Archive for the ‘Permits / Licenses / Customs / Tax’ Category

An FCPA Enforcement Action With Many Interesting Wrinkles

Wednesday, August 27th, 2014

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

The 1998 Foreign Corrupt Practices Act enforcement action against Saybolt Inc., Saybolt North America Inc. and related individuals had many interesting wrinkles:  a unique origin; a rare FCPA trial; a fugitive still living openly in his native land; and case law in a related civil claim.

As to the unique origin, Saybolt Inc. was a U.S. company whose primary business was conducting quantitative and qualitative testing of bulk commodities, such as oil, gasoline, and other petrochemicals, as well as grains, vegetable oils and other commodities.  The Environmental Protection Agency, Criminal Investigation Division (“EPA-CID”) was investigating the company for allegedly submitting false statements to the EPA about the oxygen content of reformulated gasoline blended in accordance with the requirements of the Clean Air Act.  The investigation was initiated by reports of data falsification at Saybolt’s Massachusetts facility.

During the course of the investigation EPA-CID interviewed Steven Dunlop (the general manager for Latin American operations for Saybolt) who provided the following information.

During a trip to Panama in 1994, Dunlop was advised of new business opportunities that were being offered to Saybolt Panama through the Panamanian Ministry of Commerce and Industries.  Specifically, the DOJ’s criminal complaint alleged that Hugo Tovar (the General Director of the Hydrocarbon Directorate, a division of the Ministry of Commerce and Industries) and Audo Escudero (the Sub-Director of the Hydrocarbon Directorate), offered to Saybolt Panama an opportunity to: (1) receive a substantial reduction in Saybolt Panama’s tax payments to the government of Panama; (2) obtain lucrative new contracts from the government of Panama; and (3) secure a more permanent facility for Saybolt Panama’s operations on highly coveted land near the Panama Canal.  According to the criminal complaint, this parcel of land was coveted because Saybolt Panama “only had a tenuous legal claim on its existing facility” and as a result its operations were continually at risk.

The complaint details various communications between Dunlop and David Mead (the President and CEO of Saybolt) in which Dunlop informed Mead of a $50,000 “fee” that would be needed to accomplish the above opportunities.

The complaint details a 1995 board of directors meeting at Saybolt during which discussion concerned the “$50,000 payoff demanded by the Panamanian officials with whom Saybolt was negotiating.  According to the complaint, present at this meeting were Board members Frerik Pluimers and Philippe Schreiber as well as Mead and Saybolt’s Chief Financial Officer Robert Petoia.  According to the complaint, Dunlop received instructions from Mead that he was to “take the necessary steps to ensure that the $50,000 was paid to the Panamanian officials in order to secure the deal” and that Schreiber was to be his primary contact on all issues concerning the Panamanian transaction.

According to the complaint, “in the minutes leading up to the time he was scheduled to leave his house for the airport” to travel to Panama,” Dunlop had a telephone conversation with Schreiber who advised him “that the action [he] was about to take would constitute a violation of the FCPA.”

According to the complaint, while in Panama Dunlop “learned that the Saybolt funds needed to make” the payment had not yet been received and that Dunlop then tried to contact Mead.  According to the complaint, Mead sent Dunlop an e-mail which stated: “Per telecon undersigned and capo grande Holanda the back-up software can be supplied from the Netherlands.  As previously agreed, you to detail directly to NL attn FP.” According to the complaint, “capo grande Holanda” was a reference to Pluimers (the President of the Dutch holding company that controlled Saybolt, Inc.” and the “back-up software” was a reference to the $50,000 payment.”

The complaint alleged that the funds never arrived in Panama and that Dunlop was receiving pressure from the Panamanian officials “to make the $50,000 payment prior to the upcoming Christmas holidays.”  According to the complaint, Mead told Dunlop on a telephone call to make the $50,000 payment using funds that were in the operating account of Saybolt Panama.

According to the complaint, the $50,000 in cash was obtained by laundering a check through a local construction company and that a “sack full of currency” was handed over to Escudero at a bar in Panama City by the individual who was serving as Saybolt Panama’s liaison with Escudero.  Further, according to the complaint, “shortly after this payment was made, the Ministry of Commerce and Industries and other necessary government agencies acted favorably on Saybolt’s proposal.”

In April 1998, the DOJ filed this indictment against Mead (a citizen of the U.K. and resident of the U.S. and Pluimers (a national and resident of the Netherlands) based on the above conduct.  The indictment charged Mead and Pluimers with conspiracy to violate the FCPA’s anti-bribery provisions and the Travel Act, two substantive violations of the FCPA, and two substantive violations of the Travel Act.

According to the indictment, the purposes and objectives of the conspiracy were:

  • To obtain contracts for Saybolt de Panama and its affiliates to perform import control and inventory inspections for the Ministry of Hydrocarbons, and the Ministry of Commerce and Industries, both departments of the Government of the Republic of Panama;
  • To obtain and to expedite tax benefits for Saybolt de Panama and its affiliates from the Government of the Republic of Panama, including exemptions from import taxes on materials and equipment and reductions in annual profit taxes;
  • To obtain from an agency of the Government of the Republic of Panama a secure and commercially attractive operating location for an inspection facility in Panama; and
  • To “lock out” Saybolt’s competitors by retaining possession and control of Saybolt de Panama’s existing location in Panama.

In September 1998, the DOJ filed this superseding indictment substantially similar to the first and including the same charges.

Mead moved to strike the indictment of allegations that he violated the FCPA and for dismissal of the indictment for failure to state an offense under the Travel Act, and for a Bill of Particulars.   In a one page order, U.S. District Court Judge Ann Thompson denied the motions. Dunlop was given full immunity as was the American attorney present at the board meeting and involved in several conversations with Pluimers, Mead, and Dunlop concerning the alleged payments.

