Last week the DOJ and SEC announced (here and here) a $30.5 million Foreign Corrupt Practices Act enforcement action against Sociedad Quimica y Minera de Chile S.A. (SQM), a chemical and mining company based in Chile, in relation to its conduct with Chilean officials.
The enforcement action is rife with policy issues including 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.
The enforcement action included: (i) a DOJ criminal information charging SQM with violating the FCPA’s books and records and internal control provisions that was resolved via a deferred prosecution agreement in which the company agreed to pay a $15.5 million criminal penalty; and (ii) an SEC administrative order finding FCPA books and records and internal violations in which the company agreed to pay $15 million civil penalty.
DOJ
Under the heading “Overview of the Scheme” the information alleges:
“From in or around 2008 to 2015, SQM’s corporate budgets included discretionary funding for the office of the Chief Executive Officer (“CEO”). In 2008, the CEO’s discretionary fund was approximately US $3.3 million; in 2014 it was approximately US $5.7 million.
Funds budgeted for the CEO’s discretionary fund were designated within SQM’s accounting system as being intended for payment of, among other things, the CEO’s travel, certain of SQM’s publicity efforts, and consulting and advisory services deemed necessary by the CEO.
Despite providing for a discretionary fund, SQM 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. In fact, SQM Executive [described as a Chilean citizen who was an officer and high-level executive of SQM from 1990 until he was terminated by the company in March 2015 and who was one of the SQM executives responsible for implementing the company’s internal accounting controls – it is not too difficult to figure out from public sources that this person is Patricio Contesse] sought and received assistance from SQM employees to disguise some of the payments by directing them to create fictitious invoices and contracts for services that were not rendered, pay invoices for which there was no evidence of services being performed to justify the payments, and falsely record some of the payments in SQM’s books and ledgers.
As a result, during the relevant period, SQM Executive used the CEO’s discretionary fund to direct payments totaling approximately US $14.75 million in SQM funds to Chilean politicians, political candidates, and individuals connected to them (collectively, “politically exposed persons” or “PEPs”), many of which violated Chilean tax law and/or campaign finance limits, and caused payments of those funds to be falsely recorded in the SQM’s books and records.”
Under the heading “Improper Payments from the CEO’s Discretionary Fund,” the information alleges in pertinent part:
“Between in or around 2008 and 2015, at SQM Executive’s direction, SQM paid approximately US $14.75 million to PEPs and related parties without effective internal accounting controls, such as appropriate due diligence, documentation, or oversight.
One way in which SQM made payments to PEPs was by routing payments to foundations supported by politicians. For example, between in or around 2008 and 2013, SQM transferred approximately US $160,000 from the CEO’s discretionary fund to foundations supported by Chilean Official 1.
[…]
At SQM Executive’s direction, SQM also paid approximately US $630,000 from the CEO’s discretionary fund during the relevant period to foundations controlled by Chilean Official 2, who at times during the relevant period had influence over the Chilean government’s plans for mining in Chile, an issue of central importance to SQM’s business. […] In addition, Chilean Official 2 asked SQM Executive to support his daughter’s foundation. In or around January 2014, at SQM Executive’s direction, SQM paid approximately US $16,000 to a foundation supported by Chilean Official 2.
Another way in which SQM made payments to PEPs was by paying vendors associated with PEPs pursuant to fictitious contracts and invoices for services that were not rendered, or contracts and invoices for which there was no evidence of services being performed. SQM did not conduct due diligence on or obtain anti-corruption representations from its vendors, and it allowed approval of payments to vendors without independent verification that the payments were proper, that the prices charged by the vendors for the purported services were reasonable, or that the services reflected on the vendor invoices had actually been received by SQM.
The vendor invoices paid by SQM to vendors associated with PEPs indicated that SQM had received professional services in return for its payments, when in reality, SQM received nothing from the vast majority of the vendors submitting the invoices, and some of the invoices were simply created to disguise payments to PEPs.
