“The Payments … Would Not Constitute Facilitation Payments for Routine Governmental Actions Within the Meaning of the FCPA”
The above words are from the DOJ’s non-prosecution agreement with Noble Corporation (“Noble”). The DOJ used this phrase twice in the NPA and one can reasonably conclude that if the DOJ felt the need to express such a statement twice, that the FCPA’s facilitating payment exception is probably on the minds of many in connection with the CustomsGate enforcement actions.
Next up in the analysis of CustomsGate enforcement actions is Noble Corporation (see here). See this prior post for analysis of the GlobalSantaFe enforcement action.
The Noble enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $8.2 million ($2.6 million criminal fine via a non-prosecution agreement; $5.6 million in disgorgement and interest via a SEC complaint).
During the time period relevant to the enforcement action, Noble was a Cayman Islands company. In March 2009, a new Swiss parent company, also called Noble Corporation, was created and Noble Corporation, the Cayman Islands company, became a wholly-owned subsidiary of the Swiss parent company.
DOJ
As set forth in the NPA (see here), the DOJ agreed “not to criminally prosecute Noble […] or any of subsidiaries […] related to the making of improper payments by employees and agents of Noble and/or its subsidiaries to officials of the Nigerian Customs Service in connection with Noble’s and/or its subsidiaries’ import and export of goods and items relating to its operations in Nigeria from January 2003 to July 2007, and the accounting and record-keeping associated with these improper payments.”
According to the Statement of Facts in the NPA, a “Nigerian Customs Agent” provided a variety of logistics and customs services for Noble Drilling (Nigeria) Ltd. (“Noble Nigeria”) a wholly-owned subsidiary of Noble and the primary Noble operating company in Nigeria. The Nigerian Customs Agent submitted false documents to Nigerian customs officials on behalf of Noble Nigeria “relating to the temporary importation of rigs owned or operated by Noble Nigeria into Nigerian waters” and the Nigerian Customs Agent invoiced Noble Nigeria and was paid for its services.
The Statement of Facts describes “The Nigerian Temporary Import Process.” As described, if Noble were to “permanently import a rig into Nigerian waters” the customs duties were significant, between 10-20% of the total value of the rig. Alternatively, Noble could import rigs and other items on a temporary basis in which case no customs duties would be assessed. However, as described in the Statement of Facts, “a rig, or other item, could be imported on a temporary basis only if the item: (a) was considered a high valued piece of special equipment, (b) was not available for sale in Nigeria, and (c) was being imported temporarily and was intended to be exported.” If these requirements were met, “a company, through a local customs agent, could apply for a temporary import permit.” (“TIP”).
According to the Statement of Facts, “items imported under a TIP (and TIP extension) could not remain in Nigeria longer than the period allowed for by the TIP and/or TIP extensions. When the TIP (or TIP extension) expired, the owner “could either choose to permanently import the rig … or export the rig and re-import it and obtain a new initial TIP.” According to the Statement of Facts, “the failure to export the rig after the TIP expired could result in the assessment of Nigerian penalties of up to six times its cost.”
The Statement of Facts indicate that Noble Nigeria chose to temporarily import rigs into Nigeria and that Noble Nigeria employed the Nigeria Customs Agent to apply for and secure its TIPs and TIP extension.
According to the Statement of Facts, “whenever a TIP (and related TIP extensions) expired for a rig in Nigeria, the Nigerian Customs Agent, with the knowledge of Noble Nigeria, engaged in a process of submitting false paperwork on Noble Nigeria’s behalf to avoid the time, cost, and risk associated with exporting the rig and reimporting it into Nigerian waters” – the so called “paper process” or a “paper move.” The Statement of Facts further assert that the “Nigeria Customs Agent, with the knowledge of Noble Nigeria, created and caused to be presented to the [Nigeria Customs Service] NCS documents that reflected that the rig had been physically exported and reimported, when, in fact, the rig had remained in Nigeria.”
According to the Statement of Facts, the Nigeria Customs Agent included a line item in its invoices for “special handling charges” and “Noble Nigeria personnel were informed by the Nigerian Customs Agent that all or part of the ‘special handling charges’ would be paid by the Nigeria Customs Agents to NCS officials.” Further, the Statement of Facts assert that “Noble Nigeria personnel approved the payments to the Nigerian Customs Agent with the knowledge that some or all of the payments would be paid to NCS officials.”
The Statement of Facts assert that “certain Noble and Noble Nigeria managers and employees authorized paper moves on five occasions.” In a separate section of the NPA titled, “Corporate Knowledge of the TIP Paper Process” the following statements are made.
“Manager A” (a U.S. citizen and a former manager in Noble’s Internal Audit Department) “interviewed several Noble-Nigeria employees who explained that false paperwork had been created and submitted to NCS officials through the Nigeria Customs Agent in connection with the process of securing TIPs” and that Manager A “also learned that the Nigeria Customs Agent in the past had charged a fee of approximately $75,000 per TIP to secure the TIPS.”
Manager A provided a written summary to Executive A (a U.S. citizen, an officer of Noble, and Head of Internal Audit).
Executive A discussed Manager A’s findings with Executive B (a U.S. citizen, an officer of Noble, and the Vice President-Eastern Hemisphere with management responsibility for Nigerian operations). Executive A then informed the Senior Executive (a U.S. citizen, an officer of Noble, and the former Chief Financial Officer).
The Audit Committee was advised of the “paper process” as was “members of Noble’s senior management.”
Executive B was tasked with “ensuring the Company’s compliance with all applicable rules and regulations related to the importation and exportation of assets in Nigeria…”.
Corrective action was contemplated, such as permanently importing rigs or moving them to a free trade zone, but Manager A and Executive B “decided that due to the time, cost, and risk of permanently importing or moving the rigs, the paper process would be used for three rigs for which TIPs had expired.”
“The Audit Committee was not advised of the decision to resume the paper process.”
Without any elaboration, the Statement of Facts states that the above described payments “would not constitute facilitation payments for routine governmental actions within the meaning of the FCPA.”
The Statement of Facts continue – between May 2005 and March 2006 “a total of five (5) TIPs were obtained through the submission of false documents via the paper process, and each included the payment of ‘special handling fees’ to the Nigeria Customs Agent. The ‘special handling fees’ ranged from approximately $13,800 to $17,000.”
According to the Statement of Facts:
“By their approval of the payments and the process, the Senior Executive, and Executive B caused Noble to inaccurately record in its books, records, and accounts the five (5) “special handling fee” payments paid to the Nigeria Customs Agent in a “facilitation payments” account totaling approximately $74,000, when the Senior Executive, Executive A, and Executive B knew that some or all of these payments would be passed on to NCS officials to obtain TIPs. Thus, such payments could not be facilitation payments for the performance of a “routine governmental action” within the meaning of the FCPA.”
The remainder of the Statement of Facts describes how Executive A failed to advise the Audit Committee and/or concealed from the Audit Committee that the paper process had resumed.
According to the Statement of Facts, “the total benefit received by Noble Nigeria for these payments in avoided costs, duties, and penalties was approximately $2,973,000.”
As noted in the NPA, the DOJ agreed to enter into the NPA based, in part, on the following factors:
“The Department enters into this Non-Prosecution Agreement based, in part, on the following factors: (a) Noble’s discovery of the violations through its own internal investigation; (b) Noble’s timely, voluntary, and complete disclosure of the facts described in [the Statement of Facts]; (c) Noble’s extensive, thorough, real-time cooperation with the Department and the SEC …; (d) Noble’s voluntary investigation of the Company’s business operations throughout the world; (e) the existence of Noble’s pre-existing compliance program and steps taken by Noble’s Audit Committee to detect and prevent improper conduct from occurring; (f) Noble’s remedial efforts to enhance its compliance program and oversight that have already been undertaken; (g) Noble’s agreement to continue to implement enhanced compliance measures …; and (h) Noble’s agreement to provide annual, written reports to the Department on its progress and experience in maintaining and, as appropriate, enhancing its compliance policies and procedures …”.
As is standard process in an NPA, Noble admitted, accepted, and acknowledged its responsibility for the conduct of its employees, agents, and subsidiaries as set forth in a Statement of Facts, and further agreed “not to make any public statement contradicting” the Statement of Facts.
SEC
The SEC’s complaint (here) concerns the same core set of facts as set forth in the DOJ’s NPA.
In summary fashion, the SEC alleges that “through the TIPs obtained using the paper process, Noble obtained profits from continued operations of rigs in Nigeria and avoided the costs of moving rigs out of and back into Nigerian waters.” According to the SEC, “Noble’s total gains from this conduct were at least $4,294,933.”
The SEC charged Noble with violating the FCPA’s anti-bribery provisions, as well as the FCPA’s books and records and internal control provisions.
As to the FCPA’s books and records charge, the SEC alleges that “Noble Nigeria recorded the portion of the payments it made to its customs agent that certain Noble personnel believed were being passed on to Nigerian government officials in Noble’s ‘facilitating payment’ account and in some cases to other operating expense accounts…” However, without elaborating the SEC states, “because these payments were not qualifying facilitating payments under the FCPA or otherwise legitimate expenses, Noble created false books and records by recording the payments as such.”
