Tyson Foods Settles FCPA Enforcement Action Involving Mexican Veterinarians And Their No-Show Wives
Yet another FCPA enforcement action raises the issue of whether the FCPA’s “obtain or retain business” element means anything anymore or whether the FCPA, contrary to Congressional intent, has morphed into an all-purpose corporate ethics statute and – in a game of chicken – companies opt to settle rather than mount a legal defense.
Yesterday, Tyson Foods, one of the world’s largest processors of chicken and other food items, agreed to resolve an FCPA enforcement action focused on payments to Mexican veterinarians (and their no-show wives) responsible for certifying product for export.
The enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $5.2 million ($4 million criminal fine via a DOJ deferred prosecution agreement; $1.2 million in disgorgement and prejudgment interest via a SEC settled complaint).
DOJ
The DOJ enforcement action involved a criminal information (here) against Tyson resolved through a deferred prosecution agreement (here).
Criminal Information
The information contains a background section which describes the following.
“The Government of Mexico administers an inspection program, Tipo Inspeccion Federal (“TIF”), for meat-processing facilities. Any company that exports meat products from Mexico must participate in the inspection program, which is supervised by an office in the Mexican Department of Agriculture (“SAGARPA”). The inspection program at each facility is supervised by an on-site veterinarian who is a government employee (“TIF veterinarian”), paid by the state, who ensures that all exports are in conformity with Mexican health and safety laws.” “There are two categories of TIF veterinarians: ‘approved’ and ‘official.’ Although all TIF veterinarians are foreign officials under the FCPA, Mexican law permits approved veteriarians to charge the facility in which they work a fee for their services in addition to their offcial salary. Official veterinarians receive all of their salary from the Mexican government and may not be paid by the facility they supervise.”
The conduct at issue focuses on Tyson de Mexico (“TdM”), a wholly-owned subsidiary of Tyson that produces protein-based and prepared food products for sale in Mexico and foreign countries other than the U.S. TdM is headquartered in Mexico and maintains three meat-processing factories in Mexico.
The information charges that from July 2004 through November 2006, Tyson, TdM, and others were engaged in a conspiracy to “assist Tyson and TdM in the export of meat products from Mexico through the payment and promise of payment of things of value to Mexican government-employed TIF veterinarians, in order to obtain or retain business for TdM by influencing the decisions of veterinarians responsible for certifying TdM products for export under the TIF Program.”
The information does not give any detail as to how the payments sought to influence the veterinarians nor does it suggest that the product at issue was not qualified for export. In fact, as detailed below, Tyson’s press release (a release the DOJ had to approve per the deferred prosecution agreement) states that there were no issues with the safety of the exported products.
Among other things, the information alleges that part of the conspiracy was “to place the wives of the TIF veterinarians on TdM’s payroll, providing them with a salary and benefits, knowing that the wives did not actually perform any services for TdM …”. According to the information, upon “termination of the salaries to the wives of the TIF veterinarians” in November 2006 Tyson “agreed to increase the amount paid to the veterinarians based on false invoices by the same amount as the salaries previously paid to their wives.”
The information alleges that the above payments were falsely recorded on company books and records as “professional fees” and salaries in order to conceal the true nature of the improper payments in the consolidated books and records of Tyson.
In addition to the above described payments, the information also alleges that from the time Tyson acquired TdM in 1994 through 2006, “Tyson made occassional additional improper payments to the TIF veterinarians on an ad-hoc basis.”
Under the heading “Total Improper Payments” the information alleges as follows:
“Tyson, its executives, and its subsidiaries authorized the payment, directly or indirectly, of approximately $90,000 to Mexican government-employed veterinarians, in order to obtain or retain business for TdM by influencing the decisions of veterinarians responsible for certifying TdM products for export under the TIF program, resulting in profits of approximately $880,000.”
In addition, the information alleges that from the time of Tyson’s acquisition of TdM until May 2004, “an additional $260,000 in improper payments were made to the TIF veterinarians, both indirectly and directly, including through payments to wives of TIF veterinarians.”
Based on the above allegations, the information charges Tyson with conspiracy to violate the FCPA and substantive FCPA anti-bribery violations.
DPA
The DOJ’s charges against Tyson were resolved via a deferred prosecution agreement.
Pursuant to the DPA, Tyson admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, agents, and wholly-owned subsidiaries as set forth above.
The term of the DPA is two years and it states that the DOJ entered into the agreement “based on the following factors”:
(a) Tyson voluntarily disclosed the misconduct;
(b) Tyson conducted a thorough internal investigation of the misconduct;
(c) Tyson reported all of its findings to the Department;
(d) Tyson cooperated in the Department’s investigation of the matter;
(e) Tyson has undertaken certain remedial measures;
(f-g) Tyson has agreed to continue to cooperate with the Department and the SEC in any investigation of the conduct of Tyson and its directors, offcers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to violations of the FCPA; and
(h) with respect to the corporate compliance reporting obligations, the Department considered the following facts and circumstances: (i) Tyson has already engaged in signficant remediation related to the misconduct and implemented an enhanced compliance program; (ii) approximately 85-90% of Tyson’s sales are domestic; (iii) Tyson operates only six wholly-owned production facilities overseas, three in Mexico and three in Brazil, all of which have been subjected to rigorous FCPA reviews; (iv) Tyson’s only direct government customers are domestic; and (v) the problematic operations in TdM comprised less than one percent of Tyson’s global net sales.
As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $5.04 to $10.08 million. Pursuant to the DPA, Tyson agreed to pay a monetary penalty of $4 million (approximately 20% below the minimum amount suggested by the guidelines).
Pursuant to the DPA, Tyson agreed to self-report to the DOJ “periodically, at no less than six-month intervals” during the term of the DPA “regarding remediation and implementation of the compliance activities” described in the DPA. Given the factors the DOJ set forth in (h) above, this reporting obligation is a bit of a surprise.
As is standard in FCPA DPAs, Tyson agreed not to make any public statement “contradicting the acceptance of responsibility” as set forth in the DPA and Tyson further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.
In the DOJ’s release (here) Assistant Attorney General Lanny Breuer stated as follows: “Tyson Foods used false books and sham jobs to hide bribe payments made to publicly-employed meat processing plant inspectors in Mexico – the penalty and resolution announced today reflect the company’s disclosure of this conduct, its cooperation with the government’s investigation and its commitment to implementing enhanced controls.”
SEC
The SEC’s civil complaint (here) is based on the same core conduct described above.
The complaint alleges that Tyson “authorized” TdM’s illicit activities and that “in connection with these improper payments, Tyson Foods failed to keep accurate books and records and failed to have effective internal controls, as the true nature of the payments were concealed through salary payments to phantom employees and through service invoices submitted by one of the veterinarians.”
According to the SEC, “Tyson Foods realized net profits of more than $880,000 from export sales from [TdM] facilities in fiscal years 2004, 2005 and 2006.
Based on the above conduct, the SEC charged Tyson with FCPA’s anti-bribery violations and FCPA books and records and internal control violations.
Without admitting or denying the SEC’s allegations, Tyson agreed to an injunction prohibiting future FCPA violations and agreed to pay $1.2 million in disgorgement and pre-judgement interest.
In the SEC release (here), Robert Khuzami (Director of the SEC’s Division of Enforcement) stated: “Tyson and its subsidiary committed core FCPA violations by bribing government officials through no-show jobs and phony invoices, and by having a lax system of internal controls that failed to detect or prevent the misconduct.”
Laurence Urgenson (here) of Kirkland & Ellis represented Tyson.
Tyson’s press release (here) notes, among other things, that its voluntary disclosure occured in early 2007 and that “none of the products exported from Tyson de México during the time period involved were shipped to the U.S., nor were there any issues with the safety of the products.”
David Van Bebber, the company’s Executive Vice President and General Counsel stated as follows: “We’re committed to abiding by the law as well as our company’s Core Values, which call on all of our people to operate with integrity. While we’re disappointed mistakes were made, corrective action has been taken and the improper payments were discontinued. As our international operations have expanded, we continue to strengthen the compliance efforts of our international businesses including improved training and compliance programs, extensive retraining, and anti-corruption focused audits.”
Maxwell Technologies is the First Corporate Enforcement Action of 2011
In early January, Maxwell Technologies Inc. (“Maxwell”), announced that the U.S. Department of Defense awarded the company a $1.7 million contract (here), “for the initial phase of a multi-phase program to develop a lighter, longer-lasting, energy source for field radios and other portable electronic equipment carried by military personnel.”
On January 31st, Maxwell became the first company in 2011 to settle an FCPA enforcement action.
The Maxwell enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $14.4 million ($8 million criminal fine via a DOJ deferred prosecution agreement; $6.4 million in disgorgement and prejudgment interest via a SEC settled complaint).
Maxwell previously disclosed (see here) that “discussions with the SEC and DOJ have resulted in an estimate of potential settlement of up to $20.0 million – representing the combined first offer of settlement put forth by the SEC and DOJ.” Presumably, the company’s disclosure of the government’s settlement offer did not sit well with the DOJ and on July 30, 2009, Maxwell issued this strange press release.
As set forth more fully below, the alleged recipients of the bribe payments at issue were all employees of alleged Chinese state-owned or state-controlled enterprises. Also of note, the SEC’s charges include disclosure violations not often seen in FCPA enforcement actions, based on allegation that Maxwell’s bribe payments allowed the company to offset losses and fund product expansions that are now a source of revenue for the company.
DOJ
The DOJ enforcement action involved a criminal information (here) against Maxwell resolved through a deferred prosecution agreement (here).
Criminal Information
The criminal information, a short eight pages, alleges that “from at least July 2002 through in or about May 2009, Maxwell and its subsidiaries paid approximately $2,789,131 to Agent 1 [a Chinese national, third-party agent responsible for Maxwell S.A.’s (a wholly-owned subsidiary of Maxwell) high voltage capacitor sales to Chinese customers] to be distributed to Chinese foreign officials, in return for securing contracts that profited Maxwell.”
The Chinese foreign officials?
You guessed it, employees of alleged state-owned entities such as:
“Pinggao Group Co. Ltd. [formerly Pingdingshan High Voltage Switchgear Works) … a state owned manufacturer of electric-utility infrastructure in Henan Province, China” (see here for the company’s website)
“New Northeast Electric Shenyang HV Switchgear Co., Ltd. … a state-owned manufacturer of electric-utility infrastructure in Liaoning Province, China” (see here for company information) and
“Xi-an XD High Voltage Apparatus Co., Ltd., … a state-owned manufacturer of electric-utility infrastructure in Shaanxi Province, China” (see here for the company’s website).
According to the information, “Maxwell and its subsidiaries accomplished [the bribe] payments by using Agent 1 to market and sell Maxwell’s high voltage capacitors to Chinese consumers … substantially all of which were Chinese state-owned entities.” The information alleges that Agent 1 “requested quotes from Maxwell S.A. on behalf of prospective Chinese state-owned entities” and that “upon Agent 1’s instruction, Maxwell S.A. added an extra 20 percent to the quoted amounts to arrive at a higher price for Maxwell S.A.’s high-voltage equipment.” The information alleges that Agent 1 then distributed the extra amount “to officials at the Chinese state-owned entities” including employees of the above referenced companies.
Under the heading, “Knowledge Within Maxwell’s U.S. Management,” the information alleges that “Maxwell’s management within the United States discovered, tactitly approved, concealed and caused to be concealed the bribery scheme.” According to the information, following discovery of the payments by Maxwell senior management in the U.S. including by Executive A, Executive B, and Executive C (all U.S. citizens), under Executive E’s (a Swiss citizen and Maxwell S.A’s Vice President and General Manager) oversight and supervision, the payments at issue to Agent 1 actually increased from approximately $165,000 in 2002 to nearly $1.1 million in 2008.
