Archive for the ‘SEC Enforcement Action’ Category

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.

The First FCPA Enforcement Action Against A Foreign Issuer, Plus An Interesting Issue

Tuesday, May 13th, 2014

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

In 1996, the SEC brought this civil complaint against Montedison, an Italian corporation with headquarters in Milan that had interests in the agro-industry, chemical, energy and engineering sectors.  The enforcement action was principally a financial fraud case as the SEC alleged that the company committed “financial fraud by falsifying documents to inflate artificially the company’s financial statements.”  (See here for the SEC’s release).

However, the enforcement action also included allegations that Montedison violated the FCPA’s books and records and internal control provisions based on allegations that the company concealed “hundreds of million of dollars of payments that, among other things, were used to bribe politicians in Italy and other persons.”

As described in the SEC’s complaint, Montedison wanted to enter into a joint venture with an Italian state energy agency and “determined to secure political backing” to change the terms of the underlying joint venture agreement as well as overturn a judge’s decision that had the effect of making the proposed transaction more difficult.  According to the complaint, “Montedison determined that to achieve these ends, the company would need to pay extensive bribes.”

The complaint then states:

“In an attempt to do so, Montedison management entered into an arrangement with a Rome real estate developer (the “Developer”), who was developing real estate complexes in Rome for Montedison at that time.  Under their agreement, Montedison, directly or through companies it controlled, effected numerous real estate purchases and sales at artificially high prices.  The artificial prices had the effect of transferring hundreds of million of dollars to the Developer.  On information and belief, the Developer used this money to bribe politicians in Italy and other persons on Montedison’s behalf.”

For example, the complaint alleges that Montedison, through a wholly-owned subsidiary, overpaid the Developer approximately $95 million and agreed to pay an additional $123 million “for properties that were either owned by, or had connections to, various politicians.

As noted in the SEC’s complaint, “despite these efforts, Montedison’s management was ultimately unsuccessful” in its bribery scheme.

According to the complaint:

“The fraudulent conduct … continued undetected for several years because of a seriously deficient internal control environment at Montedison.  In fact, Montedison’s internal controls were so deficient that, according to Montedison, neither the company itself, nor its auditors, have been able to reconstruct previously what occurred and who was responsible.”

The Montedison enforcement action was the first SEC Foreign Corrupt Practices Act enforcement action against a foreign issuer and was based on the company having American Depository Receipts ADRs listed on the New York Stock Exchange.

Montedison did not immediately resolve the SEC’s complaint as is the norm today.  Rather, the 1996 complaint was resolved in 2001.   As noted in the SEC’s release Montedison was ordered to pay a civil penalty of $300,000 and resolved the enforcement action without admitting nor denying liability for the allegations in the complaint.  According to the release, “the fraudulent conduct was disclosed only after new management was appointed when Montedison disclosed it was unable to service its bank debt.  Virtually all of the former senior management at Montedison responsible for the fraud were convicted by Italian criminal authorities and were sued by the company.”

The release notes as follows.

“Montedison was acquired by Compart, S.p.A., in late 2000 and its ADRs were delisted. Compart then changed its name to Montedison. No securities of Compart are listed for sale by U.S. stock exchanges. Compart, which agreed to the settlement on behalf of the former Montedison, was not a defendant in the Commission’s complaint.”

In original source media reports, Paul Gerlach (SEC Associate Enforcement Director at the time) stated:

“The case’s message is if you are a foreign company wanting to trade stock here, you are going to have to adhere to the same reporting, accounting and internal control standards followed by U.S. companies.”

Of interest, a 1996 Washington Post article about the enforcement action noted:

“The commission has been locked in debate with the NYSE for years over whether foreign companies that raise money from U.S. investors should be held to the same reporting standards as U.S. companies. SEC officials have argued that loosening the standards would hurt U.S. investors. The exchange has responded that overly stringent rules will discourage foreign companies from raising capital in the United States and erode the preeminent position of U.S. securities markets.”

Why, despite the SEC’s allegations, was Montedison not charged with FCPA anti-bribery violations?  Jurisdictional issues aside, according to a knowledgeable source at the SEC at the time, there was a belief that there were no “foreign” officials involved because Montedison, an Italian company, allegedly bribed Italian officials.

It’s an interesting question.

Does the “foreign” in official mean as it relates to the specific company at issue or as to the U.S.?

I believe that the legislative history supports the later, but will also add that Congress likely never understood that it was legislating as to foreign issuers when the FCPA was passed in 1977 because there were few foreign issuers.  Today, there are approximately 1,000 foreign issuers.  (See here and here).

In most FCPA enforcement actions against foreign issuers (Siemens, Daimler, Total, Technip, Alcatel-Lucent, etc.) the question is not relevant as, for example, German or French officials were not among the officials allegedly bribed.

HP And Related Entities Resolve $108 Million FCPA Enforcement Action

Thursday, April 10th, 2014

Hewlett-Packard Co. (“HP”) has over 300,000 employees worldwide.

Among the employees during a certain relevant time period, were 5 individuals in Russia employed by a subsidiary, 1 individual in Poland employed by a subsidiary, and a vaguely defined group of individuals in Mexico employed by a subsidiary that worked on one sales deal.

The above individuals engaged in conduct largely occurring 7-14 years ago.

The government alleges that all of these individuals were specifically trained on the FCPA by HP and that HP had other internal controls in place as relevant to these individuals.

Notwithstanding these controls, the government alleges that the individuals willfully circumvented HP’s controls to make alleged improper payments to alleged “foreign officials” by, among other things, creating secret slush funds, concealing certain other information, making false representations, and engaging in other covert means such as anonymous e-mail accounts and pre-paid mobile telephones.

So reads the latest Foreign Corrupt Practices Act enforcement action.

Yesterday the DOJ and SEC announced (here and here) a coordinated FCPA enforcement action against various HP and related entities based on alleged conduct in Russia, Poland and Mexico.  As noted in this previous post, HP has been under FCPA scrutiny since early 2010.

The enforcement action involved:

HP and related entities agreed to pay approximately $108.2 million (all guaranteed by HP) to resolve the alleged FCPA scrutiny (approximately $76.7 million in the DOJ actions; and approximately $31.5 million in the SEC action).

