Latest FCPA Cases Provide Further Insights into Enforcement Strategies and Policy

International Alert
02.16.07

Three investigations resolved in the last two weeks shed new light on U.S. Foreign Corrupt Practices Act (“FCPA”) enforcement patterns and policies. In the continuing aftermath of the ABB case (which includes 2004 cases involving ABB and Vetco and 2006 cases against former executives), three wholly owned subsidiaries of Vetco International Ltd. (“Vetco”) pled guilty to anti-bribery violations, resulting in aggregate criminal fines of $26 million. A fourth subsidiary entered into a deferred prosecution agreement (“DPA”) with the United States Department of Justice (“DOJ”), but was not required to pay a fine.

Separately, in the first FCPA enforcement action flowing out of the investigation of the United Nations’ Oil-for-Food program, El Paso Corporation reached a settlement with the Securities and Exchange Commission (“SEC”) for FCPA books and records violations, agreeing to pay approximately $7.7 million ($2.25 million in fines and $5.48 million in disgorgement). A third settlement involved disposition of books and records and internal controls issues by Dow Chemical Company involving improper payments by a “fifth-tier” subsidiary in India; this case involved payment of a $325,000 fine by Dow without an admission of wrongdoing.

These settlements follow the steep fines that were imposed on Schnitzer Steel Industries and its Korean subsidiary ($7.5 million in fines and $7.7 million in disgorgement) and Statoil ($10.5 million in fines and $10.5 million in disgorgement) in October 2006, and demonstrate continued active investigation and enforcement of FCPA violations.

Vetco

In the Vetco plea agreement, announced on February 6, 2007, the company’s three subsidiaries admitted to authorizing corrupt payments by an unnamed “major international freight forwarding and customs clearing company” of approximately $2.1 million between 2002 and 2005 to Nigerian officials in order to obtain preferential customs treatment related to Vetco’s engineering and procurement services and subsea construction equipment for Nigeria’s first deepwater oil drilling project. The DPA of the fourth Vetco subsidiary, Aibel Group Ltd., was based on the same underlying conduct. These settlements are significant for several reasons:

Follow-on Violations. In 2004, Vetco Gray UK, one of the subsidiaries involved in the plea agreement, pled guilty to violating the FCPA based on payments to Nigerian officials in connection with oil exploration bids. The 2004 matter was settled in connection with the sale of the Vetco companies by Swiss parent ABB and, as discussed below, the consortium that acquired Vetco obtained a Justice Department opinion protecting it from successor liability for Vetco’s disclosed violations. However, other, previously undisclosed violations ?? corrupt payments involving Nigerian customs officials ?? came to light in April 2005, and Vetco then voluntarily disclosed them to the U.S. Government. The result was a new plea agreement and DPA, which require completion of the commitments made in the 2004 Opinion Procedure Release and which impose, at $26 million, the highest criminal fine to date in an FCPA matter.

Successor Liability. As with the 2004 resolution, Vetco is again the subject of a possible acquisition that involves similar issues of successor liability. In 2004, the acquiring consortium sought a DOJ Opinion Procedure Release regarding their successor liability for Vetco’s activities. The acquirer represented that, with the assistance of Vetco, it had conducted an extensive review of transactions in 21 countries, using more than 200 lawyers and accountants. In Opinion Procedure Release 2004-02 (July 12, 2004), the DOJ stated its intention not to apply successor liability based in part on the acquirer’s representations that it would implement a compliance system, internal controls, training, continuing internal audits and other procedures to deter and detect FCPA violations and in recognition of the acquirer’s significant due diligence. In the current matter, General Electric (“GE”), the intended acquirer of Vetco Gray, stipulated that resolving the bribery investigation was a pre-condition to completion of the transaction. This requirement, appearing in the second public FCPA matter in which GE faced the prospect of successor liability (the InVision case being the first), reinforces the prospect of successor liability when FCPA issues arise in a mergers and acquisitions context.

Monitor. Consistent with most FCPA settlements since 2004, the DOJ again required that a compliance monitor acceptable to the DOJ be hired to oversee the actions of Vetco’s affiliates. If Vetco and the DOJ are unable to agree on a monitor, the DOJ will appoint the monitor itself. In the Aibel Group DPA, the DOJ permitted the appointment of “outside Compliance Counsel” to perform the activities of a monitor. Unlike past monitor arrangements (including the Vetco plea agreement), existing Compliance Counsel is free to perform the monitor-like functions and is not prevented from representing the Aibel Group following the end of the monitorship. The Aibel settlement also required, however, that the Aibel Group establish a Compliance Committee of the Board of Directors, consisting of a majority of members not affiliated with the lead shareholders, and an Executive Chairperson, also not affiliated with the lead shareholders. These appointed individuals will assist in monitoring FCPA issues, and their appointment is subject to DOJ approval. If the company and the DOJ are not able to reach an agreement on the individuals who will be appointed, including the Compliance Counsel, the DOJ will select the individuals on its own.