Mead argued that the FCPA only prohibited payments to assist a domestic concern in obtaining and retaining business” and he used Saybolt’s rather complex corporate structure to argue that the business sought to be obtained or retained was for a different Saybolt entity, not a domestic concern.  In his motion, Mead stated “because the government ignores the corporate legal structure and does violence to the FCPA by attempting to end-run congressional policy, the Court must justifiably refuse.”  Elsewhere, the motion stated:

“Whether the government labels foreign corporations as ‘agents of a domestic concern’ or members of an ‘unincorporated organization,’ the government still may not manipulate the Act’s broad language to end-run this congressional policy (of deliberately excluding both foreign subsidiaries and non-subsidiary foreign corporations from FCPA liability).”

The motion also argued that the indictment was devoid of any allegation that Mead acted “willfully” (i.e. with the specific intent to violate the law) because he followed the legal advice of counsel in making the alleged payments.

In response, the DOJ stated that the indictment “describes in detail how Mead – himself a U.S. resident, and also the President of one U.S. corporation (Saybolt Inc.), Executive Vice-President of a second U.S. corporation (Saybolt North America Inc.), and Chief Executive Officer of an unincorporated association (Saybolt Western Hemisphere) – and others decided to send a Saybolt Inc. employee to Panama City, Panama, to oversee the payment of a $50,000 bride, which they believed would be provided to high level government officials, in exchange for favorable treatment of Saybolt’s business interests in Panama.  The Indictment charges that Mead gave the order to go forward with the bribe and it details the contents of the e-mail message that Mead sent from his office in New Jersey to the Saybolt employee in Panama City.”

At trial, Mead argued that the Government failed to meet its burden of proof and that he acted in good faith belief that the payment to the Panamanian officials was lawful.  The relevant jury instructions stated as follows.

“If the evidence shows you that the defendant actually believed that the transaction was legal, he cannot be convicted.  Nor can he be convicted for being stupid or negligent or mistaken.  More is required than that.  But a defendant’s knowledge of a fact may be inferred from “willful blindness” to the knowledge or information indicating there was a high probability that there was something forbidden or illegal about the contemplated transaction and payment.  It is the jury’s function to determine whether or not the defendant deliberately closed his eyes to the inferences and the conclusions to be drawn from the evidence here.”

According to this docket sheet, Mead’s trial occurred in October 1998 and he was found guilty of all charges.  According to the docket, Mead was sentenced to four months imprisonment, to be followed by four months of home confinement, to be followed by three years of supervised release.  According to the docket, he was also ordered to pay a $20,000 criminal fine. After sentencing, US Attorney Donald Stern of Boston, stated: ”This sentence puts American executives on notice there will be a price to pay, far more than the monetary cost of the birbe, when they buy off foreign officials.”  For additional reading on Mead’s case, see this transcript of an in-depth CNN story about Mead that aired in 1999.

What about Pluimers?

As indicated by this docket sheet, there has been no substantive activity in the case since 1999 and Pluimers remains a fugitive – albeit living openly in his native Netherlands.  According to this 2011 New York Times article citing a Wikileaks cable, “Pluimers simply has too much influence with high-ranking Dutch officials to be handed over to U.S. authorities.”

What about Saybolt?

In August 1998, the DOJ the filed two separate criminal informations against Saybolt Inc. and its parent corporation Saybolt North American Inc. The first information charged Saybolt with conspiracy and wire fraud related to the company’s “two year conspiracy to submit false statements to the EPA about results of lab analyses. The second information charged Saybolt and Saybolt North America with conspiracy to violate the FCPA and one substantive charge of violating the FCPA.

As noted in this plea agreement, Saybolt agreed to plead guilty to all charges in the informations and agreed to pay a total fine of $4.9 million allocated as follows:  $3.4 million for the data falsification violations and $1.5 million for the FCPA violation. Saybolt also agreed to a five year term of probation.

The conduct at issue in the Saybolt and related enforcement actions also spawned a related civil malpractice action alleging erroneous legal advice by counsel regarding the above-described payments to Panamanian officials.  In Stichting v. Schreiber, 327 F.3d 173 (2d Cir. 2003), the Second Circuit analyzed whether a company, in pleading guilty to FCPA anti-bribery violations, acknowledged acting with intent thus undermining its claims that the erroneous legal advice was the basis for its legal exposure.

The court stated:

“Knowledge by a defendant that it is violating the FCPA – that it is committing all the elements of an FCPA violation – is not itself an element of the FCPA crime.  Federal statutes in which the defendant’s knowledge that he or she is violating the statute is an element of the violation are rare; the FCPA is plainly not such a statute.”

The court also stated concerning “corruptly” in the FCPA:

“It signifies, in addition to the element of ‘general intent’ present in most criminal statutes, a bad or wrongful purpose and an intent to influence a foreign official to misuse his official position.  But there is nothing in that word or anything else in the FCPA that indicates that the government must establish that the defendant in fact knew that his conduct violated the FCPA to be guilty of such a violation.”

What If Triton Energy Were Resolved Today?

Thursday, May 29th, 2014

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

Certain of the “old” Foreign Corrupt Practices Act enforcement actions reviewed thus far in this periodic series were dubious (see here for instance).

Other “old” FCPA enforcement actions contain egregious allegations concerning high-level executive knowledge, acquiescence and cover-up of bribery yet were resolved  in what can only be called – a light fashion.  Case in point is the 1997 enforcement actions against Triton Energy and several executives.   The Triton enforcement action makes reporting of Wal-Mart’s supposed corporate governance failures and oversight look garden-variety.

Learning of the Triton enforcement action causes one  to ponder – what if the enforcement action were resolved today?

*****

In February 1997, the SEC announced the filing of this settled civil complaint against Triton Energy Corporation and Richard McAdoo and Philip Keever (former officers of Triton Indonesia Inc. – a wholly owned subsidiary of Triton).  In summary fashion, the complaint alleged:

“This action concerns the activities in Indonesia of Triton Indonesia …  During the years 1989 and 1990 defendants McAdoo and Keever, then officers of Triton Indonesia, authorized numerous improper payments to Roland Siouffi, knowing or recklessly disregarding the high probability that Siouffi either had or would pass such payments along to Indonesian government employees for the purpose of influencing their decisions affecting the business of Triton Indonesia.  McAdoo and Keever, together with other Triton Indonesia employees, concealed these payments by falsely documenting and recording the transactions as routine business expenditures.  Triton Indonesia also recorded other false entries in its books and records.  During the relevant time period, Triton failed to devise and maintain an adequate system of internal accounting controls to detect and prevent improper payments by Triton Indonesia to government officials and to provide reasonable assurance that transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles.  Triton Energy did not expressly authorize or direct these improper payments and misbookings.”