According to the information, Maxwell’s financial statements and reports described the bribe payments as “sales-commission expenses.”
Based on the above allegations, the information charges Maxwell with FCPA anti-bribery violations and knowingly violating the FCPA’s books and records provisions.
DPA
The DOJ’s charges against Maxwell were resolved via a deferred prosecution agreement.
Pursuant to the DPA, Maxwell 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 it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and Maxwell.
Among the factors stated are the following.
(a) Maxwell voluntarily disclosed its FCPA violations to both the DOJ and the SEC;
(b) Maxwell cooperated with the Department’s investigation of Maxwell and others;
(c) Maxwell undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures …;
(d) Maxwell agreed to cooperate with the Department in any ongoing investigation of the conduct of Maxwell and its employees, agents, consultants, contractors, subcontractors, subsidiaries, and others relating to violations of the FCPA; and
(e) the impact on Maxwell, including collateral consequences, of a guilty plea or criminal conviction.
As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $10.5 million to $21 million. Pursuant to the DPA, Maxwell agreed to pay a monetary penalty of $8 million (25% below the minimum amount suggested by the guidelines).
Pursuant to the DPA, Maxwell agreed to self-report to the DOJ “periodically, at no less than 12-month intervals” during the term of the DPA “regarding remediation and implementation of the compliance program and internal controls, policies, and procedures” described in the DPA.
As is standard in FCPA DPAs, Maxwell agreed not to make any public statement “contradicting the acceptance of responsibility” by Maxwell as set forth in the DPA and Maxwell further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.
As to debarment issues, paragraph 22 of the DPA states as follows:
“The Department agrees to bring to the attention of governmental and other debarment authorities the facts and circumstances relating to the nature of the conduct underlying this Agreement, including the nature and quality of Maxwell’s cooperation and remediation. By agreeing to provide this information to debarment authorities, the Department is not agreeing to advocate on Maxwell’s behalf, but rather is providing facts to be evaluated independently by the debarment authorities.”
See here for the DOJ release.
SEC
The SEC’s civil complaint (here) alleges, in summary, as follows.
“From 2002 through May 2009, Maxwell violated the anti-bribery, books and records and internal control provisions of the Foreign Corrupt Practices Act (“FCPA”) when it repeatedly paid bribes to Chinese officials in order to obtain and retain sales contracts for high voltage capacitors from several Chinese state-owned entities. Maxwell engaged in bribery to maintain its high-voltage capacitor business in China, which accounted for material revenue and profits during the relevant time period.”
According to the complaint, “the illicit payments were made with the knowledge and tacit approval of certain former Maxwell officers and Maxwell failed to accurately record these payments on its books and records, and failed to implement or maintain a system of effective internal accounting controls to detect or prevent the payments.”
The complaint alleges that “the improper payments generated nearly $15.4 million in sales contracts, from which Maxwell realized profits ofover $5.6 million.”
According to the SEC:
“Maxwell violated [the FCPA’s anti-bribery provisions] by engaging in widespread bribery of government officials in China in order to sell its high-voltage capacitors to several Chinese state-owned enterprises. Maxwell violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-l, and 13a13 thereunder by failing to disclose in its annual and periodic filings that the material revenues and profits associated with its long-standing bribery scheme enabled Maxwell to better financially position itself until new products could be commercially developed and sold. Maxwell violated [the FCPA’s internal control provisions] by failing to maintain internal controls to prevent or detect the bribes paid to officials at Chinese state owned-entities. Finally, Maxwell violated [the FCPA’s books and records provisions] by failing to accurately reflect the nature of the improper payments in Maxwell’s books, records, and accounts.”
The SEC’s complaint contains an allegation not often seen in FCPA enforcement actions about how the company’s alleged bribery scheme helped offset losses in other areas and helped fund future product development.
According to the SEC:
“Maxwell greatly depended on the revenue from Maxwell SA’s high-voltage capacitor sales to China in order to help fund Maxwell’s expansion into new product lines that are now expected to become Maxwell’s future source of revenue. Maxwell engaged in the bribery scheme because it enabled the company to obtain material revenue needed to financially position itself to help fund the very products that today are sustaining Maxwell’s future growth.”
As to “Discovery of the Illicit Payments” the complaint states as follows.
“Potential FCPA and accounting concerns came to the attention of Maxwell’s finance department in September 2008, during an internal review of Maxwell SA’s commission expenses involving the Chinese Agent. Maxwell’s management team asked about these commission payments after learning of the unusually high Chinese Agent commissions, which included the Extra Amounts. During this review, Executive A informed Maxwell’s finance department that the payments made to the Chinese Agent were recorded as sales commissions. Maxwell’s finance department then sought and obtained a signed FCPA certificate from the Chinese Agent in which he represented that he was familiar with the U.S. FCPA and local laws and regulations regarding corrupt payments” and that he had not in the past and will not in the future make any improper payments.
However, according to the SEC, “after obtaining the representations, Maxwell’s finance department took no further corrective action regarding the commissions and Extra Amounts paid to the Chinese Agent …”.
In February 2009, Maxwell’s new CEO, became aware of the issues with the Chinese Agent and he “immediately notified Maxwell’s audit committee and outside counsel.”
According to the SEC:
“During the relevant period, Maxwell’s controls designed to prevent illicit payments to foreign officials were wholly inadequate. At the time, Maxwell’s Code of Conduct contained a brief section on FCPA issues, but there is no evidence that employees received any FCPA training prior to the company’s remedial steps.”
As to Maxwell’s internal controls failures, the complaint states as follows:
“Maxwell (1) failed to question why the contract prices were artificially inflated by 20% above the bid prices; (2) did not request supporting documentation for the invoices or track where the commission payments ultimately were distributed; (3) performed no due diligence on the agent; (4) did not require FCPA training for all relevant employees; and (5) failed to take any action even though it appears that certain former officers and senior managers of Maxwell had knowledge of the bribes paid by Maxwell SA and its agent since at least November 2002.”
Without admitting or denying the SEC’s allegations, Maxwell agreed to an injunction prohibiting future FCPA violations and agreed to $5,654,576 in disgorgement and $696,314 in prejudgment interest.
In the SEC release (here) Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated as follows: “Maxwell’s bribery allowed the company to obtain revenue and better financially position itself until new products were commercially developed and sold. This enforcement action shows that corruption can constitute disclosure violations as well as violations of other securities laws.”
Jeffrey Higgins (here) of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP and Jerome Roth (here) of Munger Tolles & Olson LLP represented Maxwell.
Since announcement of the January 31st enforcement action, Maxwell’s shares are up approximately 6%.
As I explored in this recent post, 60% of 2010 corporate FCPA enforcement actions involved (in whole or in part) employees of alleged state-owned or state-controlled enterprises (“SOE”). In these cases, the enforcement agencies generally allege that such enterprises are “instrumentalities” of a foreign government and that such employees are therefore “foreign officials” under the FCPA.
So far in 2011, it’s 100%.
First Enforcement Action of 2011 Involves a Former Executive Officer
In March 2010, Innospec Inc. was charged on both sides of the Atlantic in a joint DOJ / SEC / U.K. Serious Fraud Office enforcement action. (See here and here).
In August 2010, the SEC charged David Turner, the Business Director of Innospec’s TEL Group, and Ousama Naaman, the company’s agent, for their role in the bribery scheme. (See here). Naaman was also charged by the DOJ, pleaded guilty, and awaits sentencing. (See here).
Yesterday, in the first FCPA enforcement action of the year, the SEC charged Paul Jennings, Innospec’s former CFO and CEO, for his involvement in the bribery scheme. (See here). Jennings resigned from Innospec in March 2009 (see here).
Jennings name is now included on a rather short list of high-ranking executives of public companies (or affiliates) recently charged by the SEC in an FCPA enforcement action. In July 2009, Douglas Faggioli (the current President and CEO) and Craig Huff (the former CFO) of Nature’s Sunshine Products were charged (see here); in September 2008, Albert Jackson Stanley (the former CEO of Kellogg Brown & Root Inc.) was charged (see here); in December 2007, Robert Philip (the former Chairman/CEO of Schnitzer Steel was charged (see here); and in September 2007, Monty Fu (the former Chairman of Syncor International Corp. was charged (see here).
The facts of the underlying bribery scheme in the Jennings enforcement action are detailed in the prior posts linked above and this post details the allegations in the SEC’s complaint (here) regarding Jennings knowledge and involvement in the scheme.
In summary fashion, the complaint alleges as follows:
“This action arises from widespread bribery of foreign officials by Innospec, Inc., some of which occurred and was approved by Paul W. Jennings beginning in mid to late 2004 during his tenure as Chief Financial Officer (“CFO”) and continuing after he became Chief Executive Officer (“CEO”) in 2005.”
“Beginning in mid to late 2004, Jennings, who held various senior roles at Innospec, including CFO and CEO, actively participated in the bribery schemes in Iraq and Indonesia.”
“Jennings violated [the FCPA’s anti-bribery provisions] by engaging in widespread bribery of government officials in Iraq during the post-Oil for Food period in order to sell TEL to the Iraqi Ministry of Oil (“MoO”) and by engaging in bribery of Indonesian officials to sell TEL to state owned oil companies in Indonesia. Jennings aided and abetted Innospec’s violations of [the FCPA’s anti-bribery provisions] by substantially assisting in Innospec’s bribery of Iraqi and Indonesian government officials.”
“Innospec, a U.S. issuer, made use of U.S. mails and interstate commerce to carry out the scheme, and Jennings, a dual U.S. and U.K. national was complicit in the scheme. Jennings both sent and received e-mails to and from the United States to carry out the scheme. He also used interstate commerce and the mails as part of the scheme. Jennings obtained $116,092 in bonuses that were tied to the success of the TEL sales, which were procured through bribery.”
“Jennings also violated Section13(b)(5)of the Exchange Act and Rule 13b2-1 thereunder by falsifying documents as part of the bribery scheme. Jennings also violated Exchange Act Rule 13b2-2 by making false statements to accountants and violated Exchange Act Rule 13a-14 by signing false personal certifications required by the Sarbanes-Oxley Act of 2002 that were attached to annual and quarterly Innospec public filings.”
“Jennings also aided and abetted Innospec’s violations of [the FCPA’s books and records and internal control provisions] by substantially assisting in Innospec’s failure to maintain internal controls to detect and prevent bribery of officials in Iraq and Indonesia, and the improper recording of the illicit payments in Innospec’s books and records.”
According to the SEC, “beginning in 2005, Jennings, along with other members of Innospec’s management, approved bribery payments to officials at the Iraqi Ministry of Oil in order to sell TEL to Iraq. The complaint alleges that Innospec, with the approval of Jennings, used Naaman as its agent in Iraq to make improper payments and the complaint alleges that Jennings was copied on certain e-mails between Naaman and Turner discussing the bribery scheme. The complaint further alleges that Jennings approved certain payments to Naaman to facilitate the bribery scheme including certain payments Jennings approved “while in the United States.” Many of the SEC’s allegations as to the Iraqi conduct are phrased as Jennings had “general knowledge” or that Jennings was “generally aware” of the conduct at issue.
As to Indonesian payments, the complaint alleges that “Jennings became aware of and approved the improper payments to Indonesian government officials in order to win contracts for the sale of TEL to state owned oil and gas companies. Among other allegations, the complaint alleges that “in December 2004, Jennings and Executive B [the CEO of Innospec from 1998 to April 2005] discussed Innospec’s bribery scheme in Iraq and Indonesia on a flight from Denver to New York” and that “while Indonesian Agent was in the United States during the holidays, various e-mails were sent to and from the United States that discussed Jennings’ and Turner’s continued efforts to support Indonesian Agent’s payment of bribes on Innospec’s behalf.” The SEC also alleges that the “bribery scheme” was also discussed “during Jennings’ performance review in January 2005.”