As to the internal controls charges, the SEC alleges that “although Noble had an FCPA policy in place, Noble lacked sufficient FCPA procedures, training, and internal controls to prevent the use of the paper process and making of payments to Nigerian government officials to obtain TIPs and TIP extensions.”
Without admitting or denying the SEC’s allegations, Noble agreed to agreed to an injunction and will pay disgorgement and prejudgment interest of $5,576,998.
Neither the DOJ nor the SEC resolution require the company to engage a compliance monitor.
Both the DOJ’s NPA and the SEC’s complaint specifically mention that Noble conducted a worldwide review of its operations. That no other conduct was mentioned in either the DOJ’s NPA or the SEC’s complaint, suggests that Noble’s Nigerian import/export issues were an isolated incident, not indicative of systemic issues throughout the company’s other operations.
In a press release (here) Noble’s CEO stated that “ethical business conduct and strict compliance with the law remain central to Noble’s operating philosophy,” that the company “is pleased that these investigations have been concluded and a resolution has been reached,” and that the company “is moving forward with a continuing commitment to ethical business practices and a dedication to compliance, ideas that are reflected in our core values, our policies, our training and our expectations for ethical behavior.” The release notes as follows: “In May 2007, the Company self-reported to the DOJ and the SEC possible improper payments by a customs agent in connection with securing temporary import permits and extensions for the operations of Noble’s rigs in Nigeria. An internal investigation was promptly conducted by independent outside counsel, and the Company has cooperated thoroughly with the independent investigator’s review and the government’s investigation.”
In a 10-K filing yesterday, Noble stated as follows:
“We are currently operating three jackup rigs offshore Nigeria. The temporary import permits covering two of these rigs expired in November 2008 and we have pending applications to renew these permits. We have received notice that we will be allowed to obtain a new temporary import permit for one of the two rigs and are in the process of clarifying this approval. However, as of October 31, 2010, the Nigerian customs office had not acted on our application for the second unpermitted rig, but we are discussing undertaking the same process as for the first rig. We did obtain a new temporary import permit for the third rig in 2009 that had previously been operating with an expired temporary import permit, while the application was pending, by exporting and re−importing the rig. We continue to seek to avoid material disruption to our Nigerian operations; however, there can be no assurance that we will be able to obtain new permits or further extensions of permits necessary to continue the operation of our rigs in Nigeria. If we cannot obtain a new permit or an extension necessary to continue operations of any rig, we may need to cease operations under the drilling contract for such rig and relocate such rig from Nigerian waters. In any case, we also could be subject to actions by Nigerian customs for import duties and fines for these two rigs, as well as other drilling rigs that operated in Nigeria in the past. We cannot predict what impact these events may have on any such contract or our business in Nigeria. Furthermore, we cannot predict what changes, if any, relating to temporary import permit policies and procedures may be established or implemented in Nigeria in the future, or how any such changes may impact our business there.
Mary Spearing, a former DOJ attorney (here), represented Noble.
Failure to Move Rigs Costs GlobalStantaFe
When an FCPA enforcement action involving 13 separate entities, comprising both DOJ and SEC components, is announced on the same day, there is a natural tendency to look at the forest, without spending much time on the trees.
Today’s post, and those that will follow in the near future, will focus on the separate enforcement actions (see here) announced by the DOJ/SEC on November 4th, in what I’ll call “CustomsGate.”
First up, GlobalSantaFe Corp. (“GSF”), the only enforcement action without a DOJ component.
GSF provided offshore oil and gas drilling services for oil and gas exploration companies. (GSF is a former issuer that completed a merger with a subsidiary of Transocean Inc. and became known as Transocean Worldwide, Inc. which is a subsidary of Transocean Ltd., an issuer).
In order to import equipment necessary to do such work in Nigeria, GSF needed to obtain a temporary importation permit (“TIP”) from the Nigerian government through the Nigerian Customs Service (“NCS”). Obtaining a TIP required mounds of paperwork. TIPS were initially issued for one year and were allowed to be extended twice for a period of six months each. Rarely, and only in the discretion of NCS officials, could a third six-month extension be granted.
Prior to or after a TIP expired, GSF was required to move its rigs out of Nigerian waters and to begin again the paper heavy TIP application process. Failure to export a rig after the expiration of a TIP, and all permissible extensions, would render a rig subject to potential forfeiture or seizure.
Moving a rig is no small task, it requires tug boats and money.
So begins the SEC’s complaint (here) against GSF.
According to the SEC, “instead of moving its oil drilling rigs out of Nigerian waters when GSF’s permit to temporarily import the rigs into Nigeria had expired, GSF, through its customs brokers, made payments to NCS officials in order to obtain documentation reflecting that the rigs had moved out of Nigerian waters, when in fact, the rigs had not moved at all.”
According to the SEC, there were four such instances.
The Adriatic VIII should have left Nigerian waters on or before October 15, 2004. However, in September 2004, the SEC alleges that “GSF, through its customs broker, took steps to obtain false documentation from NCS reflecting that the Adriatic VIII left Nigeria on September 29, 2004.” According to the SEC, “GSF paid its customs broker $87,500 (wired through a bank account in the name of GSF located in the U.S.) to obtain the new TIP, including a payment of $3,500 identified on the customs broker’s invoice as ‘additional charges for export.” According to the SEC, GSF managers in Nigeria “knew that the Adriatic VIII had never actually left Nigerian waters and knew, or knew that there was a high probability, that the explanation on the invoice as ‘additional charges for export’ was for purposes of disguising a bribe.” According to the SEC, a fews years later, GSF, through its customs-broker, again obtained false documentation from NCS reflecting that the Adriatic VIII had left Nigerian waters when, in fact, it had not.”
The Adriatic I should have left Nigerian waters on or before January 31, 2004. However, before this date, the SEC alleges that “GSF, through its customs broker, obtained documentation from NCS, reflecting that the Adriatic I left Nigeria on January 31, 2004 when, in fact, it had not.”
The Baltic I should have left Nigerian waters on or before June 3, 2004. However, before this date, the SEC alleges that “GSF, through its customs broker, took steps to obtain documentation from NCS, reflecting that the Baltic I left Nigeria on June 25, 2004. According to the SEC, the GSF managers “authorized and submitted for payment invoices containing charges described as ‘additional charges for export’ when the same GSF managers knew that the GSF rig had not been exported from Nigeria.” Thus, the SEC alleges, the “GSF managers either knew that the ‘additional charges for export’ were bribes, or knew that there was a high probability that they were bribes.
By engaging in the above referenced conduct, the SEC alleged that GSF: (1) avoided costs of approximately $1.5 million from not physicially moving the rigs; and (2) gained revenues of approximately $619,000 from not interrupting operations to move the rigs.”
The SEC charged GSF, on the above facts, with violating the FCPA’s anti-bribery provisions.
Because none of the above-described payments were “accurately reflected in GSF’s books and records,” the SEC also charged GSF with violating the FCPA’s books and records and internal control provisions in connection with the above payments.
There is more to the SEC’s complaint.
It is common for an enforcement agency (whether DOJ or SEC) to ask the “where else question.” In other words, if the company was making the above-described payments in country x, where else was the company also making similar payments?
This frequent question causes the company to do a worldwide review of its operations and report back the results to the enforcement agency.
This is why an SEC complaint or DOJ resolution vehicle often contains a laundry list of related allegations towards the end of the resolution vehicle.
Case in point, the SEC’s complaint against GSF.
The SEC alleges that “GSF, through its customs brokers, made a number of additional payments to government officials in Nigeria totaling approximately $82,000.” The complaint gives sparse detail as to these alleged “other suspicious payments.”
Further, the SEC alleges that “GSF, through its customs brokers, also made a number of other payments […] totaling approximately $300,000 to government officials in Gabon, Angola, and Equatorial Guinea.”
These “other suspicious payments” in Nigeria and the Gabon, Angola, and Equatorial Guinea payments were not accurately reflected in GSF’s books and records and GSF failed to devise and maintain an effective system of internal controls to prevent or detect them, thus giving rise to FCPA books and records and internal charges. (These other payments were not included in the FCPA anti-bribery charges).
Based on the entire above-described conduct, and without admitting or denying the SEC’s allegations, GSF agreed to pay $5.85 million (approximately 3.75 million in disgorgement and a 2.1 million penalty).
Major Shipment – Customs Cases Bring In $236.5 Million
The pipeline that contains pending FCPA enforcement actions burst yesterday as the DOJ and SEC announced enforcement actions against 13 separate entities.
In enforcement actions that have long been anticipated, Panalpina entities, as well as several others, settled DOJ and SEC enforcement actions principally focused on customs and related payments in Nigeria, but also including alleged improper conduct in Angola, Brazil, Russia, Kazakhstan, Venezuela, India, Mexico, Saudi Arabia, the Republic of Congo, Libya, Azerbaijan, Turkmenistan, Gabon and Equatorial Guinea.
