The baseball playoffs are here and the Houston Astros are up in Beantown to open the American League Championship Series (ALCS) against the Boston Red Sox. The Astros won an ugly Game 1 in spite of our starter and Number 1 ace Justin Verlander’s meltdown in the 5thinning, walking four, with two wild pitches to give up two runs to tie the game in that inning. However the game may have turned on the final batter in that inning who took a clear call third strike and then whined, moaned and complained about it so vociferously that the Red Sox Manager Alex Cora continued to do so from the dugout. It is not clear what Cora said, i.e. did he say one of the very few words you cannot say to an umpire in baseball, but he was tossed.

The Astros took the lead in the 6thand never looked back. With a Game 2 win against 0-9 in the playoffs David Price, the Astros will come home with a 2-0 lead and will look to close out the series in Houston. The Astros will then return to the World Series for the first back-to-back since the great Yankee run from the 1990s. Go Astros.

In a Corporate Compliance and Enforcement (PCCE) conference speech last week, at the NYU School of Law Program, Assistant Attorney General Brian Benczkowski announced that the Department of Justice’s (DOJ’s) criminal division has revised its guidelines on the imposition and selection of corporate monitors. This policy was made effective through the release of a memo from Benczkowski to all Criminal Division personnel on October 11th, (the “Benczkowski  Memo”) which supplements the prior Morford Memo on this subject.

The Morford Memo had two basic requirements for the selection of a monitor: (1) what were the potential benefits and (2) what would be the cost and the impact on a corporation. The Benczkowski Memo adds several factors prosecutors must consider including, “(a) whether the underlying misconduct involved the manipulation of corporate books and records or the exploitation of an inadequate compliance program or internal control systems; (b) whether the misconduct at issue was pervasive across the business organization or approved or facilitated by senior management; (c) whether the corporation has made significant investments in, and improvements to, its corporate compliance program and internal control systems; and (d) whether remedial improvements to the compliance program and internal controls have been tested to demonstrate that they would prevent or detect similar misconduct in the future.”

This means the DOJ should consider whether the environment which led to the underlying conduct violative of the Foreign Corrupt Practices Act (FCPA) still exists in an organization and whether the change in leadership and culture are enough to insure the company does not become a recidivist. The DOJ should also consider the actions taken against those involved in the illegal conduct, such as termination of employment or termination of business relationship. The DOJ must also evaluate the company’s “remedial efforts and the effectiveness and resources of its compliance program.”

The Benczkowski Memo sets out requirements for each monitor agreement, including a list of persons within the DOJ who must approve of the monitor. Whether required in a Deferred Prosecution Agreement (DPA), Non-Prosecution Agreement (NPA) or other agreement, there must also be a description of the monitor’s qualifications and the monitor selection process, together with a plan to replace the monitor, if required. There should be an explanation of the monitor’s scope and the length of the monitorship. The monitor selection process should be completed within 60 days.

The DOJ has set up a Standing Committee which will oversee the selection process and the monitor’s compliance with all applicable regulation and guidance. The Benczkowski Memo also lays out the nomination and selection process. The Company must certify the candidate is its “first choice” and describe the candidates qualification. The company must certify there is no conflict of interest and that it will not employ the monitor for up to two years after the monitorship concludes. There are also criteria for DOJ monitor selection listed and they include such areas as monitor expertise, reputation and past experience as a monitor. The specific expertise in an industry or areas of the monitorship will be considered as well as objectivity and independence. The monitor must also be able to adequately and sufficiently discharge their duties going forward.