The enforcement action, in terms of settlement amount, is the 11th largest of all-time and the 2nd largest of all-time against a U.S. company (recognizing of course that HP’s foreign subsidiaries were a large focus of the enforcement actions).

This post summarizes both the DOJ and SEC enforcement actions based on a review of the original source documents (comprising approximately 175 pages in total).

DOJ Enforcement Action

The enforcement action involved a criminal information against HP Russia resolved via a plea agreement; a criminal information against HP Poland resolved via a DPA; and an NPA concerning HP Mexico.

HP Russia

According to the information, HP Russia is a wholly owned subsidiary of HP and was principally responsible for transacting business in Russia and the Commonwealth of Independent States (“CIS”).  During the relevant time period, the information alleges that HP Russia had approximately 315 and 55o employees and that HP Russia “was subject to HP’s internal accounting controls, and HP Russia’s financial results were included in the consolidated financial statements that HP filed with the SEC.”

The alleged conduct concerns five employees at HP Russia.

  • HP Russia Executive 1
  • HP Russia Executive 2
  • HP Russia Manager 1
  • HP Russia Manager 2
  • HP Russia Manager 3

The conduct at issue concerns “a project to automate the telecommunications and computing infrastructure of the Office of the Prosecutor General of Russia (“GPO” or “GP”),” a project valued at approximately $100 million.  According to the information, the Russian government used a state-owned entity organized under the Department of Affairs of the President of the Russian Federation, to manage the GPO project tender and execution.”

In pertinent part, the information alleges as follows.

“Between in or about 2000 and 2007, HP Russia and co-conspirators agreed to make and did make improper payments to secure, retain and implement the GPO project.  Members of the conspiracy structured the deal to create a secret slush fund, which by 2003 totaled approximately ($10 million at then-prevailing exchange rates), at least part of which was intended for bribes, kickbacks, and other improper payments.  To execute and hide the scheme, members of the conspiracy failed to implement internal controls intended to maintain accountability over HP’s assets, willfully circumvented existing internal controls, and falsified corporate books and records relied on by HP officers and external auditors to authorize the transaction and prepare HP’s consolidated financial statements.”

Regarding the slush fund, the information alleges that HP Russia “created million of dollars in excess margin for use as a slush fund” by selling product to an “often-used channel partner of HP” which in turn sold product to an intermediary at a mark-up. According to the information, “To keep track of the fund, which was concealed in the project’s financials, HP Russia maintained two sets of project pricing records:  off-the-books versions, known only to conspirators, which identified slush fund recipients, and sanitized versions of the same documents which were provided to HP credit, finance, and legal officers outside of HP Russia.” According to the information, “one example of an off-the-books document was an encrypted, password-protected spreadsheet.”

According to the information, various HP Russia employees concealed the slush fund during HP’s Solution Opportunity Approval and Review (“SOAR”) process which applied to “all-service related projects valued at greater than $500,000 anywhere in the world, including Russia.”  Among other things, the information alleges that HP Russia employees made false representations and falsely certified the adequacy of HP Russia’s internal controls, a certification the information alleges that “was relied upon by HP’s EMEA business to certify to HP’s headquarters in the United States that EMEA’s financial statements were accurate.”

According to the information, the alleged improper payments (approximately €8 million) were made through various intermediaries to “Russian Official A,” a director of a Russian government agency who assumed responsibility for the GPO Project as well as “Individual A,” an associate of Russian Official A, for things such as:

  • “expensive jewelry, luxury automobiles, travel, and other items typically associated with gifts”
  • “travel services, vehicles, tuition, electronic equipment, cotton, textiles, and various other items”
  • a “hotel bill: and “other luxury purchases” such as “expensive watches, swimming pool technology, and other items”
  • “furniture, vehicles, clothing, travel services, household appliances, hotel stays, and other items”

Based on the above alleged conduct, the information charges (i) conspiracy to violate the FCPA’s anti-bribery provisions and books and records and internal controls provisions; (ii) one count of violating the FCPA’s anti-bribery provisions; (iii) one count of violating the FCPA’s internal controls provisions; and (iv) one count of violating the FCPA’s books and records provisions.

The conduct alleged in the information allegedly occurred between December 2000 and February 2007.  As to U.S. jurisdictional allegations, the information alleges a 2001 meeting in Rockville, Maryland regarding the GPO project; a 2003 e-mail “which was routed through the United States;” and a 2003 certification “transmitted to HP’s offices in California.”

The above charges were resolved via a plea agreement in which HP Russia agreed to plead guilty to the four charges described above.  Pursuant to the plea agreement, HP Russia agreed to pay a criminal fine of approximately $58.8 million.  In the plea agreement, HP agreed to guarantee HP Russia’s payment as well as other conditions imposed upon HP Russia such as cooperation, and compliance obligations typical in corporate FCPA enforcement actions.  Among other things, the plea agreement imposed upon HP a three year reporting obligation to the DOJ regarding remediation and implementation of various compliance measures. As pertinent to the above allegations, in the plea agreement HP Russia and HP waived any and all statute of limitation defenses.

According to the plea agreement, the advisory fine range based on the alleged conduct at issue was $87 million to $174 million.   The plea agreement states that the approximate $58.8 million fine was appropriate based on the following factors:

“(a) monetary assessments that HP has agreed to pay to the SEC and is expected to pay to law enforcement authorities in Germany relating to the same conduct at issue …; (b) HP Russia’s and HP’s cooperation has been, on the whole, extraordinary, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (c) HP Russia and HP have engaged in extensive remediation, including by taking appropriate disciplinary action against culpable employees of HP and enhancing their internal accounting, reporting, and compliance functions; (d) HP has committed to continue enhancing its compliance program and internal accounting controls … (e) the misconduct identified … was largely undertaken by employees associated with HP Russia, which employed a small fraction of HP global workforce during the relevant period; (f) neither HP nor HP Russia has previously been subject of any criminal enforcement action by the Department or law enforcement authority in Russia or elsewhere; (g) HP Russia and HP have agreed to continue to cooperate with the Department and other U.S. and foreign law enforcement authorities, if requested by the Department …”

HP Poland

According to the information, HP Poland is a wholly owned subsidiary of HP and, among other functional responsibilities, HP Poland managed most of HP’s activities in Poland and had more than 200 employees during the relevant time period.   According to the information, HP Poland ”was subject to HP’s internal accounting controls, and HP Poland’s financial results were included in the consolidated financial statements that HP filed with the SEC.”