The combined DOJ/SEC settlement amounts total $236.5 million.
Your FCPA scorecard thus shows that since June 28th, the U.S. government has brought FCPA enforcement actions totaling approximately $1.1 billion. With numbers like these, aggressive FCPA enforcement based on, often times, dubious legal theories (more on that later) seems like the most profitable government program ever conceived.
Set forth below is a basic overview of the settlements. A more thorough review of the hundreds of pages of relevant documents will be forthcoming.
The DOJ resolution documents can be found here, the SEC resolution documents here.
Panalpina Entities
DOJ
Entities: Panalpina World Transport (Holding) Ltd. and Panalpina Inc.
Resolution Vehicles: Criminal information charging Panalpina World Transport(Holding) with conspiracy to violate and violating the FCPA’s anti-bribery provisions. Charges resolved through a deferred prosecution agreement. Criminal information charging Panalpina Inc. with conspiracy to violate the FCPA’s books and records provisions and aiding and abetting certain customers in violating the FCPA’s books and records provisions. Charges resolved through a plea agreement.
Countries: Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia, and Turkmenistan
Penalty: Combined $70.56 million
SEC
Entity: Panalpina, Inc.
Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery violations, aiding and abetting FCPA anti-bribery violations, and FCPA books and records and internal controls violations.
Countries: Nigeria, Angola, Brazil, Russia, and Kazakhstan
Disgorgement: $11,329,369
Pride Entities
DOJ
Entities: Pride International Inc. and Pride Forasol S.A.S.
Resolution Vehicle: Criminal information charging Pride International with conspiracy to violate the FCPA’s anti-bribery provisions and books and records provisions; violating the FCPA’s anti-bribery provisions; and violating the FCPA’s books and records provisions. Charges resolved through a deferred prosecution agreement. Criminal information charging Pride Forasol with conspiracy to violate the FCPA’s anti-bribery provisions; violating the FCPA’s anti-bribery provisions; and aidng and abetting violations of the FCPA’s books and records provisions. Charges resolved through a plea agreement.
Countries: Venezuela, India and Mexico
Penalty: $32.625 million (combined)
SEC
Entity: Pride International Inc.
Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery violations, FCPA books and records and internal controls violations.
Countries: Venezuela, India, Mexico, Kazakhstan, Nigeria, Saudi Arabia, Republic of Congo, and Libya
Disgorgement and interest: $23,529,718
Tidewater Entities
DOJ
Entities: Tidewater Marine International Inc., Tidewater Inc.
Resolution Vehicle: Criminal information charging Tidewater Marine with conspiracy to violate the FCPA’s anti-bribery and books and records provisions and violating the FCPA’s books and records provisions. Charges resolved through a deferred prosecution agreement with Tidewater that requires, among other things, Tidewater Marine to pay a $7.35 million criminal penalty.
Countries: Azerbaijan and Nigeria
Penalty: $7.35 million
SEC
Entity: Tidewater Inc.
Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery violations, FCPA books and records and internal controls violations
Countries: Nigeria, Azerbaijan
Disgorgement: $8,104,362
Civil Penalty: $217,000
Transocean Entities
DOJ
Entities: Transocean Inc. and Transocean Ltd.
Resolution Vehicle: Criminal information charging Transocean Inc. with conspiracy to violate the FCPA’s anti-bribery and books and records provision; violating the FCPA’s anti-bribery provisions; and aiding and abetting the FCPA’s books and records provisions. Charges resolved through a deferred prosecution agreement with Transocean Ltd. that requires, among other things, Transocean Inc. to pay a $13.44 million criminal penalty.
Countries: Nigeria
Penalty: $13.44 million
SEC
Entity: Transocean Inc.
Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery violations, FCPA books and records and internal controls violations
Countries: Nigeria
Disgorgement and interest: $7,265,080
GlobalSantaFe Corp.
SEC
Entity: GlobalSantaFe Corp.
Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery provisions, FCPA books and records and internal controls violations
Countries: Nigeria, Gabon, Angola, Equatorial Guinea
Disgorgement: $3,758,165
Civil Penalty: $2.1 million
Noble Corporation
DOJ
Entity: Noble Corporation
Resolution Vehicle: Non-proseuction agreement in which Noble Corporation: (i) acknowledged that certain of its employees knew that payments would be passed on as bribes to Nigerian customs officials; and (ii) admitted that the company falsely recorded the bribe payments as legitimate business expenses.
Countries: Nigeria
Penalty: $2.59 million
SEC
Entity: Noble Corporation
Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery violations, FCPA books and records and internal controls violations
Countries: Nigeria
Disgorgement and interest: $5,576,998
Royal Dutch Shell Entities
DOJ
Entities: Royal Dutch Shell plc and Shell Nigeria Exploration and Production Company Ltd. (“SNEPCO”)
Resolution Vehicle: Criminal information charging SNEPCO with conspiracy to violate the FCPA’s anti-bribery and books and records provisions and with aiding and abetting the FCPA’s books and records provisions resolved through a deferred prosecution agreement with Royal Dutch Shell Plc requiring, among other things, SNEPCO to pay a $30 million criminal penalty
Countries: Nigeria
Penalty: $30 million
SEC
Entity: Royal Dutch Shell plc and Shell International Exploration and Production Inc (“SIEP”).
Resolution Vehicle: Administrative cease and desist order finding FCPA books and records and internal control violations by Royal Dutch Shell and FCPA anti-bribery violations by SIEP
Countries: Nigeria
Disgorgement: $18,149,459
*****
According to the SEC release (here), Cheryl Scarboro, Chief of the SEC’s FCPA Unit stated: “This investigation was the culmination of proactive work by the SEC and DOJ after detecting widespread corruption in the oil services industry. The FCPA Unit will continue to focus on industry-wide sweeps, and no industry is immune from investigation.”
The SEC release further states: [t]his is the first sweep of a particular industrial sector in order to crack down on public companies and third parties who are paying bribes abroad.”
ABB
Earlier this week the DOJ and SEC announced a wide ranging enforcement action against ABB Ltd. and its subsidiaries ABB Inc., and ABB Ltd. – Jordan.
Swiss-based ABB Ltd. (here) is a provider of power and automation technologies with American Depositary Shares publicly traded on the New York Stock Exchange.
This post summarizes the various aspects of the enforcement action in which ABB Ltd. and ABB Inc. agreed to pay a total of $58.3 million ($19 million in DOJ criminal penalties and $39.3 million in SEC disgorgement and civil penalties).
DOJ
ABB Ltd. Deferred Prosecution Agreement
As noted in this DOJ release, ABB Ltd. agreed to enter into a deferred prosecution agreement (DPA). ABB’s press release (here) states that the DPA “includes provisions related to the involvement of a subsidiary in Jordan in the Oil for Food Program” and that “in lieu of an external compliance monitor, the DOJ and SEC have agreed to allow ABB to report on its continuing compliance efforts and the results of the review of its internal processes for a three-year period going forward.”
In other words, the DPA appears limited to the conduct of ABB Ltd. – Jordan (summarized below) and not the conduct of ABB Inc. (summarized below).
[Note – to my knowledge the DPA has yet to be publicly released. Here is a request for DOJ readers of this blog. Under the DOJ’s “old” website, the charging documents were released and linked along with the press release. With the revamped website, the charging documents are nowhere to be found requiring interested persons to go to Pacer or other sources. The charging documents ultimately end up on the DOJ’s FCPA specific website, but in many cases it takes weeks. DOJ may want to consider the old system which provided real-time access to these important charging documents]
ABB Ltd. – Jordan Criminal Information
The information charges ABB Ltd. – Jordan (“ABB-Jordan”) with one count of conspiracy to commit wire fraud and to violate the FCPA’s books and records provisions.
According to the information (here), ABB-Jordan was a wholly-owned subsidiary of ABB Ltd. ABB-Jordan, through its 95% owned subsidiary ABB Near East Trading Ltd. (“ABB Near East”) provided equipment and services to electrical utilities, including control measurement and protection systems, transducers, and metering equipment.
The information charges that ABB Near East “had three principle customers under the United Nations Oil-for-Food Program (“OFFP”) … the General Company for Electricity Energy Production, the Baghdad Mayoralty, and State Company Baghdad Electricity Distribution all of which were regional companies of the Iraqi Electricity Commission, an Iraqi government agency” (collectively the “Iraqi Electricity Companies”).
The information charges that “from in or about April 2000 through in or about April 2004, ABB Near East, received eleven purchase orders for electrical equipment and services worth over $5.9 million with the Iraqi Electricity Companies, pursuant to the OFFP.” According to the information, “to obtain these purchase orders, ABB Near East caused over $300,000 in kickbacks to be paid to the government of Iraq” and that “in order to generate the funds to pay the kickbacks to the Iraqi government and conceal those payments, ABB Near East would inflate the price of its contracts with the Iraqi government by approximately 10% before submitting the contracts to the U.N. for approval.”
According to the information, the kickback payments were falsely characterized on ABB-Jordan’s or ABB Near East’s books and records which were “incorporated into the books and records of ABB Ltd. for purposes of preparing ABB Ltd’s year-end financial statements.”
