Archive for the ‘Royal Dutch Shell’ Category

Troubling Trends and Problematic Patterns

Monday, January 31st, 2011

That is the alternate title I’ve given to Shearman & Sterling’s “Recent Trends and Patterns in FCPA Enforcement” (here).

The periodic publication is always in my “must-read” category. The author group is first-rate and includes noted FCPA practitioners Philip Urofsky (former Assistant Chief of the DOJ Fraud Section responsible for FCPA enforcement) and Danforth Newcomb (a dean of the FCPA bar).

The Shearman & Sterling piece raises particularly pointed questions as to the Panalpina-related enforcement actions and the seemingly vanishing “obtain or retain business” element of an FCPA anti-bribery violation.

I have covered these issues extensively as well – see here for several posts on the Panalpina-related enforcement actions and here (pg. 971 “Just How Was that Business Obtained or Retained”) as to questions about the enforcement agencies’ “obtain or retain business” allegations or interpretations.

The Shearman & Sterling piece states that “some of the government’s cases appear to blur the lines or muddy the waters when it comes to the limits of the statute.” The authors state as follows:

“In several cases, such as Pride International, Panalpina, and Royal Dutch Shell, the theories used to hold parents accountable for the acts of subsidiaries and vice versa appear to be unclear. In others, such as Pride International and Tidewater, the connection of the alleged conduct to “obtaining or retaining business,” a critical element of the statute was not pleaded or, worse, was pled in a way that suggests that virtually any bribe that improves a company’s profitability is sufficient – a result that is not consistent with established precedent and the language of the statute.”

Under the heading “Enforcement Strategies” the authors state:

“As in years past, the enforcement actions brought in 2010 provide insight, albeit sometimes clouded, into the DOJ’s and the SEC’s views of the scope and meaning of certain aspects of the statute, as well as their enforcement priorities and strategies. In doing so they are at times helpful and at other times opaque or, even worse, disturbing. As always, however, it is important to remember that although these agreements may have been hotly negotiated, in the end each of the companies and individuals settled. Thus, none of the government’s interpretations, or its view of how the law applied to the facts, has been subjected to a searching judicial examination in the context of a contested adversary proceeding.”

Under the heading “The Business Nexus” the author state:

“The Panalpina cases and certain allegations in other cases are likely to reopen the debate as to the meaning of the “obtain or retain business” element. This element is recognized as a critical factor in narrowing the scope of the FCPA. How much it does so, however, has long been a matter of debate. In its 2004 decision in U.S. v. Kay, the Fifth Circuit appeared to have ended the debate, holding that the FCPA was not limited to bribes to obtain business from a foreign government or even to bribes that led “directly to the award or renewal of contracts.” Analyzing the indictment in that case, the court held that “bribes paid to foreign officials in consideration for unlawful evasion of customs duties and sales taxes could fall within the purview of the FCPA’s proscription.” (emphasis in original). The court warned, however, that the scope of the statute was not limitless, stating, “We hasten to add, however, that this conduct does not automatically constitute a violation of the FCPA: It still must be shown that the bribery was intended to produce an effect – here, through tax savings – that would ‘assist in obtaining or retaining business.’”

Although some of the bribes in the Panalpina cases were made to obtain contracts and other specific business advantages, most of the payments were made to customs or tax officials to reduce duties and taxes, to expedite customs clearances, or to evade import regulations. In the latter cases, the government made very little effort to link such payments to obtaining or retaining business. For example, in Pride International, the DOJ alleged a number of what it termed “bribery schemes,” including payments to a Mexican Customs Official “to avoid taxes and penalties for alleged violations of Mexican customs regulations relating to a vessel leased by Pride International.” Similarly, in GlobalSantaFe, the SEC alleged that through a number of “suspicious payments” the company “avoided costs and gained revenue.” Without more explanation, such barebones allegations create the impression that the government equates gaining revenue or reducing costs generally with “obtaining or retaining business.” That, however, is the very opposite of the holding in Kay [...].”