The complaint charged Triton Energy with violating the FCPA’s anti-bribery provisions and books and records and internal controls provisions.  Keever and McAdoo were charged with violating the FCPA’s anti-bribery provisions and knowingly circumventing a system of internal controls and knowingly falsifying books and records.

The complaint noted that Keever retired from Triton in 1996 and that McAdoo was terminated by Triton in 1989.

The conduct at issue focused on Triton Indonesia being a party to a joint venture agreement which resulted in Triton Indonesia being a party to a Rehabilitation and Secondary Recovery Contract (“RSRC Contract”) with Pertamina, a national oil company owned by the Republic of Indonesia.  As alleged in the complaint, the project Triton Indonesia was working on “was subject to taxation by the Indonesian Ministry of Finance and tax liability was determined by auditors from the Ministry of Finance’s audit branch (“BPKP”).

According to the complaint:

“During the Pertamina/BPKP audits, after the auditors completed their review of the books and records, they had an exit meeting with representatives of Triton Indonesia during which they provided their preliminary written findings, including problems with the books and records that might lead to reductions in cost recovery.  Following the auditors’ presentation, Triton Indonesia prepared a written response to the audit exceptions.  Triton Indonesia and Pertamina/BPKP auditors then entered into negotiations concerning the content of the final audit report.  The Pertamina/BPKP auditors had discretion to make a determination as to whether audit exceptions would be included in their audit report or withdrawn.  [...]  These ‘negotiations’ culminated in numerous improper payments to Indonesian auditors.”

The complaint stated that “at the beginning of Triton’s Indonesia’s tenure as operator of the joint venture … the poor books and records and internal controls made it difficult for Triton Indonesia to calculate and document project costs, and threatened the company’s ability to obtain recovery of [project] costs incurred prior to Triton Indonesia’s tenure as operator.”  The complaint noted that “from the outset, Triton Indonesia and Triton Energy management anticipated that the deficient state of the books and records of the [project] would adversely impact Triton Indonesia’s ability to obtain certification of the unrecovered costs pool for [two] fiscal years.”

According to the complaint, Triton agreed with its joint venture partner to “retain Roland Siouffi as its business agent for the purpose of acting as an intermediary between Triton Indonesia and Indonesian government agencies, including Pertamina and the Ministry of Finance.”

According to the complaint, “when Keever went to Indonesia … to become Commercial Manager, Triton Energy’s controller at the time told Keever that his performance would be measured by the extent to which [project] expenditures were found to be costs recoverable in the annual Pertamina/BPKP audits.”

The complaint alleged:

“During 1989 and 1990, McAdoo and Keever authorized a number of improper payments to Siouffi entities for the purpose of influencing specific actions by various Indonesian government agencies.  To conceal the true purpose of the payments, Triton Indonesia employees created false documents that indicated that the funds were expended for transactions with Siouffi entities for legitimate purposes, such as the purchase of seismic data or repair of equipment used for oil exploration.  The expenditures were then recorded on Triton Indonesia’s books and records as having been made for the purpose reflected in the false documentation.  These false entries were made in the books and records of Triton Indonesia with the knowing participation of certain Triton Indoensia employees, including McAdoo and Keever.”

The SEC complaint contains separate allegations regarding improper payments: “in connection with a tax audit;” “Pertamina/BPKP Audits;” a corporate tax refund;” the refund of value added tax;” and “relating to a pipeline tariff.”  The complaint also references payments of cash totaling $13,500 to Indonesian auditors for the purpose of developing general good will” and “cash payments totalling $1,000 per month to Pertamina clerical employees made for the purpose of expediting payment of monthly crude oil invoices.”

Under the heading “Triton Energy Management Received Information Concerning Improper Payments and False Books and Records” the complaint alleges, in pertinent part:

“From the start of Triton Indonesia’s role as operator [of the joint venture], some Triton Energy officers and managers had concerns about the relationship with Siouffi, including concerns about the vagueness of his contractual duties, the large amounts of money he was receiving, how he might be using that money, and his honesty. Despite these concerns, Triton Energy’s former management did not establish any policies or procedures concerning the circumstances under which Triton Indonesia could make payments to Siouffi for the purpose of influencing a government decision or what activities Siouffi could engage in on Triton Indonesia’s behalf.  In addition, at the outset of Triton Energy’s involvement in Indonesia, Triton Energy’s former management became aware of additional information that should have led to a heightened degree of vigilance about the possibility of FCPA violations. Instead, Triton Energy management ignored danger signs and took no precautions.”

Among the facts alleged is that a finance manager (who acted as a liaison to Pertamina/BPKP auditors in connection with annual audits) who was terminated was reinstated in response to “pressure from Pertamina.”  In addition, the complaint alleged that “Keever informed certain members of Triton Energy’s former management about certain of the payments being made to Siouffi in order to obtain favorable government decisions” and “although the Triton Energy officers expressed concern, none ordered Triton Indonesia to discontinue these practices.”  The complaint further alleged that Triton’s new Internal Auditor, after visiting Indonesia, wrote a confidential memo to Triton Energy’s former management describing his concerns about, among other things, improper payments by Triton Indonesia to Indonesian government officials.”  According to the complaint, “the former President of Triton Energy, after reading the Internal Auditors Memorandum in the internal auditor’s presence, ordered the internal auditor to collect all copies of the memorandum and destroy them.”

According to the complaint:

“Triton Energy’s former management made no meaningful effort to determine whether the allegations in the Internal Auditor’s Memorandum were supported by facts.  Instead, after learning that the source of the information in the memorandum came from conversations with Triton Indonesia officers and personnel, Triton Energy’s former management dismissed the allegations in the Internal Auditor’s Memorandum.  No investigation was conducted and no policies and procedures were revised as a consequence of the conduct described in the Internal Auditor’s Memorandum.”