According to the DOJ release, “ABB Ltd. admitted that [ABB-Jordan] agreed to pay kickback payments to the former Iraqi government” in connection with OFFP contracts and “agreed to pay a criminal penalty of $1.9 million.”
ABB Inc. Criminal Information
According to the information (here) ABB Inc. is an “indirect subsidiary” of ABB Ltd. incorporated under Delaware law. The information charges that ABB Inc. “conducted business, in part, through a business unit called ABB Network Management (“ABB NM”) that had its principal place of business in Sugar Land, Texas and was acquired by ABB Inc. in or around January 1999.”
According to the information, “ABB NM’s primary business was to provide products and services to electrical utilities for network management in power generation, transmission, and distribution.” The information charges that “many of ABB NM’s clients were foreign state-owned utilities” and that “ABB NM conducted business in a number of its foreign markets through sales representatives.”
The information largely centers on the conduct of John Joseph O’Shea and Fernando Maya Basurto and business with Comision Federal de Electricidad (“CFE”) – a Mexican electrical company. According to the information, O’Shea was the “General Manager of ABB NM” who “oversaw its operations both before and after its acquisition by ABB Inc.” and was “responsible for approving payments to sales representatives.” According to the information, Basurto was a “citizen of Mexico” who “performed work for ABB NM on its contracts with CFE.”
O’Shea was criminally charged in November 2009 (see here). Basurto has pleaded guilty (see here). For more, see this prior post.
For additional FCPA enforcements involving CFE see this recent post.
The information details an elaborate scheme that is summarized in the DOJ release as the payment of bribes “from 1997 to 2004 that totaled approximately $1.9 million” to various officials at CFE and that “in exchange for the bribe payments … ABB NM received contracts worth more than $81 million in revenue.”
As noted in the DOJ release, “ABB Inc. pleaded guilty to a criminal information charging it with one count of violating the anti-bribery provisions of the FCPA and one count of conspiracy to violating these provisions of the FCPA.” According to the release, the court “imposed a sentence that included a criminal fine of $17.1 million.”
The information specifically states that “ABB Inc. terminated O’Shea in November 2004 and thereafter conducted a thorough internal investigation of the improper payments. It voluntarily disclosed the conduct to the DOJ and the SEC in April 2005.”
SEC
The SEC’s civil complaint against ABB Ltd. (see here) picks up both the Iraq and Mexico conduct mentioned above and charges ABB Ltd. with violating the FCPA’s anti-bribery, books and records, and internal control provisions.
The complaint alleges in summary fashion as follows:
“From 1999 to 2004, ABB, through a U.S. subsidiary and six foreign-based subsidiaries, offered and paid bribes to government officials in Mexico to obtain and retain business with government owned power companies, and paid kickbacks to Iraq to obtain contracts under the United Nations Oil for Food Program. In all, ABB’s subsidiaries made at least $2.7 million in illicit payments in these schemes to obtain contracts that generated more than $100 million in revenues for ABB.”
The complaint describes numerous payments, including payments to “pay for the Mediteranean cruise vacation for two CFE officials and their wives” and “tuition for the son of a CFE official” at a “private military school in Wisconsin.”
As to the “Mexican bribery scheme”, the SEC alleges that “ABB, which failed to conduct any due diligence on the use or payments to [a Mexican agent] and other companies, improperly recorded the illicit payments on its books as payments for commission and services on the projects.”
As to the OFFP, the complaint alleges that “from approximately 2000 to 2004, ABB participated in the Oil for Food program through six of its subsidiaries” and that the “six subsidiaries developed various schemes to pay secret kickbacks to Iraq in order to obtain contracts. The kickbacks were characterized as after sales service fees but in reality they were nothing more than bribes paid to the Iraqi regime.” According to the SEC, “kickbacks of approximately $810,793 were paid in connection with the subsidiaries’ sales of goods on twenty-seven contracts with promises to pay additional kickbacks of $239,501 on three other contracts. The total revenues on the contracts were approximately $13,577,727 and profits were $3,801,367. ABB improperly disguised the [after sales service fees] on its books and records by mischaracterizing them as legitimate after sales services, consultation costs or commissions.”
Further the SEC alleged as follows:
“as evidenced by the extent and duration of the illicit payments to foreign officials, the large number of ABB subsidiaries involved in these bribery and kickback schemes, ABB’s knowledge from the prior Commission action of illicit payments by other ABB subsidiaries, the improper recording of millions of dollars of illicit payments in ABB’s books and records, ABB’s failure to detect these irregularities, and ABB’s failure to conduct sufficient due diligence on local agents and others, ABB failed to devise and maintain an effective system of internal controls to prevent or detect these anti-bribery and books and records violations.”
In an SEC release (see here) SEC officials stated: “as the sanctions in this case demonstrate, there are significant consequences for public companies that fail to implement strong compliance programs and prevent corrupt payments to government officials” and that “multi-national companies that make illicit payments through layers of subsidiaries will be held accountable.”
Without admitting or denying the SEC’s allegations, ABB Ltd. consented to the entry of a final judgment that permanently enjoins the company from future FCPA violations, orders the company to pay $17,141,474 in disgorgement, $5,662,788 in prejudgment interest, and a $16,510,000 penalty. According to the SEC release, “the order also requires the company to comply with certain undertakings regarding its FCPA compliance program.”
In a press release (here), ABB noted that it “initiated these matters in a voluntary disclosure to the DOJ and SEC beginning in 2005.” The company stated that it “cooperated fully with the DOJ and SEC and has put in place a global comprehensive compliance and integrity program the DOJ has said ‘may become a benchmark for the industry.'”
Laurence Urgenson (here) and others from Kirkland & Ellis LLP represent the ABB entities.
More On Alliance One and Universal
Earlier this month (see here) the DOJ and SEC announced FCPA enforcement actions against tobacco companies – Alliance One International, Inc. and Universal Corporation.
Both the DOJ (here) and the SEC (here) issued a consolidated press release – the first time (to my knowledge) the agencies have consolidated an enforcement action against two unrelated companies in such a fashion. Perhaps the reason was, as explained below, a significant part of the improper conduct at both companies involved the same entity – The Thailand Tobacco Monopoly (“TTM”) – an alleged agency and instrumentality of the Thai government.
This is a long post, but then again, at nearly 300 pages, there was much in the DOJ and SEC resolution documents.
For instance, Alliance One’s entire exposure was based, not on anything it did, but rather successor liability theories.
Both the Alliance One and Universal enforcement actions were the product of voluntary disclosure. In fact, the Universal inquiry began when a former employee contacted the company’s internal compliance hotline. Query whether that individual today would do the same thing given Dodd-Frank’s whistlblower provisions – provisions which, if applicable, would make him / her a millionaire.
The Universal enforcement action is an FCPA first, in that it concerns conduct in Mozambique and Malawi.
There are also many remedial measures / compliance nuggets waiting to be digested from these enforcement actions.
The Alliance One enforcement action has already spawned a related individual enforcement action against Bobby Elkins (see here) and the Universal enforcement action may do the same as the DOJ’s Statement of Facts contains an alphabet soup of employees, including U.S. citizens, allegedly involved in the improper conduct.
This post describes the DOJ and SEC’s enforcement actions against Alliance One as well as the DOJ and SEC’s enforcement actions against Universal Corp.
Alliance One
The Alliance One enforcement action included a non-prosecution agreement between the DOJ and Alliance One, criminal pleas by Alliance One International AG and Alliance One Tobacco OSH, LLC, as well as an SEC enforcement action against Alliance One.
Edward Fuhr, Hunton & Williams LLP (see here), represented Alliance One entities. Colleen Mahoney, Skadden (see here), the former Deputy Director of the SEC’s Division of Enforcement, represented Alliance One’s Board of Directors and Audit Committee.
DOJ
Pursuant to a non-prosecution agreement (see here), the DOJ agreed not to prosecute Alliance One related to:
1. “improper payments (or agreements to make improper payments) made by employees and agents of its subsidiary or predecessor corporations in the form of:
a. corrupt payments made to foreign officials in Kyrgyzstan including (i) bribes paid to officials of the Kyrgyz Tamekisi; (ii) bribes paid to Akims; and (iii) bribes paid to Kyrgyz tax officials, which payments were made for the purpose of obtaining and retaining business with Kyrgyzstan government entities; and
b. corrupt payments made to foreign officials in Thailand in the form of
kickbacks paid to officials of the Thailand Tobacco Monopoly, which payments were made for the purpose of obtaining and retaining business with Thailand government entities; and
2. The accounting and record-keeping practices associated with these improper
payments.”
Pursuant to the NPA, Alliance One “admitted, accepted, and acknowledged successor corporate responsibility for the conduct of its corporate predecessors” as set forth in a Statement of Facts attached to the NPA.
