For anyone who grew up in the 1960s, I am sure that you remember the touchstone slogan for Tareyton cigarettes, “I’d rather fight than switch”. The television ad always showed someone with a black eye and a Tareyton cigarette in his or her fingers. I was reminded of that old advertising slogan last week when the US Department of Justice (DOJ) and Securities and Exchange (SEC) commission both announced their settlement with the French energy giant TOTAL SA (Total), over its violation of the Foreign Corrupt Practices Act (FCPA).
It was the slogan’s inverse which gave me pause in reading about Total for as recently as June 2012, the FCPA Blog asked, as the title of a blog post, “Will Total S.A. Fight Back?” In this post Dick Cassin, who reported that Total had been in discussion with the DOJ and SEC since 2010, said that the “French oil giant Total said it rejected ‘out-of-court settlement solutions’ with the DOJ and SEC that would end their longstanding FCPA investigations. And while Total said it is still talking with the agencies, it also said it’s free not to settle, ‘in which case it would be exposed to the risk of prosecution in the United States. ‘” Cassin explored some of the reasons that Total might rather fight than settle but at the end he noted, “What will happen now? A court battle would bring a deluge of scrutiny from the press and regulators around the world. At a minimum, that would imperil Total’s stock price and lead to years of litigation by aggrieved shareholders, customers, lenders, and other stakeholders. So settlement seems likely.”
So I guess Total decided that its interests mandated that it switch and settle rather than fight. What could have been the reasons for doing so? In this post, I will review some of the facts as set forth in the Criminal Information (Information)and the Deferred Prosecution Agreement (DPA), both of which were filed by the DOJ and the SEC’s Cease and Desist Order (the Order) which may have led Total to settle. In tomorrow’s posting, I will discuss the lessons learned for the compliance practitioner.
Who Was Involved
As reported by both the FCPA Blog and the FCPA Professor, Total engaged in a nearly decade long, breathtaking bribery scheme. In this scheme, Total paid approximately $60MM to an un-named Iranian Official of the National Iranian Oil Company (NIOC), who steered two major projects Total’s way. According to the FCPA Professor, in a post entitled “Total Agrees To Pay $398 Million To Resolve Its FCPA Scrutiny”, the Iranian Official in question was described in the Information as “the Chairman of an Iranian engineering company that was more than 90% owned by the Government of Iran and substantially controlled by the Government of Iran.” The Information further states that “from at least early 2001, the Iranian Official was the head of an Iranian organization concerned with fuel consumption, which was a wholly owned subsidiary of NIOC, and was a government advisor to a high-ranking Iranian official.”
The projects were the Sirri A and E oil and gas fields and South Pars gas field. Total was granted concessions to these fields within days or weeks of inking contracts with the Iranian Official’s sham entity for receipt of the bribes. The original contract was between Total and “Intermediary 1” and was entitled “Umbrella Agreement.” The specific terms for payment were set out in a document which hung off this Umbrella Agreement, which was entitled, “Consulting Services Request”. Under this Consulting Services Request, Intermediary 1 was paid approximately $26MM over 2 years. Thereafter, another sham entity, “Intermediary 2” was set up and assigned the Umbrella Agreement by the parties. Intermediary 2 received its own “Consulting Services Request”, under which it received approximately $44MM in payments.
As I said, the bribe amounts were simply breathtaking. Below is the Bribery Box Score
Bribes Paid To
Contract(s) Under Which Bribes Were Paid
Date Bribe Paid
Bribe Amounts Paid (figures approx. based upon currency conversions)
Projects Awarded to Total Based Upon Bribes Paid
|Intermediary 1||Umbrella Agreement.Consulting Services Request 1:(a) $6MM;(b) $500K for expenses;(c) $25MM as capital X reached specified levels;(d) Amount = to 5% above cap X, if exceeded; and(e) % of revenue from sale of O&G developed from site.||July 13, 1997, Total awarded Sirri Fields A&E|
|Intermediary 2||Umbrella Agreement transferred to Intermediary 2.Second Consulting Services Request 2:(a) $10MM;(b) $30MM as capital X reached specified levels;(c) payment of either (i) Amount = to 4% above cap X, if exceeded or (ii) $60MM; and(d) an additional $10MM.||On Sept. 28, 1997 Total awarded Phases 2 & 3 of South Pars project|
|Additional Payments with no specified date||$7MM|
|TOTAL AMOUNT OF BRIBES PAID||Approximately $60MM|
According to the FCPA Professor, the Information has the following about violations of the FCPA books and records provisions, “… Total knowingly falsified and caused to be falsified books, records, and accounts, required to, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Total, to wit: Total (a) mischaracterized the unlawful payments under the various consulting agreements as ‘business development expenses’ and (b) improperly characterized the unlawful consulting agreements as legitimate consulting agreements.”