According to the complaint, “when Triton Energy’s outside auditors raised concerns about possible unlawful activities by Triton Indonesia,” Triton Energy management made a partial disclosure, omitting most of the improper payments and most of the false books and records.  At the meeting with the auditors, Triton Energy’s then senior management represented that there was no evidence that money was paid to Indonesian auditors.”

According to the complaint, the payments totaled approximately $450,000.

Without admitting or denying the SEC allegations, Triton Energy consented to entry of a final judgment that permanently enjoined the company from violating the FCPA’s books and records and internal controls provisions and ordered the company to pay a $300,000 civil penalty.  The SEC’s release states:

“In accepting the settlement, the Commission has considered the fact that the violations occurred under former management and that certain remedial actions have been implemented by the current board of directors and senior management.”

Without admitting or denying the SEC’s allegations, Keever also consented to entry of a final judgment that permanently enjoined him from violating the FCPA’s books and records and internal control provisions and ordered him to pay a $50,000 penalty.

As noted in this SEC release, approximately four months later , McAdoo also consented to entry of a final judgment that permanently enjoined him from violating the FCPA’s anti-bribery provisions as well as the books and records and internal controls provisions.  McAdoo was also ordered to pay a $35,000 civil penalty.  This original source article indicates that McAdoo originally asserted his innocence and planned to contest the charges.

Simultaneous with the filing of the above civil complaint against Triton Energy, Keever and McAdoo, the SEC also instituted this administrative action against David Gore (a Director and President of Triton Energy from 1988 until his resignation in 1992), Robert Puetz (Triton Energy’s Vice President of Finance and Chief Financial Officer / Senior Vice President of Finance until his resignation in 1993), William McClure (a contract auditor with Triton Indonesia and thereafter Commercial Manager of Triton Indonesia in 1990 until he left the country) and Robert Murphy (CPA / Controller of Triton Indonesia until 1990) based on the same core conduct alleged in the SEC civil complaint.

The SEC found:

“As Commercial Manager, McClure assumed direct supervisory authority over the accounting function at Triton Indonesia.  McClure was required to review and initial documents to authorize certain expenditures.  These documents contained the descriptions of expenditures that determined how expenses were recorded in Triton Indonesia’s books and records.  As Controller, Murphy had direct responsibility for preparing entries in Triton Indonesia’s books and records.  McClure supervised Murphy’s preparation of entries for the books and records of Triton Indonesia.  Murphy was responsible for determining that all underlying documentation was present when a bank voucher was issued and initialling the voucher to signify that all required documents were present.”

Consistent with the SEC’s allegations in the civil complaint, the SEC order found that Gore and Puetz “were well aware that Triton Indonesia has entered into contracts with Siouffi entities” and had concerns with various aspects of the relationship.    The order further found that “Keever briefed Gore and Puetz about certain of the payments and false books and records” and then states that the “Triton Energy officers expressed concern about such practices which they had neither director nor authorized, but failed to require Triton Indonesia to discontinue these practices.”

As to the Internal Auditor Memorandum referenced in the civil complaint, the SEC’s order found that it was distributed to “Gore and Puetz, among others.”  The SEC’s order found:

“Gore, after reading the Internal Auditor’s Memorandum in the internal auditor’s presence, ordered the internal auditor to collect all copies of the memorandum and destroy them.  Gore and Puetz made no effort to determine whether the allegations in the Internal Auditor’s Memorandum were supported by facts.  Instead, after learning that the source of the information in the memorandum came from conversations with Triton Indonesia officers and personnel, Triton Energy’s former management dismissed the allegations in the Internal Auditor’s Memorandum.  As a result, they did not conduct an investigation or revise any policies or procedures relating to the various issues raised in the Internal Auditor’s Memorandum.”

The SEC order also found:

“… [S]hortly before Gore received the Internal Auditor’s Memorandum, Keever informed Gore that Triton Indonesia was making payments to Siouffi in connection with decisions by the Indonesian government and told Gore that money may have been paid to Indonesian auditors, including payments in connection with the predecessor’s tax audit, and the corporate tax refund. Keever also told Gore that the payments were recorded inaccurately in Triton Indonesia’s books and records.  Gore responded that he had worked in another foreign country and understood that such things had to be done in certain environments.”

The SEC’s order concluded as follows regarding McClure and Murphy.

“As Triton Indonesia’s Controller, Murphy knowingly participated in creating and recording false entries in Triton Indonesia’s books and records.  As Triton Indonesia’s Commercial Manager, McClure failed to assure that the entries prepared by Murphy accurately reflected the underlying transactions.  Keever informed both McClure and Murphy that the payments were for a purpose other than what was indicated in documents presented for their signatures.  Nevertheless, Murphy signed documents authorizing the expenditures and mischaracterizing them as legitimate business expenses.  In addition, Keever informed Murphy about the false characterization of payments which Murphy did not have any role in authorizing. Thereafter, Murphy participated in making false entries in Triton Indonesia’s books and records characterizing the payments as expenses incurred for the purpose indicated in fabricated documentation. By engaging in this conduct, McClure and Murphy violated [the FCPA's books and records provisions].”

The SEC’s order concluded as follows regarding Gore and Puetz.

“As members of Triton Energy senior management, Gore and Puetz each received information indicating that Triton Indonesia was engaged in conduct that was potentially unlawful.  Gore and Puetz received the Internal Auditor’s Memorandum … but took no action to initiate an investigation of the serious issues raised by the internal auditor.  Indeed, Gore ordered the internal auditor to collect and destroy all copies of the Internal Auditor’s Memorandum.  In addition, as described above, Keever described for Gore and Puetz certain payments made to Siouffi to obtain favorable Indonesian government decisions.  After receiving such information, Gore and Puetz failed to investigate the potentially unlawful conduct.  Instead, as the senior management of Triton Energy, Gore and Puetz simply acknowledged the existence of such practices and treated them as a cost of doing business in a foreign jurisdiction.  The toleration of such practices is inimical to a fair business environment and undermines public confidence in the integrity of public corporations.  Accordingly, Gore and Puetz caused Triton Energy to violate [the FCPA's anti-bribery provisions and books and records provisions].”