In summary fashion, the Statement of Facts are as follows:
Prior to 2005, Dimon, Inc. (“Dimon”) was a publicly traded leaf tobacco merchant subject to the FCPA. Dimon also had an obligation to ensure that its wholly owned subsidiaries, including Dimon International Kyrgyzstan, Inc. (“DIK”) and Dimon International AG (“DIAG”), maintained accurate books and records.
Prior to 2005, Standard Commercial Corp. (“Standard”) was a publicly traded leaf tobacco merchant subject to the FCPA. Standard also had an obligation to ensure that its wholly owned subsidiaries, including Standard Brazil Ltd., maintained accurate books and records.
In 2005, Dimon and Standard merged to form Alliance One.
Kyrgyzstan
Dimon maintained a wholly owned subsidiary, DIK, that was organized under Kyrgyzstan law. During the relevant time period, DIK purchased and processed tobacco grown in Kyrgyzstan and shipped processed tobacco to Dimon’s customers throughout the world.
According to the Statement of Facts, “DIK maintained its principal place of business in Osh, Kyrgyzstan and made regular reports of its business operations and financial accounts to officers of Dimon located at its headquarters in Danville, Virginia. DIK regularly sought approval for management decisions from Dimon managemeut and worked with and communicated with individuals acting as DIK’s agents in Danville, Virginia, and Farmville, North Carolina, who undertook certain acts within the territory of the United States such that DIK was a “person” within the meaning ofthe FCPA.
After the merger of Dimon and Standard in 2005, Alliance changed the name of DIK to Alliance One Tobacco Osh, LLC (“Osh”) which continued to operate in Kyrgyzstan as a wholly owned subsidiary of Alliance One.
According to the Statement of Facts, “Osh is the corporate successor to DIK, and is legally accountable for the criminal acts of its predecessor corporation.
Like the DOJ and SEC’s prior enforcement action against Bobby Elkins (see here and here), the Statement of Facts focus on improper payments to “Kyrgyz Official A,” “the Akims” and the “Kyrgyz Tax Inspection Police.”
Kyrgyz Official A served as the “General Director of the Tamekisi” “an agency and instrumentality of the [Kyrgyz] government [established] to manage and control the government-controlled shares of the tobacco processing facilities throughout Kyrgyzstan.” According to the Statement of Facts, the Tamekisi agreed to issue a license to Dimon to process and export tobacco and that from October 1996 through at least February 2004, DIK delivered approximately $2.6 million in cash payments to the official. According to the Statement of Facts, these payments were intended to “influence acts or decisions” of the official in his official capacity and to secure DIK’s “continued access to the tobacco processing facilities controlled by the Tamekisi.”
According to the Statement of Facts, an Akim is a head of Kyrgyz local government with “authority over the sale of tobacco by the growers” within a specific municipality or geographic area. The Statement of Facts indicate that beginning in 1996 “it became necessary for DIK to obtain permission from local Akims to purchase tobacco from the growers in each area” and “several of the Akims demanded payment of a “commission” from DIK “in order to secure the relevant Akim’s approval” for DIK to purchase tobacco from local growers. According to the Statement of Facts, from January 1996 to at least March 2004 DIK made cash payments “to the Akims of five different municipalities totaling approximately $283,762 in order to influence the acts and decisions of the Akims and to secure DIK’s continued ability to purchase tobacco from growers in the muncipalities controlled by the Akims.”
As to the Kyrgyz Tax Inspection Police, the Statement of Facts indicate that “during periodic audits” of DIK, the police assessed penalties and threatened to shut down DIK. According to the Statement of Facts, from March 2000 to March 2003 DIK “made approximately nine cash payments to officers of the Kyrgyz Tax Inspection Police totaling approximately $82,850 in order to influence the acts and decisions” of the police and to secure DIK’s “continued ability to conduct its business in Kyrgyzstan.”
According to the Statement of Facts, DIK maintained a company bank account in Kyrgyzstan, known as the “special account” to make the above described improper payments and when a DIK employee “needed to replenish money in the special account, he sent requests for funds by electronic mail or facsimile transmission to other employees and officers of Dimon or its affiliates in the U.S.” accompanied by a wire transfer request to Dimon’s Financial Accounting Department in Virginia.
According to the Statement of Facts, “the financial reporting on the special account from DIK and all other Dimon subsidiaries went directly to Dimon’s corporate headquarters in the U.S.” and in July 2002 “an internal audit report to Dimon headquarters stated that DIK management continued to be challenged by a ‘cash environment’ and cited corruption in Kyrgyzstan as a financial risk because of the potential control issue with cash payments.”
According to the Statement of Facts, between January 1996 and December 2004, “the Kyrgyzstan business operations of DIK generated profits of approximately $4.8 million for its parent corporation, Dimon.”
Thailand
Prior to 2005, Dimon maintained a wholly owned subsidiary, DIAG, which was organized under Swiss law and conducted business in the U.K., Brazil, Thailand, the U.S. and elsewhere. According to the Statement of Facts, “during the relevant time period, DIAG provided financial, accounting and management services to other Dimon subsidiaries that purchased tobacco grown in Brazil, and sold it to Dimon’s customers including the [TTM].” According to the Statement of Facts, DIAG, which maintained its principal place of business in the U.K., “made regular reports of its business operations and financial accounts to officers of Dimon located at its headquarters in Danville, Virginia” and DIAG “regularly sought approval for management decisions from Dimon management and worked with and communicated with individuals acting as DIAG’s agents” in Virginia and North Carolina “who undertook certain acts while in the territory of the United States such that DIAG was a “person” within the meaning ofthe FCPA.
Prior to 2005, Standard maintained a wholly owned subsidiary, Standard Brazil Ltd (“Standard Brazil”), which was organized under the laws of the Isle of Jersey, Channel Islands, and conducted business in Brazil, Thailand, and elsewhere. During the relevant period, Standard Brazil provided financial, accounting and management services to other Standard subsidiaries that purchased tobacco grown in Brazil, and sold it to Standard’s customers including the TTM. Standard Brazil regularly sought approval for management decisions from Standard management and worked with and communicated with individuals at Standard, acting as Standard Brazil’s agents in the United States and undertaking certain acts within the territory of the United States such that Standard Brazil was a “person” within the meaning of the FCPA.
The Statement of Facts concern improper payments to TTM (see here) “an agency and instrumentality” of the Thai government established to “manage and control the government-owned tobacco industry in Thailand.” According to the Statement of Facts, the TTM “supervised the cultivation of domestic tobacco crops, purchased imported tobacco and manufactured cigarettes and other tobacco products in Thailand.”
According to the Statement of Facts, the TTM was headed by a Managing Director (“Thai Official A”), appointed by the Finance Ministry, who reported through a Board of Directors directly to the Minister of Finance of Thailand and, as such, was a “foreign official” within the meaning of the FCPA. (See here for TTM’s current organizational chart).
According to the Statement of Facts, during the relevant time period, Dimon purchased tobacco from growers in Brazil and sold the Brazilian tobacco to the TTM through DIAG and Standard sold the Brazilian tobacco to the TTM through Standard Brazil. To help facilitate these sales, Dimon and Standard Brazil retained sales agents in Thailand and the companies paid sales commissions to the agents in varying amounts as a percentage of its tobacco sales to the TTM.
According to the Statement of Facts:
“Beginning in or around 2000 and continuing through at least in or around 2004, Dimon and Standard, through their agents, subsidiaries and affiliates, collaborated together and with a competing tobacco merchant, Company A, [presumably Universal Corp.] to apportion tobacco sales to the TTM among themselves and to coordinate their sales prices in order to ensure that each company would share in the Thai tobacco market. Beginning in or around 2000 and continuing through at least in or around 2004, Dimon, Standard and Company A agreed among themselves to pay bribes to officials of the TTM in exchange for their purchase of tobacco. The three companies agreed to pay ‘special expenses,’ calculated at an agreed rate per kilogram of tobacco sold to the TTM, that were paid as kickbacks to Thai Official A and other TTM officials to induce the TTM to purchase tobacco and to secure an improper advantage for Dimon, Standard and Company A.”
According to the Statement of Facts, between 2000 and 2004 “Dimon realized net profits of approximately $4.3 million from the sale of Brazilian tobacco to the TTM” and paid “special expenses totaling approximately $542,950 as kickbacks to Thai Official A and other TTM officials…” According the Statement of Facts, during the same time period, “Standard realized net profits of approximately $2.7 million from the sale of Brazilian tobacco to the TTM” and paid “special expenses totaling approximately $696,160 as kickbacks to Thai Official A and other TTM officials…”
According to the Statement of Facts, the companies and individuals involved “knew and intended that the corrupt special expenses paid to Thai Official A and other TTM officials” would “secure an improper advantage for Dimon and Standard by influencing the TTM’s decision to purchase Brazilian tobacco from Dimono and Standard.”
According to the Statement of Facts:
“After the merger of Dimon and Standard in 2005, Alliance One consolidated the assets, liabilities, and business affairs of Standard Brazil with DIAG and renamed the subsidiary corporation Alliance One International AG” (“Alliance One AG”). According to the Statement of Facts, as the successor corporation, Alliance One AG “is legally accountable for the criminal acts of both DIAG and Standard Brazil” and Alliance One AG “continued to operate in the U.K. and elsewhere as a wholly owned subsidiary” of Alliance One and accordingly is a “person” within the meaning of the FCPA.”