As to Jennings false certifications, the complaint alleges as follows.
“From 2004 to February 2009, Jennings signed annual certifications that were provided to auditors where he falsely stated that he complied with Innospec’s Code of Ethics incorporating the company’s Foreign Corrupt Practices Act policy, and that he was unaware of any violations of the Code of Ethics by anyone else. During that time frame, Jennings actively participated in bribery of Iraqi and Indonesian officials as described above. Jennings also signed annual and quarterly personal certifications pursuant to the Sarbanes-Oxley Act of 2002 in which Jennings made false certifications concerning the company’s books and records and internal controls. Jennings also signed false management certifications to Innospec’s auditors indicating that the books and records were accurate and that Innospec had appropriate internal controls.”
As noted in the SEC release, without admitting or denying the SEC’s allegations, Jennings agreed to disgorge $116,092 plus prejudgment interest of $12,945 and pay a civil penalty of $100,000. The SEC stated that the figures take into consideration Jennings’s cooperation in this matter.
In the release, Cheryl Scarboro (Chief of the SEC’s FCPA Unit) stated, “we will vigorously hold accountable those who approve such bribery and who sign false SOX certifications and other documents to cover up the wrongdoing.”
Analyzing Alcatel-Lucent
In 2006, Alcatel-Lucent, S.A. (“Alcatel”) was formed when an Alcatel S.A. subsidiary merged with Lucent Technologies, Inc. Prior to the merger, Alcatel was a worldwide provider of a wide variety of telecommunications equipment and services and other technology products. The company operated in more than 130 countries directly and through certain wholly owned and indirect subsidiaries including in Costa Rica, Honduras, Malaysia and Taiwan. From 1998 until late 2006, ADR shares of Alcatel were traded on the New York Stock Exchange.
In 2007, the right side of the hyphen – Lucent Technologies – settled an FCPA enforcement action (see here and here).
In 2010, in what was the last FCPA enforcement action of the year, the left side of the hyphen – Alcatel and certain of its subsidiaries – settled an FCPA enforcement.
This post analyzes the Alcatel-Lucent enforcement action. The enforcement action (all 360 pages) is a FCPA feast. Principally based on the lack of due diligence of third-party agents, the enforcement action serves up the following: lots of alleged state-owned or state-controlled telecommunication entities; consultants hired after contracts were secured; a purported telecommunications consultant with only perfume experience; payments to legislators and political parties; things of value including excessive travel and entertainment expenses and crystal for the secretary; joint ventures; and payments from New York and Miami bank accounts.
The Alcatel-Lucent enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $137.4 million ($92 million criminal fine via DOJ plea agreements and a deferred prosecution agreement; $45.4 million in disgorgement via a SEC settled complaint).
DOJ
The DOJ enforcement action involved a criminal information against Alcatel-Lucent, S.A. (“Alcatel”) resolved through a deferred prosecution agreement and a criminal information against Alcatel-Lucent France S.A. (“Alcatel CIT”), Alcatel-Lucent Trade International A.G. (“Alcatel Standard”), and Alcatel CentroAmerica, S.A. (“ACR”) resolved through plea agreements. See here for the DOJ release.
Alcatel-Lucent S.A. Criminal Information
The information (here) begins with a heading “Background Regarding Alcatel’s Business Practices and the State of Its Internal Controls.”
It states as follows. “Starting in the 1990s and continuing through at least last 2006, Alcatel pursued many of its business opportunities around the world through the use of third-party agents and consultants. This business model was shown to be prone to corruption, as consultants were repeatedly used as conduits for bribe payments to foreign officials (and business executives of private customers) to obtain or retain business in many countries.”
The information also highlights Alcatel’s “de-centralized business structure” which permitted different Alcatel employees around the world “to initially vet the the third-party consultants, and then rely on Executive 1 [a French citizen who served as Chief Executive Officer of Alcatel Standard in Basel, Switzerland] at Alcatel to perform due diligence on them.” According to the information, “this de-centralized structure and approval process permitted corruption to occur, as the local employees were more interested in obtaining business than ensuring that business was won ethically and legally.”
Further, the information alleges that “Executive 1 performed no due diligence of substance and remained, at best, deliberately ignorant of the true purpose behind the retention of and payment to many of the third-party consultants.” Specifically, the information alleges that “Executive 1 made no effort, or virtually no effort, to verify the information provided by the consultant in the Consultant Profile [a form the consultant was supposed to complete with information concerning its ownership, business activities, capabilities, banking arrangements, and professional references], apart from using Dun & Bradstreet reports to confirm the consultant’s existence and physical address.” According to the information, “if the paperwork was completed, regardless of any obvious issues (such as close relationships with foreign officials or a clear lack of skill, experience or telecommunications expertise), Executive 1 authorized hiring and paying the third-party consultant.”
As to payments to the consultants, the information alleges that “Alcatel Standard [a wholly-owned subsidiary of Alcatel located and incorporated in Switzerland and an entity “responsible for entering into most agreements with consultants worldwide on behalf of Alcatel and certain other entities] would contract with the third-party consultant and then Alcatel CIT [a wholly owned subsidiary of Alcatel located and incorporated in France] would pay the consultant” including through a bank account at ABN Amro Bank in New York.
The information alleges as follows. “Often senior executives at Alcatel CIT, Alcatel Standard, and ACR [a wholly owned subsidiary of Alcatel located and incorporated in Costa Rica], among others, knew bribes were being paid, or were aware of the high probability that many of these third-party consultants were paying bribes, to foreign officials to obtain or retain business. For example, in a significant number of instances, the consultant contracts were executed after Alcatel had already obtained the customer business, the consultant commissions were excessive, and lump sum payments were made to the consultants that did not appear to correspond to any one one contract.”
According to the information, “Alcatel CIT, Alcatel Standard, ACR, and certain employees of Alcatel CIT, Alcatel Standard, and ACR knew, or purposefully ignored” that much of the consultant documentation “did not accurately reflect the true nature and purpose of the agreements” and that “many of the invoices submitted by various third-party consultants falsely claimed that legitimate work had been completed, while the true purpose of the monies sought by the invoices was to funnel all or some of the money to foreign officials, directly and indirectly.”
The information alleges that “these transactions were designed to circumvent Alcatel’s internal controls system and were further undertaken knowing that they would not be accurately and fairly reflected in Alcatel CIT, Alcatel Standard, and ACR’s books and records, which were included in the consolidated financial statements that Alcatel filed with the SEC.”
The information then contains ten separate sections: conduct in Costa Rica; conduct in Honduras; conduct in Malaysia; conduct in Taiwan; conduct in Kenya; conduct in Nigeria; conduct in Bangladesh; conduct in Ecuador; conduct in Nicaragua; and other consultancy agreements entered into without proper due diligence.
Costa Rica
The alleged conduct focuses on the actions of Christian Sapsizian and Edgar Valverde Acosta and consultancy agreements on behalf of Alcatel CIT with two Costa Rican consultants which were intended to make improper payments to Costa Rican government officials for telecommunications contracts. According to the indictment, Sapsizian (a French citizen) was a long-term employee of Alcatel and Alcatel CIT responsible for developing business in Latin America. Valverde (a Costa Rica citizen) served as the President of ACR and the Country Senior Officer of Costa Rica. See here for the prior enforcement actions against Sapsizian and Valverde.
According to the information, “both consultants had many personal contacts at ICE [Instituto Costarricense de Electricidad S.A. – a “wholly state-owned telecommunications authority in Costa Rica responsible for awarding and administering public tenders for telecommunications contracts].
According to the information, Sapsizian’s supervisor, the President of Area 1 who worked in Miami, approved more than $18 million in payments to the consultants notwithstanding that the President of Area 1, according to Sapsizian, “told him on several occasions that he knew he was ‘risking jail time’ as a result of his approval of these payments, which he understood would, at least in part, ultimately wind up in the hands of public officials.”
The information alleges that various Alcatel entities “conducted insufficient due diligence” on the consultants and that “neither Alcatel nor any of its subsidiaries took sufficient steps to ensure that the consultants were complying with the FCPA or other relevant anti-corruption laws.”
According to the information, the above described payments were ultimately used to provide money to various ICE officials, a Costa Rica executive branch official, and a Costa Rica legislator, that ultimately assisted Alcatel CIT obtain a $44 million contract, a $149.5 million contract, a $109.5 million contract.
The information also alleges that Sapsizian “approved the payment of approximately $25,000 in travel, hotel, and other expenses incurred by ICE officials during a primarily pleasure trip to Paris” – a trip that “was partially intended to reward these government officials for providing Alcatel with lucrative contracts …”.
Based on this conduct, the information alleges that “employees of Alcatel CIT, Alcatel Standard, and ACR knowingly circumvented Alcatel’s internal controls system and made inaccurate and false entries in the books and records of Alcatel CIT, Alcatel Standard, and ACR, whose financial results were included in the consolidated financial statements of Alcatel submitted to the SEC. As a result of the contracts won by Alcatel CIT in Costa Rica as a result of bribe payments, Alcatel earned approximately $23,661,000 in profits.”
Honduras
The information charges that “employees of ACR, along with Sapsizian, pursued business opportunities on behalf of Alcatel in Honduras with Hondutel [Empresa Hondurena de Telecomunicaciones – an alleged wholly state-owned telecommunications authority in Honduras responsible for providing telecommunications services in Honduras including evaluating and awarding telecommunications contracts on behalf of the government of Honduras] and Conatel [Comision Nacional de Telecouniciaciones – an alleged Honduran government agency that regulated the telecommunications sector in Honduras that issued licenses and concessions for fixed-line and wireless telephony, data transmission and internet services].”
According to the information, Alcatel CIT and Alcatel Mexico made large commission payments to at least one consultant, knowing that all or some of the money paid to that consultant would be paid to a close relative of a Honduran government official, with the high probability that some or all of the money would be passed on to the Honduran government official, in exchange for favorable treatment of Alcatel, Alcatel CIT, and Alcatel Mexico.”
According to the information, the consultant was retained at the request of a high-ranking government official in the Honduran executive branch; however, the consultant was an exclusive distributor of “brand name perfumes” and had no contacts in, or prior experience with, the telecommunications industry in Honduras or anywhere else.
The information alleges that in retaining the consultant, “Alcatel Standard knowingly failed to conduct appropriate due dligence” and “did not follow up on numerous, obvious red flags.”
The information alleges that by utilizing the services of the consultant, Hondutel awarded Alcatel a $1 million contract and four additional contracts for a combined value of approximately $47 million.
The information also alleges that “Alcatel CIT and ACR employees arranged for several other Honduran government officials to take primarily pleasure trips to France, which were paid by Alcatel CIT or ACR directly.” In addition, the information charges that a “high-ranking executive at Hondutel” also “received gifts and improper payments from Alcatel CIT and ACR employees” including $2,000 for an educational trip for the official’s daughter and a trip to Paris (along with the official’s spouse) that mostly consisted of “touring activities via a chauffeur-driven vehicle.” Further, the information alleges that “Alcatel CIT also made payments to a Hondutel attorney who worked” on a contract secured by Alcatel including paying for a trip by the attorney and the attorney’s daughter to Paris.
Based on this conduct, the information alleges that “employees of Alcatel CIT, Alcatel Standard, and ACR knowingly circumvented Alcatel’s internal controls system and caused inaccurate and false entries in the books and records of Alcatel CIT, Alcatel Standard, and ACR, whose financial results were included in the consolidated financial statements of Alcatel submitted to the SEC.” According to the information, “as a result of the bribe payments, Alcatel earned approximately $870,000 in profits.”