In the SEC’s order, McClure, Murphy, Gore and Puetz were ordered to cease and desist from committing or causing any future FCPA violations.


This original source New York Times article noted that the SEC’s complaint was “unusual” and that “it has been more than 10 years since the commission brought this kind of case against a United States company, but William McLucas, director for enforcement of the S.E.C., said the agency has ”a number of investigations under way” relating to improper foreign payments.”

According to media reports, Triton sold its Indonesian operations in 1996.

DOJ Alleges Wide-Ranging Conspiracy To Bribe Indian Officials To Secure Mining Licenses

Thursday, April 3rd, 2014

Yesterday the DOJ announced the unsealing of a criminal indictment charging six individuals “with participating in an alleged international racketeering conspiracy involving bribes of state and central government officials in India to allow the mining of titanium minerals.”

According to the indictment, Dmitry Firtash, a Ukrainian businessman who was arrested in March in Austria (see here for the DOJ’s prior release), was the leader of a criminal enterprise, through his group of companies Group DF, that included:

  • Andras Knopp (a Hungarian businessman)
  • Suren Gevorgyan (of Ukraine)
  • Gajendra Lal (an Indian national and permanent resident of the U.S.)
  • Periyasamy Sunderalingam (of Sri Lanka)
  • K.V.P. Ramachandra Rao (a Member of the Parliament in India who was an official of the state government of Andra Pradesh and a close advisor to the now-deceased chief minister of the State of Andhra Pradesh, Y.S. Rajasekhara Reddy)

According to the indictment, the illegal activities of the enterprise included, but were not limited to: “utilizing United States financial institutions to engage in the international transmission of dollars for the purpose of bribing Indian public officials in connection with obtaining approval of the necessary licenses for [a mining project within Andhra Pradesh], which project was forecast to generate more than $500 million in revenues per year …”

According to the indictment:

“Licenses were required for the project before mining could begin.  These licenses required the approval of both the State Government of Andhra Pradesh and the Central Government prior to their issuance.  The approval and issuance of such licenses were discretionary, non-routine governmental actions.”

The indictment charges all defendants with racketeering conspiracy; money laundering conspiracy; and two counts of interstate travel in aid of racketeering.

In addition, all defendants except Rao (the alleged Indian “foreign official”) were charged with conspiracy to violate the FCPA’s anti-bribery provisions.

The absence of Rao from this charge is, no doubt, a result of U.S. v. Castle, 925 F.2d 831 (5th Cir. 1991). In that case involving Canadian “foreign officials,” the DOJ acknowledged that it could not charge the officials with direct FCPA violations since the FCPA did not criminalize the receipt of bribes by a foreign official.  However, the DOJ charged the Canadian officials with conspiring to violate the FCPA.  The court dismissed this charge and rejected the DOJ’s position that a “foreign official” could be charged with conspiring to violate the FCPA.  Based on the language and legislative history of the FCPA, the court found a “legislative policy to leave unpunished a well-defined group of persons [i.e., “foreign officials] who were necessary parties to the acts constituting a violation of the substantive law.”

As to the FCPA conspiracy charge, Lal is charged as a domestic concern and the other defendants are charged as “persons” under the 78dd-3 prong of the statute which contains the following jurisdictional element – “while in the territory of the U.S., corruptly … make[s] use of the mails or any means or instrumentality of interstate commerce or to do any act in furtherance” of an improper payment. The indictment contains various allegations relevant to this jurisdictional prong including use of U.S. bank accounts, travel in the U.S., use of e-mail accounts hosted on computer servers located within the U.S., and use of cell phones operating on interstate networks.

Among other things, the indictment seeks forfeiture of approximately $10.6 million from the defendants.

In the DOJ’s release, Acting Assistant Attorney General David O’Neil states:

“Fighting global corruption is part of the fabric of the Department of Justice.  The charges against six foreign nationals announced today send the unmistakable message that we will root out and attack foreign bribery and bring to justice those who improperly influence foreign officials, wherever we find them.”

U.S. Attorney for the N.D. of Illinois Zachary Fardon states:

“Criminal conspiracies that extend beyond our borders are not beyond our reach.  We will use all of the tools and resources available to us to ensure the integrity of global business transactions that involve U.S. commerce.”

Special Agent in Charge of the FBI’s Chicago Office Robert Holley states:

“This case is another example of the FBI’s willingness to aggressively investigate corrupt conduct around the globe.  With the assistance of our law enforcement partners, both foreign and domestic, we will continue to pursue those who allegedly bribe foreign officials in return for lucrative business contracts.”

As noted in the release, other than Firtash, all other defendants remain at large.  When Firtash was arrested in March, he released this statement through Group DF.  As highlighted here, Firtash paid approximately $172 million to be released on bail.

For more on the enforcement action, see here from the Chicago Tribune, here from Reuters and here from Bloomberg.

As noted in this article, while several FCPA enforcement actions have been brought in connection with foreign license and permitting issues, the government has an overall losing record when put to its burden of proof in FCPA enforcement actions outside the context of foreign government procurement.

Why You Should Be Alarmed By The ADM FCPA Enforcement Action

Friday, January 24th, 2014

I am pleased to share my new article recently published by Bloomberg BNA’s White Collar Crime Report titled “Why You Should Be Alarmed By The ADM FCPA Enforcement Action.”

The abstract is as follows.

“Like all statutes, the Foreign Corrupt Practices Act has specific elements that must be met in order for there to be a violation. However, with increasing frequency in this new era of FCPA enforcement, it appears that the Department of Justice and the Securities and Exchange Commission have transformed FCPA enforcement into a free-for-all in which any conduct the enforcement agencies find objectionable is fair game to extract a multimillion-dollar settlement from a risk-averse corporation. A case in point is the recent $54 million FCPA enforcement action against Archer Daniels Midland Co. (ADM) and related entities.  After discussing the principal features of this enforcement action – namely that ADM and its shareholders were victims of a corrupt Ukraine government – this article highlights why anyone who values the rule of law should be alarmed by the ADM enforcement action.”