The Statement of Facts then lists several acts in furtherance of the improper payments that had a U.S. nexus such as e-mail messages and wire transfers to or from the U.S.
According to the DOJ, it agreed to enter into the NPA with Alliance One based, in part, on the following factors: “(a) Alliance’s timely, voluntary and complete disclosure of the conduct and events at issue; (b) Alliance’s thorough, real-time cooperation with the Department and the Securities and Exchange Commission, including its voluntary production of documents; (c) the remedial compliance efforts undertaken and to be undertaken by Alliance; and (d) no further criminal conduct has occurred since the merger that created Alliance.”
During the three-year NPA, Alliance One shall, among other things, cooperate in any related DOJ or SEC investigation. Pursuant the NPA, Alliance One must also strenghen its internal controls and retain an independent corporate monitor.
The criminal informations against Alliance One AG (here) and Osh (here) concern the same core conduct described above.
The criminal information against Alliance One AG concerns Thailand conduct and charges: (i) conspiracy to violate the FCPA and to knowingly falsify books, record and accounts of Dimon and Standard; (ii) substantive FCPA anti-bribery violations; and (iii) aiding and abetting FCPA books and records violations.
The Alliance One AG Plea Agreement (here) notes that the benefit received from the improper conduct was approximately $7 million. The company received a “culpability score” credit for “self-reporting, cooperation, acceptance of responsibility.” The fine range, per the U.S. Sentencing Guidelines was $4.2 – $8.4 million. The DOJ and Alliance One AG agreed that the appropriate sentence should be $5.25 million. The plea agreement notes that the plea was “the result of the voluntary disclosure made by [Alliance One AG] and its parent [Alliance One] to the Department beginning in May 2004, and the disclosure of evidence obtained as a result of the extensive investigation subsequently conducted by [Alliance One] into the operations of [Alliance One AG], its parent, affiliates, and subsidiaries.” The agreement states that “at the time of the initial disclosure, the conduct was unknown to the Department.”
The criminal information against Osh concerns Kyrgyzstan conduct and charges: (i) conspiracy to violate the FCPA and to knowingly falsify books, record and accounts of Dimon; (ii) substantive FCPA anti-bribery violations; and (iii) aiding and abetting FCPA books and records violations.
The Osh Plea Agreement (here) notes that the benefit received from the improper conduct was approximately $4.8 million. The company received a “culpability score” credit for “self-reporting, cooperation, acceptance of responsibility.” The fine range, per the U.S. Sentencing Guidelines was $4.2 – $8.4 million. The DOJ and Osh agreed that the appropriate sentence should be $4.2 million. The plea agreement notes that the plea was “the result of the voluntary disclosure made by [Osh] and its parent [Alliance One] to the Department beginning in May 2004, and the disclosure of evidence obtained as a result of the extensive investigation subsequently conducted by [Alliance One] into the operations of [Osh], its parent, affiliates, and subsidiaries.” The agreement states that “at the time of the initial disclosure, the conduct was unknown to the Department.”
In the DOJ’s Consolidated Sentencing Memorandum (here), it notes that the “corporations have executed a tolling agreement that provides that the statute of limitations was tolled on May 24, 2004, the date on which the corporation first notified the Department that they were undertaking an internal investigation.”
As to the ultimate fine amounts, the DOJ states that it “and the defendant corporations have negotiated a fine that is at or above the minimum fine in the range.”
As to Osh’s $4.2 million fine, the DOJ states:
“The Department submits that a fine at the low end of the Guidelines range is
appropriate in this case given the company’s prompt and timely self-disclosure of the potentially corrupt payments as soon as they were discovered, the remedial measures taken and the nature and extent of the company’s cooperation throughout the
government’s investigation. The company retained outside counsel to conduct an extensive internal investigation and voluntarily produced thousands of pages of documents and memoranda of witness interviews. The company’s remedial measures, outlined below, included the termination of all employees found to have authorized or participated in the improper payments.”
As to Alliance One AG’s $5.25 million fine, the DOJ states:
“This fine is above the minimum of the range partly to account for the fact
that two subsidiaries (DIAG and Standard Brazil) participated in the commission of the offense, along with a third unrelated company, although they were subsidiaries of different parent corporations at the time. Further, because DIAG, Standard Brazil and Company A collaborated to fix prices and pay bribes to the Thai officials, the conduct was not limited to a few employees or confined to a single business unit.”
The Government’s Sentencing Memorandum concludes as follows:
“Alliance’s cooperation was both timely and thorough. During the course of the government’s investigation, Alliance and its outside counsel fully cooperated in good faith with the Department, and produced thousands of pages of documents and financial records. Alliance tenninated or sought resignations from all employees who were found to have knowledge of or participated in the improper payments. Alliance voluntarily produced memoranda of employee interviews conducted by counsel. Alliance and their counsel have been available to meet with Department attorneys to brief them on the progress and findings of their internal investigation. The agreed dispositions, described above, reflect the Department’s recognition of Alliance’s timely and thorough cooperation.”
“Alliance took remedial actions including enhancement of its corporate compliance program, replacement of responsible management, and discipline or termination of wrongdoers. Specifically, Alliance took the following remedial actions:
• The Special Account maintained in the name of employees was closed.
• On May 24, 2004, the Audit Committee directed management to deliver a “clear and proactive message” that:
o “Illegal acts will not be tolerated in Dimon;”
o “any potentially illegal act should be brought to the attention of the CLO prior to execution of the transaction;” and
o “any individual that believes that an illegal act may have occurred should contact the CLO immediately.”
• Management issued a directive to regional executives and all accounting personnel that any questionable expenses or payments and expenses without adequate
explanation or documentation must be reported to the Corporate Compliance Officer.
• The Audit Committee implemented a new policy requiring CFO or Controller pre-approval of any material payment in cash.
• Management issued a direction to employees that “[n]o payments to public officials or political parties are to be made in any form without the express advance approval of the Corporate Compliance Officer.”
• Compliance Officer required all personnel to re-take an online training course covering the FCPA provided by Integrity Interactive.
• Responsible personnel, including senior management in Europe and Kyrgyzstan were terminated or left company voluntarily. Other employees were reprimanded.
• Corporate Accounting required supporting information for all payments made in cash from any entity where such payments exceed $2500 annually, and issued a directive to minimize cash payments for anything other than incidental expenses.
• All cash accounts must be maintained in the company’s name.
• All cash transactions are required to be documented by receipts and signed by the recipient and they established a periodic review and approval process for all
non-incidental types of expenses paid in cash to ensure payments would comply with Company policy and the law.
A sentencing hearing is scheduled for October 21, 2010.
SEC
The SEC’s settled civil complaint (see here) alleges the same core Kyrgyzstan and Thailand conduct as the DOJ’s enforcement action.
As to books and records and internal controls, the SEC alleges that “Dimon’s Country Manager authorized, directed, and made” the improper payments in Kyrgyzstan through a DIK bank account held under his name (the above mentioned special account), that “Dimon’s Regional Financial Director authorized all fund transfers from a Dimon subsidiary’s bank account to the Special Account” and that “Dimon’s International Controller formalized the accounting methodology used to record the payments made from the Special Account for purposes of internal reporting by Dimon.”
In summary fashion, the SEC also alleged as follows:
“Despite their extensive international operations, Dimon and Standard lacked sufficient internal controls designed to prevent or detect violations of the FCPA. During the 2000-2004 period, Dimon and Standard each had a policy manual prohibiting bribery, but the training and guidance provided to their employees regarding compliance with the FCPA were not adequate or effective. Dimon and Standard each also failed to establish a program to monitor compliance with the FCPA by its employees, agents, and subsidiaries.”
As I’ve indicated in prior posts, before a company settles an FCPA enforcement action, it usually has to answer the enforcement agencies’ “where else” question – as in, if you engaged in improper conduct or had internal control problems in Kyrgyzstan and Thailand, where else did you engage in improper conduct or have internal control problems. To answer this broad question, the company is forced to conduct a world-wide review of its operations and that is why one sees, as in the SEC’s complaint against Alliance One, a laundry list of other alleged improper conduct.
In summary fashion, the SEC’s complaint also alleges as follows:
“By at least May 2005, Standard provided gifts, travel, and entertainment expenses to foreign government officials in the Asian Region, including China and Thailand.” “For example, in 2002 and 2003, contemporaneous documents show that Standard employees provided watches, cameras, laptop computers, and other gifts to Chinese and Thailand tobacco officials. Standard also paid for dinner and sightseeing expenses during non-business related travel to Alaska, Los Angeles, and Las Vegas for Chinese and Thailand government delegations.”
“In 2004, Standard made a $50,000 payment to a political candidate who was also Standard’s agent for tobacco sales in Thailand.” “The $50,000 payment was falsely recorded in Standard’s books as payment for consulting work.”
