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By on December 27, 2013 in Charitable Contributions, Double Standard, Fine / Penalty Issues, Foreign Official, Hiring Family Members of Foreign Officials, JPMorgan, Melco Crown Entertainment, Transparency International, Walters Power International, Weatherford International, World Bank

“Scurrilous and hypocritical,” scrutiny alerts and updates, a foreign official brain teaser, quotable, and for the reading stack.  It’s all here in the Friday roundup.

“Scurrilous and Hypocritical”

As I have highlighted for years (see approximately 25 separate posts under the subject matter heading double standard), there is a double standard concerning corporate interaction with “foreign officials” under the FCPA and corporate interaction with U.S. officials under other U.S. laws – specifically 18 U.S.C. 201.

Commenting on JPMorgan’s current FCPA scrutiny concerning its alleged hiring practices in China, former SEC Commissioner Arthur Levitt writes, in pertinent part, in this Wall Street Journal opinion piece as follows.

“[A]ccording to financial regulators now looking into the hiring practices of major U.S. banks and multinationals in China—some of which have employed members of influential Chinese families—anyone who once hired me [Levitt’s father was the New York state comptroller] might have been violating ethical and legal standards. Securities and Exchange Commission regulators now suggest that such hiring overseas is a form of untoward influence, akin to bribing foreign officials to win business.

The accusation is scurrilous and hypocritical. If you walk the halls of any institution in the U.S.—Congress, federal courthouses, large corporations, the White House, American embassies and even the offices of the SEC—you are likely to run into friends and family members of powerful and wealthy people.

[…]

Whether this is right or wrong, unfair or fair, is not the point. It is hypocritical of financial regulators to criticize—even penalize—practices abroad that are commonplace in Washington, New York and other seats of political and economic power.

Were the SEC to be completely consistent in its approach, it would have to come down hard on the same practices here in the U.S. And the agency would have a field day. Members of Congress and the executive branch regularly hire the children of major donors. Regulators would find scores of examples of men and women, occupying internships and entry-level positions in U.S. corporations, who were hired on the say-so of someone much higher up in the organization.

[…]

[I]f we were to deny multinational companies the ability to hire locally recommended talent, where do we draw the line? Are spouses of influential officials off-limits, but not their children? What about siblings? If not siblings, what about cousins, uncles, nephews? And then there is the issue of friends: How can a financial regulator know whether a friend of someone in power received a job offer in good faith or as a form of influence peddling?

I would hate to imagine what would happen if we applied the same kind of sliding scale to the many people who have received job offers by way of their familial relationships. If that happened, there aren’t many people in finance who would escape the accusation that their hiring was the byproduct of influence peddling.”

Scrutiny Alerts and Updates

This Macau Business Daily report notes the timing of a $10 million pledge by Nasdaq-listed Melco Crown Entertainment for a cultural project in collaboration with the Tokyo University of the Arts.  As noted in the article, the company needs various government permissions to increase its presence in Japan.  As noted in this prior post, among others, casino operators including Wynn Resorts have been the subject of FCPA scrutiny based on similar charitable contributions.

This previous post highlighted how Transparency International urged the DOJ to investigate the conduct of Walters Power International  (an Oklahoma based company that supplies, develops, services and manages electrical generation power plants around the world) in connection with power plant projects in Pakistan.  This recent article in The News International reports that Walters Power has “been cleared of any misconduct by the US Department of Justice.”  The article notes:

“Following [TI’s] complaint, the US Department of Justice launched a lengthy inquiry against WPIL […]. On Oct 31, 2012, it informed WPIL’s […] lawyers in the US that the inquiry was being closed as no evidence of wrongdoing could be found against the companies. The clearance letter, a copy of which is available with The News, said: “Over the past several months, your client, Walters Power International Ltd., has responded to a number of inquires by the Department of Justice, Criminal Division, Fraud Section, into possible violations of the Foreign Corrupt Practices Act. You have also responded to inquiries on behalf of Pakistan Power Resources, LLC, and Walters Power International, LLC.  As you are aware, the Supreme Court of Pakistan issued an order on March 30, 2012, that declared the country’s rental power plant contracts void ab initio. Our review of that order and related pleadings has revealed no allegations of bribery in connection with those contracts. In addition, on July 24, 2012, Pakistan’s National Accountability Bureau closed its case regarding Walters Power noting that “there remains no basis for further proceedings about the Company.”  Finally, Transparency International Pakistan, which publicly referred this matter to the US Department of Justice, has provided no evidence of bribery in connection with the RPP contracts in response to our request for further information.  Based upon our investigation and the information that has been made available to us to date, we presently do not intend to take any enforcement action and are closing our inquiry into this matter.  If, however, additional information or evidence should be made available to us in the future, we may reopen our inquiry.”

The article concludes as follows.

“Interestingly, WPIL […] sat on this letter issued by the US Department of Justice for over a year. When asked why this letter had not been made public for so long, a spokesman for WPIL said: “We cooperated unreservedly with the impartial and unimpeachable investigation of the US Department of Justice and are satisfied with the results. The findings of the US Department of Justice were shared with all shareholders and financial institutions but not made public for fear that this might be misconstrued as a rebuke by the now former chief justice of Pakistan.” He added that the Washington inquiry found no evidence of wrongdoing on the part of either company, contrary to popular misconceptions within Pakistan.”

“Foreign Official” Brain Teaser

As noted in this recent Wall Street Journal article, China State Construction Engineering Corp. (the largest home builder in the world), “is making its first acquisition in the U.S. market through its American subsidiary, as the company continues its aggressive push into overseas markets. China Construction America, the U.S. subsidiary, … agreed to acquire Manhattan-based Plaza Construction for an undisclosed sum.”  As noted in the article, “Plaza Construction mainly provides construction management and consulting services in places including New York, Florida, California and Washington, D.C.”

Congress never intended for employees of state-owned or state-controlled enterprises (SOEs) to be “foreign officials” under the FCPA – see here for my “foreign official” declaration – but given the DOJ and SEC’s “foreign official” interpretations, post-acquisition are Plaza Construction employees now Chinese “foreign officials?”

Quotable

World Bank Group President Jim Yong Kim recently stated as follows:

“I’d like to make clear why fighting corruption is a critical priority for me personally, and for the entire World Bank Group:  Every dollar that a corrupt official or a corrupt business person puts in their pocket is a dollar stolen from a pregnant woman who needs health care; or from a girl or a boy who deserves an education; or from communities that need water, roads, and schools. Every dollar is critical if we are to reach our goals to end extreme poverty by 2030 and to boost shared prosperity.  Let’s not mince words: In the developing world, corruption is public enemy number one. We will never tolerate corruption, and I pledge to do all in our power to build upon our strong fight against it.”

Reading Stack

The most recent edition of the always-informative Debevoise & Plimpton FCPA Update is here.  As to the recent Weatherford settlement, the Update states as follows.

“The $152 million in fines and penalties paid by Weatherford make it the eighth largest FCPA settlement in history. Although the monetary resolution is objectively large, comparing it to the monetary resolution in another recent enforcement action points to the difficulty of ascertainting the logic of penalty determinations.

[…]

Beyond the lack of transparency in the calculations that led to the financial resolution – a recurring feature of settled FCPA matters – the Weatherford settlement, like other recent settlements, is a disposition in which facts are included in the allegations or information without an explanation as to why they are relevant, potentially creating even more confusion as to what is or is not acceptable from the enforcement agencies’ point of view.”

For the recent post titled “FCPA Settlements Have Come a Long Way In a Short Amount of Time,” see here.

As to the recent Corruption Perception Index scores recently released by Transparency International (see here for the prior post), the FCPA Update rightly notes as follows.

