Last week, another Foreign Corrupt Practices Act (FCPA) case was resolved. It involved Samsung Heavy Industries Company Limited (SHI), a South Korea-based engineering company that provides shipbuilding, offshore platform construction, and other construction and engineering services. The company agreed to pay total penalties of more than $75 million to resolve the government’s investigation into violations of the FCPA arising out of a scheme to pay millions of dollars in bribes to officials in Brazil. The company settled via a Deferred Prosecution Agreement (DPA). The basic facts were admitted to by the company in a Criminal Information.
According to the Department of Justice (DOJ) Press Release, the penalty of $75,481,600 was split, with 50%, or $37,740,800, to be paid to the United States the remaining 50% to be paid to Brazilian authorities pursuant to agreements between SHI and Controladoria-Geral da União (CGU), Advogado-Geral da União (AGU) and Ministério Público Federal (MPF). If such payment is not paid to the Brazilian authorities on or before Nov. 25, 2020, payment must be made back to the US government. In related proceedings in Brazil, SHI entered into a memorandum of understanding with CGU and AGU and a complementary agreement for the negotiation of a leniency agreement with MPF.
The case involves SHI’s bribery of officials at Petróleo Brasileiro S.A. (Petrobras) to facilitate the sale of a SHI constructed oil drillship through a third-party entity, identified in the Criminal Information as Chartering Company, who had the contract with Petrobras. Chartering Company obtained a unilateral option to purchase a SHI drillship if it obtained a contract with Petrobras to charter a drillship. This relationship led SHI to retain Brazilian Agent 1 to facilitate the payment of bribes directly to the Petrobras officials in charge of contracting with Chartering Company. A SHI senior executive agreed to a $20 million payment, the majority of which would be the pot of money to fund the bribe payments.
Unfortunately for SHI, all of these negotiations were conducted in the US, thereby creating no question of US jurisdiction over the actions of SHI and its executives. This also included conversations where the corrupt Brazilian agent confirmed that payment of the commission would go towards bribe payments, confirming this information in emails back to South Korea. Further, when the bribe payment was confirmed to the corrupt Petrobras officials, they had other Petrobras employees contact the SHI executive in charge to let him know when the contract for the charter of the drillship would be approved so the bribes could then be paid out. It would appear that it was common knowledge and even thought to be above board; or at least the way business was conducted.
The payment scheme was also detailed in the Criminal Information. The corrupt agents (there were now two) created sham “Intermediary Companies” to bill SHI for the bribe funds. Illegal payments were made to these Intermediary Companies from which monies were transferred in tranches from accounts in the US to banks in Monaco for the benefit of the corrupt Brazilian Agent. This same agent then had the monies further transferred to banks in Brazil for the benefit of the corrupt Petrobras officials.
A further wrinkle was added to try and hide this paper trail. One of the Intermediary Companies created a sham loan agreement with one of the shell companies in Switzerland. Monies were paid to this shell company, allegedly to repay a non-existing loan. Since the loan was false, as it had never existed, this shell company forwarded the money as a bribe payment to one of the corrupt Petrobras officials.
Yet another interesting aspect was the cooperation (or perhaps lack thereof) by SHI which cost it a pretty penny. First, SHI did not self-disclose the matter to either US or Brazilian authorities so no Declination was available. However, the company did received credit for its cooperation with the DOJ’s investigation and for taking remedial measures. Some of these remedial measures included making significant enhancements to its compliance program, including hiring additional compliance staff, implementing enhanced anti-corruption policies and heightened due diligence controls over third party vendors, instituting mandatory anti-corruption training and improving whistleblower policies and procedures.
However, the DPA made clear that the company did not receive full credit for its cooperation. Somewhat amazingly, given its credit for cooperation, SHI failed “to meet reasonable deadlines imposed by the Fraud Section and delays it caused in reaching a resolution.” These actions cost SHI five percent off its total reduction so the “total criminal penalty reflects a 20 percent reduction off the bottom of the applicable United States Sentencing Guidelines fine range.” This failure cost SHI between $4 to $5 million in additional discounts. I hope the company found this conduct worthwhile for it surely was expensive.
It seems there is quite a bit to consider as lessons learned for the compliance professional. Obviously, the money trail was critical in this case. It was not clear from the Criminal Information who selected, vetted or approved the agents in this matter. However, any review of them who have surely revealed multiple red flags, none of which appeared to be investigated. The most interesting additional fact in this case was the customer between SHI and Petrobras.
After all, the entire deal was contingent on the Chartering Company getting a contract with Petrobras for a drilling charter so that SHI could build and sell a drillship. This clearly speaks to the continued risk we have seen from the series of Petrobras enforcement actions where the end using customer was in on the bribery scheme. This SHI case was no different but here the end using customer of the product was the Chartering Company not Petrobras. All of this would portend the need for greater involvement by the compliance function in the entire sales cycle.
Finally, is the clear and very expensive lesson that if you agree to deadlines with the DOJ, you must meet them. Failure to do cost SHI a very pretty penny.
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© Thomas R. Fox, 2019