Today I conclude my two-part series on the recent Foreign Corrupt Practices Act (FCPA) enforcement action involving the Chilean chemicals and mining company Sociedad Química y Minera de Chile (SQM), which agreed to pay a criminal penalty of $15.5 million and a civil penalty of $15 million for a total fine and penalty of $30.5 million. The company settled with the Department of Justice (DOJ) via a Criminal Information and Deferred Prosecution Agreement (DPA) and with the Securities and Exchange Commission (SEC) via a Cease and Desist Order (Order).
However, before I conclude the review of the SQM enforcement, today we honor the very first ‘Trial of the Century’ involving the Big Bill Haywood, Charles Moyer, and George Pettibone, all officers of the labor union the Western Federation Miners, for the murder of former Idaho Governor Frank Steunenberg which had occurred the prior year. On this date in 1906 the three were arrested and extradited to Idaho to stand trial. Haywood’s defense counsel, Clarence Darrow, successfully defended him and secured an acquittal. The trial made national headlines and even President Theodore Roosevelt publicly commented on it. Some 20 years later Haywood fled to Russia and is one of two Americans buried at the Kremlin.
Earlier, I considered the facts of the SQM case and they were quite damning indeed, with Chief Executive Officer (CEO) involvement in the illegal conduct and Board awareness, yet do-nothingness in the face of clear illegal conduct. Today I want to consider how the company was able to achieve such a successful resolution, which included a 25% reduction off the lower end of the range suggested by the US Sentencing Guidelines and only a two-year independent monitorship.
The Deferred Prosecution Agreement (DPA) acknowledged there was no self-disclosure. Yet the company received full credit for its cooperation, with the DPA stating “the Company received full cooperation credit based on its cooperation with the Fraud Section’s investigation, which included: conducting a thorough internal investigation; producing relevant documents from overseas, accompanied by translations of key documents, to the Fraud Section; and providing to the Fraud Section all relevant facts known to it, including information about individuals involved in the misconduct”.
The DPA also detailed the extensive remediation engaged in by the company during the pendency of the enforcement action. It noted, “the Company has … engaged in a number of remedial measures, including: (1) reconstituting and staffing new compliance and internal audit divisions; (2) implementing new internal accounting/payment process controls; (3) revising the corporate Code of Ethics and conducting training for all personnel; (4) voluntarily paying over $9 million in taxes, interest, and penalties to Chilean authorities in connection with the improper payments described in the Statement of Facts; (5) disciplining the employees involved in the improper payments and false books and records described in the Statement of Facts – including terminating the employment of a senior officer of the Company and demoting another employee; and (6) providing in-depth anti-corruption and compliance training and consultations with outside compliance and internal controls experts to an employee who failed to take appropriate steps in response to red flags regarding the misconduct”.
In a December 2015 Form 6K filing to the SEC, the company provided additional detail on the scope of its remediation. It stated, “The measures that have already been adopted include: (i) dismissing Mr. P. Contesse G. from his position as SQM’s CEO; (ii) filing corrected tax returns with the Chilean Internal Revenue Service; (iii) creating SQM’s Corporate Governance Committee, which is comprised of three of its directors; (iv) separating and strengthening the team and responsibilities of the Internal Audit and Compliance departments, both of which report to SQM’s board of directors, while the latter also reports to the Company’s CEO; (v) hiring KPMG, the auditing firm, to review SQM’s payment process controls; (vi) improving the Company’s payment process controls and approvals; and, (vii) reformulating SQM’s Code of Ethics.”
Finally, the company agreed to a two-year external monitor because, as noted in the Information, “Although the Company has taken a number of remedial measures, the Company is still in the process of implementing its enhanced compliance program, which has not had an opportunity to be tested, and thus the Company has agreed to the imposition of an independent compliance monitor for a term of two years to diminish the risk of reoccurrence of the misconduct; the independent compliance monitor will serve a term of two years instead of three because of the significant enhancements the Company has already made to its compliance program, and because the Company’s size and risk profile are such that an independent compliance monitor should not need more than two years to test the Company’s compliance program.”
Embedded throughout this affair are numerous lessons for the compliance practitioner and others. First, and foremost, is the senior executive involvement which demonstrates a clear risk for corruption at the highest levels of an organization. When you couple such blatant disregard for legal standards, with unlimited discretion and no Board oversight, you have a recipe for disaster, which is what befell SQM. The next point is the specific failure of the company’s Board of Directors in its oversight role for compliance. Apparently not realizing that by listing its shares in the US public markets, it subjected itself to US laws, the SQM Board had a total abdication of its oversight responsibility. Even when presented with clear evidence of both FCPA violations and specific failures around internal controls, the Board failed to act. One might well wonder if this had been company with a US based Board if there might finally have been a criminal prosecution of Board members for failure to fulfill their obligations under the Ten Hallmarks of an Effective Compliance program.
Finally, are the various schemes used by SQM to hide the dodgy payments. There were payments to relatives of foreign officials, through mechanisms such as “financial services” allegedly provided to the company, the always popular consulting services, one my engineering father would have loved engineering and statistical services and, finally, one which may take the cake, an invoice for areas of fertilized tests. There were also payments to various foundations and charitable entities run by or affiliated with Politically Exposed Persons (PEPs).
The jurisdictional reach of the FCPA is quite broad. On the simplest level, the US does not want companies which take advantage of raising money with US investors to be so oblivious to the basics of anti-corruption as the failure to any type of compliance program can lead to defrauding of US investors. More importantly for the global scourge of corruption, the SQM enforcement points once again to the imperative of broad US enforcement of the FCPA as the most powerful tool to combat this scourge. The moral authority of the US to do, depends on large part from its willingness to lead this fight. It should continue to do so.
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© Thomas R. Fox, 2017