“[W]hile companies subject to the FCPA, the UKBA, or other transnational anti-bribery regimes should continue to pay heed to the CPI, those seeking most efficiently to assess compliance risks also need to assess such matters as: (1) sector risk; (2) business model risk (including the degree to which the firm relies on third parties and the nature of controls over their activities); and (3) the nature and scope of government interactions, not only in connection with winning sales from government customers but also in obtaining zoning and building permits, tax clearances, customs rulings, currency transaction permissions, investment and financing approvals, and a range of other daily decisions from government actors. Firms with business risks associated with non-compliance such as expiring patents, excess capacity, disproportionate sales-based compensation, and limited oversight over sales and supply chain personnel, may well have significant corruption risks even in nations ranked highly in the CPI.”

*****

A good weekend to all.

 

Of Note From The Weatherford Enforcement Action

By on December 3, 2013 in Internal Controls, Iraq Oil For Food, Panalpina, Weatherford International

This previous post went long and deep as to the Weatherford International enforcement action.  This post continues the analysis by highlighting additional notable issues.

Why Do FCPA Violations Occur?

The question has been explored numerous times on this site (see here for instance).

Why do Foreign Corrupt Practices Act violations occur?

Do companies subject to the FCPA do business in foreign markets: (i) intent on engaging in bribery as a business strategy; or (ii) subject to difficult business conditions, trade distortions and barriers which create conditions in which harassment bribery flourishes.

As Joseph Covington (a former DOJ FCPA Unit Chief) commented in this prior guest post, he has “rarely seen [companies subject to the FCPA] affirmatively offering bribes in the first instance.”  Rather, Covington observed that companies doing business in international markets are “reacting to a world not of their making” and that “as the world shrinks companies who seek to do the right thing can’t help but confront corrupt officials – as customers, regulator and adjudicators – and confront them often.”

Consider the allegations against Weatherford Services Ltd. in Angola.

Per the DOJ’s allegations, if the company wanted a well screens business in Angola, it needed to have a local sponsor.  That trade distortion and barrier funneled Weatherford into a situation in which alleged “foreign officials” were given the ability to suggest the local partner(s) … and the rest is history as they say.

Per the DOJ’s other Angola allegations, even if Weatherford wanted to do business with non-governmental customers in Angola, an alleged “foreign official” was given the ability under Angolan law to approve the business arrangement.  The alleged “foreign official” demanded a bribe … and the rest is history as they say.

The above discussion should not be interpreted as excusing Weatherford’s alleged conduct, but it is certainly relevant to addressing the key question of why do FCPA violations occur.

As highlighted in this recent post, the root causes of much bribery and corruption are trade barriers and distortions.  Simply put, trade barriers and distortions create bureaucracy. Bureaucracy creates points of contact with foreign officials. Points of contact with foreign officials create discretion. Discretion creates the opportunity for a foreign official to misuse their position by making demand bribes.

[Note:  the original version of this post discussed the Swiss Freight Forwarding Agent identified in both the DOJ and SEC resolution documents as being Panalpina.  A knowledgeable source has informed me that Panalpina was not the Swiss Freight Forwarding Agent identified in the resolution documents]

The Last Iraq Oil for Food Enforcement Action?

One circumstance that has contributed to the bulk of FCPA enforcement activity in recent years was the Iraq Oil for Food Program (see here for the statistics).  As noted in this July 2012 post, with the exception of the then-pending Weatherford action, Iraq Oil for Food Program enforcement actions had largely run their course.

The Weatherford enforcement action was the only Iraq Oil for Food related enforcement action since the April 2011 enforcement action against Johnson & Johnson (see here for the prior post).

Will the Weatherford action be the last Iraq Oil for Food related enforcement action?

Are a Significant Percentage of Issuers Engaged in Criminal Acts?

The question posed is the same as in this prior post.

Does the DOJ really believe that a significant percentage of issuers are engaged in criminal acts?

The DOJ has stated that non-prosecution and deferred prosecution agreements “benefit the public and industries by providing guidance on what constitutes improper conduct.”  (See here).

With that in mind, in the Weatherford action the DOJ alleged, in support of criminal FCPA internal controls violations, in pertinent part that Weatherford:

“failed to institute effective internal accounting controls, including corruption-related due diligence on appropriate third parties and  business transactions, limits of authority, and documentation requirements”

“did not have adequate internal accounting controls and processes in place that effectively evaluated business transactions, including acquisitions and joint ventures, for corruption risks and to investigate those risks when detected”

“did not have an effective internal accounting control system for gifts, travel, and entertainment.  In practice, expenses were not typically adequately vetted to ensure that they were reasonable, bona fide, or properly documented”

“did not have a dedicated compliance officer or compliance personnel” and “although [the Company] promulgated an anti-corruption policy that it made available on its internal website, it did not translate that policy into any language other than English, and it did not conduct anti-corruption training”

If the DOJ believes that each of the above constitutes a criminal violation of the internal controls provisions, then a significant percentage of issuers are engaged in criminal acts as survey after survey indicates that a significant percentage of companies, including issuer’s subject to the FCPA’s internal controls provisions, fail to do such things.

The DOJ’s allegations in the Weatherford enforcement action are all the more notable given that the time period relevant to the conduct at issue was generally prior to 2008.  Is the DOJ suggesting that nearly every issuer during this time period was engaged in criminal acts given that issuers during that time period likely failed to engage in all of the compliance practices identified in the Weatherford enforcement action?

In Depth On The Weatherford Enforcement Action

By on December 2, 2013 in 2013 Enforcement Actions, Albania, Algeria, Angola, Anything of Value, Congo, Deferred Prosecution Agreements, Demand for Bribes, Distributor Issues, DOJ Enforcement Action, FCPA Related Charges, Foreign Issuers, Foreign Non-Issuer Company, Internal Controls, Iraq Oil For Food, Joint Venture, Monitor, Oil and Gas Industry, Panalpina, SEC Enforcement Action, Travel and Entertainment, Weatherford International

Last week, the DOJ and SEC announced (here and here) that Switzerland-based oil and gas services company Weatherford International agreed to resolve a Foreign Corrupt Practices Act enforcement action based primarily on alleged conduct by its subsidiaries in Angola, the Middle East, and in connection with the Iraq Oil for Food program.  The enforcement action has been expected for some time (as noted in this prior post, in November the company disclosed that it had agreed in principle to the settlement announced last week).

The enforcement action involved a DOJ criminal information against Weatherford Services Ltd. resolved via a plea agreement, a criminal information against Weatherford International Ltd. (“Weatherford”) resolved via a deferred prosecution agreement, and a SEC settled civil complaint against Weatherford.  [Note, the SEC enforcement action also alleged violations of the books and records and internal controls provisions in regards to commercial transactions with various sanctioned countries in violation of U.S. sanction and export controls laws.  The DOJ – or other government entities – also alleged such conduct, but in resolution documents separate and apart from the FCPA resolution documents highlighted below].

Weatherford agreed to pay approximately $153 million to resolve its alleged FCPA scrutiny ($87 million to resolve the DOJ enforcement action and $66 million to resolve the SEC enforcement action).  The Weatherford action is the 8th largest FCPA settlement of all-time (see here for the top ten FCPA settlements).

DOJ

Weatherford Services Ltd.

Weatherford Services (“WSL”), incorporated in Bermuda, is identified as a wholly-owned subsidiary of Weatherford International that “managed most of Weatherford’s activities in Angola.”

The conduct at issue involved “two schemes to bribe Sonangol officials to obtain or retain business.”