“In April 2003, Dimon’s subsidiary in Greece made a payment of $96,000 to a Greek tax official in exchange for the tax official’s agreement not to pursue certain irregularities discovered during an audit, thus significantly reducing Greece’s tax liability. Separately, the controller of Dimon’s subsidiary in Indonesia made a $44,000 cash payment to an Indonesian tax official in exchange for receiving a tax refund.”
The SEC complaint charges Alliance One with violations of the FCPA’s anti-bribery provisions, books and records and internal control provisions.
The SEC release (here) notes that Alliance One, without admitting or denying the SEC’s allegations, consented to entry of a permanent injunction enjoining future FCPA violations and agreed to pay a disgorgement penalty of $10 million.
In an Alliance One press release (see here) R. E. Harrison, the Company’s Chairman and Chief Executive Officer, stated:
“Our Company is committed to the highest standards of conduct in all transactions in all jurisdictions where we do business throughout the world. In these cases, although occurring prior to our merger in May, 2005, the conduct by those predecessor companies did not meet our standards and we believe it to be in the best interest of the Company, our shareholders and our other stakeholders to put these issues behind us by means of these negotiated agreements. As indicated in our agreement with the DOJ, we have cooperated fully throughout the course of this investigation and believe that since our merger we have demonstrated our complete commitment to conducting our business in accordance with the highest standards of legal and ethical conduct.”
Universal
The Universal enforcement action included a non-prosecution agreement between the DOJ and Universal, a criminal plea by Universal Leaf Tabacos Ltda. (“Universal Brazil”), as well as an SEC enforcement action against Univeral.
Patrick Hanes, Williams Mullen (see here) represented Univeral.
DOJ
Pursuant to a non-prosecution agreement (see here) the DOJ agreed not to prosecute Univeral Corp. related to:
“the making of improper payments, by employees and agents of Universal and/or its subsidiaries to officials of the Government of Thailand in connection with Universal Brazil’s efforts to secure business, namely, to secure the improper sale of leaf tobacco to the Thailand Tobacco Monopoly, from 2000 to 2004, and the accounting and record-keeping associated with these improper payments.”
Pursuant to the NPA, Universal Corp. “admitted, accepted, and acknowledged responsibility for the conduct of its subsidiaries” as set forth in a Statement of Facts attached to the NPA.
In summary fashion, the Statement of Facts are as follows:
Universal is a publicly traded company headquartered in Richmond, Virginia which, through its subsidiaries, is a worldwide purchaser and supplier of processed leaf tobacco. As an issuer, Universal was required to make and keep accurate books, records and accounts reflecting its transactions and disposition of assets of Universal and its subsidiaries including Universal Brazil.
Universal Brazil, a wholly owned subsidiary of Universal, was a Brazilian corporation, headquartered in Santa Cruz do Sul, Brazil. Universal Brazil was a “person” under the FCPA, and individuals and entities affiliated with and acting on behalf of Universal Brazil while in the territory of the United States, used and caused the use of the mails and means and instrumentalities of interstate commerce and performed other acts in furtherance of an offer, promise, authorization, or payment of money or anything of value to foreign government officials for the purpose of assisting in obtaining or retaining business.
The Statement of Facts refers to the same general kickback scheme involving TTM officials as alleged in the Alliance One enforcement action. The Statement of Facts indicate that “from in or around March 2000 to in or around July 2004, the TTM awarded Universal Brazil five orders for the sale of Brazilian leaf tobacco. To obtain these orders, between June and December 2004, Universal Brazil paid approximately $697,800 in kickbacks to representatives of the TTM through Agent X (a Thai national).”
The Statement of Facts then details the kickback scheme including the involvement of Employee A (a U.S. citizen who was the President of Universal Brazil); Employee B (a Brazilian citizen who was the Commercial Director for Universal Brazil); Employee C (a Brazilian citizen who was a Sales Manager for Universal Brazil); Employee D (a Zimbabwean citizen who was a Sales Director for Universal Brazil); Employee E (a Brazilian citizen who was the Finance Director for Universal Brazil); Employee F (a Brazilian citizen who was the Export Superintendent for Universal Brazil); Employee G (a Brazilian citizen who was a Sales Manager for Universal Brazil); Employee H (a Zimbabwean citizen who was the Sales Director for Universal Leaf Asia); Employee I (a Brazilian citizen who was an account manager in Brazil); Employee J (a U.S. citizen who was a Vice President of Universal Leaf Tobacco – a wholly owned subsidiary of Universal Corp. – who approved wiring instructions for payments to Agent X); Employee K (a U.S. citizen who was the Controller of Universal who approved wiring instructions for payment to Agent X); and Employee L (a U.S. citizen who was the Director of Financial Accounting for Universal Leaf Tobacco who approved wiring instructions for payments to Agent X).
Given the alleged involvement of others, including U.S. citizens, it will be interesting to see if additional DOJ or SEC enforcement actions against such individuals are forthcoming.
According to the Statement of Facts:
“The scheme ended in or about April 2005 when the TTM switched to an ‘electronic auction’ process to award orders. The electronic auction process increased the transparency of all of the bids received by the TTM, allowed for more open competition, and prevented Universal Brazil [and others] from including additional amounts in the price of their tobacco sales, thereby eliminating the ability of the companies to mask kickback payments used to secure sales orders.”
According to the Statement of Facts – “from in or around 2000 through in or around 2004, Employee E and others falsely characterized Universal Brazil’s kickback payments to TTM representatives in Universal Brazil’s books, records and accounts (which were incorporated into the books, records and acconts of Universal Corp. for purposes of preparing year-end financial statements) as “commission payments” to Agent X.”
As to Universal’s internal controls, the Statement of Facts indicates as follows:
“Universal Brazil’s employees, including Employees E and F, directed that
kickback payments be paid through LATCO, a wholly owned Universal subsidiary. The financial records of LATCO were maintained with insufficient oversight or review by Universal’s legal, finance, or compliance departments and were never audited by Universal during the period from 2000 to 2004. Universal Brazil’s Finance Department and executives and employees from either Universal Corp. or Universal Leaf Tobacco, including Employee J, Employee K, and Employee L approved or directed the transfer of the multiple ‘commission’ payments to Agent X even though: (a) some of the payments were described as ‘special expense’ payments; (b) there was no contractual basis for the payment of the additional commission amounts; (c) the payments were to accounts unassociated with the Agent; (d) the instructions that were provided when wiring the money indicated that Universal Corp. should not identify the agent or that the amounts were for ‘special expenses;’ and (e) the payments were above the standard five (5) percent commission typically paid by Universal Brazil to its agents.
The Statement of Facts also indicate that “Universal Brazil did not conduct sufficient due diligence prior to engaging Agent X.”
According to the DOJ, it agreed to enter into the NPA with Universal based, in part, on the following factors: “(a) Universal’s discovery of the violations through its own internal hotline process; (b) timely, voluntary, and complete disclosure of the facts; (c) Universal’s extensive, thorough, real-time cooperation with the Department and the SEC; and (d) the remedial efforts already undertaken and to be undertaken by Universal.”
During the approximate three-year NPA, Universal Corp. shall, among other things, cooperate in any related DOJ or SEC investigation. Pursuant the NPA, Universal Corp. must also strenghen its internal controls and retain an independent corporate monitor.
The criminal informations against Universal Brazil (see here) concerns the same core conduct described above.
The criminal information against Univeral Brazil charges: (i) conspiracy to violate the FCPA and to knowingly falsify books, record and accounts of Universal; and (ii) substantive FCPA anti-bribery violations.
The Universal Brazil Plea Agreement (here) notes that the benefit received from the improper conduct was between $1 million – $2.5 million. The company received a “culpability score” credit for “self-reporting, cooperation, and acceptance of responsibility.” The fine range, per the U.S. Sentencing Guidelines was $$6.3 million – $12.6 million. The DOJ and Univeral Brazil agreed that the appropriate sentence should be $4.4 million. The plea agreement states that the fine amount (30% below the bottom of the sentencing guidelines range) “was appropriate” based on the following factors:
“Universal Corporation and Universal Brazil’s extensive cooperation
during the course of the investigation, including the provision of relevant documents and information; Universal Corporation and Universal Brazil’s substantial assistance with other related Department investigations regarding the bribery of foreign government officials; and Universal Corporation and Universal Brazil’s remedial efforts, including enhancing the companies’ compliance resources and compliance policies, procedures, and internal controls.”
The plea agreement further states that the investigation was “a result of the voluntary disclosure made by Universal Brazil and its parent corporation Universal Corporation, through their counsel, to the Department and the disclosure of evidence obtained as a result of the investigation subsequently conducted through their counsel and the extraordinary cooperation by Universal Brazil and its parent Universal Corporation throughout the Department’s investigation” and that “at the time of the initial disclosure, the conduct was unknown to the Department.”