Malaysia
The information alleges that “in at least 17 instances in or around 2004 to in or around 2006, Alcatel Malaysia [a joint venture in which Alcatel owned a majority share of and exercised control of] employees, with the consent and approval of Alcatel Malaysia’s management, such as Executive 2 [Alcatel Malaysia’s Country Senior Officer] and Executive 3 [Alcatel Malaysia’s Chief Financial Officer], made improper payments to Telekcom Malaysia [an alleged state-owned and controlled telecommunications provider in Malaysia responsible for awarding telecommunications contracts 43% owned by the Malaysian Ministry of Finance] employees in exchange for nonpublic information relating to ongoing public tenders.” According to the information, “the documents purchased generally consisted of internal assessments by Celcom’s [Telekom Malaysia’s wholly owned subsidiary] tender committee of non-public pricing information.” According to the information, “eight of the 17 improper payments to Telekom Malaysia employees were made in connection with a single public tender that Alcatel Malaysia ultimately won …”. The information alleges that the payments were falsely characterized as “document fees” or accurately as “purchase of tender documents.”
The information further alleges that Alcatel Standard entered into a consulting agreement for more than $500,000 with a Malaysian consultant even though “Alcatel typically paid its agents and consultants commission rates based on the total value of a contract rather than pay a fixed fee for services.” According to the information, “at the time the payments were made to Malaysian Consultant 1, Alcatel Malaysia and Alcatel Standard were aware of a significant risk that Malaysian Consultant 1 would pass on all or a part of these payments to foreign officials.”
The information further alleges that Alcatel Standard entered into another consulting agreement with another consultant by which Alcatel Standard agreed to pay the consultant $500,000 for a “strategic intelligence report on Celcom’s positioning in the celluar industry in relation to its competitors.” According to the information, despite paying the consultant “half a million dollars for this report … there is no evidence that Malaysian Consultant 2 did any actual work for Alcatel Malaysia or ever produced the report.” The information states that “Alcatel Standard and Alcatel Malaysia were aware of a significant risk that Malaysian Consultant 2 was serving merely as a conduit for bribe payments to foreign officials.”
The information further alleges, in summary fashion, as follows. “Alcatel Malaysia lacked internal controls, such as formal policies covering expenditure for gifts, travel, and entertainment for customers, leading to Alcatel Malaysia employees giving lavish gifts to Telekom Malaysia officials.”
Based on this conduct, the information alleges that “Alcatel Standard and Alcatel Malaysia knowingly circumvented Alcatel’s internal controls system and caused inaccurate and false entries in the books and records of Alcatel Standard and Alcatel Malaysia, whose financial results were included in the consolidated financial statements of Alcatel submitted to the SEC.” The information states that “although Alcatel won the $85 million Celcom contract, Alcatel did not generate any profits from it.”
Taiwan
According to the information, Alcatel pursued business in Taiwan through its indirect subsidiary Alcatel SEL, a company located and incorporated in Germany. The information states that Executive 4 [a German citizen who served on Alcatel SEL’s director of international business ans sales] hired two third-party consultants to assist Alcatel SEL and Taisel, a joint venture 60% owned by an Alcatel subsidiary in obtaiing an axle counting contracts from the TRA [the Taiwan Railway Administration – an alleged wholly state-owned authority in Taiwan responsible for managing, maintaining, and running passenger freight services on Taiwan’s railroad lines].” According to the information, “both consultants claimed to have close ties to certain legislators in the Taiwanese government who were understood to have influence in awarding the contract due to their particular responsibilities in the legislature.”
The information alleges that the “purpose behind Alcatel’s hiring of Taiwanese Consultant 1 was so that Alcatel SEL could make improper payments to three Taiwanese legislators who had influence in the award of the TRA axle counting contract.” According to the information, after Taisel has been awarded the contract, “Alcatel SEL paid Taiwanese Consultant 1 a commission of approximately $921,413 by wire transfer from Alcatel SEL’s ABN Amro bank account in New York” and that Taiwanese Consultant 1, in turn, “made improper payments to two Taiwanese legislators: Legislator 2 and Legislator 3 – both members of the Legislative Yuan, the unicameral legislative assembly of the Republic of China. Among other things, the information alleges: that the the consultant promised approximately $180,000 in campaign funds for Legislator 3’s 2004 election campaign and then paid Legislator 3 approximately $90,000 after Alcatel SEL won the bid; that Executive 4 and the consultant “spent approximately $8,000 on trips to Germany” that were “primarly for personal, entertainment purposes, with only nominal business justification;” that Alcatel SEL paid the consultant “approximately $3,000 to reimburse it for a set of crystal given to the secretary of the Taiwan Transportation and Communications Minister.”
The information also alleges that Executive 4 also hired another consultant because “Taiwanese Consultant 2’s owner was the brother of Legislator 4, who had influence with respect to TRA matters.” The information alleges that “to bribe Legislator 4, Alcatel SEL arranged for a bogus consulting agreement between Taisel and Taiwanese Consultant 2.”
The information alleges as follows. “Neither Taiwanese Consultant 1 nor Taiwanese Consultant 2 provided legitimate services to Alcatel or Alcatel SEL. Their only function was to pass on improper payments to three Taiwanese legislators on behalf of Alcatel SEL and Taisel. On or about December 30, 2003 Taisel’s bid was accepted by the TRA, which granted Taisel a supply contract worth approximately $19.2 million …”.
According to the information, “Alcatel SEL’s financial results were included in the consolidated financial statements of Alcatel submitted to the SEC” and “as a result of contracts won by Alcatel in Taiwan as a result of bribe payments, Alcatel earned approximately $4,342,600 in profits.”
Kenya
The information describes a Kenyan joint venture (“Kenyan JV”) formed by a French telecommunications company (“French Telecom”) and a Kenyan company (“Kenyan Company”) to apply for a mobile telecommunications license that the Kenyan JV was awarded for approximately $55 million. Several companies, including Alcatel CIT, bid to provide approximately $87 million in infrastructure and services to the Kenyan JV. The information alleges that Alcatel CIT was informed by French Telecom that Alcatel CIT “would win the bid under one condition: an Alcatel entity had to make improper payments to an intermediary in the approximate amount of $20 million.”
The information then describes the intermediary and payments made to it and concludes with the following paragraph. “After entering into the various contracts, the intermediary provided monthly reports and economic intelligence on the telecommunications market in Africa, but never provided any information related to the 2nd GSM license or the Kenyan telecommunications market. In light of the huge amounts of the payments, the fact that the intermediary performed little legitimate work in connection with the 2nd GSM license, and the fact that Company Z [another company suggested by the intermediary] was an offshore holding of Kenyan Company, there is a high probability that all or a portion of the approximately $20 million in payments made by Alcatel CIT to the intermediary and the related entities was passed on to Kenyan Company, which in turn passed on the funds to Kenyan government officials who had played a role in awarding the original contract to French Telecom.”
Nigeria
The information states that between 1999 and 2007, Alcatel pursued business with various Nigerian customers and alleges as follows.
“Certain Alcatel subsidiaries made improper payments to government officials in Nigeria in the following contexts: (a) payments made to government officials for the purpose of reducing tax or other liabilities; (b) payments made to government officials to obtain security services from the Nigerian police; (c) a payment of approximately $75,000 to a former Nigerian Ambassador to the United Nations for the purpose of arranging meetings between Alcatel representatives and Nigerian Senior Government Official 1, a high-ranking official in the Nigerian executive branch; (d) payments made to government officials for the purpose of securing recovery of a debt totaling approximately $36.5 million owed by the government of Nigeria to ITT Nigeria [an Alcatel entity]; and (e) a payment to a People’s Democractic Party official. These payments were not described accurately and fairly on Alcatel’s books and records.”
The information also alleges as follows. “Alcatel personnel also made improper payments via a consultant to a Senior Executive at Nigerian Telecommunications Company 1” and “Alcatel also made large improper payments to two other consultants which were owned at least in part by a relative of the Senior Executive at Nigerian Telecommunications Company 1.” “These payments were not described accurately and fairly on Alcatel’s books and records.” There is nothing in the information to suggest that Nigerian Telecommunications Company 1 was a state-owned or controlled enterprise and the information refers to payments to the Senior Executive as “commercial bribe payments.”
Bangladesh
The information generally alleges that “Alcatel generated a significant portion of its revenue in Bangladesh from Bangladesh Telegraph and Telephone Board, the state-controlled telecommunications services provider” and that Alcatel used an agent in Bangladesh but “Alcatel Standard did not conduct adequate due diligence” on the consultant. In addition, the information alleges that Alcatel Standard retained the agent in connection with a submarine cable project connecting fourteen countries – Alcatel’s portion of the contract was approximately $258 million. According to the information, Alcatel CIT paid the consultant approximately $626,492 in compensation for services provided in connection with the project and approximately $2,524,939 in connection with various upgrades to a predecessor of the project “aware of a significant risk that Bangladsh Consultant would pass on all or a part of these payments to foreign officials.”
Ecuador
According to the information, “Alcatel conducted business in Ecuador with three major telecommunicatios customers, all of which were state-owned: Andinatel, Pacifictel, and Empresa Municipl de Telecomunicaciones, Aqua Potable, Alcantarillados y Saneamiento. The information alleges that Alcatel retained a consultant in Ecuador (“a wealthy businessman”), but that the consultant and the entities he controlled “did little legitimate work for Alcatel.” The information alleges as follows. “Instead, it was anticipated that Ecuadorian Consultant would funnel a portion of the funds Alcatel paid him to officials of the Ecuadorian state-owned telecommunications companies in order to secure business and other benefits for Alcatel. Improper payments were anticipated to be made or offered in connection with at least nine contracts with government-owned telecommunication companies.”
According to the information, at least some of Alcatel’s payments to the consultant wre made to bank accounts in Miami.
In addition, the information alleges as follows. “Alcatel also paid for trips taken by officials of the three telecommunications companies that were principally for pleasure. For example, both the Vice-President and the Chairman of the Board of Pacifictel received improper all-expenses paid trips to France.”
Nicaragua
According to the information, “Alcatel’s only customer in Nicaragua was Empresa Nicaraguense de Telecomunicaciones S.A. (“Enitel”) which was state-owned during the relevant time period.” The Ecuadorian consultant referenced above, also served as Alcatel’s consultant in Nicaragua. According to the information, “with the assistance of Ecuadorian Consultant, Alcatel CIT secured two contracts with Enitel” valued at approximately $1.6 million and $370,000. The information alleges that Alcatel CIT made payments totaling approximately $229,3822 to the Miami bank account of the consultant and that the consultant “likely used a portion of these payments to bribe certain key Enitel officials in order to influence Enitel to award the two contracts to Alcatel, to obtain confidential information about competing bids, and to secure favorable financial terms.” The information alleges that payments to the consultant were “identified in Alcatel’s books and records as consulting fees, and thus the description of those payments did not accurately and fairly reflect those transactions.”
The information further alleges that “Alcatel CIT also provided a trip to Paris and Madrid to two Enitel officials in late 2001 in order to encourage the execution of one of the two contracts” and that the “purpose of the trip was largley for pleasure, and it appears that Alcatel CIT covered all travel costs and a large portion of the expenses.”
The substantive portion of the information ends with a section titled “Other Consultancy Agreements Entered Into Without Proper Due Diligence.” The allegations concern consultants in Angola, the Ivory Coast, Burkina Faso, Uganda, and Mali. The customers associated with the consultants were either allegedly state-owned or private companies.