The front-line DOJ prosecutor handling the matter and their supervisor(s) who make a monitor recommendation are required to prepare a memo to the Standing Committee on the following matters: (a) a brief statement of the underlying case; (b) a description of the proposed disposition of the case, including the charges filed (if any); (c) an explanation as to why a monitor is required in the case, based on the considerations set forth in this memorandum; (d) a summary of the responsibilities of the monitor, and his/her term; (e) a description of the process used to select the candidate; (f) a description of the selected candidate’s qualifications, and why the selected candidate is being recommended; (g) a description of countervailing considerations, if any, in selecting the candidate; (h) a description of the other candidates put forward for consideration by the Company; and (i) a signed certification, on the form attached hereto, by each of the Criminal Division attorneys involved in the monitor selection process that he/she has complied with the appropriate conflicts-of-interest guidelines. All of the above must be approved by the Standing Committee, the Assistant Attorney General over the division and the Deputy Attorney General.

The Benczkowski Memo answers many of the criticisms around monitors leveled years ago by companies when there was less transparency around the process. Over the past several years, the DOJ was worked to create greater transparency in the process for the parties involved, which has been accomplished. Others have argued for more public transparency in the process. The Benczkowski Memo appears to answer that recent criticism, and, to that extent, provides greater certainty to the process, which is certainly a positive. In the area of FCPA enforcement, this DOJ has continued its policy of consolidating how the Fraud Section has been working for some time.

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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2018

This blog post continues my multi-part exploration of the Petróleo Brasileiro S.A. – Petrobras (Petrobras) Foreign Corrupt Practices Act (FCPA) enforcement action. Today we take up some of the more prominent bribery schemes and how they funded the bribery piggy bank.

The Petrobras FCPA enforcement action came in the form of a Non-Prosecution Agreement(NPA) with the Department of Justice (DOJ) and Cease and Desist Order(Order) with the Securities and Exchange Commission (SEC). The penalties were stunning. The FCPA Blogreported the settlement included a criminal penalty of $853.2 million. The SEC penalty included $933.5 million civil penalty of profit disgorgement but Petrobras was given credit for the $2.95 million it had previously paid to settle its shareholder lawsuit in the US.

Under the NPA, Petrobras will pay 10 percent or $85.3 million of the criminal penalty to the DOJ and another 10 percent to the SEC. Petrobras will pay the remaining 80 percent or $682.5 million to the Ministerio Publico Federal in Brazil.” The DOJ fine represents a 25% discount off the low end of the range of the US Sentencing Guidelines. (We will explore how this was achieved in a subsequent blog post.) In addition to the eye-popping monetary fine and penalty, there was no independent monitor required by the DOJ or SEC.

The bribery schemes were as comprehensive in an organization as one could ever want to see, to the point of the management of the organization. The Order noted, “Petrobras is overseen by a board of directors, which has the authority to hire and fire Petrobras’s division directors and other senior officers of its subsidiaries. The Brazilian government has historically appointed a super-majority of the members of this board. From at least 2003 to April 2012, prominent Brazilian politicians abused this power by appointing people of their choosing to specific executive positions, and demanding recompense from the appointees. The appointees and their co-conspirators engaged in corruption schemes that benefited themselves and their political patrons, including by diverting billions of dollars from overpriced contracts for infrastructure projects.”

When you have that type of corruption at the top it is no wonder the entire organization was corrupt. But Petrobras operated as more than just the piggy bank for the ruling party in Brazil. It was the piggy bank for many others as well.

The bribery schemes were initially creative but as time passed they became hardened into fixed costs. The basic scheme involved cartels of contracts, which received inside and confidential information on bid information. These cartels, consisting of contractors in league with corrupt Petrobras officials, would agree to split up the contracts awarded by Petrobras with an uplift of 1% to 3% which would become the bribery fund. According to the NPA, through this process “more than U.S $2 billion has been estimated to have been generated and used to make corrupt payments. Up to $1 billion of these bribes were then paid to political parties and corrupt politicians. The remaining was kept by corrupt Petrobras officials.”

But this corruption did not stop with corrupt contractors. Even a legally operating contractor could be forced to pay monies which became bribes. For instance, if a legit company was awarded a Petrobras contract, it would be required to use only Petrobras approved subcontractors. Many of these subcontractors were corrupt and they would fraudulently and falsely charge the clean contractors. This fraud scheme generated bribe payments by which the Brazilian subcontractors would kickback a portion of the overcharges to corrupt Petrobras employees to keep them on the approved subcontractor list.