For example, in or around July 2009, at SQM Executive’s direction, SQM paid approximately US $11,034 on an invoice for purported “financial services” submitted by the sister-in-law of Chilean Official 3. However, Chilean Official 3’s sister-in-law rendered no services to SQM and submitted the invoice solely in order to facilitate a disguised payment by SQM to a Chilean senatorial campaign.
Similarly, SQM paid numerous invoices submitted by vendors connected to Chilean Official 4, including approximately US $63,000 between in or around December 2008 and in or around September 2012 for purported “communications advice” from Chilean Official 4’s former advisor and chief of staff, and approximately US $29,000 in or around July through October 2009 for purported “consulting-services” by a relative of Chilean Official 4. SQM made these payments without receiving any evidence that the “communications advice” or “consulting services” were provided, and to date is unable to identify any evidence that they were provided.”
Under the heading “SQM’s Falsification of Its Books and Records,” the information alleges:
“In connection with the improper payments described above, SQM falsely recorded some of these payments in its books and records in order to conceal the payment scheme.
For example, SQM falsely recorded the payments … as “communications advice” and “consulting services” despite knowing that the payments were not, in fact, for such services rendered.
In addition to concealing the nature of the payments from the CEO’s discretionary fund, SQM employees, including SQM Executive and other SQM employees, knowingly and willfully disguised the destination of these payments. For example, in or around February 2011, at the direction of SQM Executive, two SQM employees created a fake service contract for a fictitious vendor for the sole purpose of funneling SQM funds to a foundation controlled by Chilean Official 5. Between approximately 2008 and approximately 2012, SQM paid from the CEO’s discretionary fund 36 invoices submitted under the contract, for a total of approximately US $577,000.
Similarly, in or around May and in or around June of 2013, an advisor to Chilean Official 1 invoiced SQM for approximately US $4,400 for purported engineering and statistical services. SQM paid the invoice and booked the payment as having been made in return for such services, despite knowing that such services had not been received from the advisor.
From 2008 to 2013, at the end of each fiscal year, SQM’s books and records, including those that SQM Executive and others intentionally falsified to justify payments to vendors connected to PEPs, were used for the purpose of preparing SQM’s financial statements. In addition, during each of these years from 2008 to 2013, SQM Executive signed financial certifications as part of SQM’s securities filings that he knew to be false.”
Under the heading “SQM’s Continued Failure to Implement Adequate Internal Accounting Controls,” the information alleges:
“SQM personnel responsible for implementing and maintaining SQM’s internal accounting controls, including SQM Executive and another high-level executive, became aware of control failures relating to payments from the CEO’s discretionary fund to vendors associated with PEPs but nevertheless failed to take adequate steps to prevent further such payments. For example, during a 2014 internal audit, SQM identified six vendors paid in 2012 and 2013 that had “high risk” connections to PEPs. Each of the identified payments was made from the CEO’s discretionary fund and was authorized by SQM Executive. The internal audit report recommended SQM terminate any active contracts with the six high risk vendors identified, to require a compliance addendum for any future contracts, and to maintain backup documentation for each contract transaction.
Despite these internal audit findings, which were summarized for the board of directors, no adequate changes were made to SQM’s internal accounting controls. As a result, SQM’s payments to PEPs continued after this internal audit report for an additional six months. For example, while payments to the son of a Chilean politician stopped in or around September 2014 as a result of the audit, they were replaced by payments to the politician’s aide beginning in or around October 2014.”
Based on the above allegations, the information charges SQM with violating the FCPA books and records provisions and internal controls provisions.
The criminal charges were resolved via a deferred prosecution agreement which references the following relevant considerations.
