As highlighted in this previous post, in early 2019 the Commodity Futures Trading Commission (CFTC) issued this enforcement advisory concerning companies and individuals “that timely and voluntarily disclose to the Division violations of the Commodity Exchange Act (CEA) involving foreign corrupt practices, where the voluntary disclosure is followed by full cooperation and appropriate remediation.”
Certain sources, including the FCPA Blog, falsely claimed that the CFTC would now be investigating and prosecuting FCPA violations. However, the CFTC advisory clearly concerned violations of the CEA. (See here for a recent FCPA Flash podcast on the topic).
Recently, in connection with the actual FCPA enforcement action against Vitol, the CFTC also brought an enforcement action against the company for its “fraudulent and manipulative conduct – including conduct relating to foreign corruption.” As stated in the CFTC’s release “this is the first action brought by the CFTC involving foreign corruption” and this post takes a closer look at the CFTC enforcement action.
In summary fashion, the CFTC order finds:
“Vitol is a significant participant in the globally interconnected physical and derivatives markets for oil, with a substantial trading operation based in Houston, Texas. At various times from 2005 through early 2020, Vitol engaged in conduct designed to increase profits from physical and derivatives trading in the global oil markets through corruption, fraud, and at times during August 2014 and July 2015, manipulation.
Vitol’s conduct during the Relevant Period involved corrupt payments (e.g., bribes and kickbacks) to employees and agents of certain state-owned entities (“SOEs”) in Brazil, Ecuador, and Mexico. Vitol or its affiliates made the corrupt payments in exchange for improper preferential treatment and access to trades with the SOEs. Regarding Brazil, the corrupt payments also were in exchange for nonpublic information from employees and agents of the SOE, including information material to Vitol’s transactions with the SOE or related trading. Vitol’s conduct was intended to secure unlawful competitive advantages in trading physical oil products and related derivatives to the detriment of its counterparties and market participants.
Regarding the Brazil scheme, from approximately 2005 until 2015, in exchange for corrupt payments to employees and agents of the Brazilian SOE (“SOE agents”), Vitol obtained, in addition to improper preferential treatment and access to trades, confidential information concerning the SOE’s projected supply, demand, and strategic planning related to oil products markets around the world, including U.S. markets. At times, the confidential information Vitol obtained included the exact nonpublic price—at times referred to internally at Vitol as the “gold number”—at which Vitol understood it would win a supposedly competitive bidding or tender process. Vitol used the corruptly obtained confidential information to deceive the SOE and other market participants. Vitol traders, while in possession of this improperly obtained information, traded and secured physical oil products and related derivative contracts in a broad range of oil markets in the United States and globally. At times, Vitol used improperly obtained confidential information from the SOE to secure facially legitimate Exchange of Futures for Physical transactions (“EFPs”) on the U.S. derivatives markets, whereby Vitol exchanged futures positions for physical oil with that SOE.
Regarding the Ecuador and Mexico schemes, between in or about 2015 and in or about 2020, Vitol via intermediaries made corrupt payments to SOE agents in Ecuador and in Mexico in exchange for improper preferential treatment and access to trades with the relevant SOEs. In addition, at times during August 2014 and July 2015, Vitol also attempted to manipulate certain U.S. price assessment benchmarks relating to physical fuel oil products in order to benefit its related physical and derivatives positions. Vitol’s manipulative and deceptive conduct undermined the legitimate forces of supply and demand and the integrity of the global physical and derivatives oil markets.”
According to the order:
“Vitol used these corrupt payments to, among other things, rig or circumvent bidding processes for oil contracts to the detriment of the SOE and market participants involved in the bidding processes. For example, the confidential information obtained through corruption included the specific nonpublic price—referred to internally at Vitol as the “gold number”—at which Vitol understood it would win a supposedly competitive bidding or tender processes. By receiving a “last look,” Vitol was given the opportunity to meet or beat the best price offered to the SOE, including the preferential treatment of winning the trade in the event of a tie.
At times, Vitol and/or its affiliates used improperly obtained confidential information from the SOE to secure a facially legitimate EFP on the U.S. derivatives markets, whereby Vitol exchanged futures positions for physical oil with that SOE. Also at times, Vitol, while in possession of the confidential information, would assume a derivatives position in advance of the SOE obtaining its physical position.
Vitol documents and communications reveal that Vitol supervisors and traders understood the sensitivity of improperly obtained confidential information, and took steps to maintain it in confidence and ensure that the SOE would not learn they had it in their possession. To that end, the communications disseminating the improperly obtained confidential information within Vitol were labeled “private and confidential” or “pnc” for short. Vitol traders appreciated the sensitivity of this information, and considered it material to certain of Vitol’s business and trading decisions.”
According to the order:
“By attempting to manipulate such benchmarks, Vitol was also attempting to manipulate and would have distorted numerous futures, swaps, and other derivatives and physical trades that price in reference to those benchmarks. This would be to the detriment of market participants that had opposite exposure (including Vitol’s counterparties), or who looked to rely on the benchmarks as a fair price reference for physical or derivative trades, including U.S. futures contracts and swaps.”
Based on the above findings, the CFTC found that Vitol violated Section 6(c)(1) of the Commodity Exchange Act and Regulation 180.1 among other ways by:
“intentionally or recklessly: (1) submitting manipulative bids and offers and otherwise engaging in manipulative trading activity relating to Platts physical fuel oil price benchmarks in order to attempt to benefit, among other positions, physical positions and related derivatives positions held on U.S. derivatives markets ; (2) using misappropriated and corruptly obtained nonpublic information material to Vitol’s transactions with the SOE or related trading, for example, through its trading of physical oil products and related derivatives contracts; and (3) obtaining improper preferential treatment and access to trades from agents of its counterparties as a result of corrupt payments to benefit its trading of physical oil products and related derivatives contracts in the global oil markets, including in the United States, and thereby defrauding its counterparties and harming other market participants.”
To resolve the CFTC matter, Vitol agreed to pay net approximately $28.8 million. This amount consists of disgorgement of approximately $12.8 million plus a $16 million civil monetary penalty. (Note: the $83 million civil monetary penalty was offset by $67 million given the DOJ criminal resolution and/or Brazil law enforcement resolution the company agreed to in connection with the same underlying conduct.
In the order, the CFTC recognized “the substantial cooperation” of Vitol and also acknowledged its “representations concerning its remediation” and further recognized the company’s “substantial cooperation and appropriate remediation” which was reflected “in the form of a reduced penalty.” Under the heading “Cooperation,” the order finds:
“Vitol voluntarily provided material information to the Division obtained by Vitol through an internal investigation it conducted. Vitol proactively identified information of interest, produced expeditious and prioritized responses to the Division Staff’s requests for information on a voluntary basis, and assisted the Division in analyzing trading data.
Vitol also commenced significant remedial action to improve internal controls and policies related to the use of third-party agents and payments to third parties, as well as related to eWindow trading. In particular, Vitol represents that Vitol and its affiliates have strengthened due diligence and approval processes related to the use of third parties, updated relevant model agreements, and initiated a global review of payment processes. Vitol further represents that Vitol has also dedicated additional resources to the compliance function and enhanced its internal trading surveillance processes, including with respect to trading activity in oil liquids MOCs.”
In the CFTC’s release, CFTC Chairman Heath Tarbert stated:
“This historic enforcement action demonstrates that the CFTC will actively pursue fraud tied to foreign corruption and manipulation that impacts the U.S. derivatives and related physical markets.”
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