Sonangol is alleged to be a “government-owned and controlled corporation” of the Angolan government. The information specifically states:

“Sonangol was the sole concessionaire for exploration of oil and gas in Angola, and was solely responsible for the exploration, production, manufacturing, transportation, and marketing of hydrocarbons in Angola.  Sonangol was run by a board of directors established by governmental decree in 1999.  Each member of the board was also appointed or renewed in their position by governmental decree.  Because Sonangol was wholly owned, controlled, and managed by the Angolan government, it was an ‘agency’ and ‘instrumentality’ of a foreign government and its employees were ‘foreign officials'” under the FCPA.

According to the information, the first bribery scheme “centered around a joint venture which WSL and other Weatherford employees established with two local Angolan entities.”  The information alleges that “Angolan Officials 1, 2, and 3 (described as “high-level, senior officials of Sonangol” with influence over contracts) controlled and represented one of the entities” and that a “relative of Angolan Official 4 (described as a “high-level, senior official of Angola’s Ministry of Petroleum” with influence over contracts entered into by the Angolan government) controlled and represented the other.”

The information alleges that the “joint venture began because WSL sought a way to increase its share of the well screens market in Angola” and states that “WSL learned that Sonangol was encouraging oil services companies to establish a well screens manufacturing operations in Angola with a local partner.”  Thereafter, “a high-level Weatherford executive sent Angolan Official 1 a letter expressing Weatherford’s intent to form a well screens manufacturing operation in Angola with a local partner and requesting Sonangol’s participation in the process.”

The information next alleges that “Angolan Official 1 advised WSL that Sonangol had selected local partners for WSL and that Sonangol would support the joint venture.”  According to the information:

“… the parties agreed that two local Angolan entities (“Angolan Company A” and Angolan Company B”) would be WSL’s joint venture partners.  Angolan Officials 1, 2 and 3 conducted all business with WSL on behalf of Angolan Company A.  Angolan Company B was owned in part by the daughter of Angolan Official 4.”

According to the information, “certain WSL and Weatherford employees knew from the outset of discussions regarding the joint venture that the members of Angolan Company A included a Sonangol employee and Angolan Official 3’s wife, while Angolan Company B’s members included Angolan Official 4’s daughter and son-in-law.”

According to the information, “prior to entering into the joint venture, neither Weatherford nor WSL conducted any meaningful due diligence of either joint venture partner.”  The information specifically alleges that Weatherford Legal Counsel A (a citizen of the U.S. and a Senior Corporate Counsel at Weatherford from 2004 to 2008) reached out to a law firm “to discuss whether partnering with the Angolan companies raised issues under the FCPA,” but that Weatherford Legal Counsel A “did not follow the advice” that had been provided to him.  In addition, the information alleges that Weatherford Legal Counsel A “falsely told [another] outside counsel that the joint venture had been vetted and approved by another outside counsel, when, in fact, no outside law firm ever conducted such vetting or gave such approval.”

The information alleges that WSL signed the final joint venture agreement with Angolan Company A and Angolan Company B in 2005, but that “neither Angolan Company A nor Angolan Company B provided any personnel or expertise to the joint venture, nor did they make any capital contributions.”

According to the information:

“In 2008, Angolan Company A and Angolan Company B received joint venture dividends for 2005 and 2006, including on revenues received in 2005 [before the joint venture agreement was executed].  […]  In total, the joint venture paid Angolan Company A $689,995 and paid Angolan Company B $136,901.”

The information alleges that “prior to the distribution of joint venture dividends, WSL executives knew that Angolan officials were directing the distribution of those dividends.”

According to the information, “WSL benefitted from the joint venture arrangement” in the following ways: “Sonangol began taking well screens business away from WSL’s competitors, even when a competitor was supplying non-governmental companies, and awarding it to WSL”  and “WSL received awards of business for which its bids were, by its own admission, not price competitive.”

The second bribery scheme alleged in the information relates to the “Cabinda Region Contract Renewal” in which WSL allegedly “bribed Angolan Official 5 (described as “a Sonangol official with decision-making authority in Angola’s Cabinda region”) so that he would approve the renewal of a contract under which WSL provided oil services to a non-governmental oil company in the Cabinda region of Angola.”  The information alleges that even though the contract was between WSL and a non-governmental company, Angolan law required “that it be approved by Sonangol before being finalized” and that “Angolan Official 5 was the Sonangol official responsible for approving or denying the renewal contract.”

The information alleges that Angolan Official 5 solicited the bribe and that “WSL executives agreed to pay the bribe Angolan Official 5 had demanded” even though a prior WSL Manager had refused to pay it.  According to the information, WSL made the payments to Angolan Official 5 through the Freight Forwarding Agent (described as a Swiss Company who provided freight forwarding and logistics services in Angola) who had previously paid bribes on behalf of WSL.”

As to the Freight Forwarding Agent, the information alleges that WSL retained the agent via a consultancy agreement in which the agent rejected a specific FCPA clause, but that “WSL and Weatherford acquiesced by removing the FCPA clause and inserting a clause requiring the Freight Forwarding Agent to ‘comply with all applicable laws, rules, and regulations issued by any governmental entity in the countries of business involved.”  According to the information, “WSL generated sham purchase orders for consulting services the Freight Forwarding Agent never performed, and the Freight Forwarding Agent, in turn, generated sham invoices for those non-existent services.”  The information alleges that the Freight Forwarding Agent passed money on to Angolan Official 5.

Based on the above, the information charges WSL with one count of violating the FCPA’s anti-bribery provisions and specifically invokes the dd-3 prong of the statute applicable to “persons” other than issuers or domestic concerns.

Pursuant to the plea agreement, WSL agreed to pay a criminal fine in the amount of $420,000.

Weatherford International

The Weatherford information largely focuses on the company’s internal accounting controls and alleges as follows.

“Weatherford, which operated in an industry with a substantial corruption risk profile, grew its global footprint in large part by purchasing existing companies, often themselves in countries with high corruption risks.  Despite these manifest corruption risks, Weatherford knowingly failed to establish effective corruption-related internal accounting controls designed to detect and prevent corruption-related violations, including FCPA violations, prior to 2008.

Prior to 2008, Weatherford failed to institute effective internal accounting controls, including corruption-related due diligence on appropriate third parties and business transactions, limits of authority, and documentation requirements.  This failure was particularly acute when it came to third parties, including channel partners, distributors, consultants, and agents.  Weatherford failed to establish effective corruption-related due diligence on third parties with interaction with government officials, such as appropriately understanding a given third party’s ownership and qualifications, evaluating the business justification for the third party’s retention in the first instance, and establishing and implementing adequate screening of third parties for derogatory information.  Moreover, Weatherford failed to implement effective controls for the meaningful approval process of third parties.  Weatherford also did not require, in practice, adequate documentation supporting retention and in support of payments to third parties, such as appropriate invoices and purchase orders.

Prior to 2008, Weatherford did not have adequate internal accounting controls and processes in place that effectively evaluated business transactions, including acquisitions and joint ventures, for corruption risks and to investigate those risks when detected.  Moreover, following the establishment of joint ventures and certain other business transactions, Weatherford did not appropriately implement its policies and procedures to ensure an effective internal accounting control environment through proper integration.

Prior to 2008, Weatherford also did not have an effective internal accounting control system for gifts, travel, and entertainment.  In practice, expenses were not typically adequately vetted to ensure that they were reasonable, bona fide, or properly documented.

These issues were exacerbated by the fact that, prior to 2009, a company as large and complex as Weatherford – with its substantial risk profile – did not have a dedicated compliance officer or compliance personnel.  Although Weatherford promulgated an anti-corruption policy that it made available on its internal website, it did not translate that policy into any language other than English, and it did not conduct anti-corruption training.