Based on all of the above conduct, the information charges Alcatel with violations of the FCPA’s internal control provisions. The information alleges that Alcatel “knowingly: (a) failed to implement sufficient anti-bribery compliance policies and procedures; (b) failed to maintain a sufficient system for the selection and approval of consultants, which, in turn, permitted corrupt conduct to occur at certain subsidiaries; (c) entered into purported business consulting agreements with no apparent basis, and without performing any due diligence, sometimes after the cmpany had already won the relevant project; (d) failed to verify information provided by consultants, including failing to follow up in circumstances in which managers knew or were substantially certain illicit activity was taking place; (e) failed to prevent consultants from using multiple shell companies to receive commissions in excess of 10% knowing there was a substantial likelihood those consultants were acting as conduits for corrupt payments; (f) failed to conduct appropriate audits of payments to purported business consultants; (g) failed to prohibit lump sum payments being made to consultants that did not correspond to any contract; (h) failed to prohibit payments to consultants and public officials pursuant to an oral ‘gentlemen’s agreement’; (i) failed to appropriately investigate and respond to allegations of corrupt payments and discipline employees involved in making corrupt payments; (j) failed to establish a sufficiently empowered and competent Corporate Compliance Officer; (k) failed to exercise due diligence to prevent and detect criminal conduct; (l) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed, including monitoring and internal audits to detect criminal conduct; (m) failed to evaluate regularly the effectiveness of the company’s compliance and ethics program; and (n) failed to provide appropriate incentives to perform in accordance with the compliance and ethics program.”
Based on the above conduct, the information also charges Alcatel with FCPA books and records violations for (a) drafting sham business consulting agreements to justify third party payments; (b) mis-characterizing bribes in the corporate books and records as consulting fees and other seemingly legitimate expenses; (c) justifying payments to purported business consultants based on false invoices; and (d) entering into purported business consulting agreements with no basis, sometimes after Alcatel had won the relevant project.
Alcatel-Lucent DPA
The DOJ’s charges against Alcatel were resolved via a deferred prosecution agreement (see here).
Pursuant to the DPA, Alcatel admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, agents, and those of Alcatel’s subsidiaries as described above.
The term of the DPA is three years and it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and Alcatel-Lucent. Among the factors stated are the following.
(a) following press reports concerning bribery by Alcatel, S.A., in Costa Rica, the company investigated and disclosed over the course of several years to the Department and the United States Securities and Exchange Commission the misconduct described above;
(b) Alcatel-Lucent conducted a global internal investigation concerning bribery and related misconduct;
(c) Alcatel-Lucent reported its findings to the Department and the SEC;
(d) after limited and inadequate cooperation for a substantial period of time, Alcatel-Lucent substantially improved its cooperation with the Department’s investigation of this matter, as well as the SEC’s investigation;
(e) Alcatel-Lucent undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures as contemplated by the DPA;
(f) on its own initiative and at a substantial financial cost, Alcatel-Lucent determined as matter of company policy to no longer use third party sales and marketing agents in conducting its worldwide business; and
(g) Alcatel-Lucent agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of Alcatel-Lucent and its employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.
As stated in the DPA, the fine range for the above describe conduct under the U.S. Sentencing Guidelines was $86.58 – $173.16 million. Pursuant to the DPA, Alcatel-Lucent agreed to pay a monetary penalty of $92 million – a rather rare instance of an FCPA criminal fine actually being within the Guidelines range and not below even the minimum range suggested by the Guidelines. Also relevant is that Alcatel’s culpability score was reduced only by -1, reflecting that Alcatel did not receive cooperation credit as many FCPA corporate defendants do receive.
The DPA states that above fine is appropriate given, among other things, “penalties related to the same conduct in Costa Rica [see here], and the extraordinary remedial step of terminating use of third-party sales and marketing agents.”
Pursuant to the DPA, Alcatel agreed to a host of compliance undertakings including the retention of an independent compliance monitor “who is a French national” for a three year term. Corporate Monitors used to be common in FCPA enforcement actions (circa 2005-2008), but required use of corporate monitors has become less common over the past few years.
As is standard in FCPA DPAs, Alcatel agreed not to make any public statement “contradicting the acceptance of responsibility by Alcatel-Lucent as set forth” in the DPA and Alcatel-Lucent further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.
As to potential debarment issues, the DPA states as follows. “The Department agrees to bring to the attention of governmental and other debarment authorities the facts and circumstances relating to the nature of the conduct underlying this Agreement, including the nature and quality of Alcatel-Lucent’s cooperation and remediation. By agreeing to provide this information to debarment authorities, the Department is not agreeing to advocate on behalf of Alcatel-Lucent, but rather is providing facts to be evaluated independently by the debarment authorities.”
Alcatel-Lucent France S.A., Alcatel-Lucent Trade International A.G. and Alcatel CentroAmerica, S.A. Criminal Information
The criminal information against the above Alcatel subsidiaries is virtually identical to the above-described criminal information against Alcatel, albeit it is limited to Costa Rica, Honduras, Malaysia, and Taiwan conduct. Based on this conduct, the information charges the entities with conspiracy to violate the FCPA’s anti-bribery and books and records and internal control provisions. According to the information, the purpose of the conspiracy was to “secure the assistance of officials of various governments, including those in Costa Rica, Honduras, Malaysia, and Taiwan, in obtaining and retaining lucrative telecommunications business through the offer, promise, and payment of bribes.”
Alcatel-Lucent France S.A., Alcatel-Lucent Trade International A.G. and Alcatel CentroAmerica, S.A. Plea Agreements
The above described charges were resolved via separate plea agreements with Alcatel-Lucent France (here), Alcatel-Lucent Trade International (here) and Alcatel CentroAmercia (here). Each plea agreement states that in light of the overall dispositions with the other Alcatel-Lucent entities and “the interrelationship among the charges and conduct underlying those dispositions” the agreed upon fine is $500,000.
SEC
The SEC’s civil complaint (here) alleges in summary fashion as follows.
“From December 2001 through June 2006, Alcatel, S.A., now called Alcatel-Lucent, S.A. (“Alcatel” or the “company”), through its subsidiaries and agents, violated the Foreign Corrupt Practices Act by paying more than $8 million in bribes to foreign government officials. Alcatel made these payments to influence acts and decisions by these foreign government officials to obtain or retain business, with the knowledge and approval of certain management level personnel of the relevant Alcatel subsidiaries. Alcatel lacked sufficient internal controls to prevent or detect such improper payments, and improperly recorded the payments in its books and records.”
“During this period, Alcatel’s agents and/or subsidiaries paid bribes to foreign government officials in several countries to obtain or retain business:
• From December 2001 to October 2004, Alcatel’s agents and/or subsidiaries paid at least $7 million in bribes to government officials of Costa Rica to obtain or retain three contracts to provide telephone services in Costa Rica totaling approximately $303 million.
• From December 2002 to June 2006, Alcatel’s agents and/or subsidiaries paid bribes to government officials of Honduras to obtain or retain five telecommunications contracts totaling approximately $48 million.
• From October 2003 to May 2004, Alcatel’s agents and/or subsidiaries paid bribes to government officials of Taiwan to obtain or retain a railway axle counting contract valued at approximately $27 million.
• From October 2004 to February 2006, Alcatel’s agents and/or subsidiaries paid bribes to government officials of Malaysia to obtain or retain a telecommunications contract valued at approximately $85 million.”
“All of these payments were undocumented or improperly recorded as consulting fees in the books of Alcatel’s subsidiaries, and then consolidated into Alcatel’s financial statements. A lax corporate control environment aided Alcatel’s improper conduct. Alcatel failed to detect or investigate numerous red flags suggesting that its business consultants were likely making illicit payments and gifts to government officials in these countries at the direction of certain Alcatel employees. The respective heads of several Alcatel subsidiaries and geographical regions, some of whom reported directly to Alcatel’s executive committee, authorized extremely high commission payments under circumstances in which they failed to determine whether such payments were, in part, to be funneled to government officials in violation of the FCPA. These high-level employees therefore knew, or were severely reckless in
not knowing, that Alcatel paid bribes to foreign government officials.”
The SEC complaint contains allegations about the same “Costa Rica Bribery Scheme,” “The Honduras Bribery Scheme,” “The Taiwan Bribery Scheme,” and “The Malaysia Bribery Scheme” referenced above. Typically, SEC complaints in FCPA matters are more broad than DOJ resolution documents, yet in this case the SEC complaint is more narrow than the DOJ resolution documents in that the SEC complaint does not contain any allegations as to conduct in Kenya, Nigeria, Bangladesh, Ecuador, Nicaragua, Angola, the Ivory Coast, Burkina Faso, Uganda, and Mali – as does the DOJ information.
Based on the above conduct, the SEC charged Alcatel with FCPA anti-bribery and books and records and internal control violations and knowingly failing to implement a system of internal controls and knowingly falsifying books and records.
As to books and records the complaint alleges as follows.
“Specifically, A1catel failed to keep accurate books and records by (1) entering into consulting agreements retroactively; (2) establishing and using a system of intermediaries to obscure the source and destination of funds; (3) making payments pursuant to business consulting agreements that inaccurately described the services provided; (4) generating false invoices and other false documents to justify payments; (5) disbursing funds in cash with inaccurate documentation authorizing or supporting the withdrawals; (6) recording illicit payments as legitimate consulting fees; and (7) recording bribes as payment for legitimate services.”
As to internal controls, the complaint alleges as follows.
“Alcatel failed to implement adequate internal controls to comply with the
company’s NYSE listing, including the detection and prevention of violations of the FCPA. First, Alcatel and/or its subsidiaries falsified books and records, entered into agreements retroactively, and obscured the purpose for, and ultimate recipient of, illicit payments. Alcatel used business consultants and intermediaries to funnel bribes in at least four countries. Alcatel created and used false invoices and payment documentation under business consulting agreements that described services that were never intended to be rendered. Illicit payments were falsely recorded as expenses for consulting fees.”
“Second, Alcatel also routinely circumvented the internal controls the company had in place. Although the company in theory had a policy of “checks and balances” to authorize the retention of business consultants, which required several signatures to approve the retention of, and payment to, business consultants, Alcatel employees often violated that policy. In numerous instances, Alcatel officials responsible for reviewing due diligence reports on consultants failed to conduct any review of the documents or could not read the language in which the documents were written. Alcatel employees also entered into agreements retroactively and obscured the amounts paid to business consultants by splitting the payments among separate
agreements (to conceal the high commissions Alcatel paid). Finally, Alcatel Standard’s due diligence on business consultants was inadequate, and Alcatel CIT often paid business consultants without adequate proof of services rendered. Alcatel CIT failed to establish robust controls over cash disbursements, allowed manual payments without documentation, and Alcatel’s FCPA compliance function was understaffed and lacked independence. Alcatel also failed to conduct thorough anti-bribery and corruption training.”
Without admitting or denying the SEC’s allegations, Alcatel agreed to an injunction prohibiting future FCPA violations and agreed to pay disgorgement of $45.372 million.
In a relese (here), Robert Khuzami (Director of the SEC’s enforcement division) stated as follows. ““Alcatel and its subsidiaries failed to detect or investigate numerous red flags suggesting their employees were directing sham consultants to provide gifts and payments to foreign government officials to illegally win business. Alcatel’s bribery scheme was the product of a lax corporate control environment at the company.” Glenn Gordon (Associate Director of Enforcement in the SEC’s Miami office) added, “the serious sanctions Alcatel has agreed to, including paying back all net profits made on the contracts Alcatel illegally obtained, should serve as a reminder that we are committed to enforcing the FCPA and a level playing field for companies seeking to obtain or retain business in other countries.”