The specific alleged conduct concerned “HP Poland Executive” (a citizen of Poland who was the District Manager of Public Sector Sales and Public Sector Sales Lead).

According to the information, HP Poland “(i) caused the falsification of HP’s books and records; and (ii) circumvented HP’s existing internal controls, in connection with a scheme to make corrupt payments to one or more foreign officials in Poland, including the Polish Official [the Director of Information and Communications Technology within the Polish National Police Agency ("KGP") which was part of the Polish Ministry of the Interior and Administration].”

According to the information, “the conduct was related to HP Poland’s efforts to secure and maintain millions of dollars in technology contracts with the Polish government.”  The information alleges that HP Poland “resorted to corruption to foster a relationship with the Polish Official.”

Specifically, the information alleges that in 2006 the Polish Official attended a technology-industry conference in San Francisco and that the “weekend before the conference” HP Poland “paid for dinners, gifts, and sightseeing by the Polish Official in San Francisco.”  The information also alleges that HP Poland took the Polish Official on a side trip to Las Vegas “with no legitimate business purpose” and that while in Las Vegas HP Poland paid for the Polish Official’s “transportation and expenses … including lodging, drinks, dining, shows, other events on or near the Las Vegas Strip, and a private tour flight over the Grand Canyon.”  As to the above travel and entertainment allegations, the information also alleges that “another global technology company” (“Company A”) also wined and dined the Polish Official and paid for his expenses.

The information also alleges that “beginning in late 2006, HP Poland started providing technology products to the Polish Official for personal use.”  The information states:

“Early gifts included HP products, such as desktop and laptop computers, and later expanded to include additional HP computers, HP-branded mobile devices, an HP printer, iPods, flat screen televisions, cameras, a home theater system, and other items.”

According to the information, the above things of value were provided to the Polish Official “in circumvention of HP’s internal controls” and were not “properly reflected in HP’s books and records.”

The information also alleges that in early 2007, “shortly after receiving the first of these gifts, Polish Official signed a contract with HP Poland on behalf of the Polish government, valued at approximately $4.3 million.  A month later, the Polish Official signed another contract with HP Poland, valued at approximately $5.8 million.”

According to the information, “around the date of the second contract award, HP Poland expanded the bribes to include large cash payments to Polish Official from off-the-books accounts.  HP Poland agreed to pay Polish Official 1.2% of HP Poland’s net revenue on any contract awarded by KGP.”

The information then specifically alleges that in 2007 “Polish Official signed a KGP contract with HP Poland valued at approximately $15.8 million” and that “HP Poland Executive delivered to Polish Official’s personal residence a bag filled with approximately $150,000 in cash.”  The information also alleges another instance in which HP Poland Executive met Polish Official in a Warsaw parking lot and gave Polish Official another bag filled with approximately $100,000 in cash.  Further, the information alleges that in 2008, on at least four separate occasions, HP Poland Executive gave Polish Official bags of cash totaling at least $360,000.  According to the information, in 2008, Polish Official signed three contracts on behalf of KGP with HP Poland for approximately $32 million.

As to the above payments, the information alleges that HP Poland willfully circumvented HP’s internal controls and falsified corporate books and records relied on by HP’s officers and external auditors to prepare HP’s financial statements.  Moreover, the information alleges that HP Poland facilitated the corrupt relationship with Polish Official through covert means such an anonymous e-mail accounts, pre-paid mobile telephones, and other means to circumvent HP’s internal controls.

In total, the information alleges between 2006 and 2010 HP Poland “provided Polish Official cash worth the equivalent of approximately $600,000, gifts valued in excess of $30,000, and several thousand dollars in improper travel and entertainment benefits.” According to the information, “during this same time span, the Polish government awarded to HP Poland at least seven contracts for KGP-related information technology products and services, with a total value of approximately $60 million.

Based on the above conduct, the information charges HP Poland with violating the FCPA’s books and records and internal controls provisions.

The above charges were resolved via a DPA in which HP Poland admitted and accepted responsibility for the above conduct.  The DPA has a term of three years and it lists the following relevant considerations considered by the DOJ;

“(a) HP Poland’s cooperation with the Department’s investigation; (b) HP Poland’s ultimate parent corporation, HP, has committed to maintain and continue enhancing its compliance program and internal accounting controls …; and (c) HP Poland and HP have agreed to continue with the Department and other U.S. and foreign law enforcement authorities in any ongoing investigation …”

Based on the advisory guidelines calculation in the DPA, the fine range for the alleged conduct at issue was $19.3 million to $38.6 million.  Pursuant to the DPA, HP Poland agreed to pay approximately $15.5 million, an amount deemed “appropriate” given the “nature and extent of HP Poland’s and HP’s cooperation and their extensive remediation in this matter.”

Like the HP Russia plea agreement, in the HP Poland DPA, HP agrees to guarantee the payment of HP Poland and to implement various compliance measures and report to the DOJ for a three year period.  As is typical in FCPA DPAs, the HP Poland DPA contains a so-called “muzzle clause.”

HP Mexico

The NPA with HP Mexico (a wholly-owned subsidiary of HP based in Mexico) states that beginning in 2008 “HP Mexico began presales activities and discussions with Pemex (Mexico’s alleged state-owned petroleum company) to sell to Pemex a suit of business technology optimization (“BTO”) software, hardware, and licenses.”  According to the NPA, BTO is a niche product that requires sophisticated knowledge to integrate with other software products and the contracts for this software sale were for approximately $6 million.

According to the NPA, “HP Mexico sales managers on the BTO Deal ultimately decided that they could not win the business without working with, and making payments to, a Mexican information-technology consulting company. (“Consultant”)”  According to the information, “HP Mexico sales managers knew that Pemex’s Chief Operating Officer (“Official A”) was a former principal of Consultant” and that “HP Mexico employees also knew that Official A supervised Pemex’s Chief Information Officer (“Official B”), who was a key signatory on behalf of Pemex for the BTO Deal.”