Prior to 2008, Weatherford did not have an effective system for investigating employee reporting of ethics and compliance violations.  If an employee’s ethics questionnaire response indicated an awareness of payments or offers of payments to foreign officials or of undisclosed or unallocated funds, Weatherford did not have a protocol in place to perform any further investigation into the alleged corruption.  As a matter of practice, in fact, Weatherford did not conduct additional investigation of such allegations.  Prior to 2004, Weatherford did not require any employee to complete any kind of ethics questionnaire.

Further, Weatherford lack effective mechanisms to control its many foreign subsidiaries’ activities to ensure that they maintained internal accounting controls adequate to detect, investigate, or deter corrupt payments made to government officials.”

Under the heading “corrupt conduct” the information alleges – in summary form – as follows:

“Due to Weatherford’s failure to implement such internal accounting controls, a permissive and uncontrolled environment existed within Weatherford in which employees of certain of its wholly owned subsidiaries in Africa and the Middle East were able to engage in various corrupt conduct over the course of many years, including both bribery of foreign officials and fraudulent misuse of the United Nations’ Oil for Food Program.”

Thereafter, the information contains nine paragraphs of allegations that track the Angola allegations in the WSL information.

In addition, the information contains allegations about another alleged “scheme, in the Middle East, from 2005 through 2011” in which “employees of another Weatherford subsidiary [Weatherford Oil Tool Middle East Limited (WOTME) – described as a British Virgin Islands corporation headquartered in Dubai that was a wholly-owned subsidiary of Weatherford and responsible for managing most of Weatherford’s activities in North Africa and the Middle East] awarded improper ‘volume discounts’ to a distributor who supplied Weatherford products to a government-owned national oil company, believing those discounts were being used to create a slush fund with which to make bribe payments to decision makers at the national oil company.”

According to the information, “officials at the national oil company had directed WOTME to sell goods to the company through this particular distributor” and the information alleges:

“Prior to entering into the contract with the distributor, neither WOTME nor Weatherford conducted any due diligence on the distributor, despite (a) the fact that the Distributor would be furnishing Weatherford goods directly to an instrumentality of a foreign government; (b) the fact that a foreign official had specifically directed WOTME to contract with that particular distributor, and (c) the fact that executives at WOTME knew that a member of the country’s royal family had an ownership interest in the distributor.”

According to the information, “between 2005 and 2011, WOTME paid approximately $15 million in volume discounts to the distributor” that were “recorded in WOTME’s general ledger under a heading titled “Volume Discount Account.”

The information next contains four paragraphs of allegations relevant to the Iraq Oil for Food program and how Weatherford’s “failure to implement effective internal accounting controls also permitted corrupt conduct relating” to the program.

In a summary allegation, under the heading “Profits from the Corrupt Conduct in Africa and the Middle East” the information states:

“Due to Weatherford’s failure to implement internal accounting controls, an environment existed within Weatherford in which employees of certain of its wholly owned subsidiaries in Africa and the Middle East were able to engage in various corrupt business transactions, which conduct earned profits of $54,486,410, which were included in the consolidated financial statements that Weatherford filed with the SEC.”

Based on the above conduct, the information charges Weatherford with violating the FCPA’s internal controls provisions – specifically – that Weatherford knowingly:

“(a) failed to implement, monitor, and impose internal accounting controls and to maintain their effectiveness; (b) failed adequately to train key personnel to implement internal accounting controls to detect and avoid illegal payments and to identify and deter violations of those controls; (c) failed to monitor and control the financial transactions of its subsidiaries, in a manner that provided reasonable assurances that its subsidiaries’ transactions were executed in accordance with management’s general and specific authorization; (d) failed to monitor and control the financial transactions of its subsidiaries, in a manner that provided reasonable assurances that its subsidiaries’ transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and any other criteria applicable to such statements; (e) failed to maintain a sufficient system for the selection and approval of, and performance of corruption-related due diligence on, third party business partners and joint venture partners, which, in turn, permitted corrupt conduct to occur at subsidiaries; (f) failed to investigate appropriately and respond to allegations of corrupt payments and discipline employees involved in making corrupt payments; (g) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed, including training employees, and performing monitoring to detect criminal conduct; (h) failed to maintain internal accounting controls sufficient to prevent a subsidiary from entering into a joint venture agreement to funnel improper benefits to, and receive preferential treatment from, foreign government officials; (i) failed to maintain internal accounting controls sufficient to prevent a subsidiary from making payments to a channel partner not authorized by contract knowing there was a substantial likelihood that those payments were used to make corrupt payments; and (j) failed to maintain internal accounting controls sufficient to prevent kickbacks paid to the government of Iraq by a subsidiary.”

The charge against Weatherford was resolved via a DPA in which the company admitted, accepted, and acknowledged that it was responsible for the acts of its officers, directors, employees, and agents as charged in the information.

The DPA has a term of three years and under the heading “relevant considerations” it states:

“The Department enters into this Agreement based on the individual facts and circumstances presented by this case and the Company.  Among the facts considered were the following:  (a) the Company’s cooperation has been, on the whole, strong, including conducting an extensive worldwide internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department, including the production of more than 3.8 million pages of data; (b) the Company has engaged in extensive remediation, including terminating the employment of officers and employees responsible for the corrupt misconduct of its subsidiaries, establishing a Compliance Officer position that is a member of the Company’s executive board, as well as a compliance office of approximately 38 full-time compliance professionals, including attorneys and accountants, that the Compliance Officer oversees, conducting more than 30 anti-corruption compliance reviews in many of the countries in which it operates, enhancing its anti-corruption due diligence protocol for third-party agents and consultants, and retaining an ethics and compliance professional to conduct an assessment of the Company’s ethics and compliance policies and procedures designed to ensure compliance with the FCPA and other applicable anti-corruption laws; (c) the Company has committed to continue to enhancing its compliance program and internal accounting controls …; (d) the Company has already significantly enhanced, and is committed to continue to enhance, its compliance program and internal controls …; and (e) the Company has agreed to continue to cooperate with the Department in any ongoing investigation …”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $87.2 million to $174.4 million.  The DPA states that the monetary penalty of $87.2 million “is appropriate given the facts and circumstances of this case, including the nature and extent of the Company’s criminal conduct, the Company’s extensive cooperation, and its extensive remediation in this matter.”

The DPA specifically states that “any criminal penalties that might be imposed by the Court on WSL in connection with WSL’s guilty plea to a one-count Criminal Information charging WSL with violations of the FCPA, and the plea agreement entered into simultaneously, will be deducted from the $87.2 million penalty agreed to under this Agreement.”

Pursuant to the DPA, Weatherford agreed to review its existing internal controls, policies and procedures regarding compliance with the FCPA and other applicable anti-corruption laws.   The specifics are detailed in Attachment C to the DPA.  The DPA also requires Weatherford to engage a corporate compliance monitor for ”a period of not less than 18 months from the date the monitor is selected.”  The specifics, including the Monitor’s reporting obligations to the DOJ, are detailed in Attachment D to the DPA.

As is common in FCPA corporate enforcement actions, the DPA contains a “muzzle clause” prohibiting Weatherford or anyone on its behalf from “contradicting the acceptance of responsibility by the company” as set forth in the DPA.

In the DOJ’s release, Acting Assistant Attorney General Mythili Raman stated:

“Effective internal accounting controls are not only good policy, they are required by law for publicly traded companies – and for good reason.  This case demonstrates how loose controls and an anemic compliance environment can foster foreign bribery and fraud by a company’s subsidiaries around the globe.  Although Weatherford’s extensive remediation and its efforts to improve its compliance functions are positive signs, the corrupt conduct of Weatherford International’s subsidiaries allowed it to earn millions of dollars in illicit profits, for which it is now paying a significant price.”