“Reading between the lines of the pleadings, we can, in many cases, construct some theory of how certain of the payments might have fallen within the Kay rule, e.g., some payments appear to have allowed the importers to bring in equipment and rigs without which they could not perform new or existing contracts. It is even possible that, similar to the facts in Kay, the importers could not have competed for existing or new business had they paid the full duties or taxes or complied with other local requirements. The pleadings, however, for the most part only hint at such an underlying rationale, leaving us to wonder exactly what does the government think the business nexus means today?”

When an author group including a former DOJ official responsible for enforcing the FCPA (in a more measured and disciplined era) uses words such as “disturbing” and phrases such as “not consistent with established precedent and the language of the statute” – well, I think we all should take notice.

Its All About Pancourier Services in Shell

Thursday, December 16th, 2010

The Nigerian customs services has a reputation for being notoriously corrupt. According to this recent report (jointly commissioned by the European Union, the UN Office on Drugs and Crime, Nigeria’s Economic and Financial Crimes Commission, and the National Bureau of Statistics) “in the case of clearance of goods through customs [in Nigeria], the percentage of business who were requested to pay a bribe is considerable.”

So, what happens when ….

A Nigerian company uses two United Kingdom contractors in connection with a Nigerian project. The U.K. contractors utilize a Swiss company that provides freight forwarding and logistics services. The Swiss company makes payments to Nigerian customs officials to “expedite the delivery of goods and equipment into Nigeria.” The U.K. contractors seek reimbursement from the Nigerian company. The Nigerian company records the payments as “local processing fees” and “administrative / transport charges” on its books and records. The Nigerian company is wholly-owned by a U.K. company based in the Netherlands. The U.K. company based in the Netherlands has ADRs traded on a U.S. exchange. A few low-ranking employees or contract employees located in the U.S. of another subsidiary of the U.K. company based in the Netherlands receive letters or e-mails regarding the payments.

Why of course, $48 million into the U.S. treasury via an FCPA enforcement action even though the FCPA specifically states that the anti-bribery provisions “shall not apply to any facilitating or expediting payment to a foreign official … the purpose of which is to expedite or to secure the performance of a routine governmental action …”

Next up in the analysis of CustomsGate enforcement actions is Shell.

See here for the prior post on the Transocean enforcement action, here for the prior post on the Tidewater enforcement action here for the prior post on the Noble enforcement action and here for the prior post on the GlobalSantaFe enforcement action.

The Shell enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $48.1 million ($30 million criminal fine via a DOJ deferred prosecution agreement; $18.1 million in disgorgement and prejudgment interest via a SEC administrative order).

DOJ

Criminal Information

The DOJ enforcement action included a criminal information (here) filed against Shell Nigeria Exploration and Production Company Ltd. (“SNEPCO”), a Nigerian wholly-owned subsidiary of Royal Dutch Shell (“RDS”) with headquarters in Nigeria. RDS is a U.K. company based in The Hague, The Netherlands, with ADRs traded on the New York Stock Exchange.

The information alleges that “SNEPCO’s agents, including employees of its U.S. affiliates, while in the territory of the United States, used and caused the use of the mails and means and instrumentalities of interstate commerce and performed other acts for SNEPCO’s benefit in furtherance of the payment of bribes to foreign government officials for the purpose of assisting in obtaining or retaining business for, or directing business, to SNEPCO and others.”

The criminal information relates to “an express door-to-door courier service” called “Pancourier” provided by Panalpina “that expedited the delivery of goods and equipment into Nigeria.” [The Transocean enforcement action here also involved, in part, Pancourier services]. According to the information, “the Pancourier service involved the payment of bribes by [Panalpina] to [Nigerian Customs Service] officials to expedite the delivery of materials by inducing the officials to circumvent the official Nigerian customs clearance process and to provide an improper advantage with respect to the importation of certain tools and materials that were imported into Nigeria.” The information states: “as a result of the payment of bribes, SNEPCO employees knew that official Nigerian duties, taxes, and penalties would not [be] paid when the items were imported.”