According to the NPA, while the Consultant had prior technical experience, “HP Mexico ultimately retained Consultant in connection with HP Mexico’s bid for the sale to Pemex primarily because of Consultant’s connections to Official A, Official B, and other senior Pemex officials.”  According to the information, as part of its agreement with Consultant, HP Mexico agree to pay Consulant a commission, “which HP Mexico also called an ‘influencer fee,’ equal to 25% of the licensing and support components of the BTO Deal.”

To circumvent HP’s internal controls regarding channel partners, the NPA states that “HP Mexico executives pursuing the BTO Deal arranged for another entity (“Intermediary”), which was already an approved HP Mexico channel partner, to join in the transactions” and that “HP Mexico executives recorded Intermediary as the deal partner in its internal tracking system.”

The NPA states “HP Mexico through the Intermediary, Consultant made a cash payment of approximately $30,000 to an entity controlled by Official B” and that “Consultant made three additional cash payments totaling approximately $95,000 to the Official B controlled entity.”

According to the NPA, “in total, HP Mexico received approximately $2,527,750 as its net benefit on the BTO Deal.”

According to the NPA, the DOJ agreed to enter it based on the following factors:

“(a) HP Mexico and HP’s cooperation, including conducting an extensive internal investigation, voluntarily making U.S. and foreign employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the DOJ; (b) HP Mexico and HP have engaged in extensive remediation, including taking appropriate disciplinary action against culpable employees, enhancing their due diligence protocol for third-party agents and consultants, and enhancing their controls for payments of sales commissions to channel partners in Mexico; (c) HP Mexico’s and HP’s continued commitment to enhancing their compliance programs and internal controls; and (d) HP Mexico’s and HP’s agreement to continue to cooperate with the DOJ in any ongoing investigation.”

In the NPA HP Mexico admitted and acknowledged responsibility for the above conduct.  Pursuant to the NPA, HP Mexico agreed to pay a forfeiture of approximately $2.5 million.  Pursuant to the NPA, which has a term of 3 years, HP Mexico and HP agreed to various compliance obligations.  As is typical in FCPA NPAs, the NPA contains a so-called muzzle clause.

In the DOJ release, Deputy Assistant Attorney General Bruce Swartz states:

“Hewlett-Packard subsidiaries created a slush fund for bribe payments, set up an intricate web of shell companies and bank accounts to launder money, employed two sets of books to track bribe recipients, and used anonymous email accounts and prepaid mobile telephones to arrange covert meetings to hand over bags of cash.  Even as the tradecraft of corruption becomes more sophisticated, the department is staying a step ahead of those who choose to violate our laws, thanks to the diligent efforts of U.S. prosecutors and agents and our colleagues at the SEC, as well as the tremendous cooperation of our law enforcement partners in Germany, Poland and Mexico.”

Melinda Haag (U.S. Attorney for the N.D. of California) states:

“The United States Attorney’s Office, working alongside our colleagues in the Criminal Division, will vigorously police any efforts by companies in our district to illegally sell products to foreign governments using bribes or kickbacks in violation of the FCPA,  Today’s resolution with HP reinforces the fact that there is no double standard: U.S. businesses must respect the same ethics and compliance standards whether they are selling products to foreign governments or to the United States government.”

Valerie Parlave (Assistant Director in Charge of the FBI’s Washington Field Office) states:

“This case demonstrates the FBI’s ability to successfully coordinate with our foreign law enforcement partners to investigate and bring to justice corporations that choose to do business through bribery and off-the-book dealings.  I want to thank the agents who worked on this case in Washington, New York and in our Legal Attaché offices in Mexico City, Moscow, Berlin and Warsaw as well as the prosecutors.  Their work ensures a level playing field for businesses seeking lucrative overseas government contracts.”

Richard Weber (Chief of the Internal Revenue Service – Criminal Investigation) states:

“This agreement is the result of untangling a global labyrinth of complex financial transactions used by HP to facilitate bribes to foreign officials.  IRS-CI has become a trusted leader in pursuit of corporations and executives who use hidden offshore assets and shell companies to circumvent the law.  CI is committed to maintaining fair competition, free of corrupt practices, through a potent synthesis of global teamwork and our dynamic financial investigative talents.”

SEC Enforcement Action

The enforcement action involved an administrative cease and desist order against HP and is based on the same Russia, Poland and Mexico conduct described above.

Under the heading “Summary,” the order states:

“From approximately 2003 to 2010 (the “relevant period”), HP Co.’s indirect, wholly-owned subsidiaries in Russia, Mexico and Poland, by and through their employees, agents and intermediaries, made unlawful payments to various foreign government officials to obtain business. These payments were also falsely recorded in the subsidiaries’ books and records and, ultimately, in HP Co.’s books and records. In Russia, HP Co.’s subsidiary (“HP Russia”) made payments through HP Russia’s agents to a Russian government official to retain a multi-million dollar contract with the federal prosecutor’s office. The payments were made through shell companies engaged by the agents to perform purported services under the contract. In Poland, certain agents or employees of HP Co.’s Polish subsidiary (“HP Poland”) provided gifts and cash bribes to a Polish government official to obtain contracts with Poland’s national police agency. In Mexico, HP Co.’s Mexican subsidiary (“HP Mexico”) made improper payments to a third party in connection with a sale of software to Mexico’s state-owned petroleum agency. HP Co. and its consolidated subsidiaries (collectively, “HP”) earned approximately $29 million in illicit profits as a result of this improper conduct.

The payments and improper gifts to government officials made directly or through intermediaries were falsely recorded in the relevant HP subsidiaries’ books and records as legitimate consulting and service contracts, commissions, or travel expenses. In fact, the true purpose of the payments and gifts was to make improper payments to foreign government officials to obtain lucrative government contracts for HP. During the relevant period, HP lacked sufficient internal controls to detect and prevent the improper payments and gifts made by executives and representatives of certain of its foreign subsidiaries.”

As to HP Russia, the order also states under the heading “Additional Conduct,” as follows.

“In June and July 2006, several European HP subsidiaries, including HP Russia, arranged for a high-profile customer marketing event in connection with the FIFA World Cup soccer tournament in Germany. Despite managerial directives not to invite representatives of government customers, certain HP sales employees arranged for a number of government or state-owned customers to attend the event. In all, HP Russia and other European subsidiaries of HP paid tens of thousands of dollars in travel and entertainment expenses for these government customers, and HP Co.’s internal controls failed to detect or prevent the conduct.