The Information also specifies the FCPA internal controls charges. They included:
“(a) failed to implement adequate anti-bribery compliance policies and procedures; (b) failed to maintain an adequate system for the selection and approval of consultants; (c) failed to conduct adequate audits of payments to purported consultants; (d) failed to establish a sufficiently empowered and competent corporate compliance office; (e) failed to take reasonable steps to ensure the company’s compliance and ethics program was followed; (f) failed to evaluate regularly the effectiveness of the company’s compliance and ethics program; (g) failed to provide appropriate incentives to perform in accordance with the compliance and ethics program; (h) concealed the consulting agreements’ true nature and true participants; (i) performed no due diligence concerning the named or unnamed parties to these agreements; and (j) lacked controls sufficient to provide reasonable assurances that the consulting agreements complied with applicable laws.”
In a blog post entitled “Total SA pays $398 million to settle U.S. bribe charges” the FCPA Blog reported that “In the fourth biggest FCPA case ever, French oil giant Total S.A. agreed Wednesday to pay $398 million in penalties and disgorgement for bribing an Iran official to gain access to oil and gas fields. Total will pay a criminal penalty to the DOJ of $245.2 million. It received a three-year deferred prosecution agreement that requires appointment of an independent compliance monitor. In its settlement with the SEC, Total will disgorge profits of $153 million.” For those of you keeping score at home that is Number 4 on the list of greatest FCPA fines in the history of the world AND Number 2 on the list of the biggest profit disgorgements in FCPA history. Something to be proud of, or perhaps not.
While the raw number of nearly $400MM does seem eye-catching, perhaps even more interesting is that the DOJ assessed a fine nearly at the bottom of the fine range. After the calculations were made under the US Sentencing Guidelines (USSG), there was a fine range of between a low end of $235.2MM up to $470.4MM. My curiosity here is based upon something NOT in the DPA, where the DOJ assessed Total’s conduct under the USSG ‘culpability score’. Under USSG §8C2.5 an organization can receive a reduction in its culpability score in three ways. First, a company’s overall score can be subtracted “three points from the organization’s culpability score if the organization had an effective compliance and ethics program as defined in §8B2.1 in place at the time of the offense.” Second, the culpability score can be reduced “by five points if the organization self-reported the offense to the appropriate governmental authorities, fully cooperated in the investigation, and clearly demonstrated recognition and affirmative acceptance of responsibility for its conduct.” If the organization did not self-report, but fully cooperated in the investigation, and accepted responsibility for its conduct, the culpability score is reduced by two points. Third, and finally, “if the organization did not self-report or cooperate, but clearly demonstrated recognition and affirmative acceptance of responsibility for its conduct, the culpability score is reduced by one point.” [citations omitted]
It would appear that while Total fully cooperated and recognized the error of its ways, it did not have nor put in place an effective compliance program. Also it would appear that Total did not self-report its FCPA violations. So I guess the question is: what did Total do to warrant receiving a fine at near the bottom end of the possible range?
I find jurisdictional arguments to be similar to arguments about pregnancy. Just as one is not ‘a little bit pregnant’, there is not just ‘a smidgen of jurisdiction’. It either exists or it does not. From the Information, it states that “Total owned a number of subsidiaries that conducted business in the United States. Total’s American Depository Shares were registered with SEC and traded on the New York Stock Exchange as American Depository Receipts (“ADRs”). Accordingly at all relevant times, Total was an “issuer” within the meaning of the FCPA. Total also funded one of the bribe payments from “account at Banker’s Trust in New York, New York.” Maybe Total was more than just ‘a little pregnant’.
So what could have led Total to switch to settling rather than fighting? Perhaps it finally understood that if you list your shares in the US, your company will be subject to US laws. And of course, do not bribe foreign governmental officials using money wired from US banks.
Or maybe, just maybe, Total decided it was in their corporate interests to settle rather than go to trial.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at email@example.com.
© Thomas R. Fox, 2013