In a company press release (here), Steve Reynolds, Alcatel-Lucent General Counsel, stated as follow. “We take responsibility for and regret what happened and have implemented policies and procedures to prevent these violations from happening again. The violations largely occurred prior to the merger of Alcatel and Lucent Technologies and involved improper activities in several countries. These settlements resolve the company’s FCPA liability with the DOJ and SEC. We are pleased to have reached these settlements and look forward to putting these matters behind us. Alcatel-Lucent, created as a result of the merger of Alcatel and Lucent Technologies at the end of 2006, is a radically different company today: It has different management, including a new CEO, a new executive committee and a different Board of Directors; It has a zero-tolerance policy regarding bribery and corruption and has a system in place with strong processes and Internet-based and live training designed to prevent these types of situations in all aspects of our business; and as the first in its industry to do so, Alcatel-Lucent announced in 2008 that it would terminate the use of sales agents and consultants — the primary means by which certain former employees made the improper payments involved in the violations described in the DOJ and SEC settlement papers.”
Martin Weinstein (here) of Willkie Farr & Gallagher represented the Alcatel entities.
All About Panalpina
Last but certainly not least in the analysis of CustomsGate enforcement actions is Panalpina.
See here for the prior post on the Pride International enforcement action, here for the prior post on the Shell enforcement action, 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 Panalpina enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $81.9 million ($70.6 million criminal fine via a DOJ plea agreement and deferred prosecution agreement; $11.3 million in disgorgement via a SEC settled complaint).
This is a long post, but the enforcement action takes up 230 pages.
What you will find in these pages is that Panalpina paid millions of dollars of alleged bribes on behalf of certain of its customers (and in some instances for its own benefit as well), that a majority of the improper payments relate to Nigeria, and that a majority of Nigerian payments relate to temporary importation permits in connection with importing rigs and other vessels into Nigerian waters.
As to a U.S. nexus of these payments (a nexus necessary to find Panalpina, a foreign based non-issuer company, liable under the FCPA) you will find that the information alleges one e-mail and one conference call in which a certain Nigerian payment was discussed.
You will find that Panalpina also engaged in alleged improper conduct in numerous other countries besides Nigeria, but because of how the deferred prosecution agreement is structured, Panalpina ended up paying $0 for this non-Nigeria improper conduct.
You will find how Panalpina, despite an alleged corporate culture of bribery, including at the most senior levels of the company, was offered a deferred prosecution agreement even though it did not disclose the conduct at issue, even though it did not cooperate at all times in the DOJ’s investigation, and even though certain improper payments continued while the company was engaged in discussions with the DOJ.
You will also find how the SEC asserted a rather unique jurisdictional basis against Panalpina. That is Panalpina acted as an agent for certain of its issuer-customers and violated the FCPA by masking the true nature of bribe payments in invoices submitted to its issuer customers that allowed the customers to then violate the FCPA.
DOJ
The DOJ enforcement action involved a criminal information against Panalpina World Transport (Holdings) Ltd. (“PWT”) resolved through a deferred prosecution agreement and a criminal information against Panalpina Inc. resolved through a plea agreement.
PWT Criminal Information
Basel, Switzerland based PWT (here) “is one of the world’s leading suppliers of forwarding and logistics services, specializing in global supply chain management solutions and intercontinental air freight and ocean freight shipments and associated supply chain management solutions.” It operates “a close-knit network with some 500 branches in over 80 countries,” does business in a further 80 countries with partner companies, and employs approximately 15,000 individuals.
The criminal information (here) focuses on a “network of local subsidiaries … each of which was responsible for providing the freight forwarding and logistics services to customers and for coordinating with other Panalpina-affiliated companies with respect to the transportation and shipment of cargo from abroad.” In addition, PWT and its subsidiaries “provided customers with importation, customs clearance and ground shipment services once the shipped goods reached their destination jurisdiction.”
The subsidiaries are:
Panalpina Inc. (“Panalpina U.S”), a wholly-owned subsidiary and agent of PWT located in New Jersey with 38 branches in the U.S. ,including Houston – the office that had the “primary relationship for [Panalpina’s] oil and gas industry customers”;
Panalpina World Transports (Nigeria) Limited (“Panalpina Nigeria), a majority-owned subsidiary and agent of PWT until 2008 located in Lagos, Nigeria that was an “affiliate of Panalpina U.S. and provided a wide variety of services for Panalpina U.S.’s customers”;
Panalpina Transportes Mundiasis, Navegacao e Transitos, SARL (“Panalpina Angola”), a wholly-owned subsidiary and agent of PWT located in Luanda, Angola;
Panalpina Limitada (“Panalpina Brazil”), a wholly-owned subsidiary and agent of PWT located in Sao Paulo, Brazil;
Panalpina Azerbaijan LLC (“Panalpina Azerbaijan”), a wholly-owned subsidiary and agent of PWT located in Baku, Azerbaijan;
Panalpina Kazakhstan LLP (“Panalpina Kazakhstan”), a wholly-owned subsidiary and agent of PWT located in Almaty, Kazakhstan;
Panalpina World Transport Limited (Russia) (“Panalpina Russia”), a wholly-owned subsidiary and agent of PWT located in Moscow, Russia; and
Panalpina World Transport Limited (Turkmenistan) (“Panalpina Turkmenistan”), a wholly-owned subsidiary and agent of PWT located in Turkmenbashi, Turkmenistan.
The information refers to PWT and the above subsidiaries collectively as “Panalpina.”
The criminal information begins with a heading titled “Panalpina’s Culture of Corruption.” This section states as follows.
“Prior to 2007, dozens of employees throughout the Panalpina organization were involved in paying bribes to foreign offcials. Panalpina generally made payments on behalf of customers in order to circumvent the customs process for imports and exports of goods and items. Panalpina paid these bribes for various reasons, such as to cause officials to overlook insufficient, incorrect, or false documentation and to circumvent the local laws and inspections so as to allow the shipment of contraband (mainly unauthorized food and clothing). Panalpina also on occasion paid bribes to secure foreign government contracts for itself or to obtain favorable tax treatment by foreign governments.”
According to the information, “the highest levels of PWT’s leadership, including a former member of PWT’s Board of Directors (“Board Member A”), knew of and tolerated Panalpina’s payments of bribes.”
The information states as follows:
“Panalpina’s longstanding practice of making bribe payments in violation of the FCPA resulted from a variety of factors, including: (1) pressure from Panalpina’s customers to have services performed as quickly as possible, or to receive preferential treatment in obtaining services; (2) an inadequate compliance structure; (3) a corporate culture that tolerated and/or encouraged bribery prior to 2007 as customary and necessary in various markets; (4) the involvement of management in PWT’s Swiss headquarters that tolerated the improper payments prior to 2007; and (5) the involvement of Panalpina management in the U.S. and in other countries that encouraged the improper payments prior to 2007.”
According to the information, between 2002 and 2007 “Panalpina paid bribes to foreign officials valued at approximately $49 million” and “payments paid on behalf of Panalpina’s U.S. customers and their foreign subsidiaries accounted for approximately $27 million of these bribes payments.”
The criminal information (here) alleges bribery schemes in Nigeria, Angola, Brazil, Azerbaijan, Russia, Kazakhstan, and Turkenistan.
Nigeria
According to the information:
“Panalpina had a substantial number of oil and gas customers that shipped items into Nigeria, including customers in the United States. The goods shipped by Panalpina into Nigeria could only be imported into the jurisdiction if they satisfied the local statutory and regulatory requirements, which required product inspection, submission of satisfactory paperwork, and payment of customs duties and other taxes. Furthermore, once the items had been imported, they remained subject to local laws or regulations. Some of Panalpina’s customers, including its U.S. customers, sought to avoid local customs and import laws and processes by seeking to import goods without sufficient documentation, without being inspected, or without paying the required taxes, duties or fees. Panalpina used a portion of the revenue earned from its customers to make bribe payments to local customs officials in exchange for their cooperation in assisting Panalpina in circumventing these local legal or regulatory requirements on behalf of Panalpina’s customers. Panalpina sought reimbursement for these bribe payments through invoices that used false terms to characterize the bribe payments.”
According to the information, Panalpina used “approximately 160 different terms [internally and externally to invoice customers] to falsely describe the bribes it paid in Nigeria relating to the customs process.”
The information alleges that “the bribes paid by Panalpina relating to the customs process were paid to officials in the Nigerian Customer Service (“NCS”), a Nigerian government agency” responsible for “assessing and collecting duties and tariffs on goods imported into Nigeria.”
According to the information, between 2002 and 2007, “Panalpina paid over $30 million in bribes to Nigerian government officials” and “payments made on behalf of Panalpina’s U.S. customers and their foreign subsidiaries accounted for at least $19 million of these bribe payments.”
The information describes four types of “bribery payments” in Nigeria – (1) Pancourier; (2) Temporary Import Permits payments; (3) “special” and other bribe payments; and (4) “recurring payments to government officials.” According to the DPA statement of facts “the overall largest category of payments, accounting for the largest amount of bribes, related to securing Temporary Importation Permits on behalf of its customers” and “those bribes ranged in value from $5,000 to over $75,000 per transaction.”
Pancourier
“Pancourier” was Panalpina’s “express courier service” that certain Panalpina customers used instead of “the normal shipping process” to “import goods or contraband into Nigeria without complying with Nigerian customs law.” According to the information, “Panalpina charged its customers a premium for this service and explained that no government receipt or paperwork would be available from NCS for the goods that were imported.” The information alleges that “Panalpina typically billed its customers for two separate charges” (1) a charge based on the weight of the shipment; and (2) a “special fee” that was a “bribe paid to the NCS officials for the purpose of securing an improper advantage for the customer.”
According to the information, between 2002 and 2007 “Panalpina, through Panalpina Nigeria, paid hundreds of bribes to NCS officials in relation to the Pancourier service.”
Special and Other Improper Payments
The information states as follows:
“In addition to the Pancourier service, Panalpina also offered standard freight forwarding and shipping services. For standard Panalpina freight forwarding and shipping, once the goods arrived at their destination, a Panalpina Nigeria employee would ensure that the goods cleared customs. The clearance process typically required the submission of documents, an inspection of the product being shipped, and the payment of any customs and other fees associated with the importation of that product. The goods shipped by Panalpina frequently encountered delays in clearng customs for various reasons, including insufficient or missing documentation or delays due to the legally-required inspection process. Panalpina customers often sought to avoid local customs and import laws and processes to expedite their shipments into Nigeria. Panalpina made cash bribe payments, through Panalpina Nigeria, to local government officials, including NCS employees, to expedite customs clearance, avoid the required cargo inspections, avoid fines, duty payments, and tax payments, and to circumvent permit requirements and other legal requirements.”
According to the information, between 2002 and 2007, “Panalpina, through Panalpina, Nigeria, paid thousands of bribes on behalf of its customers to Nigerian government officials to resolve these types of customs and immigration matters.”
Temporary Import Permits Payments
The information states as follows:
“Another service offered by Panalpina involved obtaining Temporary Import Permits (“TIPs”) required under Nigerian law to import high-value special equipment, such as rigs and other large vessels, into Nigerian water. A TIP could be extended through two six-month extensions (known as “TIP extensions”). Vessels imported under a TIP (and TIP extensions) could not remain in Nigeria longer than the period allowed for by the TIP and/or TIP extensions. Upon expiration, the vessel was required to be exported from Nigeria and, if appropriate, the customer could re-apply for a new TIP. Panalpina, through Panalpina Nigeria, made improper payments to Nigerian government officials to assist some of its customers to circumvent TIP regulations. Specifically, Panalpina Nigeria made payments to NCS officials, on behalf of customers, to extend TIPs without complying with Nigerian TIP regulations. As a result, the customers avoided the time and cost of removing vessels upon the expiration of the TIP, as was otherwise required by Nigerian law.”