According to the information, Panalpina invoiced the “Subsea EPIC Contractor” (a U.K. corporation and SNEPCO’s engineering, procurement, installation and commissioning contractor for subsea services) and the “Topsides EPIC Contractor (a U.K. corporation that provided project management, engineering design, and fabrication services) “for the bribes that it paid to the NCS officials and characterized the payments as, among other things, ‘local processing fees’ or ‘administrative/transport charges.’” The contractors, in turn sought reimbursement from SNEPCO for these charges.

According to the information:

(i) in approximately March 2004 “SNEPCO and SIEP [Shell International Exploration and Production Inc. - a wholly-owned subsidiary of RDS based in Houston] employees … knew, or were substantially certain, that all or a portion of the money paid by the Subsea EPIC Contractor and the Topsides EPIC Contractor to [Panalpina] for the Pancourier service was being paid as bribes to NCS officials to secure an improper advantage with respects to the importation of certain tools and materials that were imported into Nigeria. SNEPCO and SIEP employees were aware that as a result of the payment of bribes, official Nigerian duties, taxes, and penalties were not paid when the items were imported;

(ii) in approximately March 2004 to approximately March 2006 “certain other SNEPCO employees repeatedly authorized the Subsea EPIC Contractor and the Topsides EPIC Contractor to use the Pancourier service. This resulted in the payment of over $2 million to reimburse the subcontractors for charges submitted by [Panalpina]. SNEPCO intended that some or all of this money was to reimburse the subcontractors for the bribes made to NCS officials. The benefit to SNEPCO resulting from the bribes exceeded $7 million.”

(iii) “throughout the relevant time period, SNEPCO recorded the reimbursements for the improper payments to the NCS officials in its books, records, and accounts as ‘local processing fees’ and ‘administrative/transport charges’ among other terms.”

(iv) “at the end of SNEPCO’s fiscal years 2004 through 2006, the books and accounts of SNEPCO containing the false characterizations of the payments to the NCS officials, were incorporated into the books, records and accounts of RDS for purposes of preparing RDS’s consolidated year-end financial statements filed with the SEC.”

Based on the above conduct, the DOJ charged SNEPCO with conspiracy to violate the FCPA’s anti-bribery provisions and to knowingly falsify books and records; and aiding and abetting false books and records violation.

In terms of a U.S. nexus, the information charges as follows:

(i) “the Subsea Contract Manager [a U.S. citizen and employee of SIEP] located in Houston, Texas, sent an email to SNEPCO employees in Nigeria authorizing the Subsea EPIC Contractor to use Pancourier to transport electrical equipment, with knowledge of facts indicating that a bribe would be paid through [Panalpina] to the NCS officials to expedite the delivery of materials by inducing the officials to circumvent the Nigerian customs clearance process and which resulted in the non-payment of official Nigerian duties, taxes, and penalties.”

(ii) “the Subsea Contract Engineer [a SIEP contract employee] located in Houston, Texas sent an e-mail to SNEPCO employees in Nigeria authorizing the Subsea EPIC Contractor to use Pancourier to transport miscellaneous parts, with knowledge of facts indicating that a bribe would be paid through [Panalpina] to the NCS officials to expedite the delivery of materials by inducing the officials to circumvent the Nigerian customs clearance process and which resulted in the non-payment of official Nigerian duties, taxes, and penalties.”

(iii) “a Subsea EPIC Contractor employee drafted and sent an e-mail from Nigeria to … the Subsea Contract Manager and Subsea Contract Engineer, in Houston, Texas advising that Pancourier was ‘illegal.’”.

The criminal charges against SNEPCO were resolved via a deferred prosecution agreement (here) between the DOJ, SNEPCO and RDS “on behalf of its wholly-owned subsidiary SNEPCO.”

Deferred Prosecution Agreement

Pursuant to the DPA, SNEPCO admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, subsidiaries, and agents as set forth above.

The term of the DPA is three years and seven months and it states that the DOJ entered into the agreement “based on the individual facts and circumstances” of the case and SNEPCO. Among the factors stated are the following.

