payments to U.N. officials are no less reprehensible than bribes to foreign government officials.” As noted in the SEC release, Armor, without admitting or denying the SEC’s allegations, consented to the entry of a permanent injunction against further FCPA violations and agreed to pay $1,552,306 in disgorgement, $458,438 in prejudgment interest, and a civil monetary penalty of $3,680,000.
The SEC release also contains the following summary statistic. “Since 2010, the SEC has filed 32 FCPA cases, including the case against Armor Holdings, and obtained more than $600 million in penalties, disgorgement and interest.”
Roger Witten and Kimberly Parker (here and here of Wilmer Cutler Pickering Hale and Dorr) represented Armor Holdings.
Tenaris Resolves FCPA Enforcement – SEC Uses a DPA For the First Time
Once upon a time there was a law enforcement system in this country where companies that committed crimes or engaged in other wrongdoing were prosecuted criminally and/or civilly and where companies that did not commit crimes or did not engage in other wrongdoing were not prosecuted. That system has to a large extent been abandoned by the DOJ years ago – particularly in the FCPA context – and now that system appears to be crumbling at the SEC as well.
In December 2010, the SEC entered into its first non-prosecution agreement – albeit not in the FCPA context (see here for the prior post) and yesterday the SEC announced its first deferred prosecution agreement – of any kind – against Tenaris to resolve an FCPA enforcement action.
As has generally happened with the DOJ’s enforcement of the FCPA, the SEC’s enforcement of the FCPA will now be even further removed from judicial scrutiny and resolutions will now more frequently be negotiated over private conference room tables.
This is a troubling development on many fronts and it gives the public little confidence that our laws are enforced in a consistent and transparent manner or that regulators and companies are being held accountable.
With that introduction, let’s take a look at the Tenaris enforcement action.
Tenaris (here) “is a leading supplier of tubes and related services for the world’s energy industry and certain other industrial applications.” Tenaris is headquartered in Luxembourg and its American Depository Receipts (“ADRs”) are listed on the New York Stock Exchange. In FCPA-speak, that makes Tenaris an “issuer.”
The enforcement action involved both a DOJ and SEC component. Total settlement amount was $8.9 million ($3.5 million criminal penalty via a DOJ non prosecution agreement; $5.4 million in disgorgement and prejudgment interest via a SEC deferred prosecution agreement … its feels odd just writing that).
Both enforcement actions involve commission payments to an Uzbekistan agent to receive confidential bidding documents in connection with tenders conducted by alleged Uzbekistan state-owned or state-controlled companies. The enforcement actions state that Tenaris employees “were aware or substantially certain that all or a portion” of the commission payments would be offered by the Agent to employees at the SOEs and that certain of the payments were paid via a wire transfer through a New York bank account.
DOJ
The NPA (here – dated March 14, 2011) begins as follows.
The DOJ “will not criminally prosecute” Tenaris and its subsidiaries and affiliates for any crimes “related to Tenaris’s knowing violations of the anti-bribery and books and records provisions of the FCPA … arising from and related to the making of improper payments by employees and agents of Tenaris to officials of OJSC O’ztashqineftgaz (“OAO”), an Uzbekistan state-controlled oil and gas production company, and the accounting and record-keeping associated with these improper payments.”
The NPA has a term of two years and Tenaris admitted, accepted, and acknowledged responsibility for the below described conduct. As is typical in FCPA NPAs or DPAs, Tenaris agreed “not to make any public statement contradicting” the described conduct.
According to the NPA, Tenaris has more than 24,000 employees around the world and it conducts operations in 12 countries and its customers include the world’s leading oil and gas companies. The NPA states that Tenaris’s operations included supplying steel pipe and related servics in the Caspian Sea region, including Uzbekistan. This region accounted for approximately 1% of Tenaris’s total global sales and services from 2003 to 2008. Tenaris’s Caspian Sea business was run from offices in Azerbaijan and Kazakhstan.
According to the NPA, “Tenaris obtained oilfeld services business in the Caspian Sea region in part by bidding on contracts solicited by state-owned companies or governmental agencies to provide pipeline used in the development and production of oil and natural gas. Tenaris often used agents to assist in biddig on government contracts in the Caspian Sea region.”
