This month is the 60thanniversary of the publication of the greatest photograph about jazz musicians. It is of course A Great Day in Harlem which came out in the January issue of Esquire magazine. The photo was taken in August 1958 by Art Kane, who had never before taken a picture as a professional. Kane had passed a message through the New York jazz scene that he wanted to take a picture for a special edition of Esquire magazine commemorating the golden age of jazz. Because the shoot was scheduled for 10 AM, long before most jazz players were up, he feared there would be a small turnout. To Kane’s amazement, scores of musicians assembled to create what is now a world-famous, “class photograph” of America’s jazz legends. If you want to find out more about this most famous photo, check out the Oscar-nominated documentary A Great Day in Harlem.
Last year (on Monday) I began a two-part blog series on the final two Foreign Corrupt Practices Act (FCPA) of 2018. On Monday, we considered the Polycom, Inc. FCPA enforcement action and today we consider the enforcement action involving Centrais Elétricas Brasileiras S.A. (Eletrobras). This the second FCPA enforcement action involving a Brazilian state-owned enterprise. The matter was resolved with a Cease and Desist Order(Order) issued by the Securities and Exchange Commission (SEC). The company paid a fine of only $2.5 million, probably for reasons similar to why Petrobras sustained only a Non-Prosecution Agreement (NPA) for one of the greatest bribery scandals ever.
While you might wonder what the SEC is doing sanctioning a Brazilian power generation, transmission and distribution company based in Rio de Janeiro, it is because “Eletrobras’s common and preferred shares are registered with the Commission pursuant to Section 12(b) of the Exchange Act and trade on the New York Stock Exchange.” Additionally, “Eletrobras files periodic reports with the Commission pursuant to Section 13 or 15(d) of the Exchange Act.”
The illegal actions of the company, as stated in the Order, were that “former officers at Eletrobras Termonuclear S.A (“Eletronuclear”), Eletrobras’s majority-owned (over 99%) nuclear power generation subsidiary, engaged in an illicit bid-rigging and bribery scheme involving the construction of a nuclear power plant (“UTN Angra III”) from approximately 2009 until 2015. These officers used their influence at Eletronuclear in favor of a bid-rigging scheme among certain private Brazilian construction companies. The officers also misused their official positions in authorizing unnecessary contractors and inflating the cost of Eletronuclear’s infrastructure project. In return, the construction companies involved in the scheme agreed to pay, and did pay, the former Eletronuclear officers approximately $9 million.”
The UTN Angra III was a huge nuclear power and transmission plant, with bid letting at over $5.7 billion in both 2009 and 2014. The massive number of contracts let for this project were used to fund bribery payments to former Brazilian government officials and Brazilian political parties, the former President of Eletrobras and other company officials. The bribe amounts were huge with 2% alone going to “officials associated with two of Brazils largest political parties.” The company President got a paltry $4.1 million and senior company officials split another $4.9 million.
The corruption clearly emanated from the top and perforated the entire organization. Regarding its anti-corruption compliance program, including policies and procedures and internal controls, the Order noted they were “general or boilerplate prohibitions that did not apply to all employees or were ignored. For example, Eletrobras adopted a code of ethics in 2005 to ensure that competiveness and profitability did not override ethical behavior.” Moreover, Eletrobras’s code of ethics only applied to the holding company and not to any of the 13 regional subsidiaries, 175 special purpose entities or 25 other entities the company held controlling interests in during the time in question.
In 2010 the company began anti-corruption compliance training but for only “a small part of its workforce.” It also implemented internal controls “designed to promote these ethical principles, such as certain contractual measurement criteria requiring that payments to suppliers be proportional to the worked performed, were ignored or circumvented.”
Obviously when you have corruption on such a massive scale there follows significant material weaknesses in controls and financial reporting. The Order stated, “from 2009 through 2015 Eletrobras disclosed in its annual reports material weaknesses related to its ability to maintain an effective control environment, adequately perform risk assessments, and effectively maintain and operate controls with respect to its accounting for property, plant and equipment. Many of these material weaknesses, including the failure to maintain effective controls to ensure the completeness, accuracy, validity, and valuation over the purchase and payments of goods and services, contributed to the bribery scheme flourishing undetected for years.”
Finally, the company’s numerous subsidiaries were able “to ignore prohibitions against direct payments to subcontractors and allow the payment of upfront costs for work not performed. This occurred against a backdrop where Eletrobras’s compliance policies and procedures were not specifically tailored to the inherent risks associated with Eletrobras’s business operations.”
In addition to all of the above and most importantly for the compliance practitioner is the mechanism used to fund the bribery and corruption. Just as we saw in the Polycom FCPA enforcement action, the customer was in on the scheme to create the pot of money to fund the bribes. The Order stated, “Pursuant to this scheme, the construction companies overcharged Eletronuclear under construction contracts and contracts to provide goods and services, and used the overpayment to fund the bribes to the executives and political parties. From about 2009 until 2015, the former Eletronuclear officers caused Eletronuclear to approve and pay invoices from contractors involved in the bid-rigging and bribery scheme relating the UTN Angra III project. At least 28 invoices were from a contractor used as a conduit for the bribes paid to the former Eletronuclear president.”
With Polycom and Eletrobras enforcement actions coming out together, it drives home the message that compliance professionals must be cognizant of contracting processes and pricing to help detect and prevent bribery and corruption. This means a set of robust internal controls that would not only review contract pricing but also work to oversee legitimate business reasons for both discounts and overcharges.
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© Thomas R. Fox, 2019