Valerie Parlave, Assistant Director in Charge of the FBI’s Washington Field Office, stated:

“When business executives engage in bribery and pay-offs in order to obtain contracts, an uneven marketplace is created and honest competitor companies are put at a disadvantage.  The FBI is committed to investigating corrupt backroom deals that influence contract procurement and threaten our global commerce.”

SEC

The SEC’s complaint (here) is largely based on the same core set of facts alleged in the above DOJ action.

In summary fashion, the complaint alleges:

“Between at least 2002 and July 2011, Weatherford and its subsidiaries authorized bribes and improper travel and entertainment intended for foreign officials in multiple countries to obtain or retain business or for other benefits. Weatherford and its subsidiaries also authorized illicit payments to obtain commercial business in Congo and authorized kickbacks in Iraq to obtain United Nations Oil for Food contracts.  Weatherford realized over $59.3 million in profits from business obtained through the use of illicit payments.”

As to the additional Congo allegations, the complaint states:

“In addition to bribery schemes involving Angolan government officials, WSL made over $500,000 in commercial bribe payments through the Swiss Agent to employees of a commercial customer, a wholly-owned subsidiary of an Italian energy company, between March 2002 and December 2008.

[…]

WSL mischaracterized the bribe payments as legitimate expenses on its books and records. Bank account records and a U.S. brokerage account statement show that among the recipients were two employees of the commercial customer who were responsible for awarding contracts to WSL. Weatherford obtained profits of$1,304,912 from commercial business in Congo relating to payments made by Swiss Agent.”

The SEC complaint also contains allegations concerning conduct in Algeria and Albania.

Under the heading “Improper Travel and Entertainment in Algeria,” the complaint alleges:

Weatherford also provided improper travel and entertainment to officials of Sonatrach, an Algerian state-owned company, that were not justified by a legitimate business purpose. The improper travel and entertainment to Sonatrach officials include:

• June 2006 trip by two Sonatrach officials to the FIFA World Cup soccer tournament in Hanover, Germany;

• July 2006 honeymoon trip of the daughter of a Sonatrach official; and

• October 2005 trip by a Sonatrach employee and his family to Jeddah, Saudi Arabia, for religious reasons that were improperly booked as a donation

In addition, on at least two other occasions, Weatherford provided Sonatrach officials with cash sums while they were visiting Houston. For example, in May 2007, Weatherford paid for four Sonatrach officials, including a tender committee official, to attend a conference in Houston. Prior to the trip, a Weatherford finance executive sent an email to a Weatherford officer requesting $10,000 cash to be advanced to a WOTME employee without providing any explanation tor the cash advance. The request was approved and a portion of the funds was provided to the tender committee official. There is no evidence the cash was used for legitimate business or promotional expenses. In connection with a December 2007 trip by three Sonatrach officials traveling to Houston, a Weatherford finance employee questioned the propriety of a WOTME employee’s request for a $14,000 cash advance in connection with the trip.  The finance employee’s concern was disregarded and the request was ultimately approved at high levels within Weatherford and a portion of the funds was provided to the officials.  In total, Weatherford spent $35,260 on improper travel, entertainment and gifts for Algerian officials from May 2005 through November 2008 that were recorded in the company’s books and records as legitimate expenses.”

Under the heading “Improper Payments to Albanian Tax Authorites,” the complaint alleges:

“From 2001 to 2006, the general manager and financial manager at a Weatherford Italian subsidiary, WEMESP A, misappropriated over $200,000 of company funds, a portion of which was improperly paid to Albanian tax auditors. WEMESPA’s general manager and financial manager misappropriated the funds by taking advantage of Weatherford’s inadequate system of internal accounting controls. They misreported cash advances, diverted payments on previously paid invoices, misappropriated government rebate checks and received reimbursement of expenses that did not relate to business activities, such as golf equipment and perfume. 

[…]

In addition to the cash payments, in 2005, after a regime shift in Albania, the Country Manager provided three laptop computers for the tax director and two members of Albania’s National Petroleum Agency, which the WEMESPA executives approved and misrecorded in the books and records.”

Under the heading “Misconduct During the Investigation and Subsequent Remediation Efforts,” the complaint states:

“Certain conduct by Weatherford and its employees during the course of the Commission staffs investigation compromised the investigation. These activities involved the failure to provide the staff with complete and accurate information, resulting in significant delay. In one instance, the staff sought information concerning the Iraq Country Manager who signed letters agreeing to pay bribes to Iraqi officials during the Oil for Food Program. The staff was informed that the Country Manager was missing or dead when, in fact, he remained employed by Weatherford. In at least two instances, email was deleted by employees prior to the imaging of their computers. On another occasion, Weatherford failed to secure important computers and documents and allowed potentially complicit employees to collect documents subpoenaed by the staff.  Subsequent to the misconduct, Weatherford greatly improved its cooperation and engaged in remediation efforts, including disciplining employees responsible for the misconduct, establishing a high level Compliance Officer position, significantly increasing the size of its compliance department, and conducting numerous anti-corruption reviews in many of the countries in which it operates.”

Under the heading “Anti-Bribery Violations,” the complaint states in pertinent part:

“Weatherford’s conduct in the Middle East and Angola violated [the FCPA’s anti-bribery provisions]. From 2005 through 2011, Weatherford authorized $11.8 million in payments to national oil company officials through a distributor intended to wrongfully influence national oil company decision makers to obtain and retain business.  Weatherford also violated [the anti-bribery provisions] when it retained the Swiss Agent to funnel bribes to a Sonangol official to obtain the Cabinda contract. Weatherford similarly violated [the anti-bribery provisions] by bribing other Sonangol officials via the joint venture in return for contracts and preferential treatment.”

Under the heading “Failure to Maintain Books and Records,” the complaint states in pertinent part:

“Weatherford, directly and through its subsidiaries, also violated [the books and records provisions] when it made numerous payments and engaged in many transactions that were incorrectly described in the companys books and records. In the Middle East, for example, the money given to a distributor to be used as bribes was reflected in Weatherford‘s books and records as legitimate volume discounts. In Angola and Congo, payments to foreign officials and others were described as legitimate consulting fees rather than bribe payments.  Payments to Sonangol executives through the joint venture were misrecorded as legitimate dividend payments.”

Under the heading “Failure to Maintain Adequate Internal Controls,” the complaint states in pertinent part:

“Weatherford violated [the internal controls provisions] by failing to devise and maintain an adequate system of internal accounting controls.  The violations were widespread and involved conduct at Weatherford’s headquarters as well as at numerous subsidiaries. Executives, managers and employees throughout the organization were aware of the conduct, which lasted a decade.  Weatherford paid millions of dollars to consultants, agents and joint venture partners without adequate due diligence. Weatherford approved cash payments to Algerian officials traveling to Houston without any justification for the payments. Employees made payments to agents without regard to grants of authority and, on some occasions, without even receiving an invoice. In Italy, internal accounting controls were ineffective, allowing executives to embezzle and pay bribes for years.

In the Middle East, the company failed on several occasions to perform due diligence on the distributor it used, despite the fact that the agent was imposed upon them by a national oil company official and would be selling to a government entity. The use of large volume discounts was not routinely reviewed.  […] Weatherford also failed to provide FCPA … training.  While Weatherford did require certain employees to complete a yearly ethics questionnaire seeking instances of alleged misconduct, Weatherford failed to investigate or even review the responses.”

As noted in the SEC’s release, Weatherford agreed to pay approximately $65.6 million to the SEC, including an approximate $1.9 million penalty assessed in part for lack of cooperation early in the investigation.

In the SEC’s release, Andrew Ceresney (Co-Director of the SEC’s enforcement division) stated:

“The nonexistence of internal controls at Weatherford fostered an environment where employees across the globe engaged in bribery and failed to maintain accurate books and records.  They used code names like ‘Dubai across the water’ to conceal references to Iran in internal correspondence, placed key transaction documents in mislabeled binders, and created whatever bogus accounting and inventory records were necessary to hide illegal transactions.”

Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:

“Whether the money went to tax auditors in Albania or officials at the state-owned oil company in Angola, bribes and improper payments were an accustomed way for Weatherford to conduct business.  While the profits may have seemed bountiful at the time, the costs far outweigh the benefits in the end as coordinated law enforcement efforts have unraveled the widespread schemes and heavily sanctioned the misconduct.”

Joseph Warin (Gibson Dunn) represented Weatherford.

In this statement, Bernard Duroc-Danner (Weatherford’s Chairman, President and CEO) stated:

“This matter is now behind us. We move forward fully committed to a sustainable culture of compliance.  With the internal policies and controls currently in place, we maintain a best-in-class compliance program and uphold the highest of ethical standards as we provide the industry’s leading products and services to our customers worldwide.”

On the day of the enforcement action, Weatherford’s shares closed up approximately 1.2%.

Friday Roundup

By on November 8, 2013 in ADM, Bio-Rad, Double Standard, FCPA Inc., GlaxcoSmithKline, Layne Christensen, Voluntary Disclosure, Weatherford International

That’s just so fringe, where now?, the pulse of FCPA Inc., scrutiny alerts and updates, for the reading stack, and save the date.  It’s all here in the Friday Roundup.

That’s Just So Fringe

Many in the anti-corruption space have latched onto developments in other countries and carried forward the torch of reform.  Just goggle Anna Hazare’s hunger strike in India or discover the wealth of material written about marches and demonstrations in Brazil prior to Brazil’s bribery laws being amended.

Recently there was a march in Washington D.C., protesting, in part, government corruption.  (See here).  Why has there not been similar coverage in the anti-corruption space?  Where are those who otherwise carried forward the torch of reform?  Apparently the reaction is – when it happens here in the U.S. – well, that’s just so fringe.

Where Now?

As DOJ Deputy Assistant Attorney, John Burretta “oversaw the Criminal Division’s Fraud Section, among others, including the Fraud Section’s FCPA Unit.”  He also “supervised the preparation of the DOJ and SEC’s Resource Guide to the U.S. Foreign Corrupt Practices Act, issued in November 2012.”

Like most other DOJ policy leaders and FCPA enforcement attorneys with supervisory powers during this new era of FCPA enforcement, Burretta is now in the private sector as he recently joined Cravath as a partner.  (See here).  According to his Cravath bio, “his practice focuses on investigations and white collar criminal defense, including advising and representing clients in matters related to the FCPA” among other things.

The Pulse of FCPA Inc.

Few FCPA Inc. participants are publicy-traded companies.  Thus, it is often difficult to take the pulse of FCPA Inc. other than anecdotal information.

However, one FCPA Inc. participant that is publicly traded is FTI Consulting.  The company recently disclosed that revenues for the quarter in its relevant business segment increased nearly 2% compared to the prior year “due to higher services revenues primarily for investigations involving the Foreign Corrupt Practices Act and interest rate setting process concerning the London Interbank Offered Rate (“LIBOR”) …”.

It’s only one company, but with few FCPA Inc. datapoints publicly available, it is a relevant datapoint.

Scrutiny Alerts and Updates

Weatherford

Weatherford International recently disclosed as follows concerning its long-running FCPA scrutiny:

“During the quarter ended June 30, 2013, negotiations related to the oil-for-food and FCPA matters progressed to a point where we recognized a liability for a loss contingency that we believe is probable and for which a reasonable estimate can be made.  The Company estimates that the amount of this loss is $153 million and recognized a loss contingency equal to such amount in the quarter ended June 30, 2013.  Since our last 10-Q filing, substantial progress in the negotiations was made, and these negotiations have recently concluded. These negotiations have resulted in agreements with representatives of the DOJ and the SEC enforcement staff relating to terms and total payments to be made to government agencies relating to the oil-for-food and FCPA matters subject in each case to final review and approval by the DOJ and SEC Commission as well as judicial approval.  The agreements would require total payments to government agencies equal to the $153 million loss contingency that the Company recognized in the quarter ended June 30, 2013.  The agreements would also include (1) an agreement under which criminal prosecution for the Company would be deferred for three years and a plea agreement would impose a criminal conviction on one of the Company’s subsidiaries; (2) a requirement to retain, for a period of at least 18 months, an independent monitor responsible to assess the Company’s compliance with the terms of the agreement so as to address and reduce the risk of recurrence of alleged misconduct, after which the Company would continue to evaluate its own compliance program and make periodic reports to the DOJ and SEC; and (3) a requirement to maintain agreed compliance monitoring and reporting systems.  If final settlement terms differ from the agreements we have reached with DOJ and SEC representatives or if necessary approvals are not ultimately obtained, we could become subject to injunctive relief, disgorgement, fines, penalties, sanctions or imposed modifications to business practices that could adversely affect our results of operations.”

A $153 million FCPA settlement amount would be 8th largest of all time based on the current top ten settlement list.

Layne Christensen Co.

Layne Christensen Co. recently disclosed as follows concerning its long-running FCPA scrutiny:

“The Company is engaged in discussions with the DOJ and the SEC regarding a potential negotiated resolution of these matters. The Company believes that it is likely that any settlement will include both the payment of a monetary fine and the disgorgement of any improper benefits. In May 2013, the staff of the SEC orally advised the Company that they calculated the estimated benefits to the Company from allegedly improper payments, plus interest thereon, to be approximately $4.8 million, which amount was accrued by the Company as of April 30, 2013. Based on the results of the Company’s internal investigation, an analysis of the resolution of recent and similar FCPA resolutions, the Company currently estimates a potential settlement range for resolving these matters (including the amount of a monetary penalty and the disgorgement of any improper benefits plus and interest) of $10.4 million to $16.0 million. The Company has increased its reserve for the settlement of these matters from $4.8 million to $10.4 million, representing the low end of this range.  At this time, we can provide no assurances as to whether the Company will be able to settle for an amount equal to its current reserve or within its estimated settlement range or whether the SEC or DOJ will accept voluntary settlement terms that would be acceptable to the Company. Furthermore, the Company cannot currently assess the potential liability that might be incurred if a settlement is not reached and the government was to litigate the matter. As such, based on the information available at this time, any additional liability related to this matter is not reasonably estimable. The Company will continue to evaluate the amount of its liability pending final resolution of the investigation, and any related settlement discussions with the government; the amount of the actual liability for any fines, penalties, disgorgement or interest that may be recorded in connection with a final settlement could be significantly higher than the liability accrued to date.  Other than the indication of the estimated disgorgement amount noted above, the Company has not received any proposed settlement offers from the SEC or DOJ and there can be no assurance that its discussions with the DOJ and SEC will result in a final settlement of any or all of these issues or, if a settlement is reached, the timing of any such settlement or that the terms of any such settlement would not have a material adverse effect on the Company.”

ADM

ADM recently disclosed as follows concerning its long-running FCPA scrutiny.

“The Company has completed its internal review and is engaged in discussions with the DOJ and SEC to resolve this matter. In connection with this review, government agencies could impose civil penalties or criminal fines and/or order that the Company disgorge any profits derived from any contracts involving inappropriate payments. Included in selling, general, and administrative expenses for the nine months ended September 30, 2013 were charges for the Company’s current estimate of potential disgorgement, penalties, and fines that may be paid by the Company in connection with this matter of $54 million. As of September 30, 2013, the estimated loss provision liability of $54 million is included in accrued expenses and other payables in the Company’s consolidated balance sheet. These events have not had, and are not expected to have, a material impact on the Company’s business or financial condition.”

