This previous post went in-depth into the $30.5 million Foreign Corrupt Practices Act enforcement action against Sociedad Quimica y Minera de Chile S.A. (SQM) announced on January 13th. The action focused on the Chilean chemical and mining company’s conduct with Chilean officials.
As mentioned in the original post, there was no U.S. nexus alleged other than SQM having Series B shares, a form of American Depository Shares, listed on the New York Stock Exchange and thus being required to file periodic reports with the SEC.
This post highlights additional issues to consider.
Discretionary Fund
The enforcement action focused on a “discretionary fund” maintained by SQM’s former CEO and how the company “knowingly and willfully failed to maintain internal accounting controls that were adequate to ensure that the CEO’s discretionary funds were used for their intended purposes, were used in accordance with the law, and were properly recorded in SQM’s books and records.”
That’s the easy part of the enforcement action. Simply put, executives should not have a “discretionary fund” and payments authorized by executive officers obviously should be subject to various checks and balances.
Policy
The more difficult part of the SQM enforcement action is the policy issue concerning the proper scope of FCPA enforcement given that there is no U.S. nexus alleged other than SQM having Series B shares, a form of American Depository Shares, listed on the New York Stock Exchange and thus being required to file periodic reports with the SEC.
Further, the problematic conduct was exclusively focused on the Chilean company’s conduct with Chilean officials.
The flip side equivalent would be Chile bringing an enforcement action against a U.S. company for its interactions, including political contributions, with U.S. officials premised solely on the U.S. company listing certain of its securities on a Chilean stock exchange.
Are we in the U.S. prepared for such a foreign prosecution of U.S. companies given that many in the world view certain aspects of the U.S. political system to be corrupt and there are certain double standards inherent in U.S. bribery enforcement (see here for the article “The Uncomfortable Truths and Double Standards of Bribery Enforcement”)
None in 39 Years, Two In Three Weeks
Related to the above point, as recently highlighted in connection with the December 20, 2016 Odebrecht / Braskem enforcement action, the action was believed to be the first in the FCPA’s 39 year history against a foreign company based on conduct involving its own “domestic” officials.
The SQM action involved the same dynamic and represents the second such action in the span of just three weeks.
Interesting Disclosure
In December 2015, SQM made the following disclosure which speaks to the breadth of the company’s internal investigations as well as the findings of Shearman & Sterling, the firm that conducted the review of behalf of SQM’s board committee. In pertinent part, the filing states:
“SQM previously informed the relevant authorities and markets that this Committee had been formed and that it had hired the professional services of Shearman & Sterling LLP to investigate and analyze the possible liability for SQM under the Foreign Corrupt Practices Act (FCPA), a United States of America law that applies to the Company as an issuer of securities in the U.S. market. The Chilean law firm Grupo Vial / Serrano Abogados and the international forensic services firm FTI Consulting, Inc. assisted Sherman & Sterling.
The investigation specifically analyzed:
(a) Whether the Company had made any payment defined as corrupt for FCPA purposes.
(b) Whether the Company had breached the accounting provisions of the FCPA.
The Company’s Management was fully cooperative and transparent during the investigation. Among other procedures, investigators collected more than 3.5 million documents and selected approximately 930,000 for review. In addition, 24 individuals were interviewed, including members of the board prior to April 2015, as well as SQM’s senior executives and other relevant employees. A forensic analysis of the Company’s accounting since 2008 was also conducted. Interviews were also requested from Mr. Patricio Contesse G.—former CEO of SQM—and Mr. Patricio Contesse F.—former director of SQM, but they declined.
After close to nine months of investigation, Shearman & Sterling, assisted by Grupo Vial / Serrano Abogados and FTI Consulting, informed the Committee that for FCPA purposes: (a) payments were identified that had been authorized by SQM’s former CEO, Mr. Patricio Contesse G., for which the Company did not find sufficient supporting documentation; (b) no evidence was identified that demonstrates that payments were made in order to induce a public official to act or refrain from acting in order to assist SQM obtain economic benefits; (c) regarding the cost center managed by SQM’s former CEO, Mr. Patricio Contesse G., it was concluded that the Company’s books did not accurately reflect transactions that have been questioned, notwithstanding the fact that, based on the amounts involved, these transactions were below the materiality threshold defined by the Company’s external auditors determined in comparison to SQM’s equity, revenues, expenses or earnings within the reported period; and (d) SQM’s internal controls were not sufficient to supervise the expenses made by the cost center managed by SQM’s former CEO and that the Company trusted Mr. P. Contesse G. to make a proper use of resources.”
Timeline
SQM’s prior disclosures state that around December 2015 the “Company voluntarily shared the findings of the ad-Hoc Committee investigation with authorities in Chile and the U.S. (including the SEC and the U.S. Department of Justice (“DOJ”)), and it has cooperated with requests for additional documents and information from these authorities regarding the internal investigation discussed above.”
Thus from start to finish, SQM’s FCPA scrutiny appears to have lasted approximately one year, significantly below the normal 3-5 year time frame of FCPA scrutiny.
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