(a) SNEPCO and RDS cooperated with the Department’s investigation of SNEPCO and RDS entities; (b) SNEPCO and RDS undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures …; (c) SNEPCO and RDS agreed to continue to cooperate with the Department in any ongoing investigation …; and (d) the impact on SNEPCO and other RDS entities, including collateral consequences, of a guilty plea or criminal conviction.”

As stated in the DPA, the fine range for the above describe conduct under the U.S. Sentencing Guidelines was $34.2 million to $68.4 million. Pursuant to the DPA, SNEPCO and RDS agreed that SNEPCO shall pay a monetary penalty of $30 million – approximately 15% below the minimum guideline amount.

Pursuant to the DPA, SNEPCO and RDS agreed to a host of compliance undertakings and to report to the DOJ on an annual basis (during the term of the DPA) “on its progress and experience in maintaining and, as appropriate, enhancing its compliance policies and procedures.”

As is standard in FCPA DPAs, SNEPCO and RDS agreed not to make any public statement “contradicting the acceptance of responsibility by SNEPCO as set forth” in the DPA and SNEPCO and RDS further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.

SEC

The SEC’s administrative order against RDS and SIEP (here) concerns “violations of the anti-bribery provisions of the FCPA” by SIEP and “the record keeping and internal controls provisions of the FCPA” by RDS.

Both violations concern the same core set of facts as set forth in the DOJ’s DPA. The SEC order states as follows.

“From September 2002 through November 2005, SIEP, on behalf of Shell, authorized the reimbursement or continued use of services provided by a company acting as a customs broker that involved suspicious payments of approximately $3.5 million to officials of the Nigerian Customs Service in order to obtain preferential treatment during the customs process for the purpose of assisting Shell in obtaining or retaining business in Nigeria on Shell’s Bonga Project. As a result of these payments, Shell profited in the amount of approximately $14 million. None of the improper payments was accurately reflected in Shell’s books and records, nor was Shell’s system of internal accounting controls adequate at the time to detect and prevent these suspicious payments.”

According to the SEC, “the Nigerian customs clearance process was routinely delayed, often taking weeks or even months to clear equipment through customs.” Use of the Pancourier service “expedited shipments into Nigeria by about 20 to 39 days.” “A shipment that would take 30 days to clear Nigerian customs using regular air freight could clear customs in as quickly as 10 days using” the Pancourier service.

In summary fashion, the SEC’s order states as follows:

“Shell benefitted through these payments by bypassing the normal customs process and importing equipment into Nigeria faster than Shell would have had the payments not been made. Ultimately, this accelerated Shell’s ability to reach First Oil and provided Shell with the value of its oil production profits sooner than it would have had it not made the payments. By avoiding the payment of certain customs duties through these payments, Shell also benefited by having the use of those funds when Shell would have otherwise had to wait to be reimbursed from the proceeds of oil production. As a result of these payments, Shell profited in the amount of $14,153,536.”

The SEC’s administrative order requires, among other things, the payment of $14,153,536 in disgorgment and $3,995,923 in prejudgment interest.

Ralph Ferrara (here) and Christopher Clark, a former DOJ attorney, (here), both at Dewey & LeBoeuf, represented Shell.

Major Shipment – Customs Cases Bring In $236.5 Million

Friday, November 5th, 2010

The pipeline that contains pending FCPA enforcement actions burst yesterday as the DOJ and SEC announced enforcement actions against 13 separate entities.

In enforcement actions that have long been anticipated, Panalpina entities, as well as several others, settled DOJ and SEC enforcement actions principally focused on customs and related payments in Nigeria, but also including alleged improper conduct in Angola, Brazil, Russia, Kazakhstan, Venezuela, India, Mexico, Saudi Arabia, the Republic of Congo, Libya, Azerbaijan, Turkmenistan, Gabon and Equatorial Guinea.

The combined DOJ/SEC settlement amounts total $236.5 million.

Your FCPA scorecard thus shows that since June 28th, the U.S. government has brought FCPA enforcement actions totaling approximately $1.1 billion. With numbers like these, aggressive FCPA enforcement based on, often times, dubious legal theories (more on that later) seems like the most profitable government program ever conceived.

