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Preventing the Worst: Stopping Obvious and Bold FCPA Violations by Executives

May 14, 2015
Categories: Anti-corruption, Bribery, Compliance, Due Diligence, FCPA

Last year, a number of corruption cases, both individual prosecutions and suits against companies, revolved around the behavior of senior executives. While third parties can often be the vehicle companies use to funnel bribe payments, many agents – and company employees – act with executive knowledge. According to the OECD Foreign Bribery Report, senior executives were in involved in more than 50% of cases, playing a direct role in corrupt schemes, violating rudimentary anti-corruption principles and creating liability for their company and themselves.

The following 2014 Foreign Corrupt Practices Act (FCPA) cases illustrate some of the most devastating executive behaviors and how other companies have mitigated or prevented similar behavior:

1) Co-CEOs wire bribes to government official’s bank account and try to hire his wife

In 2014, the Department of Justice (DOJ) charged both PetroTiger co-CEOs and its General Counsel with conspiracy to violate the FCPA. The DOJ alleged that the three executives made at least four payments of more than $300,000 in 2010 from PetroTiger’s account to an employee of the Colombia-owned petroleum company, Ecopetrol, in exchange for the official’s assistance in securing approval for an oil services contract worth roughly $39 million.

Additionally, the DOJ claimed that the executives accepted kickbacks from a company PetroTiger hoped to acquire. In exchange for the acquisition deal, the three executives increased the price to be paid for the acquisition and then accepted kickbacks of more than $400,000 for themselves.

Initially, the defendants attempted to wire money from their U.S. bank account to the employee’s wife, claiming that the wife had provided “consulting services,” but when that failed, they wired the money directly to the employee himself.

Last year PetroTiger’s co-CEO and its General Counsel pled guilty to conspiracy to violate the FCPA. The other co-CEO, Joseph Sigelman, is currently defending against a number of additional criminal charges.

The PetroTiger executive scheme was initially discovered by a board representative of Aimco, a Canadian pension fund management company looking to invest in fast-growing companies based in emerging economies. Sigelman already had experience developing a previous business in India which added some credibility to the PetroTiger investment. Aimco ultimately invested $85 million into PetroTiger in exchange for a 43% stake and installed its board representative, Luis Plata.

Plata eventually became chairman, but both before and after that occurred, the board had a number of disputes with management, including Sigelman, over the growth of the company. By March 2011, the board rid themselves of Sigelman and his co-CEO, and then began investigating the company’s books more seriously than before. The board discovered a consulting invoice paid to the wife of the government official who had just awarded a contract to PetroTiger. The board employed a law firm to conduct an internal investigation and then handed over its findings to the U.S. and Colombian governments.

Discovering the illegal conduct didn’t require any complicated compliance system; the board reviewed the financial records of the company and discovered the illegal activity. Though belated, the discovered conduct and investigation saved the company from DOJ prosecution due to proactive cooperation with the federal agency, highlighting the value of a Board serious about compliance.

2) CEO and Executives Discuss Need for Bribery in Business Planning Discussion

Earlier last year in July, the DOJ charged BizJet executives with violation of the FCPA anti-bribery provision for bribes paid to government officials in Brazil, Mexico, and Panama in order to win contracts for BizJet. According to the DOJ, BizJet’s former CEO and other executives discussed the need to pay bribes in e-mail correspondence.

Categorized as “commissions,” these payments to foreign government agencies were apparently deemed necessary by the executives to remain competitive in the aircraft repair industry. At one company meeting with the Board, several BizJet executives discussed the foreign officials holding out for higher “commissions” and whether BizJet would have to build the fees into the revenue in order to stay head of the competition. In response to Board concerns about market share, the executives stated that “referral fees” would help keep BizJet competitive.

In 2014, the former President and CEO pled guilty to conspiracy to violate the FCPA.  Other executive defendants had already pled guilty to earlier DOJ charges for money laundering and FCPA violations.

Again, in this case, the corrupt conduct was uncovered through routine corporate procedures related to the use of third parties. The audit revealed that the BizJet executives had been conspiring with other companies to jointly bribe foreign officials for years. BizJet self-disclosed the conduct and cooperated with the DOJ, reducing its fine by nearly $35 million. However, if BizJet had started even a rudimentary compliance program sooner, it could have discovered the executives’ plot before racking up a hefty fine. It wasn’t until the company was performing an FCPA compliance audit in 2010, that the executive misconduct was discovered.

3)  Alstom Executives Ignore DOJ Request for Documents

French power company Alstom and several of its subsidiaries pled guilty in late 2014 to DOJ charges of FCPA books and records and internal control violations, leading to a criminal fine of more than $772 million. According to the DOJ, Alstom paid $75 million in consulting fees to third parties in exchange for around $4 billion in projects around the world.

The DOJ started subpoenaing documents from Alstom and its subsidiaries, but for the first year, only Alstom’s subsidiaries responded to the DOJ’s requests. According to the plea agreement, after the first year, Alstom only gave “limited cooperation” and only fully cooperated with the DOJ after multiple executives were charged with conspiracy to violate the FCPA.

The extended refusal to cooperate is cited as one factor leading to Alstom’s record criminal penalty, the highest in FCPA history. Combined with Alstom’s failure to self-report when executives were aware of the conduct, the lack of a compliance program, and Alstom’s prior sanctions for corruption-related activity, Alstom received the second highest total penalty since the adoption of the FCPA.

The recent FCPA settlement between the SEC and Goodyear demonstrates the important role of cooperation in resolving FCPA enforcement actions. While Goodyear failed to perform proper pre-acquisition due diligence – one of the hallmarks of an effective compliance program and one of the factors the DOJ will consider in bringing enforcement actions – the company still received a reduced fine for “significant cooperation.”

In addition to self-reporting the violations to the SEC, Goodyear performed an internal investigation after discovering the conduct and shared the results of that investigation with the DOJ. It also took disciplinary action against the employees responsible for the FCPA violations. These kinds of steps reduced Goodyear’s fine substantially and highlights the potential benefits of cooperation.

Non-executive controls are vital

As these recent cases demonstrate, effective internal controls at all levels of the business are necessary to prevent, detect and mitigate the damage caused by rogue executives enriching themselves at the expense of the company and shareholders. Other parties such as an independent audit team and the board of directors must provide additional scrutiny of business transactions in order to create a truly holistic anti-corruption risk management system.

 

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