“a. the Company did not voluntarily self-disclose the conduct …;
b, the Company received full cooperation credit based on its cooperation with the Fraud Section’s investigation, which included: conducting a thorough internal investigation; producing relevant documents from overseas, accompanied by translations of key documents, to the Fraud Section; and providing to the Fraud Section all relevant facts known to it, including information about individuals involved in the misconduct; the Company has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment C to this Agreement, and has engaged in a number of remedial measures, including: (1) reconstituting and staffing new compliance and internal audit divisions; (2) implementing new internal accounting/payment process controls; (3) revising the corporate Code of Ethics and conducting training for all personnel; (4) voluntarily paying over $9 million in taxes, interest, and penalties to Chilean authorities in connection with the improper payments …; (5) disciplining the employees involved in the improper payments and false books and records … including terminating the employment of a senior officer of the Company and demoting another employee; and (6) providing in-depth anti-corruption and compliance training and consultations with outside compliance and internal controls experts to an employee who failed to take appropriate steps in response to red flags regarding the misconduct;
d. although the Company has taken a number of remedial measures, the Company is still in the process of implementing its enhanced compliance program, which has not had an opportunity to be tested, and thus the Company has agreed to the imposition of an independent compliance monitor for a term of two years to diminish the risk of reoccurrence of the misconduct; the independent compliance monitor will serve a term of two years instead of three because of the significant enhancements the Company has already made to its compliance program, and because the Company’s size and risk profile are such that an independent compliance monitor should not need more than two years to test the Company’s compliance program;
e, the Company has agreed to continue to cooperate with the Fraud Section;
f. the nature and seriousness of the offense, including the involvement of a senior officer at the Company in a six-year scheme to pay millions of dollars to politicians, political candidates, and individuals connected to them in violation of Chilean tax law and/or campaign finance limits, and the falsification of records and the creation of fictitious invoices and contracts to conceal the scheme;
g. the Company has no prior criminal history;
h. accordingly, after considering (a) through (g) above the Company received an aggregate discount of 25% off of the bottom of the U.S. Sentencing Guidelines fine range …”
The DPA sets forth an advisory fine range of $20.6 million to $41.3 million and as mentioned above, pursuant to the three year DPA, SQM is required to engage an independent compliance monitor for two years.
SEC
The SEC’s order is based on the same core conduct alleged in the DOJ action. In summary fashion, the order states:
“This matter concerns violations of the books and records and internal control provisions of the FCPA by SQM. From at least 2008 to 2015, SQM made approximately US $14.75 million in improper payments to Chilean politicians, political candidates, and individuals connected to them (collectively, “politically exposed persons” or “PEPs”). Most of the payments were made based on fictitious documentation submitted to SQM by persons and entities associated with PEPs who posed as legitimate vendors to SQM (“third party vendors”). Those payments were not supported by documentation that those third party vendors provided services to SQM. Virtually all of the improper payments to PEPs were directed and authorized by a senior SQM executive.
SQM violated the books and records provisions of the FCPA by failing to fairly and accurately reflect in its books, records and accounts that payments SQM ostensibly made to legitimate vendors were actually payments to PEPs. SQM also failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that the company was not making improper payments to PEPs.”
Under the heading “SQM’s Management Failed to Exercise Proper Oversight of the CEO Account,” the order states:
“SQM failed to conduct adequate due diligence on the third party entities who received payments from the CEO’s discretionary fund and as a result of a lack of adequate internal accounting controls allowed payments to the third party vendors without verifying that the payments were proper, that the prices charged by the vendors were appropriate, or that SQM had ever received the services reflected on the vendor invoices and contracts.
SQM failed to conduct due diligence on such payments to foundations to ensure that the payments were proper and were not going to, or for the benefit of, PEPs.
In addition, SQM management failed to exercise any oversight of the CEO Account. For example, in one instance a finance manager sent a senior executive of SQM an email discussing reports that he was preparing related to the activities of the CEO Account. In response to the finance manager’s query, the senior executive told the finance manager to send printed reports directly to SQM Executive only, stating that SQM Executive was “in charge of this.” The senior executive did not conduct any oversight of the CEO Account to determine whether funds were being properly expended by SQM Executive.
Ultimately, SQM personnel responsible for implementing and maintaining SQM’s internal accounting controls became aware of control deficiencies related to payments to PEPs but failed to take appropriate steps to prevent further payments.