The conduct at issue focused on OAO contracts between 2006 and 2007. According to the NPA, OAO “was a wholly owned subsidiary of Uzbekneftegaz, the state holding company of Uzbekistan’s oil and gas industry” and during the relevant time period “Uzbekneftegaz and OAO were wholly owned by the Government Uzbekistan.” The NPA then states, “OAO was an agency and instrumentality of the Government of Uzbekistan and its employees were foreign officials within the meaning of the FCPA.”
According to its website (here) the current ownership of OAO is as follows: “government’s share – 51%; foreign investors’ share – 37.27%; free market trade share – 11.73%.”
According to the NPA, in December 2006, Tenaris “was introduced to a potential agent (“OAO Agent”) to help Tenaris bid on additional contracts with OAO” and “as an incentive to retain the OAO Agent, the OAO Agent offered Tenaris access to confidential bidding information of competitors obtained from officials in OAO’s tender department, who would allow Tenaris to submit revised bids after reviewing the confidential information.” The NPA states that “Tenaris would use the confidential competitor bid information to submit revised bids in order to increase the likelihood of Tenaris being awarded the underlying contract.”
According to the NPA, Tenaris “agreed to pay the OAO Agent a fee of 3.5% for these services” and that Employees A, B, C, and D (non-U.S. citizens but “employees and agents” of Tenaris) “were aware or substantially certain that all or a portion of such money would be offered by the OAO Agent to one or more OAO employees.”
The NPA then lists approximately $19.4 million in contracts Tenaris obtained using this system and states that certain of the commission payments to the OAO Agent were paid via wire transfer through a New York bank account.
Under the heading “Additional Improper Conduct to Avoid Detection,” the NPA states that in November 2007 the above referenced employees learned of complaints from company competitors as to the bidding process on certain of the contracts and that an investigation by Uzbekekspertiza JSC (a Uzbekistani government agency) might commence. According to the NPA, “in an effort to avert the potential investigation of the bidding process, the OAO Agent recommended to Tenaris that the OAO Agent make an improper payment to Uzbekekspertiza officials to refrain from recommending the investigation against Tenaris or re-opening the bidding process to Tenaris’s competitors” and that the employees “agreed to pay the recommended payment” to the officials to avert the investigation. However, the NPA states as follows: “the investigation did not uncover evidence that any such payment was made.”
As to books and records, the NPA states that “the books, records and accounts reflecting Tenaris’s transactions … were incorporated into Tenaris’s consolidated year-end financial statements” and that “Tenaris knowingly failed to make and keep books, records, and accounts that accurately and fairly reflected Tenaris’s transactions … and the payments to the OAO Agent.”
Based on the above conduct, Tenaris agreed to pay a $3.5 million criminal penalty. The NPA states as follows. “This substantially reduced monetary penalty reflects the DOJ’s determination to meaningfully credit Tenaris for its extraordinary cooperation with the Department, including its timely and voluntary disclosure, its subsequent investigation, and the effective manner in which Tenaris conveyed information to the [DOJ and the SEC].”
Inquiring minds want to know – how much was the penalty “substantially reduced?”
According to the NPA, the DOJ agreed to resolve the action via an NPA based, in part, on the following factors.
(a) Tenaris’s timely, voluntary, and complete disclosure of the conduct at issue;
(b) Tenaris’s extensive, thorough, real-time cooperation with the DOJ and the SEC;
(c) subsequent to its voluntary disclosure of certain conduct unrelated to Uzbekistan, but prior to discovery of the unlawful conduct related to Uzbekistan, Tenaris’s voluntary investigation of the Company’s business operations throughout the world, specifically including the thorough and effective manner in which this investigation was carried out and information was disclosed to the DOJ and SEC;
(d) Tenaris’s remedial efforts already undertaken and to be undertaken, including voluntary enhancements to its compliance program; and
(e) Tenaris’s commitment to implement enchanced compliance measures described in the NPA.
Based on (c) above, inquiring minds want to know – what did Tenaris originally voluntarily disclose?
Under the heading, “Disclosure and Investigation of Improper Activity,” the NPA states as follows.