Set forth below is a basic overview of the settlements. A more thorough review of the hundreds of pages of relevant documents will be forthcoming.

The DOJ resolution documents can be found here, the SEC resolution documents here.

Panalpina Entities

DOJ

Entities: Panalpina World Transport (Holding) Ltd. and Panalpina Inc.

Resolution Vehicles: Criminal information charging Panalpina World Transport(Holding) with conspiracy to violate and violating the FCPA’s anti-bribery provisions. Charges resolved through a deferred prosecution agreement. Criminal information charging Panalpina Inc. with conspiracy to violate the FCPA’s books and records provisions and aiding and abetting certain customers in violating the FCPA’s books and records provisions. Charges resolved through a plea agreement.

Countries: Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia, and Turkmenistan

Penalty: Combined $70.56 million

SEC

Entity: Panalpina, Inc.

Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery violations, aiding and abetting FCPA anti-bribery violations, and FCPA books and records and internal controls violations.

Countries: Nigeria, Angola, Brazil, Russia, and Kazakhstan

Disgorgement: $11,329,369

Pride Entities

DOJ

Entities: Pride International Inc. and Pride Forasol S.A.S.

Resolution Vehicle: Criminal information charging Pride International with conspiracy to violate the FCPA’s anti-bribery provisions and books and records provisions; violating the FCPA’s anti-bribery provisions; and violating the FCPA’s books and records provisions. Charges resolved through a deferred prosecution agreement. Criminal information charging Pride Forasol with conspiracy to violate the FCPA’s anti-bribery provisions; violating the FCPA’s anti-bribery provisions; and aidng and abetting violations of the FCPA’s books and records provisions. Charges resolved through a plea agreement.

Countries: Venezuela, India and Mexico

Penalty: $32.625 million (combined)

SEC

Entity: Pride International Inc.

Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery violations, FCPA books and records and internal controls violations.

Countries: Venezuela, India, Mexico, Kazakhstan, Nigeria, Saudi Arabia, Republic of Congo, and Libya

Disgorgement and interest: $23,529,718

Tidewater Entities

DOJ

Entities: Tidewater Marine International Inc., Tidewater Inc.

Resolution Vehicle: Criminal information charging Tidewater Marine with conspiracy to violate the FCPA’s anti-bribery and books and records provisions and violating the FCPA’s books and records provisions. Charges resolved through a deferred prosecution agreement with Tidewater that requires, among other things, Tidewater Marine to pay a $7.35 million criminal penalty.

Countries: Azerbaijan and Nigeria

Penalty: $7.35 million

SEC

Entity: Tidewater Inc.

Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery violations, FCPA books and records and internal controls violations

Countries: Nigeria, Azerbaijan

Disgorgement: $8,104,362

Civil Penalty: $217,000

Transocean Entities

DOJ

Entities: Transocean Inc. and Transocean Ltd.

Resolution Vehicle: Criminal information charging Transocean Inc. with conspiracy to violate the FCPA’s anti-bribery and books and records provision; violating the FCPA’s anti-bribery provisions; and aiding and abetting the FCPA’s books and records provisions. Charges resolved through a deferred prosecution agreement with Transocean Ltd. that requires, among other things, Transocean Inc. to pay a $13.44 million criminal penalty.

Countries: Nigeria

Penalty: $13.44 million

SEC

Entity: Transocean Inc.

Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery violations, FCPA books and records and internal controls violations

Countries: Nigeria

Disgorgement and interest: $7,265,080

GlobalSantaFe Corp.

SEC

Entity: GlobalSantaFe Corp.

Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery provisions, FCPA books and records and internal controls violations

Countries: Nigeria, Gabon, Angola, Equatorial Guinea

Disgorgement: $3,758,165

Civil Penalty: $2.1 million

Noble Corporation

DOJ

Entity: Noble Corporation

Resolution Vehicle: Non-proseuction agreement in which Noble Corporation: (i) acknowledged that certain of its employees knew that payments would be passed on as bribes to Nigerian customs officials; and (ii) admitted that the company falsely recorded the bribe payments as legitimate business expenses.