According to the information, between 2002 and 2007, “Panalpina, through Panalpina Nigeria, paid over a hundred bribes to Nigerian government officials on behalf of Panalpina’s customers to improperly secure TIPs and TIP extensions.”
Payment of Bribes to Secure a Contract
The information alleges that between November 2003 and August 2005, “Panalpina promised to pay $50,000 to a National Petroleum Investment Management Services official (the “NAPIMS Official) in exchange for the official’s assistance in securing the award by NAPIMS of a logistics contract to Panalpina.” According to the information, “Panalpina was awarded a global framework logistics contract in or around November 2003” and “in or around November 2005, PWT directed the $50,000 bribe payment to be made to the NAPIMS Official in cash.”
The information states that NAPIMS supervised and managed Nigeria’s investment in the oil and gas industry and NAPIMS officials had the authority to approve or disapprove logistics contracts awarded for certain projects.
Recurring Payments to Government Officials
Although referenced in the information, the information does not contain any detail about such payments.
However, the DPA’s statement of facts states as follows.
“Panalpina Nigeria made improper payments to a wide variety of Nigerian officials, including, but not limited to, NCS offcials, Port Authority offcials, Maritime Authority officials, Police officials, Deparment of Petroleum officials, Immigration Authority officials, and National Authority for Food and Drug Control officials. Most of these improper payments were tied to specific transactions, however, Panalpina Nigeria also provided certain officials weekly or monthly allowances to ensure the officials would provide preferential treatment to Panalpina and its customers. Between in or around 2002 and in or around 2007, Panalpina made hundreds of improper weekly and monthly payments to Nigerian government officials.”
Angola
The information charges that between 2002 and 2008 “Panalpina Angola paid approximately $4.5 million in bribes to Angolan government officials.” Two types of payments are described: “Customs and Immigration Payments” and “Payments to Secure Contracts.”
Customs and Immigration Payments
According to the information, the payments were made to “Angolan government officials responsible for customs and immigration matters” and the purpose of the payments was to “cause such officials to: overlook incomplete or inaccurate documentation; avoid levying proper customs duties; or avoid imposition of fines relating to the failure of Panalpina Angola, or its customer, to comply with legal requirements.” According to the information, Panalpina Angola paid “hundreds of bribes” ranging from “de minimus amounts to $25,000 per transaction.”
Payments to Secure Contracts
The information charges that between December 2006 and March 2008, “Panalpina Angola paid over $300,000 to two Angolan government officials responsible for Angolan oil and gas operations to secure two separate logistics contracts.” According to the information, the officials “had the authority to approve or disapprove the retention of logistics companies to provide services for projects that Panalpina sought to secure.” According to the information, in connection with certain of these payments, Panalpina Angola “invoiced an Angolan government-controlled entity for a non-existent employee (referred to as the ‘ghost employee’) who was allegedly dedicated to the Angolan entity to work on the logistics for the particular project.”
Azerbaijan
The information states as follows.
“Between in or around 2002 and in or around 2007, Panalpina Azerbaijan paid approximately $900,000 in bribes to Azeri government officials responsible for assessing and collecting duties and tariffs on imported goods. […] The purpose of many of the bribes paid to the Azeri government officials was to cause these officials to overlook incomplete or inaccurate documentation; avoid levying proper customs duties; or avoid imposition of fines relating to the failure of Panalpina, or its customer, to comply with legal requirements. In addition, Panalpina also made bribe payments to Azeri tax officials to secure preferential treatment for Panalpina Azerbaijan.”
Brazil
The information states as follows.
“Between in or around 2002 and in or around 2007, Panalpina Brazil paid over $1 millon in bribes to Brazilian govermnent officials responsible for assessing and collecting duties and tariffs on imported goods on behalf of its customers. […] The purpose of many of these bribes was to expedite the customs clearance process; to avoid the imposition of fines and penalties; to circumvent Brazilian law requirements for customs declaration of courier shipments; to permit shipments to be imported in Brazil without an import license; and to allow exports from Brazil of goods originally imported without accurate and complete documentation. Many of the bribe payments made by Panalpina Brazil on behalf of its customers were in connection with shipments to Brazil originating with Panalpina U.S. from the United States.”
Kazakhstan
The information states as follows.
“Between in or around 2002 and in or around 2007, Panalpina Kazakhstan paid over $4 milion in bribes to Kazakh governent officials, including, for example, payments to Kazakh government officials responsible for assessing and collecting duties and tariffs on imported goods and officials responsible for administering and enforcing Kazakhstan tax policy. […] The purpose of many of the bribes paid to the Kazakh government officials was to cause officials to overlook incomplete or inaccurate documentation; avoid levying proper customs duties; and avoid imposition of fines relating to the failure of Panalpina, or its customer, to comply with legal requirements.”
According to the information, the payments “ranged from several hundred dollars to $50,000 per transaction.”
The information further states that “Panalpina Kazakhstan paid bribes to Kazakhstan officials responsible for administering Kazkhstan tax policy in conjunction with its annual tax audits to minimize the duration and depth of the audits as well as to reduce proposed fines.”
Russia
The information states as follows.
“Between in or around 2002 and in or around 2007, Panalpina Russia paid over $7 milion in bribes to Russian government officials responsible for assessing and collecting duties on imported goods. […] The purpose of many of the bribes paid to the Russian government officials was to avoid delays, administrative fines, and other legal action as a result of missing, incomplete or erroneous documentation; to avoid problems arising out of the improper use of a TIP; and to bypass the customs process in total.”
Turkmenistan
The information states as follows.
“Between in or around 2002 and in or around 2009, Panalpina Turkmenistan paid over $500,000 in cash bribes to: (i) Turkmen government officials responsible for assessing and collecting duties and tariffs on imported goods in order to expedite the release of shipments and undocumented shipments and to circumvent the official Turkmen customs and immigration regulations; (ii) Turkmen government officials responsible for auditing, assessing, and collecting taxes on economic activity in Turkmenistan to minimize the duration of audits and investigations and to reduce proposed fines; and (iii) Turkmen govermnent officials responsible for enforcing Turkmenistan labor, health, and safcty laws, including through the use of audits and inspections, to minimize the duration of audits and investigations and to reduce the proposed fines.”
Based on all of the above conduct, the information charges conspiracy to violate the FCPA’s anti-bribery provisions. In addition, as to the Nigeria conduct, the information charges FCPA anti-bribery violations.
As to a U.S. nexus (a requirement for an entity such as PWT to be in violation of the FCPA’s anti-bribery provisions under 78dd-3), the information merely alleges that in November 2003 “a Panalpina U.S. employee located in Houston, Texas, sent an e-mail to a Panalpina employee based in Switzerland advising that the NAPIMS Official would award a logistics contract with the Nigerian government to Panalpina in exchange for a bribe of $50,000” and that in November 2003 “Panalpina employees based in Switzerland, Panalpina U.S. employees located in Houston, Texas, and others participated in a conference call to discuss the $50,000 payment to the NAPIMS Official.”
PWT DPA
The DOJ’s charges against PWT were resolved via a deferred prosecution agreement (see here).
Pursuant to the DPA, PWT admitted, accepted and acknowledged that it was responsible for the acts of its directors, officers, employees, subsidiaries, agents and consultants as set forth above.
The DPA’s statement of facts contains a separate section titled “Panalpina U.S.’s Assistance to its Issuer-Customers in Circumventing Books and Records Controls.” This section states that between 2002 and 2007 “Panalpina U.S. provided services to over 40 customers that were issuers” and that “in total, Panalpina paid approximately $27 million in bribes to foreign officials on behalf of these issuer-customers.”
In pertinent part, the statement of facts state as follows.
“Many of Panalpina U.S.’s issuer-customers knew, or were aware of facts indicating a high probability, that Panalpina was paying bribes on their behalf. Further, those issuer-customers with knowledge of the bribe payments failed to properly record the payments in their books and records.”
“Many of Panalpina’s issuer-customers were aware of the bribes paid by Panalpina. Importantly, those issuer-customers with strong compliance programs or rigorous audit standards were either not offered services such as Pancourier, which included improper payments to governent officials, or Panalpina paid bribes on the issuer-customer’s behalf but would not invoice the issuer-customer for the payment.”
“Panalpina US., through the local Panalpina affiiates, knowingly and substantially assisted the issuer-customers in violating the FCPA’s books and records provisions by masking the true nature of the bribe payments in the invoices submitted to the issuer-customers. By providing an invoice to the issuer-customer for what appeared to be a legitimate payment, the customer could use that invoice as support for recording a particular charge as a legitimate service in its corporate books and records when, in fact, the invoice was for a bribe.”
The statement of facts then describe how Panalpina Nigeria specifically assisted Customer A (Shell) and Customer B (Tidwater) in making bribe payments for Pancourier services and TIP payments.
The DPA’s statement of facts provides further information about “Panalpina’s Corporate Culture and Senior Management Knowledge.” According to the statement of facts: “Prior to 2007 a culture of corruption within Panalpina emanated from senior level management in Switzerland who tolerated bribery as business as usual in various markets. This trickled down to other Panalpina employees who accepted bribery as a part of Panalpina’s standard business practice.” According to the statement of facts: “Many employees openly used the terms ‘apples,’ ‘interventions,’ ‘special handling,’ and ‘evacuations’ on a daily basis in conversations, written correspondence, and e-mail exchanges” even though “most employees understood that these terms referred to cash payments provided to government officials in exchange for preferential treatment.”
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 PWT. Among the factors stated are the following.
(a) PWT conducted comprehensive anti-bribery compliance investigations of operations of PWT’s subsidiaries in seven countries, as well as separate investigations related to U.S. and Swiss operations;
(b) PWT conducted a review of certain transactions and operations conducted by its subsidiaries or agents in another 36 countries;
(c) PWT promptly and voluntarily reported its findings from all investigations to the Department, including arranging to provide information from foreign jurisdictions which significantly facilitated the Department’s access to such information;
(d) PWT mandated employee cooperation from the top down and ensured the availabilty of more than 300 employees and former employees for interviews during and following the investigations;
(e) PWT instituted a limited employee amnesty program to encourage employee cooperation with the investigations;
(f) PWT expanded the scope of the investigations where necessary to ensure thorough and effective review of potentially improper practices, and promptly and voluntarily reported any improper payments identified after internal and Department investigations had begun;
(g) After initially not cooperating with the investigation for several months, PWT fully cooperated with the Department’s investigation of this matter, as well as the SEC’s investigation, and on the whole exhibited exemplary
cooperation with the Departent’s investigation;
(h) PWT provided substantial assistance to the Department and the SEC in its investigation of its directors, officers, employees, agents, lawyers, consultants, contractors, subcontractors, subsidiaries and customers relating to violations of the FCPA;
(i) PWT undertook substantial remedial measures [the DPA then lists 10 such measures including “of its own initiative and at a substantial cost, PWT closed down its operations and withdrew from Nigeria to avoid potential ongoing improper conduct”]; and
(j) PWT agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of PWT and its directors, officers, employees, agents, lawyers, consultants, subcontractors, subsidiaries, and customers relating to violations of the FCPA.
As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $72.8 million to $145.6. Pursuant to the DPA, PWT agreed to pay a monetary penalty of $70.56 million. However, the DOJ and PWT agreed “that any criminal penalty that is imposed by the Court and paid by Panalpina U.S., in connection with its guilty plea and plea agreement entered into simultaneously herewith will be deducted from the $70,560,000 criminal penalty required by this Agreement.” Because the Panalpina Inc. plea agreement (which relates only to Nigeria conduct) contemplates a payment of $70,560,000, the effect of the above clause is that PWT will end up paying $0 for the non-Nigeria conduct described in the DPA.