GSK

In my first GSK post over the summer, I posed the question – based on GSK disclosures and public statements – whether GSK is the victim of rogue employee conduct?

According to this U.K. Independent article:

“GlaxoSmithKline, the British drug company at the heart of a bribery investigation in China, is likely to avoid a company-wide charge for  allegedly funneling up to £300m in kickbacks to doctors and government officials.  Instead, police are likely to charge some of its Chinese executives, according to reports citing legal and industry sources.  Such an outcome would see Chinese police drop  claims made in September that corruption was co-ordinated at a company level.  […] The [Chinese] police investigation into GSK is likely to be concluded around the end of November or in December, said a person with direct knowledge of the probe. The sources noted it was difficult to predict what Chinese authorities would ultimately do. But the most likely legal scenario was that they would charge Chinese GSK executives, said the person with direct knowledge of the investigation and two other sources familiar with the matter. The sources declined to be identified because of the sensitivity of the case. Indeed, the Ministry of Public Security had tried to find evidence tying GSK   as a legal entity to the alleged wrongdoing, but it was unlikely authorities would be able to prove its involvement at a corporate level, said the person with direct knowledge of the investigation.” (emphasis added).

Bio-Rad Labs

Bio-Rad recently disclosed that it recorded “an accrued expense of $20 million in connection with the Company’s initial efforts to resolve the previously disclosed investigation of the Company in connection with the United States Foreign Corrupt Practices Act.”

For The Reading Stack

The always informative Miller & Chevalier quarterly update is out.  (See here for the Autumn 2012 FCPA Review).

From an article titled “The ‘Mens Rea’ Component Within the Issue of the Over-Federalization of Crime” by John Baker and William Haun in Engage, a Federalist Society publication.

“Designed to prohibit bribery of foreign officials for any business advantage, the [FCPA’s] breadth allows the federal government to hold businesses liable for actions by rogue agents.  As former U.S. Attorney General Michael Mukasey and Jones Day partner James Dunlop note, this “adds unnecessary uncertainty and opens businesses to massive, largely unavoidable, liability, with few offsetting benefits.”  The statute’s broad language can transgress the intent of Congress.  In discussing the example of Wal-Mart, Professor Mike Koehler has shown that Congress had no desire to apply the Act against “grease payments” to clerical employees, but that the backroom nature of FCPA enforcement gives that congressional limitation uncertain relevance. The reluctance of corporations to go to trial minimizes judicial review of the FCPA’s use. As a result, the FCPA investigations have developed a “prosecutorial common law,” allowing the Department of Justice (DOJ) to impose burdensome compliance costs without having to prove in court that criminal activity has actually occurred or is likely to occur.  Companies spend millions to “comply” with requirements possessing an unknown reach.  In remarks on the FCPA, former U.S. Attorney General Mukasey observed that, given how few FCPA cases actually see a court room, “there is a whole body of law being developed” in prosecutor’s offices through negotiated FCPA settlements with major companies. Even if the settlements are reasonable, as General Mukasey noted, they do not provide any clarity or consistency necessary to “demystify” an ordinary person’s responsibilities under the law.  He noted that DOJ and the business community reached an understanding on some aspects of the FCPA.  Such agreements, however, should not serve as the functional equivalent of legislation.  It is the obligation of Congress to establish clear mens rea requirements for the FCPA and other statutes, not the executive via piecemeal prosecution.”

What’s one takeaway point from the recent Diebold enforcement actions?  According to Richard Smith (Norton Rose Fulbright) in this recent Law360 article:

“The Diebold settlements underscore the need for companies to fully evaluate whether voluntary disclosure is in the company’s best interest. Although U.S. authorities may be willing to reward companies for self-disclosing FCPA issues — indeed, the DOJ specifically stated in the DPA that it credited Diebold for making such a disclosure — the positive credit received is not always clear. The ultimate financial and operational burden on a company may, in any given instance, outweigh credit received.  Based on previous enforcement action settlements, some companies may have assumed that voluntary disclosure assists the company in avoiding the imposition of a compliance monitor. In light of the Diebold settlements, however, companies assessing the option of self-disclosure must consider the real possibility that doing so may not shield them from the increased costs and scrutiny associated with the retention of independent compliance monitors.”

Save The Date

On December 4th in Washington, D.C., George Washington University Law School is hosting a full-day symposium titled “The International Fight Against Corruption: Are the OECD and UN Conventions Achieving their Objectives?”  To learn more about the event, see here.

Friday Roundup

By on August 2, 2013 in AB InBev, Avon, Baxter International, ENI, FCPA Statistics, GlaxcoSmithKline, Internal Investigation Issues, Lingua Franca, Multimedia, Origins of FCPA Actions, Pharmaceutical Industry, Wal-Mart, Weatherford International, Year in Review 2013

Scrutiny alerts, misleading yet interesting, the flip side, and for the reading stack.  It’s all here in the Friday roundup.

Scrutiny Updates

Baxter International

The Wall Street Journal reports that Baxter International “investigated a joint venture in China and discovered expense violations there last year.”  According to the article, Baxter took action after employees of Guangzhou Baxter Qiaoguang Healthcare Co., reported problems internally in July 2012.  According to the article, similar allegations were made in July 2013 that “employees at Baxter’s joint venture paid travel agencies for arranging conferences between 2011 and 2012 for Chinese health officials.”  According to the article, “employees at several hotels identified as the conference sites in the documents said they had no records of the conferences.”

ENI

IntelliNews report here:  “ENI SpA  chief executive Paolo Scaroni will become a target of a major US Foreign Corruption Practices Act investigation by the US Department of Justice and the US Securities Exchange Commission in connection with an Algerian bribery scandal, [Italian] judicial sources said.” Among other things, the article states: “Judicial sources in Milan said they have compelling evidence Scaroni had personal knowledge of the bribe paid by SAIPEM and that SAIPEM is directly controlled by ENI and its management.”

As noted in this previous post, Eni has ADRs registered with the SEC.  In 2010, Eni resolved (see here) an SEC FCPA enforcement action concerning Bonny Island, Nigeria conduct.  In resolving the action, Eni consented to the entry of a court order permanently enjoining it from violating the FCPA’s books and record and internal controls provisions.

Weatherford

The company recently disclosed as follows concerning its long-lasting FCPA scrutiny.

“During the quarter ended June 30, 2013, negotiations related to the oil-for-food and FCPA matters progressed to a point where we recognized a liability for a  loss contingency that we believe is probable and for which a reasonable estimate  can be made.  Certain significant issues remain unresolved in the negotiations and, if these issues are not resolved to the Company’s satisfaction,  negotiations may be discontinued and such unresolved issues may ultimately  impact our ability to reach a negotiated resolution of the matters.  At this  time, the Company estimates that the most likely amount of this loss is $153 million.”

A $153 million settlement would be the eighth largest in FCPA history.

Avon

The company recently disclosed as follows concerning its long-lasting FCPA scrutiny.

“As previously reported in August 2012, we are in discussions with the SEC and the DOJ regarding resolving the government investigations. Our factual presentations as part of these discussions are substantially complete. In June 2013, we made an offer of settlement to the DOJ and the SEC that, among other terms, included payment of monetary penalties of approximately $12. The DOJ and the SEC have rejected the terms of our offer. Although we expect that the DOJ and the SEC will make a counterproposal to our offer, they have not yet done so. Our discussions with the DOJ and the SEC are ongoing.