“In or about March 2009, a third party disclosed to Tenaris information indicating that certain sales agency payments were made by Tenaris in relation to business in a country other than Uzbekistan. These payments appeared to be for an improper purpose. In response to this information, Tenaris’s Audit Committee retained outside counsel to investigate the allegations. Thereafter, in a Form 20-F filed with the SEC on or about June 30, 2009, Tenaris disclosed information related to these allegations. Tenaris also made a prompt, full disclosure of the information to the [DOJ] and the [SEC] concerning the allegations. In or around July 2009, counsel for Tenaris met with the [DOJ and SEC] and disclosed preliminary findings of the internal investigation. Such disclosure was related to facts known to Tenaris at the time but was not related to transactions in Uzbekistan. Tenaris’s counsel also informed the [DOJ and the SEC] that it would conduct a thorough, world-wide investigation of its business operations and internal controls and would report the findings to the [DOJ and SEC]. Tenaris’s investigation plan included significant collection and review of a substantial quantity of electronic and paper records from the company and third parties from multiple locations around the world, translation of all relevant materials into English, subsequent interviews of relevant personnel including senior executives and third parties, and review and testing of internal controls and compliance procedures. In or around June 2010, Tenaris disclosed the factual findings from its internal investigation in a thorough, complete and useful manner to the [DOJ and SEC]. As a result of its internal investigation, Tenaris discovered facts and transactions in Uzbekistan that constitute the violations set forth above. Tenaris voluntaly engaged in certain remediation efforts to include termination and disciplinary measures of the persons involved. Tenaris also thoroughly reviewed its pre-existing compliance program and applicable internal controls, and undertook voluntary, affirmative steps to update and improve its compliance program and to implement enhanced compliance measures and controls. Tenaris also agreed to provide real and meaningful cooperation with the [DOJ and SEC] and any law enforcement agency in connection with this matter.”
Again, inquiring minds want to know – what did Tenaris originally voluntarily disclose?
See here for the DOJ’s release announcing the enforcement action.
SEC
The SEC DPA (here) is based on the same core conduct described above.
As to internal controls, the SEC DPA states as follows.
“… Tenaris’s system of internal controls failed to detect or prevent payments to OAO officials in an effort to obtain and retain business in Uzbekistan, including a failure to ensure that proper and effective due diligence was conducted on the Agent for the OAO contracts, and that the review process for authorization or approval of payments to the Agent failed to detect or prevent the illegal payments to OAO officials. Tenaris’s policies, procedures and training related to anticorruption and the Foreign Corrupt Practices Act (“FCPA”) compliance in place at that time warranted further strengthening to ensure effective compliance with the related laws.”
One of the undertakings Tenaris agreed to in the DPA was the following.
“To conduct effective training regarding anticorruption and compliance with the FCPA for (1) all current officers and managers, (2) all employees working in Finance, Accounting, Internal Audit, Sales, and Government Relations, (3) all other employees working in positions Tenaris deems to involve activities implicated by Tenaris’s policies regarding anticorruption and compliance with the FCPA, on or before December 31, 2011, and (4) all such future employees within 90 days oftheir affiliation with Tenaris.”
Under the terms of the two-year DPA, Tenaris, without admitting or denying the SEC’s allegations (the same way defendants are ordinarly allowed to resolve SEC enforcement actions), agreed to pay $5.4 million in disgorgement and prejudgment interest.
Pursuant to the DPA, Tenaris agreed “not to contest or contradict the factual statements” supporting the Statement of Facts. As noted in this prior post when the SEC announced its intention to make use of NPAs and DPAs, “[a]n admission or an agreement not to contest the relevant facts underlying the alleged offenses” is a key factor the SEC will consider in determining whether a company should receive a deferred prosecution agreement.
Like the SEC’s prior NPA, the Tenaris DPA is very similar to DOJ DPAs and NPAs.
In a release (here) the SEC touted its first use of a DPA.
Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows. “The Tenaris foreign bribery scheme was unacceptable and unlawful, but the company’s response demonstrated high levels of corporate accountability and cooperation. The company’s immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training made it an appropriate candidate for the Enforcement Division’s first Deferred Prosecution Agreement. Effective enforcement of the securities laws includes acknowledging and providing credit to those who fully and completely support our investigations and who display an exemplary commitment to compliance, cooperation, and remediation.”
Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated as follows. “Tenaris’s conduct was clearly in violation of the FCPA. The company’s employees bribed government officials in Uzbekistan to obtain government contracts. But when Tenaris discovered the illegal conduct, it took noteworthy steps to address the violations and significantly enhance its anti-corruption policies and practices to remediate weaknesses in its internal controls.”
Robert Giuffra, Jr. of Sullivan & Cromwell (here) represented Tenaris.