For example, during a 2014 internal audit, SQM personnel identified six vendors paid in 2012 and 2013 that had “high risk” connections to PEPs. Each of the identified payments was made from the CEO Account and was authorized by SQM Executive. The internal audit report recommended SQM terminate any active contracts with the six high-risk vendors identified, require a compliance addendum for any future contracts, and maintain backup documentation for each contract transaction. Despite these internal audit findings, which were provided to SQM Executive and another senior executive of SQM and were summarized for SQM’s board of directors, insufficient changes were made to SQM’s internal accounting controls. As a result, SQM’s improper payments to PEPs continued after the internal audit report for an additional six months.
Even when payments to “high risk” recipients were identified by the internal audit in 2014 and suspect contracts were terminated, payments were still made to recipients connected to PEPs. For example, when payments to the relative of a Chilean official were shut down in about September 2014, payments began to be made to that Chilean official’s aide in about October 2014.”
Under the heading “Falsification of SQM’s Books and Records,” the order states:
“SQM falsely recorded payments to the PEPs and related entities in its books and records as legitimate business expenditures. For example, as described above, SQM falsely recorded improper payments to PEPs as legitimate expenses for “financial services,” “communications advice,” “consulting services,” and “engineering services,” despite the fact that the payments were not for those services but were actually payments funneled to PEPs.
SQM failed to devise and maintain an adequate system of internal controls over the use of the CEO Account to ensure that the CEO Account expenditures were not used for unauthorized purposes, such as the payments to PEPs. For example, SQM’s senior management and board did not conduct adequate review and oversight of expenditures of the CEO Account, including payments to foundations; management gave complete deference to SQM Executive’s discretion of how to spend funds allocated to the CEO Account; SQM Executive was the sole authorization for expenditures; insufficient due diligence was performed on the third party entities submitting fictitious invoices and contracts; SQM’s procedures did not require independent verification that services invoiced had been provided before purchase orders were released; and SQM staff members arranged and executed the payments without oversight of those assignments by other senior management. The use of the CEO Account to make payments to PEPs was contrary to management’s authorization and SQM’s internal policies. SQM failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that its expenditures through third party vendors was done in accordance with management’s authorization.”
Based on the above, the order finds that SQM violated the FCPA books and records and internal controls provisions and the company agreed to pay a $15 million civil penalty.
The order contains a separate section titled “Internal Investigation and Remedial Efforts,” which states:
“In 2015, in response to inquiries from Chilean tax authorities and related news articles in the Chilean press, SQM conducted an internal investigation based on allegations that SQM had taken improper tax deductions for payments to certain vendors. As a result of its internal investigation, SQM undertook remedial measures, including: terminating SQM Executive; creating a Corporate Governance Committee; strengthening the Internal Audit department and creating a separate Compliance and Risk Management department and requiring them report to SQM’s board of directors; hiring additional compliance and auditing staff with significant experience; expanding accounting and compliance systems; making personnel changes to General Counsel’s office; hiring outside experts to review and improve SQM’s payment process controls and approvals, including controls related to payment process, due diligence of vendors, verification of services provided, and restrictions concerning potential conflicts of interest; reformulating SQM’s Code of Ethics; enhancing mandatory training related to the Code of Ethics, compliance and internal controls; and fully cooperating with Chilean and U.S. authorities.
Upon the commencement of its internal investigation, SQM self-reported potential FCPA violations to the Commission and fully cooperated with the Commission’s investigation. SQM subsequently provided extensive and thorough cooperation. SQM voluntarily provided reports of its investigative findings; shared its analysis of documents and summaries of witness interviews; and responded to the Commission’s requests for documents and information and provided translations of key documents.”
In the SEC’s release, Stephanie Avakian (Acting Director of the SEC Enforcement Division) stated:
“SQM permitted millions of dollars in payments to local politicians while failing for years to exercise proper oversight over a key discretionary account and internal controls.”
*****
J. Allen Miller and Keith Rosen (Chadbourne & Parke) represented SQM.
On the day the enforcement action was announced, SQM’s U.S. shares closed up 1.05%.
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