In Depth On The ADM Enforcement Action

Monday, December 30th, 2013

On December 20th, the DOJ and SEC announced (here and here) that Archer Daniels Midland Company (“ADM”) agreed to resolve a Foreign Corrupt Practices Act based on the conduct of an indirect subsidiary in Ukraine and a joint venture partner in Venezuela.  The enforcement action had 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).

[Although announced on December 20th, original source documents relevant to the enforcement action did not become publicly available until December 24th and the documents are still not on the DOJ's FCPA website].

The enforcement action involved a DOJ criminal information against Alfred C. Toepfer International Ukraine Ltd. resolved via a plea agreement, a non-prosecution agreement involving ADM, and a SEC settled civil complaint against ADM.

ADM entities agreed to pay approximately $54 million to resolve alleged FCPA scrutiny ($17.7 million in criminal fines to resolve the DOJ enforcement action and $36.5 million to resolve the SEC enforcement action).

This post summarizes both the DOJ and SEC enforcement actions.

DOJ

Alfred C. Toepfer International Ukraine Ltd. (ACTI Ukraine)

The criminal information begins as follows.

“At certain times between in or around 2002 and in or around 2008, the Ukrainian government did not have the money to pay value-added tax (“VAT”) refunds that it owed to companies that sold Ukrainian goods outside of Ukraine.” (emphasis added).

Thereafter, the information alleges, in pertinent part, as follows.

“In order to obtain VAT refunds from the Ukrainian government, ACTI-Ukraine [an indirect 80%-owned subsidiary of ADM], with the help of its affiliate, Alfred C. Toepfer International GmbH (ACTI Hamburg) [an indirect 80%-owned subsidiary of ADM], paid third-party vendors to pass on nearly all of that money as bribes to government officials.”

“In order to disguise the bribes, ACTI Ukraine and ACTI Hamburg devised several schemes involving the use of Vendor 1 [a U.K. export company that used both truck and rail services for the export of goods from Ukraine] and Vendor 2 [a Ukrainian insurance company that provided insurance policies for commodities].  In some instances, ACTI Ukraine and ACTI Hamburg paid Vendor 1, a vendor that provided export-related services for ACTI Ukraine, to pass on nearly all the money they paid it as bribes to Ukrainian government officials in exchange for those officials’ assistance in obtaining VAT refunds for and on behalf of ACTI Ukraine.  In addition, ACTI Ukraine purchased unnecessary insurance policies from Vendor 2 so that Vendor 2 could use nearly all of that money to pay bribes to Ukranian government officials in exchange for those officials’ assistance in obtaining VAT refunds for and on behalf of ACTI Ukraine.”

“In total, ACTI Ukraine, ACTI Hamburg, and their executives, employees, and agents paid roughly $22 million to Vendor 1 and Vendor 2 to pass on nearly all of that money to Ukrainian government officials to obtain over $100 million in VAT refunds.  These VAT refunds gave ACTI Ukraine a business advantage resulting in a benefit to ACTI Ukraine and ACTI Hamburg of roughly $41 million.”

“In furtherance of the bribery scheme, employees from ACTI Ukraine and its co-conspirators, while in the territory of the United States, and specifically in the Central District of Illinois, communicated in-person, via telephone, and via electronic mail with employees of ACTI Ukraine’s and ACTI Hamburg’s parent company, Archer Daniels Midland Company (ADM), which owned an 80% share of the ACTI entities, about the accounting treatment of VAT refunds in Ukraine.  During those communications, the ACTI employees mischaracterized the bribe payments as “charitable donations” and “depreciation.”

Based on the above allegations, the DOJ charged ACTI Ukraine with conspiracy to violate the FCPA’s anti-bribery provisions under 78dd-3.  This prong of the FCPA has the following jurisdictional element.

“while in the territory of the United States, corruptly to make use of the mails or any means or instrumentality of interstate commerce or to do any other act in furtherance” of a bribery scheme.

There is no allegation in the criminal information that anyone associated with ACTI Ukraine “while in the territory of the U.S.” made use of the mails or any means or instrumentality of interstate commerce.”

Rather, the information alleges, as to overt acts, as follows.

“[In July 2002 - 11 years prior to the enforcement action] executives from ACTI Hamburg [not the defendant ACTI Ukraine] traveled to ADM’s headquarters in Decatur, Illinois for business meetings.  In one of those meetings, these ACTI executives met with executives from ADM’s tax department and discussed ACTI Ukraine’s ability to recover VAT refunds and the way in which ACTI Ukraine was accounting for the write-down of those refunds.  During this discussion, the ACTI Hamburg executives stated that the way in which ACTI Ukraine was recovering its VAT refunds was by making charitable donations.  ACTI Ukraine was not making such donations in conjunction with VAT recovery.  In fact, ACTI Ukraine was writing down its VAT receivable based upon anticipated payments to Vendor 1.”

The other overt acts alleged in the information all concern e-mail traffic, none of which fits the jurisdictional element of “while in the territory of the U.S.”

The above charge against ACTI Ukraine was resolved via a plea agreement in which the company admitted, agreed, and stipulated that the factual allegations in the information are true and correct and accurately reflects the company’s “criminal conduct.”

As set forth in the plea agreement, the advisory Sentencing Guidelines calculation for the conduct at issue was between $27.3 million and $54.6 million and ACTI Ukraine agreed to a $17,711,613 criminal fine.  The plea agreement states as follows.

“The parties have agreed that a fine of $17,771,613 reflects an approximately thirty-percent reduction off the bottom of the fine range as well as a deduction of $1,338,387 commensurate with the fine imposed by German authorities on ACTI Hamburg.”