There can be no assurance that a settlement with the SEC and the DOJ will be reached or, if a settlement is reached, the timing of any such settlement or the terms of any such settlement. We expect any such settlement will include civil and/or criminal fines and penalties, and may also include non-monetary remedies, such as oversight requirements and additional remediation and compliance requirements. We may be required to incur significant future costs to comply with the non-monetary terms of any settlement with the SEC and the DOJ. Under certain circumstances, we may also be required to advance significant professional fees and expenses to certain current and former Company employees in connection with these matters. Until any settlement or other resolution of these matters, we expect to continue to incur costs, primarily professional fees and expenses, which may be significant, in connection with the government investigations.
At this point we are unable to predict the developments in, outcome of, and economic and other consequences of the government investigations or their impact on our earnings, cash flows, liquidity, financial condition and ongoing business.  However, based on our most recent discussions with the DOJ and the SEC, the Company believes that it is probable that the Company will incur a loss upon settlement that is higher than the offer made by the Company of approximately $12, which was accrued by the Company as of June 30, 2013. We are unable to reasonably estimate the amount of any additional loss above the amount accrued to date; however it is reasonably possible that such additional loss will be material.”

Owens-Illinois

The beverage company recently disclosed as follows.

“The Company conducted an internal investigation into conduct in certain of its overseas operations that may have violated the anti-bribery provisions of the United States Foreign Corrupt Practices Act (the “FCPA”), the FCPA’s books and records and internal controls provisions, the Company’s own internal policies, and various local laws. In October 2012, the Company voluntarily disclosed these matters to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”). The Company intends to cooperate with any investigation by U.S. authorities. On July 18, 2013, the Company received a letter from the DOJ indicating that it presently did not intend to take any enforcement action and is closing its inquiry into the matter. The Company is presently unable to predict the duration, scope or result of any investigation by the SEC or whether the SEC will commence any legal action.”

AB InBev

The beverage company recently disclosed as follows.

“As previously disclosed, we have been informed by the SEC that it is conducting an investigation into our affiliates in India, including our non-consolidated Indian joint venture, InBev India Int’l Private Ltd, and whether certain relationships of agents and employees were compliant with the FCPA. We continue to cooperate in this investigation and have been informed by the Department of Justice (DOJ) that it is also conducting a similar investigation. Our investigation into the conduct in question is ongoing and we are cooperating with the SEC and the DOJ.”

Misleading Yet Interesting

Perhaps one reason for why there appears to much confusion about the FCPA and FCPA enforcement is due to the vast amount of misleading information in the public domain concerning the FCPA.

This recent article in the Economic Times of India concerning Wal-Mart is an instructive example.

Stating that the FCPA is a “law that prohibits American companies and their foreign subsidiaries from bribing officials” is not a completely accurate statement concerning the scope of the law.  Stating that “the anti-bribery provisions of the FCPA are enforced by the Department of Justice and the accounting provisions by the Securities and Exchange Commission” is not completely accurate either.  The SEC can also bring civil actions for FCPA anti-bribery violations and the DOJ can also bring criminal actions for wilful violations of the accounting provisions.

“In 2008, for example, Siemens paid a fine of $1.6 billion, the largest ever for an FCPA violation.”  This is a false statement.  While the Siemens enforcement action is indeed the largest in FCPA history in terms of fine and penalty amount, the amount was $800 million.”

Citing a source that says Wal-Mart’s FCPA scrutiny could result in an enforcement action “between $4.5 billion and $9 billion” is outrageous beyond belief.

Despite its deficiencies, the article highlights an interesting tension between conducting a thorough internal investigation and the treatment of employees.  The article states:

“The long shadow of Bentonville, channelled by the permanent gaze of investigators, is causing angst among the Indian staff of Walmart. A company official quoted earlier says the army of investigators, who enjoy sweeping powers to seize documents and equipment of the staff, are seen by many employees as intrusive and as an extra-judicial authority in the office. For example, the investigators scan even the couriers sent out by the staff. The official quoted above says the objective to ensure FCPA compliance is causing even minor situations to snowball.”

[…]

“In another case, Richard Leonard, a British citizen and general manager for asset protection in India, was on a store visit to Ludhiana, that too with Asia head Price, when he received a frantic call from a colleague that KPMG executives were trying to seize his desktop computer and break open his drawer. He immediately called other colleagues, asking them to stop the investigators from taking possession of his workstation. On his return to the office, Leonard dashed off e-mails to his bosses, including Walmart’s global head Mike Duke, on how employees like him have lost respect in the office and they are being portrayed as “criminals” by independent auditors.”

The article also states:

“Walmart is asking all India employees who have left or been suspended to sign a three-page ‘consultancy and cooperation agreement’, ostensibly with the FCPA fallout in mind. The agreement essentially requires them to make themselves available to provide any information or explanation of materials or documents requested by Walmart or any government authority. “The manner in which lawyers and audit team are going about doing their business, I have started believing that I have done something wrong,” says an employee.”

The Flip Side

This Forbes columnist asks – in the context of GlaxoSmithKline –  “is big pharma addicted to fraud?”

The question reminded me of the spot-on statement previously profiled here.  In a Law360 interview, Stephen Jonas (here), a partner in the Boston office of WilmerHale, was asked “what aspects of law in your practice are in need of reform, and why?”  He stated:

“One area greatly in need of reform, in my view, is the investigation of alleged health care fraud. This is an area in which the government regularly secures enormous settlements, starting in the tens of millions of dollars, and now exponentially expanding to the billions of dollars. Virtually every pharmaceutical company has now been subjected to one or more of these investigations and the results are predictable — enormous monetary contributions to the federal government. I find it hard to believe that wrongdoing is so rampant in this industry that every company has at least several hundred million dollars worth of it. The more likely answer is that these settlements often have far more to do with the leverage the government enjoys than the merits of what the company did or didn’t do. In order to stay in business, pharmaceutical and medical device companies must be able to sell products that can be paid for by Medicaid and Medicare. But a conviction for a health care offense would result in exclusion of the companies from federal health insurance and essentially a death sentence for their business. So they cannot afford to fight even the most debatable of charges. One of the results is that novel legal theories and sketchy evidence will never be tested in a court of law and negotiated settlements (under threat of exclusion) serve as “precedent” for the next case. That is a system badly in need of reform.”

Related to GSK, see here for my recent TV interview with LinkAsia.

Reading Stack

The always informative Miller & Chevalier FCPA Summer Review 2013.  As noted in the review “while investigation activity levels appear robust, the overall pace of  enforcement in 2013, in terms of resolved dispositions, remains at its lowest  level since 2006.”  This is correct, although difficult to square with a recent article from Compliance Week titled “FCPA Enforcement on the Rise Once Again.”  This is why an FCPA lingua franca is so important.  (See prior posts here and here).  Among other things, the Miller & Chevalier review contains useful charts including the nationality of companies under FCPA investigation and the countries implicated most frequently in FCPA enforcement actions.

Press coverage of BSG Resources and Beny Steinmetz (the wealthy Israeli for whom BSG Resources is named) regarding its business in Guinea continues.  (See this recent article from the U.K. Guardian).

An informative read from John Rupp (Covington) on how corporate interests and individual interests in a bribery investigation can collide and what corporate counsel can do to prevent this dynamic.

An interesting read from Trace Blog on how bribery schemes fall apart.  The post states:

“The reality is that many bribery schemes simply self-implode.  Think of it this way, once a bribe is paid, a corresponding debt is created to all who are involved in the scheme:  to the business partner who provides the funds; to the third party “consultant” who launders them through false pretense; to the accountant who cooks the books; to the bagman who delivers the payment; to each and every role player, big or small, who helps to bring about the bribe. At the time, loyalties may seem obvious: each co-conspirator will usually have a clear self-interest in keeping the bribery scheme hidden.  But as situations change, so too do incentives, and in business there are few guarantees as unsure as the honor among thieves.  […] Think of all the bribery stories that have come to light simply by their own accord.”

*****

A good weekend to all.

 

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