With both the monitor requirement for Vetco and the novel compliance counsel provisions for the Aibel Group, DOJ has taken for itself a more direct role in shaping the post-settlement monitor process. Previous cases involving monitors allowed companies to select monitors “acceptable to” the DOJ. In the Schnitzer Steel Industries DPA, the DOJ limited choices to two monitors proposed by DOJ. In Vetco, DOJ retains considerable discretion with respect to the selection of the monitor, and in Aibel, DOJ extends its approval authority to the Executive Chairperson and the Compliance Committee, as well as to Compliance Counsel. Thus far, the SEC in its FCPA settlements has simply required monitors “not unacceptable to” the Commission.

Customs. The Vetco resolution also highlights growing interest in FCPA violations in the customs realm. Bribes and facilitating payments in the area of customs clearance, known to be a persistent problem in many countries, typically are small on a transaction-specific basis. However, as this case shows, such payments can be significant when viewed in the aggregate. According to the public documents, the affiliates authorized at least 378 corrupt payments totaling approximately $2.1 million. Notably, the illicit payments at issue were not made directly, but instead through an unnamed “major international freight forwarding and customs clearing company,” a factor that underscores the importance of due diligence and safeguards on third party agents, even when working with well established entities.

El Paso

On February 7, 2007, the SEC announced a settlement with El Paso Corporation for violations of the FCPA’s books and records and internal controls provisions. According to the public releases, the violations stemmed from illegal payments of $5.5 million indirectly made to Iraqi officials from 2001 to 2002 in connection with purchases of crude oil under the U.N. Oil-for-Food Program. The payments were demanded by Iraqi officials in the form of surcharges. Some of the surcharges were arranged through a consultant, and others were paid through third parties from which El Paso purchased Iraqi oil. The SEC alleged that “El Paso knew, or was reckless in not knowing,” of the illegal surcharges and failed to accurately record them in the company’s books and records. Pursuant to the settlement, El Paso agreed to pay $2.25 million in fines and $5.48 million in disgorgement. El Paso satisfied the disgorgement obligation by paying the amount to the U.S. Government pursuant to a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York. Documents indicate that the DOJ will seek to transfer the disgorged funds to the Iraq Development Fund.

The El Paso settlement is the first U.N. Oil-for- Food Program investigation resulting in a settlement for violations of the FCPA. El Paso’s resolution with the SEC only involved violations of the books and records provisions of the FCPA, and not the antibribery provisions. It also involved no requirement for the appointment of a compliance monitor. The terms of the settlement, which noted El Paso’s past and continuing cooperation, may provide insight into avenues for future resolutions of FCPA charges related to Oil-for-Food Program investigations.

The settlement also covered charges of alleged violations of the Iraqi Sanctions Regulations, which are administered by the Treasury Department’s Office of Foreign Assets Control (“OFAC”). OFAC Director Adam Szubin was a party to the settlement, agreeing that, under the terms imposed, OFAC would not pursue a civil enforcement action against El Paso (though not against other entities or individuals) with respect to the specific conduct at issue.

Of some note in this case is that it originated from the Southern District of New York, and because it was not primarily an FCPA matter, coordination with main Justice that is normally otherwise required did not occur in this case. The settlement terms accordingly suggest that cases that are managed primarily by U.S. Attorney’s Offices rather than the Fraud Section of the Department of Justice in Washington may not follow the same pattern, as some of the features of this case suggest.

Dow Chemical

On February 13, 2007, the SEC filed a settled civil action with the Dow Chemical Company for violations of the FCPA’s books and records and internal controls provisions related to approximately $200,000 in improper payments made by its “fifth-tier subsidiary” in India. According to the complaint, the initial payments (dating from 1996) were made to “expedite the registration” of pesticides. These payments were made through agreements with contractors, who added fictitious charges onto the bills charged back to the Dow subsidiary. Later payments (which ran through 2001) were made to officials to “distribute and sell products” (mostly as small payments of under $100 per payment from petty cash), to “sales tax officials,” to “excise tax officials,” and to customs officers. The complaint also indicates that an additional sum of approximately $37,000 was expended for gifts, travel, entertainment, and other items for officials. None of these payments were accurately recorded in Dow Chemicals’ books and records.

The SEC documents noted that Dow voluntarily disclosed the payments to the Commission staff after an extensive internal investigation. The papers also note that Dow took certain remedial actions, including “employee disciplinary” actions and training of relevant employees, and that the company “restructured” its global compliance program to enhance its focus on the FCPA. Dow also hired an independent consultant to review its FCPA compliance program.

These remedial steps, along with other possible factors (such as the level of control over the subsidiary and the age of the payments) may have led to the disposition of the case, which involved a relatively modest $325,000 fine and cease-and-desist order, as well as no obligation to retain a government-approved independent compliance monitor, which has been a standard part of most recent cases.

For further information, please contact any of the following lawyers:

Homer Moyer, hmoyer@milchev.com, 202-626-6020

John Davis, jdavis@milchev.com, 202-626-5913

Kathryn Cameron Atkinson, katkinson@milchev.com, 202-626-5957

James Tillen, jtillen@milchev.com, 202-626-6068

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