The plea agreement further states that this fine amount is the “appropriate disposition based on the following factors”:

“(a) Defendant’s timely, voluntary, and thorough disclosure of the conduct; (b) the Defendant’s extensive cooperation with the Department; and (c) the Defendant’s early, extensive, and unsolicited remedial efforts already undertaken and those still to be undertaken.”

As is common in corporate FCPA enforcement actions, the plea agreement contains a “muzzle clause” prohibiting ACTI Ukraine or anyone on its behalf from making public statements “contradicting the acceptance of responsiblity” of ACTI Ukraine

ADM

The NPA between the DOJ and ADM concerns the above Ukraine conduct as well as alleged conduct in Venezuela.  Only the Venezuela conduct is highlighted below.

The Statement of Facts attached to the NPA states as follows regarding “conduct relating to Venezuela.”

“From at least in or around 2004 to in or around 2009, when customers in Venezuela purchased commodities through ADM Venezuela [a joint venture between ADM Latin America (ADM Latin - a wholly owned subsidiary of ADM) and several individuals in Venezuela], the customers paid for the commodities via payment to ADM Latin.  During this time period, a number of customers overpaid ADM Latin for the commodities by including a brokerage commission in the cost of the commodities.  At the instruction of ADM Venezuela, including Executive A [a high-level executive at ADM Venezuela] and ADM’s Latin’s customers, rather than repaying these excess amounts to the customer directly, ADM Latin made payments to third-party bank account outside of Venezuela, which, in many instances, were used to funnel payments to accounts owned by employees or principles of the customer.  In addition, ADM Venezuela personnel prepared invoices to ADM Latin’s customers that violated Venezuelan laws and regulations regarding foreign currency exchanges.”

The NPA states that in approximately 1998, “ADM identified the customer “commission” practice as a business risk and recognized that customers may attempt to engage in such transactions with ADM Latin through the prospective joint venture, and instituted a policy that prohibited the repayment of excess funds to any account other than that originally used by the customer to make the payment.  However, although this policy was made known to Executive A and some ADM Venezuela employees, it was initially not formalized and from in or around 1999 until in or around 2004 the same practices continued.  The customers submitted excess payments to ADM Latin, claiming that the overpayment was attributable to deferred credit expenses (“DCE”).”

The NPA further states as follows.

“In or around 2004, ADM conducted an audit of ADM Venezuela due to an issue pertaining to Executive A and uncovered the payments to third-party bank accounts being made through DCE.  Although ADM took some remedial measures, including terminating the employment of the credit employee who had signed off on the refunds, conducting limited training on compliance for its joint venture partners, and instituting a written policy prohibiting refund payments of DCE to bank account different than the accounts from which the money came, the policy was narrowly drawn only to cover DCE payments.  ADM did not train ADM Latin employees and did not take adequate steps to monitor ADM Latin and ADM Venezuela to prevent such payments in forms other than DCE.  From in or around 2004 to in or around 2009, various customers, with the help of ADM Venezuela, including Executive A, began classifying these additional expenses as “commissions” or “commissions K,” rather than DCE, which were processed by the accounting department at ADM Latin, rather than the credit department.  Therefore, when the customers instructed that the excess “commissions” be paid to third-party entities at third-party bank accounts, ADM Latin authorized and made the payments.”

The NPA further states that “in or around 2008, Executive A, and others at ADM Venezuela negotiated the sale of soybean oil from ADM Latin to Industrias Diana [an oil company headquartered in Venezuela that was wholly owned by Petroleos de Venezuela, Venezuela's state-owned and controlled national oil company].”  According to the NPA, in connection with this sale, “Broker 1 [a third-party agent that purportedly performed brokerage services for customers of ADM Latin, including Industrias Diana, in connection with the purchase of commodities] submitted an invoice to ADM Latin for the $1,735,157 commission amount, which ADM Latin paid to Broker 1′s bank account.  Broker 1 then transferred this amount, in large part, to an account in the name of an employee of Industrias Diana.”

The NPA states as follows.

“On a number of other occasions, ADM Latin made payments to Broker 1′s bank account in connection with the purchase of commodities by other customers.  Broker 1 then transferred those amounts, in large part, to bank accounts outside of Venezuela in the name of the principals of those customers.  In total, ADM Latin transferred roughly $5 million to Broker 1.”

According to the NPA, certain of Broker 1′s transfers were to “accounts owned and controlled by Executive A, as well as numerous transfers to a company in which Executive A had ownership interests.”

The NPA states that the DOJ will “not criminally prosecute ADM … for any crimes … related to violations of the internal controls provisions of the FCPA arising from or related to improper payments by the Company’s subsidiaries, affiliates or joint ventures in Ukraine and Venezuela … and any other conduct relating to internal controls, books and records, or improper payments disclosed by the Company to the Department prior to the date on which this Agreement is signed.”

The NPA has a term of three years and ADM “agreed to pay a monetary penalty of $9,450,000 provided, however, that any criminal penalties that might be imposed by the Court on ACTI Ukraine in connection with its guilty plea and plea agreement … will be deducted from the $9,450,000 penalty agreed to under this Agreement.”

Pursuant to the NPA, ADM agreed to “report to the Department periodically regarding remediation and implementation of the compliance program and internal controls, policies, and procedures, as described in Attachment C” to the NPA.

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

“As today’s guilty plea shows, paying bribes to reap business benefits corrupts markets and undermines the rule of law.  ADM’s subsidiaries sought to gain a tax benefit by bribing government officials, and then attempted to deliberately conceal their conduct by funneling payments through local vendors.  ADM, in turn, failed to implement sufficient policies and procedures to prevent the bribe payments, although ultimately ADM disclosed the conduct, cooperated with the government, and instituted extensive remedial efforts.  Today’s corporate guilty plea demonstrates that combating bribery is and will remain a mainstay of the Criminal Division’s mission.  We are committed to working closely with our foreign and domestic law enforcement partners to fight global corruption.”

The release further states:

“The agreements acknowledge ADM’s timely, voluntary and thorough disclosure of the conduct; ADM’s extensive cooperation with the department, including conducting a world-wide risk assessment and corresponding global internal investigation, making numerous presentations to the department on the status and findings of the internal investigation, voluntarily making current and former employees available for interviews, and compiling relevant documents by category for the department; and ADM’s early and extensive remedial efforts.”