Finally, in June 2005, HP Russia paid more than $2.5 million to a third party distributor for the supply of software and implementation services to a Russian state-owned enterprise. HP Russia’s records do not reflect what, if any, work was actually performed by the distributor for these payments, and communications among HP Russia employees suggest that the distributor may have played an influential role in connection with obtaining the contract. The payments to the distributor were recorded in HP Russia’s books and records as a payment for providing software and services, even though there was minimal evidence concerning what was actually provided for these payments.”

Based on the above, the order finds violations of the FCPA’s books and records and internal controls provisions.  Specifically, the order states:

“HP’s global operations are organized by geographic regions and sub-regions, as well as business units. Employees in HP’s foreign subsidiaries may report to a supervisor in both their geographic region and their business unit. During the relevant period, HP’s foreign subsidiaries operated pursuant to compliance policies and directives developed by HP and implemented at the local subsidiary level by the country or regional management. Although HP had certain anti-corruption policies and controls in place during the relevant period, those policies and controls were not adequate to prevent the conduct described herein and were insufficiently implemented on the regional or country level. Further, HP failed to devise and maintain an adequate system of internal accounting controls sufficient to provide reasonable assurance that: (1) access to assets was permitted only in accordance with management’s authorization; (2) transactions were recorded as necessary to maintain accountability for assets; and (3) transactions were executed in accordance with management’s authorization.

[...]

As described above, HP Co. violated Section 13(b)(2)(A) of the Exchange Act. Its subsidiaries in Russia, Poland and Mexico falsely recorded the payments made to agents as payments for legitimate services or commissions, when the true purpose of these payments was to make corrupt payments to government officials to obtain business. The false entries were then consolidated and reported by HP in its consolidated financial statements. HP Co. also violated Section 13(b)(2)(B) by failing to devise and maintain sufficient accounting controls to detect and prevent the making of improper payments to foreign officials and ensure that payments were made only to approved channel partners.”

Under the heading “Remedial Efforts,” the order states:

“In response to the Commission’s investigation, HP retained outside counsel to assist it in conducting an internal investigation into improper conduct in the jurisdictions that were the subject of the staff’s inquiry, as well as in other jurisdictions where HP identified additional issues. HP cooperated with the Commission’s investigation by voluntarily producing reports and other materials to the Commission staff summarizing the findings of its internal investigation. HP also cooperated by, among other things, voluntarily producing translations of numerous documents, providing timely reports on witness interviews, and by making foreign employees available to the Commission staff to interview.

HP has also undertaken significant remedial actions over the course of the Commission’s investigation, including by implementing a firm-wide screening process for its channel partners, training its public sector sales staff on its policies for dealing with business intermediaries, increasing compliance-related training for its global work force, and implementing additional enhancements to its internal controls and compliance functions. In addition, HP took disciplinary actions against certain of its employees in response to the conduct identified by the Commission staff and by the company through its internal investigation.”

In resolving the matter, the SEC ordered HP to cease and desist from committing future violations of the FCPA’s books and records and internal controls provisions and to pay disgorgement of $29 million and prejudgment interest of $5 million. According to the order, approximately $2.5 million of the disgorgement amount will be satisfied by HP’s payment of $2.5 million in forfeiture in connection with the HP Mexico DOJ action.  The order also requires HP to report to the SEC for a three year period regarding the status of its remediation and implementation of various compliance measures.

In the SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) states:

“Hewlett-Packard lacked the internal controls to stop a pattern of illegal payments to win business in Mexico and Eastern Europe. The company’s books and records reflected the payments as legitimate commissions and expenses.  Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf.”

Gibson Dunn attorneys Joseph Warin and John Chesley represented the HP entities.

In this release (a release HP had to consult with the DOJ before issuing) HP Executive Vice President and General Counsel John Schultz states:

“The misconduct described in the settlement was limited to a small number of people who are no longer employed by the company.  HP fully cooperated with both the Department of Justice and the Securities and Exchange Commission in the investigation of these matters and will continue to provide customers around the world with top quality products and services without interruption.”

HP’s stock closed yesterday up approximately .8%

Alcoa Resolves A “Legacy Legal Matter” By Agreeing To Pay $384 Million In An FCPA Enforcement Action

Friday, January 10th, 2014

Given the importance statute of limitations have in our legal system (see here for a recent Supreme Court decision), there is something odd in reading a Foreign Corrupt Practices Act enforcement action concerning allegations from a time when I was in 8th grade.  It is even more odd reading of an FCPA enforcement (not to mention the fourth largest FCPA enforcement action of all-time in terms of a settlement amount) when the alleged consultant at the center of the alleged bribery scheme was criminally charged by another law enforcement agency, put the law enforcement agency to its burden of proof at trial, and the law enforcement agency dismissed the case because there was no ”realistic prospect of conviction” (see here for the prior post concerning the U.K. enforcement action of Victor Dahdaleh).

So begins this post concerning the Alcoa FCPA enforcement action announced yesterday by the DOJ and SEC (see here and here).

The enforcement action involved a DOJ criminal information against Alcoa World Alumina LLC resolved via a plea agreement and an SEC cease and desist order against Alcoa Inc.

Alcoa entities agreed to pay approximately $384 million to resolve alleged FCPA scrutiny (a criminal fine of $209 million and an administrative forfeiture of $14 million to resolve the DOJ enforcement action and $175 million in disgorgement to resolve the SEC enforcement action – of which $14 million will be satisfied by the payment of the forfeiture in the criminal action).

The $384 million settlement amount is the fourth largest in FCPA history.

This post summarizes both the DOJ and SEC enforcement actions.

DOJ

Criminal Information Against Alcoa World Alumina LLC

The enforcement action centers on Consultant A (no doubt Victor Dahdaleh) and his alleged interactions on behalf of Alcoa entities with Aluminium Bahrain B.S.C. (Alba), an aluminium smelter operating in Bahrain.”  (See this 2010 post “What is Alba”).

The Alcoa entity charged is Alcoa World Alumina LLC, an entity that beginning in 2000 “assumed primary responsibility for all of Alcoa World Alumina and Chemicals (AWAC’s) relationships with global alumina customers, including Alba.”  According to the information, Alcoa World Alumina LLC “personnel responsible for these functions reported indirectly to Alcoa personnel in New York.”

Alba is described in the information as follows.