Countries: Nigeria

Penalty: $2.59 million

SEC

Entity: Noble Corporation

Resolution Vehicle: Settled civil complaint charging FCPA anti-bribery violations, FCPA books and records and internal controls violations

Countries: Nigeria

Disgorgement and interest: $5,576,998

Royal Dutch Shell Entities

DOJ

Entities: Royal Dutch Shell plc and Shell Nigeria Exploration and Production Company Ltd. (“SNEPCO”)

Resolution Vehicle: Criminal information charging SNEPCO with conspiracy to violate the FCPA’s anti-bribery and books and records provisions and with aiding and abetting the FCPA’s books and records provisions resolved through a deferred prosecution agreement with Royal Dutch Shell Plc requiring, among other things, SNEPCO to pay a $30 million criminal penalty

Countries: Nigeria

Penalty: $30 million

SEC

Entity: Royal Dutch Shell plc and Shell International Exploration and Production Inc (“SIEP”).

Resolution Vehicle: Administrative cease and desist order finding FCPA books and records and internal control violations by Royal Dutch Shell and FCPA anti-bribery violations by SIEP

Countries: Nigeria

Disgorgement: $18,149,459

*****

According to the SEC release (here), Cheryl Scarboro, Chief of the SEC’s FCPA Unit stated: “This investigation was the culmination of proactive work by the SEC and DOJ after detecting widespread corruption in the oil services industry. The FCPA Unit will continue to focus on industry-wide sweeps, and no industry is immune from investigation.”

The SEC release further states: [t]his is the first sweep of a particular industrial sector in order to crack down on public companies and third parties who are paying bribes abroad.”

Coming Soon, "Freight Forwarding" Starring Panalpina, Shell, and Others

Monday, October 18th, 2010

For the second time over a one week span, the FCPA was front page news in the Wall Street Journal. This time, it was Panalpina and how it, and one of its customers, Royal Dutch Shell, are reportedly close to settling FCPA enforcement actions. [See here for the other recent WSJ story regarding Schlumberger.]

Last December, Panalpina announced that it had commenced settlement discussions with the DOJ. For more information on this, as well as background on the Panalpina matter see this prior post.

For background on the Shell matter, in its most recent Form 2O-F (March 2010) Shell stated (here) as follows:

“In July 2007, Shell’s US subsidiary, Shell Oil, was contacted by the US Department of Justice regarding Shell’s use of the freight forwarding firm Panalpina, Inc and potential violations of the US Foreign Corrupt Practices Act (FCPA) as a result of such use. Shell has an ongoing internal investigation and is co-operating with the US Department of Justice and the US Securities and Exchange Commission investigations. As a result of these investigations, Shell may face fines and additional costs.”

According to the WSJ story by Kara Scannell and Thomas Catan, Panalpina is expected to pay around $85 million in fines to settle charges that it violated the FCPA and Shell is expected to pay around $30 million in penalties to settle charges stemming from its use of Panalpina as an agent in Nigeria.”

As noted in the WSJ article, the Panalpina matter has spawned several related inquiries of Panalpina customers, including Shell, Nabor Industries Ltd., Schlumberger Ltd., Transocean Ltd., and Noble Corp. The WSJ reports that “several of those companies also are expected to reach settlements with U.S. authorities in coming weeks or months.”

Freight forwarding, customs clearance, and logistics. It’s rather mundane stuff.

It will be interesting to see the allegations in these upcoming enforcement actions as the public disclosures have suggested conduct and facts that would seem to implicate the FCPA’s facilitating payments exception. However, because these FCPA enforcement actions (like most) will never be challenged or subjected to meaningful judicial scrutiny, this relevant exception will likely not be explored.

If you are scoring at home, this means that an additional $115 million will flow into the U.S. Treasury based on allegations that two foreign companies made “improper payments” to foreign officials. For more on this issue, see here for my recent comments (pg. 4) at the World Bribery and Corruption Compliance Forum and here for how the FCPA has become, in the eyes of some, a U.S. government cash cow.