The Agreed Sentencing Memorandum (here) sheds light on how the facts at issue were first uncovered. The memo states:
“The government’s investigation began with a self-disclosure by counsel for Universal in 2006. In 2006, a former Univeral Brazil employee with knowledge of the bribery scheme in Brazil reported the conduct to Universal through Universal’s website. Based on the tip provided by the former employee, Universal’s counsel and outside auditors investigated the matter, identified a series of suspicious payments, and reported this information to the Department. Thereafter, Universal and Univeral Brazil cooperated in the Department’s and the U.S. Securities and Exchange Commission’s joint investigation of this matter.”
In footnotes, the DOJ states as follows:
“The Department encourages companies to disclose evidence of potential FCPA violations promptly. The agreed disposition with Universal Brazil and its parent Universal partly reflect credit given for Universal’s timely self-disclosure, thorough investigation, and ongoing cooperation.”
“Pursuant to Universal’s internal compliance program, Universal maintained on its website an employee ‘hotline’ that allowed current and former employees to report improper conduct. It is because of this useful compliance initiative that the improper conduct came to light. The agreed upon disposition partly reflects credit given for Universal’s pre-existing compliance program.”
According to the sentencing memo, Universal Brazil realized net profits of approximately $2.3 million on four contracts secured through the $697,800 in kickbacks to TTM officials.
As to the $4.4 million fine amount, the DOJ stated “that a fine below the Guidelines range is appropriate in this case given the company’s prompt and timely self-disclosure of the potentially corrupt payments as soon as they were reported, the nature and extent of the company’s cooperation throughout the government’s investigation, and the remedial measures taken.”
The sentencing memo details timely disclosure and cooperation as follows:
“Universal and Univeral Brazil’s cooperation was both timely and thorough. The company retained outside counsel to conduct an extensive internal investigation. Universal, Universal Brazil, and their counsel were consistently available to meet with Department attorneys to brief them on the progress and findings of their internal investigation. During the course of the government’s investigation, Universal and Univeral Brazil and its outside counsel fully cooperated in good faith with the Department and produced thousands of pages of documents and financial records and made employees available for interviews. Further, Universal and Univeral Brazil terminated or reprimanded employees who were determined to have authorized and facilitated the improper payments.”
As to remedial measures, the sentencing memo states:
“The company’s remedial measures, outlined below, included the implementation of an enhanced compliance program. Further, Universal Brazil, pursuant to the plea agreement, and its parent, Universal, pursuant to an Non-Prosecution Agreement (NPA), have agreed to further strengthen their internal controls, implement a rigorous compliance program and engage an independent corporate monitor (“monitor”) who will conduct a comprehensive review of the Universal and Univeral Brazil’s compliance standards and procedures and its internal controls. The monitor will prepare an initial report and two follow-up reports of his or her findings and make recornmendations for improvements in the companies’ compliance programs over the three-year term. Universal and Univeral Brazil took remedial actions including enhancement of the corporate compliance program, replacement of responsible management, and discipline of wrongdoers.
Specifically, Universal and Univeral Brazil took the following remedial
actions:
• Management established a Compliance Committee comprised of the Chief Financial Officer, the General Counsel, the Head of Internal Audit, the Treasurer, the Controller, and the Principle Sales Director. The Compliance Committee meets on a monthly basis to review and evaluate Universal’s compliance programs and training.
• Management established a Chief Compliance Officer who is responsible for the day-today operations of Universal’s compliance program and Chairs the Compliance Committee.
• Management issued a revised and updated Code of Conduct and translated the Code into fourteen (14) languages.
• Management required sales, finance, and executive-level personnel to attend a day long in-person training session devoted to FCPA and local anti-bribery laws.
• Management revised and enhanced its payment approval policy which now requires an ‘approving officer’ to review all supporting documentation for a payment and to understand the purpose of the payment prior to approval. The ‘approving officer’ must certify that he or she has reviewed the existing documentation and obtained an understanding of the legitimate business purpose of the payment. The policy also requires that employees investigate any questionable payments and determine that they
are legal, legitimate, and appropriate prior to approving the payment.
• Management revised and enhanced its due diligence process for agents. Initially, Universal suspended all commission payments to agents worldwide subject to legal department confirmation that each requested payment was adequately supported. Thereafter, Universal instituted a formal and standardized process for the assessment and approval of existing and proposed sales agents, which is coordinated by Universal’s Legal Department. As part of this policy, an officer of Universal, known as a ‘Relationship Officer,’ must complete a ‘Sales Agent Due Diligence Checklist’ for each prospective sales agent. This detailed checklist includes disclosure of relationships with foreign governments by owners, officers, directors and employees of the third-party agent or their family members, reference checks, and a list of potential red flags.
• Management conducted, and has pledged to continue to conduct, compliance and/or FCPA training at every global conference held for Universal employees.
• Management terminated and reprimanded certain employees involved in the improper
conduct.”
SEC
The SEC’s settled civil complaint (see here) alleges the same core Thailand conduct as the DOJ’s enforcement action.
Further to the “where else” issue discussed above, the SEC’s complaint also alleges conduct related to Mozambique and Malawi business.
In summary fashion, the SEC’s complaint alleges:
“From 2000 through 2007, Universal Corporation violated the Foreign Corrupt Practices Act of 1977 (the “FCPA”) by paying, through its subsidiaries, over $900,000 to govemment officials in Thailand and Mozambique to influence acts and decisions by those foreign officials to obtain or retain business for Universal. Those payments were directed by employees at multiple levels of the company, including management in its corporate offices and at its wholly-or majority-owned and controlled foreign subsidiaries. The Company had inadequate internal controls to prevent or detect any of these improper payments, and improperly recorded the payments in its books and records.”
“Between 2000 and 2004, Universal subsidiaries paid approximately $800,000 to bribe officials of the government-owned Thailand Tobacco Monopoly (“TTM”) in exchange for securing approximately $11.5 million in sales contracts for its subsidiaries in Brazil and Europe. From 2004 through 2007, Universal subsidiaries made a series ofpayments in excess of $165,000 to government officials in Mozambique, through corporate subsidiaries in Belgium and Africa. Among other things, the payments were made to secure an exclusive right to purchase tobacco from regional growers and to procure legislation beneficial to the Company’s business.”
“In addition, between 2002 and 2003, Universal, subsidiaries paid $850,000 to high ranking Malawian government officials. Those payments were authorized by, among others, two successive regional heads for Universal’s African operations. Universal did not accurately. record these payments in its books and records.”
As to the Mozambique payments, the complaint alleges:
(i) that two $10,000 payments were made to the “wife of an official in Mozambique’s Ministry of Agriculture and Fisheries” to obtain the official’s “assistance in revising legislation to impose a 20% export tax on unprocessed tobacco” – legislation that would have “benefited Universal over competitors because Universal was building a tobacco processing plant in the country;
(ii) that “Universal Leaf Africa directed that Universal’s Belgian subsidiary pay $50,000 to the brother of an official of in Mozambique’s Ministry of Agriculture and Fisheries” to “enable the Company’s Mozambican subsidiary to avoid incurring an export tax that it otherwise would have incurred for shipping unprocessed tobacco out of Mozambique;”
(iii) that “Univeral Leaf Africa made a series of payments totaling $86,830 from its own account and the account of the Mozambican subsidiary to secure a land concession given the subsidiary exclusive rights to purchase tobacco from growers on that land from the 2006 growing season.” According to the complaint Universal Leaf made “cash payments to a Governor in Mozambique; and gave gifts including supplies for a bathroom renovation, and personal travel on a Company jet.” and
(iv) that “Universal Leaf Africa forgave a debt and directed an additional series of payments from its own accounts and the account of the Mozambican subsidiary totaling $19,061” – according to the complaint the “debt forgiveness and payments were provided to Mozambican government officials and their family members in exchange for continued business favors.”
As to the Malawi payments, the complaint alleges as follows:
“Between approximately October 2002 and November 2003, Universal Leaf Africa made payments totaling $500,000 to one high-ranking Malawian government official; $250,000 to a second high-ranking government official; and $100,000 to a political opposition leader.”
As to Universal’s books and records and internal controls, the SEC alleges in summary fashion that Universal made payments under circumstances in which the Company lacked adequate internal controls to ensure that such payments were not being transmitted to government officials in order to obtain or retain business and that Universal’s books and records falsely characterized the payments.
The SEC complaint charges Universal with violations of the FCPA’s anti-bribery provisions, books and records and internal control provisions.
The SEC release (here) notes that Universal, without admitting or denying the SEC’s allegations, consented to entry of a permanent injunction enjoining future FCPA violations and agreed to pay a disgorgement penalty of approximately $4.6 million.
In a Universal press release (see here) George C. Freeman, III, Universal’s Chairman, President, and Chief Executive Officer, states:
“Universal prides itself on conducting business with honesty and integrity. These past payments were – and are – contrary to the policies and standards of Universal and its subsidiaries. We have absolutely no tolerance for this type of activity. Our Audit Committee conducted a rigorous and thorough investigation, we voluntarily reported this matter to federal authorities, and we have fully cooperated with federal authorities at each step of the investigation. We have since taken steps to strengthen our culture of ethical and legal compliance, and our efforts are supported by our operations around the world. Our regional management is fully committed to our culture.”