“The state holding company of the Kingdom of Bahrain, the Mumtalakat, which was controlled by the Ministry of Finance, held 77% of the shares of Alba.  The Saudi Basic Industries Corp. (SABIC), which was majority-owned and controlled by the government of the Kingdom of Saudi Arabia, held a 20 percent minority stake in Alba, and three percent of Alba’s shares were held by a German investment group.  The majority of profits earned by Alba belonged to the Mumtalakat, through part of the profit was permitted to be used by Alba for its operations.  The Ministry of Finance had to approve any change in Alba’s capital structure and had to be consulted on any major capital projects or contracts material to Alba’s operations.  Members of the Royal Family of Bahrain and representatives of the government sat on the Board of Directors of Alba, controlled its board, and had primary authority in selecting its chief executive and chief financial officer.”

The alleged “foreign officials” are described as follows.

“Official A was a member of Bahrain’s Royal Family and served as a member of the board of directors of Alba from 1982 to 1997.  From 1988 to 1990, Official A was also a member of Alba’s tender committee, which was responsible in part for awarding major contracts to Alba’s suppliers, such as Alcoa entities supplying alumina to Alba.”

“Official B served on Alba’s board from at least 1986 to 2000 as a representative of SABIC.  From 1988 to 1990, Official B also served on Alba’s tender committee with Official A.”

“Official C was a senior member of Bahrain’s Royal Family, a senior government official of Bahrain from at least 1995 to 2005, and served as a high-ranking officer of Alba from 1995 to 2005.  As a high-ranking officer of Alba, Official C was extremely influential over the assignment of contracts to Alba’s suppliers.  Official C relied on Consultant A to assist him in opening international bank accounts using various aliases or shell entities for the purpose of receiving corrupt funds from kickbacks from Alba’s suppliers.”

“Official D was a senior member of Bahrain’s Royal Family and a senior government official of Bahrain for many decades.  Official C was a close associate of Official D.  Official D’s office was required to be consulted before Alba could commit to a long term alumina supply contract with Alcoa.”

According to the information, ”beginning in or around 1989, at the request of certain Bahraini government officials who controlled Alba’s tender process, Alcoa of Australia retained Consultant A’s shell companies as purported sales agents and paid them purported sales commissions.”

The information alleges as follows.

“In or around 1988, an Alcoa of Australia sales manager for the Alba account received a request from certain Alba officials to retain Consultant A as ‘Alcoa’s agent’ and pay him a ‘commission.’  The request was made in part at the behest of Official A, a member of Alba’s board and tender committee.  The sales manager subsequently told his supervisor that Alcoa of Australia would lose the supply contract if Consultant A was not retained as its agent, and that supervisor, in turn, conveyed that information to an individual who was both an Alcoa of Australia Board member and an Alcoa employee based in Pittsburgh.  The individual approved the retention of Consultant A as a agent.”

Under the heading “Consultant A Channeled Millions in Corrupt Payments to Government Officials From 1991 Through 1996,” the information alleges:

“From 1993 through 1996, Consultant A made over $1 million in corrupt payments to Official A …”.

“From 1993 through 1996, Consultant A made over $2 million in corrupt payments to Official B …”.

Under the heading “Consultant A Channeled Million in Corrupt Payments to Government Officials From 1997 Through 2001,” the information alleges:

“From 1997 through 2001, Consultant A made over $5 million in corrupt payments to Official A …”.

“From 1997 through 2001, Consultant A made approximately $2.2 million in corrupt payments to Official B …”.

“From 1999 through 2001, Consultant A made over $19 million in corrupt payments to Official C …”.

Under the heading “Consultant A Channeled Millions in Corrupt Payments to Government Officials From 2002 Through 2004,” the information alleges:

“In 2002, Consultant A made over $1 million in corrupt payments to Official B …”.

“From 2002 through 2004, Consultant A made approximately $29 million in corrupt payments to Official C …”.

Under the heading “Additional Corrupt Payments to Government Officials,” the information alleges:

“From 2005 through 2006, Consultant A made almost $13 million in corrupt payments … to accounts that were beneficially owned by Official C under client code names …”.

“On or about April 3, 2006, Consultant A transferred $17 million … to an account owned by Official D …”.

Based on the above allegations, the information charges Alcoa World Alumina LLC with one count of violating the FCPA’s anti-bribery provisions and states:

“Alcoa World Alumina LLC caused Alcoa of Australia to enter into a sham distributorship agreement with Alumet and AAAC that facilitated the funneling of millions of dollars of bribes indirectly through Consultant A to senior officials of the Kingdom of Bahrain in order to obtain and retain a long-term alumina supply agreement between Alcoa of Australia and Alba.”

Plea Agreement

The above charge was resolved via a plea agreement in which Alcoa agreed to “guarantee, secure and ensure delivery” by Alcoa World Alumina LLC “of all payments due from the Defendant under the Agremenet.”  The advisory Sentencing Guidelines calculation set forth in the plea agreement based on the alleged conduct was $446 million to $892 million.

The plea agreement states that a $209 million criminal fine was an “appropriate disposition” of the case “because immediate payment of the entire fine would pose an undue burden” on Alcoa and the agreement lists the following factors:

the impact of a penalty within the guidelines range on the financial condition of Alcoa and its potential to substatially jeopardize Alcoa’s ability to compete, including, but not limited to, its ability to fund its sustaining and improving capital expenditures, its ability to invest in research and development, its ability to fund its pension obligations, and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.

The plea agreement also references:

“(b) the significant remedy being imposed on the Defendant’s majority shareholder, Alcoa, by the U.S. Securities and Exchange Commission for Alcoa’s conduct in this matter; (c) after learning allegations of FCPA violations, Alcoa’s Board of Directors appointed a Special Committee of the Board of Directors to oversee an internal investigation by independent counsel; (d) the substantial cooperation provided to the Department by the Defendant’s majority shareholder, Alcoa, including conducting an extensive internal investigation, voluntarily making employees available for interviews, and collecting, analyzing, and organizing voluminous evidence and information for the Department; (e) the remedial efforts already undertaken and to be undertaken by the Defendant’s majority shareholder, Alcoa, which affect both the Defendant’s operations and those of Alcoa, including the hiring of new senior legal and ethics and compliance officers and the implementation of enhanced due diligence reviews of the retention of third-party agents and consultants; and (f) Alcoa’s separate commitment to ensuring that its anti-corruption compliance program will be maintained to continue to satisfy the minimum elements” set forth in an attachment to the agreement.

