Last week the Department of Justice (DOJ) settled a multi-part enforcement action, partly involving the Foreign Corrupt Practices Act (FCPA), with Vitol Inc. (Vitol), the US subsidiary of Vitol Holding II SA. Vitol agreed to pay a combined $135 million to resolve matters. Interestingly, also included in the overall settlement was a disgorgement of more than $12.7 million to the Commodity Futures Trading Commission (CFTC) in a related matter and a penalty payment to the CFTC of $16 million related to trading activity. The FCPA component was settled via a Deferred Prosecution Agreement (DPA) and Criminal Information (Information).
In a DOJ Press Release, Acting Assistant Attorney General Brian C. Rabbitt of the Justice Department’s Criminal Division, said, “Over a period of 15 years, Vitol paid millions of dollars in bribes to numerous public officials – in three separate countries – to obtain improper competitive advantages that resulted in significant illicit profits for the company. Today’s coordinated resolution with Brazil, along with our first coordinated FCPA resolution with the CFTC, underscores the department’s resolve to hold companies accountable for their crimes while, at the same time, avoiding unnecessarily duplicative penalties.” Acting US Attorney Seth D. DuCharme of the Eastern District of New York added, “Vitol paid bribes to government officials in Brazil, Ecuador and Mexico to win lucrative business contracts and obtain competitive advantages to which they were not fairly entitled. The United States Attorney’s Office for the Eastern District of New York will continue to hold accountable companies and individuals that attempt to defy U.S. law to the detriment of honest competitors.”
While the total amount of the criminal penalty was $135 million, the DOJ credited “$45 million – approximately one third of the total criminal penalty – against the amount that Vitol will pay to resolve an investigation by the Brazilian Ministério Público Federal for conduct related to the company’s bribery scheme in Brazil.” Moreover, as a part of the DPA, “Vitol Inc. and Vitol S.A., another company within the Vitol group of companies, have agreed to continue to cooperate with the department in any ongoing investigations and prosecutions relating to the conduct, including of individuals; to enhance their compliance programs; and to report to the department on the implementation of their compliance programs.”
This enforcement action had some interesting aspects for every compliance practitioner to consider. The first was that Vitol paid bribes in violation of the FCPA in exchange for receiving confidential Petróleo Brasileiro SA (Petrobras) pricing and competitor information. During the 2011 to 2014 time period, the company admitted that it bribed at least five other Petrobras officials in exchange for receiving confidential pricing information that Vitol used to win fuel oil contracts with Petrobras.
The second interesting aspect was the nature of the parties. Many energy traders have claimed over the years that the FCPA does not apply to their business. The Vitol case illustrates that nothing can be further from the truth. Energy traders routinely deal with those entities which have energy products to sell, namely energy companies. This means that a large amount of their business is with national energy companies such as Petrobras, Petróleos Mexicanos (Pemex) and EP Petroecuador. If there was ever a question about energy traders and FCPA risk, this enforcement action answers it once and for all.
The third and final feature of this matter for every compliance professional to take note of was the CFTC involvement. In spite of the Trump Administration’s attempt to get rid of the CFTC, it still exists as a viable government agency regulating anti-competitive behavior. According to the CFTC Press Release, the agency’s involvement and enforcement action was for manipulative and deceptive conduct, “which spanned from 2005 to early 2020, involved foreign corruption and physical and derivatives trading in the U.S. and global oil markets, including attempted manipulation of two S&P Global Platts physical oil benchmarks.”
Clearly Vitol had adopted bribery, corruption and market manipulation as business strategies for some 15 years. The Press Release stated, “Vitol’s fraudulent and manipulative conduct—including conduct relating to foreign corruption—defrauded its counterparties, harmed other market participants, and undermined the integrity of the U.S. and global physical and derivatives oil markets. This case is brought in coordination with the Division of Enforcement’s Corruption Task Force and is the first action brought by the CFTC involving foreign corruption.”
The CFTC Order detailed that Vitol committed fraud by making corrupt payments to employees and agents of Petrobras “in exchange for confidential information, including confidential material involving Vitol’s trading in physical oil and derivatives. This material included at times the specific price information—referred to internally at Vitol as the “gold number”—at which Vitol understood it would win a supposedly competitive bidding or tender process.”
Further, “in August 2014 and July 2015, Vitol acted to manipulate two Platts fuel oil benchmarks for the purpose of benefiting Vitol’s related physical and derivatives positions, including positions obtained while in possession of confidential information. By attempting to manipulate such benchmarks, Vitol was also attempting to manipulate futures, swaps, and other derivatives and physical trades that price in reference to those benchmarks. If Vitol’s actions had been successful, such conduct would have been to the detriment of market participants who held opposing positions—including Vitol’s counterparties—or those who rely on the benchmarks as an untainted price reference for U.S. physical or derivative trades.”
This entry of the CFTC into FCPA-related enforcement was clearly communicated by the CFTC in its 2019 Advisory on Violations of the Commodity Exchange Act Involving Foreign Corrupt Practices (Advisory). In this Advisory, CFTC’s then Enforcement Director, James McDonald, said, “Combatting misconduct that affects our financial markets has truly become a team effort, and that is particularly true with respect to foreign corrupt practices. We at the CFTC will do our job as part of the team to identify this type of misconduct in our markets and hold wrongdoers accountable, working closely with our enforcement partners domestically and abroad.”
This case clearly portends greater liability where a company’s violations of the FCPA result in market manipulation. I am sure this is something the incoming Biden Administration will look to expand.
Tomorrow, I will look at the bribery schemes.
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© Thomas R. Fox, 2020