SEC

The SEC’s complaint (here) is based on the same Ukraine allegations set forth in the above DOJ action.

In summary fashion, the complaint alleges:

“This matter involves violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by ADM. At certain times between 2002 and 2008, Alfred C. Toepfer, International G.m.b.H. (“ACTI Hamburg”) and its affiliate, Alfred C. Toepfer, International (Ukraine) Ltd. (“ACTI Ukraine”) paid approximately $22 million to two third-party vendors so that they could pass on nearly all of that money as bribes to Ukrainian government officials to obtain over $100 million in accumulated value added tax (“VAT”) refunds. These payments were recorded by ACTI Hamburg and ACTI Ukraine in their books and records as insurance premiums and other business expenses. ADM indirectly owns a majority of ACTI Hamburg and ACTI Ukraine through its 80% interest in Alfred C. Toepfer International B.V. (“ACTI”), and in 2002, ADM began consolidating ACTI’s financial results into its financial statements.

In order to disguise the purpose of these improper payments, ACTI Hamburg and ACTI Ukraine made certain payments for export-related services and insurance premiums to third parties, but, in fact, nearly all of these payments were intended to be passed on through these third parties as bribes to Ukrainian government officials in exchange for obtaining VAT refunds for and on behalf of ACTI Ukraine.

ACTI’s conduct went unchecked by ADM, and ACTI continued to make these improper payments for several years. ADM’s anti-bribery compliance controls in existence at the time were insufficient in that they did not deter and detect these payments. ACTI Hamburg and ACTI Ukraine created inaccurately described reserves in their books and records, manipulated commodities contracts that were kept open for an extended period of time, structured payments to avoid detection, and created fictitious insurance contracts to hide from ADM and others the payments to third-parties to secure VAT refunds in Ukraine.

Due to the consolidation of ACTI’s financial results, which included these inaccurately characterized payments, into ADM’s books and records, ADM violated [the FCPA's books and records provisions]. ADM violated [the FCPA's internal controls provisions] by failing to maintain an adequate system of internal controls to detect and prevent the illicit payments.”

Under the heading “ADM’s Violations,” the complaint states:

“ACTI Hamburg and ACTI Ukraine characterized their improper payments to the Shipping Company and the Insurance Company as insurance premiums and other business expenses even though nearly all of those payments were intended to be used for payment to Ukrainian government officials. Due to the consolidation of ACTI’s financial results into ADM’s, ADM’s financial records also failed to reflect the true nature of the payments.

Between 2002 and 2008, ADM’s anti-corruption policies and procedures relating to ACTI were decentralized and did not prevent improper payments by ACTI to third-party vendors in the Ukraine or ensure that these transactions were properly recorded by ACTI. In this respect, ADM failed to implement sufficient anti-bribery compliance policies and procedures, including oversight of third-party vendor transactions, to prevent these payments at ACTI Hamburg and ACTI Ukraine.

Through its various schemes, ACTI Ukraine and ACTI Hamburg paid roughly $22 million in improper payments to obtain more than $100 million in VAT refunds earlier than they otherwise would have. Getting these VAT refunds earlier—before the Ukraine endured a brief period of hyperinflation—gave ACTI Ukraine a business advantage resulting in a benefit to ADM of roughly $33 million.”

Under the heading “ADM’s Discovery and Subsequent Remedial Measures,” the complaint states:

“In mid-2008, after becoming aware of these insurance expenses, ADM controllers questioned ACTI executives regarding these expenses, particularly the basis for the accounting treatment of these expenses. An ACTI Ukraine employee disclosed to its outside auditors that the insurance payments were, in fact, made to secure VAT refunds. After ADM controllers received this information, ADM’s legal and compliance departments took action, which led to an immediate investigation in which ADM ultimately uncovered ACTI’s various schemes to secure VAT refunds.

Following discovery of these payments, ADM immediately retained outside counsel to conduct an internal investigation. As a result of the investigation, using its authority as majority shareholder through the ACTI supervisory board, ADM terminated certain ACTI executives. ADM then voluntarily conducted a world-wide risk assessment and corresponding global internal investigation, made numerous presentations to the Department of Justice and Securities and Exchange Commission, made current and former employees available for interviews, produced documents without subpoena, and implemented early and extensive remedial measures.”

As noted in the SEC’s release, ADM agreed to pay approximately $36.5 million to resolve the action (disgorgement of $33,342,012 plus prejudgment interest of $3,125,354), consented to the entry of a final judgment permanently enjoining it from future violations of the FCPA books and records and internal control provisions, and to report on its FCPA compliance efforts for a three year period.  The release states:

“The SEC took into account ADM’s cooperation and significant remedial measures, including self-reporting the matter, implementing a comprehensive new compliance program throughout its operations, and terminating employees involved in the misconduct.”

In the release, Gerald Hodgkins (Associated Director in the SEC’s enforcement division) stated:

“ADM’s lackluster anti-bribery controls enabled its subsidiaries to get preferential refund treatment by paying off foreign government officials.  Companies with worldwide operations must ensure their compliance is vigilant across the globe and their transactions are recorded truthfully.”

William Bachman and Jon Fetterolf (Williams Connolly) represented ADM.

Robin Bergen (Clearly Gottlieb Steen & Hamilton) represented ATCI Ukraine.

In this press release, ADM’s Chairman and CEO stated:

“In 2008, soon after we became aware of some questionable transactions by a non-U.S. subsidiary, we engaged an outside law firm and an accounting firm to undertake a comprehensive internal investigation.  In early 2009, we voluntarily disclosed the matter to appropriate U.S. and foreign government agencies and undertook a comprehensive anti-corruption global risk analysis and compliance assessment. We have also implemented internal-control enhancements, and taken disciplinary action, including termination, with a number of employees. The conduct that led to this settlement was regrettable, but I believe we handled our response in the right way, and that the steps we took, including self-reporting, underscore our commitment to conducting business ethically and responsibly.”