In this “Agreed Motion to Waive the Presentence Report,” the DOJ condenses the extensive allegations in the information as follws under the heading “Charged Conduct.”

“The charge is based on the Defendant’s role in 2004 in procuring a ten-year agreement to sell approximately 1.7 million metric tons of alumina to Alba from AWAC’s Australian refineries. The Defendant caused Alcoa of Australia to enter into a purported distributorship with a shell company owned by Consultant A, an international middleman who had close contacts with certain members of Bahrain’s Royal Family, rather than contract directly with Alba. The Defendant consciously disregarded that the mark-up imposed by Consultant A on sales of alumina to Alba was facilitating corrupt payments to certain Bahraini government officials who controlled Alba’s tender process.”

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

“Alcoa World Alumina today admits to its involvement in a corrupt international underworld in which a middleman, secretly held offshore bank accounts, and shell companies were used to funnel bribes to government officials in order to secure business.  The law does not permit companies to avoid responsibility for foreign corruption by outsourcing bribery to their agents, and, as today’s prosecution demonstrates, neither will the Department of Justice.”

David Hickton (U.S. Attorney for the W.D. of Pa) stated:

“Today’s case shows that multinational corporations cannot get away with using middlemen to structure sham business arrangements that funnel kickbacks to government officials.”

Richard Weber (Chair of the IRS Criminal Division) stated:

“This case is the result of unraveling complex financial transactions used by Alcoa World Alumina LLC’s agent to facilitate kickbacks to foreign government officials.  IRS-CI will not be deterred by the use of sophisticated international financial transactions as we continue our ongoing efforts to pursue corporations and executives who use hidden offshore assets and shell companies to circumvent the law.”

Valerie Parlave (Assistant Director in Charge of the FBI’s Washington Field Office) stated:

“Corrupt kickback payments to foreign government officials to obtain business diminish public confidence in global commerce.  There is no place for bribery in any business model or corporate culture.   Today’s plea demonstrates the FBI and our law enforcement partners are committed to curbing corruption and will pursue all those who try to advance their businesses through bribery.”

The DOJ release further states:

“The plea agreement and related court filings acknowledge Alcoa’s current financial condition as a factor relevant to the size of the criminal fine, as well as Alcoa’s and Alcoa World Alumina’s extensive cooperation with the department, including conducting an extensive internal investigation, making proffers to the government, voluntarily making current and former employees available for interviews, and providing relevant documents to the department.   Court filings also acknowledge subsequent anti-corruption remedial efforts undertaken by Alcoa.   The department acknowledges and expresses its appreciation for the cooperation and assistance of the Office of the Attorney General of Switzerland, the Guernsey Financial Intelligence Service and Guernsey Police, the Australian Federal Police, the U.K.’s Serious Fraud Office, and other law enforcement authorities in the department’s investigation of this matter.”

 SEC

The SEC enforcement action is based on the same core set of facts alleged in the DOJ enforcement action and the cease and desist order states in summary fashion as follows.

“These proceedings arise from violations of the Foreign Corrupt Practices Act by Alcoa concerning alumina sales to Aluminium Bahrain B.S.C. (“Alba”), an aluminum manufacturer owned primarily by the Kingdom of Bahrain.

Between 1989 and 2009, Alcoa of Australia (“AofA”) and Alcoa World Alumina LLC (“AWA”) (collectively, the “AWAC Subsidiaries”) retained a consultant to act as their middleman in connection with sales of alumina to Alba and knew or consciously disregarded the fact that the relationship with the consultant was designed to generate funds that facilitated corrupt payments to Bahraini officials. The consultant was paid a commission on sales where he acted as an agent and received a markup on sales where he acted as a purported distributor. On sales where the consultant acted as a purported distributor, no legitimate services were provided to justify the role of the consultant as a distributor. The consultant used these funds to enrich himself and pay bribes to senior government officials of Bahrain.

The commission payments to the consultant and the alumina sales to the consultant made pursuant to the distribution agreements were improperly recorded in Alcoa’s books and records as legitimate commissions or sales to a distributor and did not accurately reflect the transactions. The false entries were initially recorded by the AWAC Subsidiaries which were then consolidated into Alcoa’s books and records. During the relevant period, Alcoa also lacked sufficient internal controls to prevent and detect the improper payments.”

In pertinent part, the order states as follows.

“Despite the red flags inherent in this arrangement [between the AWAC Subsidiaries and Consultant A], AofA’s in-house counsel approved the arrangement without conducting any due diligence or otherwise determining whether there was a legitimate business purpose for the use of a third party intermediary.”

[...]

“Employees at AWA and AofA either knew or were willfully blind to the high probability that Consultant A would use his commissions and markup to pay bribes.”

[...]

“The AWAC Subsidiaries knew or consciously disregarded the fact that Consultant A was inserted into the Alba sales supply chain to generate funds to pay bribes to Bahraini officials. Ultimately, these funds facilitated at least $110 million in corrupt payments to Bahraini officials. The vast majority of those funds were generated from the markup between the price Consultant A sold to Alba and the price that AofA sold to Consultant A. Those funds were also generated from the commissions that AofA paid to Consultant A.

The recipients of the corrupt payments included a senior Bahraini official, members of the board of directors of Alba, and senior management of Alba. Examples of the corrupt payments include:  In August 2003, Consultant A’s shell companies made 2 payments totaling $7 million to accounts for the benefit of a Bahraini government official who Consultant A had been retained to lobby. Two weeks later, Alcoa and Alba signed an agreement in principle to have Alcoa participate in Alba’s plant expansion.  In October 2004, Consultant A’s shell company paid $1 million to an account for the benefit of that same government official. Shortly thereafter, Alba agreed in principle to Alcoa’s offer for the 2005 Alba Supply Agreement. In or around the time of the execution of the final 2005 Alba Supply Agreement, Consultant A-controlled companies paid another Bahraini government official and/or his beneficiaries $41 million in three payments.”

The order then states as follows.

