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?