Also of note, even though the DPA states that PWT did not initially cooperate with the DOJ’s investigation for several months, PWT nevertheless received sentencing credit for “fully cooperating” in the DOJ’s investigation.
Pursuant to the DPA, PWT agreed to a host of compliance undertakings and to report to the DOJ (during the term of the DPA) “on its progress and experience in implementing and, as appropriate, enhancing its compliance policies and procedures.”
The DPA references three tolling agreements agreed to between January 2008 and October 2010.
As is standard in FCPA DPAs, PWT agreed not to make any public statement “contradicting the acceptance of responsibility by PWT as set forth” in the DPA and PWT further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.
Panalpina U.S. Criminal Information
The criminal information (here) describes “Panalpina U.S.’s Actions to Conceal Bribes on Behalf of Its Issuer-Customers in Nigeria.” Separate sections concern “Pancourier Express Courier Payments” and “Temporary Importation Payments.”
Count One of the information charges Panalpina U.S., a non-issuer, with conspiring and agreeing with Customer A [Shell] and Customer B [Tidewater] “to knowingly falsify and cause to be falsified books, records, and accounts which were required, in reasonable detail, to accurately and fairly reflect the transactions and dispositions of the assets of Customer A, Customer B, and other issuers” in violation of the FCPA’s books and records provisions.
Count Two of the information charges Panalpina U.S. with aiding and abetting FCPA books and records violations by aiding, abetting, and assisting Customer A [Shell] “in mischaracterizing payments for freight forwarding costs as ‘administration/transport charges’ in Customer A’s books and records when, in truth and in fact, Customer A knew that these payments were bribes, paid through Panalpina Nigeria, intended to be transferred to NCS officials.”
Panalpina U.S. Plea Agreement
The above criminal charges against Panalpina U.S. were resolved via a plea agreement (see here).
As stated in the plea agreement, the fine range for Panalpina U.S.’s conduct under the U.S. Sentencing Guidelines was $72.8 million to $145.6. Pursuant to the plea agreement, Panalpina U.S. agreed to pay a monetary penalty of $70.56 million.
In an “Agreed Motion to Waive the Presentence Report” (here) the DOJ states as follows.
“…Panalpina’s cooperation and remediation in this matter has been exemplary. Panalpina provided substantial assistance to the Deparment in its investigations relating to these matters. In addition, where Panalpina encountered evidence of new violations in the course of its internal investigation, it expanded the scope of the investigation accordingly and reported the new findings to the Department. Panalpina acknowledged and accepted responsibility for misconduct, investigated and identified the nature and extent of the misconduct, and undertook comprehensive global remediation and training during the course of the investigation. Panalpina’s remediation was global and included a dramatic change in its busincss model, paricularly in higher risk countries.”
As to how the DOJ’s investigation of PWT and its related entities began, the Report states as follows. “In approximately 2006, the Department opened an investigation into Panalpina’s business practices based on evidence obtained through several Panalpina customers indicating Panalpina had paid bribes to foreign government officials on behalf of its customers.”
The Report continues as follows. “In total, between in or around 2002 and in or around 2007, Panalpina paid bribes to offcials in at least seven countries, including Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia, and Turkmenistan. Approximately $27,000,000 of that total related directly to, and was paid on behalf of, customers that were US. issuers or “domestic concerns” within the meaning of the FCPA.
The Report contains a footnote that states “a small number of improper payments continued into 2008 and 2009.” As to these payments, the Report notes elsewhere as follows. “Despite PWT’s and Panalpina U.S.’s extensive efforts to transform its compliance program, during the course of the investigation, PWT uncovered a few instances in which employees were continuing to pay bribes to foreign officials. This improper conduct, although limited, continued to occur into 2008 and early 2009. Upon discovery, PWT took swift action to stop the payments, to disclose the conduct to the Department, to terminate and/or reprimand the employees implicated in the conduct, and to retrain employees in the relevant countries regarding the importance of adhering to PWT’s compliance rules and regulations.”
As to Panalpina’s “Cooperation and Assistance” the Report states as follows.
“The Department initiated its investigation of Panalpina in or around mid-2006 based on conduct disclosed by Panalpina customers. Panalpina learned of the
investigation in or around late-2006 from its customers. Despite knowledge of the investigation, Panalpina did not voluntarily disclose the conduct to the Department and did not stop the illegal payment of bribes that was occurring on multiple continents. In or about early-2007, the Department requested documents and information from Panalpina; however, at that time, Panalpina exhibited a reluctance to cooperate with the investigation. Thereafter, Panalpina engaged and instructed its legal counsel (“Counsel”) to conduct a comprehensive internal investigation, and ultimately authorized Counsel to report the findings to the Department and SEC. Thereafter, Panalpina exhibited exemplary cooperation with the Department and SEC, and conducted a comprehensive internal investigation that fully supported and paralleled the Department’s investigation. Specifically, Panalpina engaged Counsel to lead investigations encompassing 46 jurisdictions and hired an outside audit firm to perform forensic analysis and other support tasks. Panalpina’s internal investigation included a comprehensive review of operations in nine countries – the United States, Switzerland, Nigeria, Brazil, Angola, Russia, Kazakhstan, Turkmenistan, and Azerbaijan – and a detailed review of 102 additional issues in another 36 countries. Panalpina expanded the scope of its internal investigation where necessary, and promptly and voluntarly reported its findings from all investigations to the Department and SEC in over 60 meetings and calls. When potential issues were identified in countries not subject to a full investigation, Panalpina thoroughly investigated and remediated those issues. Panalpina voluntarily supplied to the Department and the SEC information from interviews and documentary evidence regarding potential violations by Panalpina customers and third parties used as conduits for improper payments and for facilitating improper transactions. Panalpina provided substantial assistance to the Department and SEC in the investigation of its own directors, officers, and employees, mandated employee cooperation from the top down, and made over 300 current and former employees available for interviews to Counsel, the Department, and the SEC during and after the internal investigation. Panalpina also adopted a limited employee amnesty program to encourage employee cooperation with the internal investigation.”
The Report further notes as follows. “On September 30, 2010, in an unelated matter, PWT was charged in a three-count criminal information with fixing prices on surcharges added to air cargo shipments in certain trade lanes, in violation of Title 15, United States Code, Section 1. See United States v. Panalpina World Transport (Holding) Ltd., 10270-RJ (D.D.C.). The Company has agreed to plead guilty and to pay a fine of $11,947,845. No date has yet been set for entry of
the plea or sentencing.”
SEC
The SEC’s civil complaint (here) alleges, in summary, as follows.
“Between 2002 and continuing until 2007, Panalpina, Inc. engaged in a series of transactions whereby it directed business to affiliated companies within the Panalpina Group, which then used part of the revenues generated from this business to pay a significant number of bribes to government officials in countries including Nigeria, Angola, Brazil, Russia, and Kazakhstan. These bribes were paid by the Panalpina Group companies in order to assist Panalpina, Inc.’ s issuer customers in obtaining preferential customs, duties, and import treatment in connection with international freight shipments. The practice of Panalpina Group companies making these payments was known to certain Panalpina, Inc. employees, including some
members of Panalpina, Inc.’s management. Although the reasons for the bribes, and the payment schemes themselves, differed from jurisdiction to jurisdiction and transaction by transaction, most shared several similarities. The issuer customers often used Panalpina, Inc. or other Panalpina Group companies to ship goods from the United States, or elsewhere, to another jurisdiction or sought Panalpina, Inc.’s assistance in obtaining customs or logistics services in the country to which the goods were shipped. However, for various reasons including delayed departures, insufficient or incorrect documentation, the nature of the goods being shipped and imported, or the refusal of local government officials to provide services without unofficial payments, Panalpina, Inc.’ s issuer customers sometimes faced delays in importing the goods. In other cases, Panalpina, Inc.’s issuer customers sought to avoid local customs duties or inspection requirements or otherwise sought to import goods in circumvention of local law. In order to secure the importation of goods under these circumstances, Panalpina, Inc.’ s issuer customers often authorized Panalpina, Inc. and the local affiliated Panalpina Group companies (e.g., Panalpina Nigeria) to bribe local government offcials. These cash payments to government officials were typically made by employees of the local affiliated Panalpina Group companies. The affiliated Panalpina Group companies generally invoiced the issuer customers for the bribes, along with other legitimate fees, either directly or through an affiliated billing entity (“Affiliated Billing Entity”). These invoices, which contained both legitimate and illegitimate costs incurred by the Panalpina Group companies, inaccurately referred to the payments as ‘local processing,’ ‘special intervention,’ ‘special handling,’ and other seemingly legitimate fees. In reality, these payments were bribes to local government officials in order to secure improper benefits for the issuer customers.”
By engaging in this conduct, the SEC alleged that Panalpina, “while acting as an agent of its issuer customers” violated the FCPA’s anti-bribery provisions and aided and abetted its issuer customers’ violations of the FCPA’s anti-bribery provisions and books and records and internal control provisions. The SEC complaint specifically states that “neither Panalpina, Inc. nor PWT is an issuer for purposes of the FCPA.”
As to Pancourier payments, the complaint alleges that in order to assist its issuer customers avoid certain Nigerian legal requirements, “Panalpina Inc. would ship the product to Nigeria wrapped in a distinctive manner so that customs officials would recognize it as a Pancourier shipment and not inspect it, require a Form M, or otherwise subject it to normal customs procedures. In order to secure its preferential treatement, Panalpina Nigeria made regular improper cash payments to Nigerian customs officials.”
The SEC complaint also describes “additional bribes paid on behalf of issuer customers in Nigeria, Angola, and Brazil” including temporary importation payments described as “the largest category of customs-related payments made by Panalpina Nigeria on behalf of the issuer customers.” The complaint also describes “pre-release, intervention, evacuation, and special payments” made by Panalpina Nigeria to “Nigerian government officials on behalf of the issuer customers to secure the release of goods from customs prior to the completion of the inspection process” and to “secure improper benefits for the issuer customers.”
The Angola payments related to immigration matters “in order to obtain visas for the issuer customers on an emergency basis, often requesting that the visa be issued same-day, in contravention of Angolan law;” and customs matters “in order to assist the issuer customers to import goods into Angola without complying with Angolan law.” The complaint also describes “other payments” in Angola including “unofficial payments to Angolan military officials on behalf of the issuer customers in order to permit them to use military cargo aircraft to transport their commercial goods.”
The Brazil payments related to “improper payments to Brazilian government officials on behalf of its issuer customers in order to expedite the customs clearance process, and where necessary, to resolve customs and import-related issues.”
The complaint also alleges that between 2002 and 2007 “Panalpina Kazakhstan and Panalpina Russia made or authorized the making of several types of improper payments on behalf of issuer customers to government officials in Russia, Kazakhstan, and other parts of Central Asia, in order to assist the issuer customers improperly import goods into these jurisdictions or to obtain other types of improper benefits.”
According to the SEC, “Panalpina Inc. obtained improper benefits totatling at least $11,329,369 from the illegal conduct” described in the complaint.
Without admitting or denying the SEC’s allegations, Panalpina agreed to an injunction prohibiting future FCPA violations and agreed to pay disgorgement of $11,329,369.
In a press release (here), Panalpina CEO, Monika Ribar stated as follows. “The settlement of these claims marks the closing of an extremely burdensome chapter in Panalpina’s history and the end of a very demanding three-year effort to address and eliminate serious concerns. Now it is time for us to look to the future and to build on the strong and sustainable compliance culture we have put in place. We are also looking forward to strengthened relationships with our customers who have ceased or reduced business activities with Panalpina due to the investigation. Based on new leadership and significant enhancements of our compliance systems we are a much stronger company today.”
Richard Dean (here) and Douglas Tween (here) both of Baker & McKenzie represented the Panalpina entities.