“This Order contains no findings that an officer, director or employee of Alcoa knowingly engaged in the bribe scheme. As described above, Alcoa violated [the FCPA's anti-bribery provisions] by reason of its agents, including subsidiaries AWA and AofA, indirectly paying bribes to foreign officials in Bahrain in order to obtain or retain business. AWA, AofA, and their employees all acted as “agents” of Alcoa during the relevant time, and were acting within the scope of their authority when participating in the bribe scheme. As described above, Alcoa exercised control over the Alumina Segment, including the AWAC Subsidiaries. Alcoa appointed the majority of seats on the AWAC Strategic Council, and the head of the Global Primary Products group served as its chair. Alcoa and AofA transferred personnel between them, including alumina sales staff; Alcoa set the business and financial goals for AWAC and coordinated the leg al, audit, and compliance functions of AWAC; and the AWAC Subsidiaries’ employees managing the Alba alumina business reported functionally to the global head of the Alumina Segment. Alba was a significant alumina customer for Alcoa’s Alumina Segment and during the relevant period, members of Alcoa senior management met both with Alba officials and Consultant A to discuss matters related to the Alba relationship, including a proposed joint venture between Alcoa and Alba. During this time, Alcoa was aware that Consultant A was an agent and distributor with respect to AofA’s sales of alumina to Alba and that terms of related contracts were reviewed and approved by senior managers of Alcoa’s Alumina Segment in the United States.”

[...]

“Alcoa violated [the books and records provisions] by improperly recording the payments, to Consultant A, as agent commissions when the true purpose of these payments was to make corrupt payments to Bahraini officials. Alcoa violated [the books and records provisions] when Alcoa recorded the sales to Consultant A as a distributor. The false entries were initially recorded by the AWAC Subsidiaries which were then consolidated and reported by Alcoa in its consolidated financial statements. Alcoa also violated [the internal controls provisions] by failing to devise and maintain sufficient accounting controls to detect and prevent the making of improper payments to foreign officials.”

Under the heading “Alcoa’s Remedial Measures,” the order states:

“Alcoa made an initial voluntary disclosure of certain of these issues to the Commission and Department of Justice in February 2008, and thereafter Alcoa’s Board of Directors appointed a Special Committee of the Board of Directors to oversee an internal investigation by independent counsel. Alcoa’s counsel regularly reported on the results of the investigation and fully cooperated with the staff of the Commission.  Alcoa also undertook extensive remedial actions including: a comprehensive compliance review of anti-corruption policies and procedures, including its relationship with intermediaries; enhancing its internal controls and compliance functions; developing and implementing enhanced FCPA compliance procedures, including the development and implementation of policies and procedures such as the due diligence and contracting procedure for intermediaries; and conducting comprehensive anti-corruption training throughout the organization.”

In the SEC’s release, George Canellos (Co-Director of the SEC Enforcement Division) stated:

“As the beneficiary of a long-running bribery scheme perpetrated by a closely controlled subsidiary, Alcoa is liable and must be held responsible.  It is critical that companies assess their supply chains and determine that their business relationships have legitimate purposes.”

Kara N. Brockmeyer (Chief of the SEC Enforcement Division’s FCPA Unit) stated:

“The extractive industries have historically been exposed to a high risk of corruption, and those risks are as real today as when the FCPA was first enacted.”

The SEC release further states:

“The SEC appreciates the assistance of the Fraud Section of the Criminal Division at the Department of Justice as well as the Federal Bureau of Investigation, Internal Revenue Service, Australian Federal Police, Ontario Securities Commission, Guernsey Financial Services Commission, Liechtenstein Financial Market Authority, Norwegian ØKOKRIM, United Kingdom Financial Control Authority, and Office of the Attorney General of Switzerland.”

In this release (which per the plea agreement, the company needed to consult with the DOJ before issuing), Alcoa stated as follows.

“Alcoa Inc. [has] announced the resolution of the investigations by the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC) regarding certain legacy alumina contracts with Aluminium Bahrain B.S.C. (Alba).  The settlement with the DOJ was reached with Alcoa World Alumina LLC (AWA). AWA is a company within Alcoa World Alumina and Chemicals (AWAC), the unincorporated bauxite mining and alumina refining  venture between Alcoa Inc. and Alumina Limited.   [...]  There is no allegation in the filings by the DOJ and there is no finding by the SEC that anyone at Alcoa Inc. knowingly engaged in the conduct at issue.  [...]  Alcoa welcomes the resolution of this legacy legal matter with the U.S. Government.”

The Alcoa release also details the drawn out nature of the settlement payments (an unusual feature in an FCPA enforcement action).  The release states:

“As part of the DOJ resolution [...] AWA will pay a total of $223 million, including a fine of $209 million payable in five equal installments over four years. The first installment of $41.8 million, plus a one-time administrative forfeiture of $14 million, will be paid in the first quarter of 2014, and the remaining installments of $41.8 million each will be paid in the first quarters of 2015-2018.”

“Under the terms of the settlement with the SEC, Alcoa Inc. agreed to a settlement amount of $175 million, but will be given credit for the $14 million one-time forfeiture payment, which is part of the DOJ resolution, resulting in a total cash payment to the SEC of $161 million payable in five equal installments over four years. The first installment of $32.2 million will be paid to the SEC in the first quarter of 2014, and the remaining installments of $32.2 million each will be paid in the first quarters of 2015-2018.”

As to the reason for the drawn-out settlement amounts, the SEC release states:

“In light of the impact of the disgorgement payment upon Respondent’s financial condition and its potential to substantially jeopardize Alcoa’s ability to fund its sustaining and improving capital expenditures, its ability to invest in research and development, its ability to fund its pension obligations, and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities, Alcoa shall pay the disgorgement in five equal payments …”.

Alcoa World Alumina was represented in the criminal matter by Jonathan R. Streeter, Robert J. Jossen and Diane Nicole Princ of Dechert LLP and Alcoa was represented in the SEC matter by Evan Chesler of Cravath Swaine & Moore LLP.

Yesterday, Alcoa’s stock price closed down approximately 1.3%.

As highlighted in this post, in October 2012 Alcoa announced (here) that it entered into a settlement agreement with Alba resolving a civil lawsuit that had been pending since 2008 concerning the same alleged core facts in the DOJ and SEC enforcement action.Alcoa agreed to make a cash payment to Alba of $85  million payable in two installments.

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.”