A classic manner in which this scheme was used was in the refurbishment of a refinery. Here  corrupt Petrobras officials simply used the opportunity as one to engage in massive fraud and corruption. In the case of the Abreu e Lima Refinery (RNEST), in the Brazilian Northeast state of Pernambuco, hundreds of millions of dollars in bribes were generated through over 300 contracts with 900 amendments.

Another scheme involving refineries was to wildly over pay for the facility and then have a part of the overpayment used to fund bribes. According to the Order in one such scheme, “Petrobras’s purchase of a Texas oil refinery in 2006 from a Belgium company, which had acquired the refinery for $42.5 million in 2005. Executive 1 knew that the equipment and structures of the refinery had deteriorated, that the oil it produced did not meet Petrobras’s needs, and that it would require a massive overhaul to fix the physical condition of the refinery. Nevertheless, he recommended that Petrobras purchase the refinery. In return, he received a $2.5 million bribe, which he used for his personal benefit and passed on a portion to his political patron.”

But it is even better than that as the refinery, previously owned by a Belgium company called Astra Oil, was purchased in 2005 for $42.5 million. Amazingly, Astra Oil then sold the refinery to Petrobras, in a series of transactions beginning in 2006, for $1.2 billion. That is certainly one hefty return on investment. Petrobras far overpaid for the purchase as even Petrobras’ internal evaluation was for only$742 million. It was on this inflated valuation that Petrobras officials made their offer, funded the transaction and got their bribery piggy bank.

Then there was the corruption in the drillships and shipyards. Obviously the FCPA enforcement actions involving SBM Offshore N.V. and Keppel Offshore & Marine Ltd. are well-known. Yet all the work in these areas was also a piggy bank for bribes to be funded and paid out of going forward. Once again hundreds of millions in bribes were paid in these two arenas.

Tomorrow I will consider how Petrobras was able to garner a NPA with no monitor required. 

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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2018

 

 

In the episode, I visit with Doug Allen, Managing Director at Ethisphere. We discuss the application process for Ethisphere’s 2019 World’s Most Ethical company designation. We consider the process for application, why a company should go through the process and the benefits even if your organization does not receive the designation. More highlights include:

  1. What is the Ethics Quotient? How is it developed and used?
  2. How are companies scored? Is there a difference between industries or geographies?
  3. If a company is under FCPA or other investigation, can they still apply?
  4. How does Ethisphere verify company responses?
  5. Does Ethisphere provide feedback?
  6. Do past winners receive a preference?
  7. How does the WME process align with Ethisphere values/missions and other services?
  8. When and where will WME 2019 companies be honored?

For more information on Ethisphere’s 2019 World’s Most Ethical companies application process check out the following:

Link to request an application for the 2019 World’s Most Ethical Companies designation: https://www.worldsmostethicalcompanies.com/apply/

Link to the 2019 World’s Most Ethical Companies Application Guide: https://www.worldsmostethicalcompanies.com/wp-content/uploads/2019-application-guide.pdf

If you have any questions, you can contact Doug Allen at douglas.allen@ethisphere.com. For additional questions, you can contact Ethisphere’s Applicant support account at wmeapplications@ethisphere.com

Does your company have what it takes to win the World’s Most Ethical designation? Find out how to do apply in this episode of the FCPA Compliance Report.

This blog post will begin a multi-part exploration of the Petróleo Brasileiro S.A. – Petrobras (Petrobras) Foreign Corrupt Practices Act (FCPA) enforcement action. The action was a stunning reminder of the costs of endemic corruption. However, I first have to pay tribute to one of the great vocalists of rock and roll; Jefferson Airplane co-founder Marty Balin, who died over the weekend. Balin joins co-founder Paul Kantner and original vocalist Signe Toly Anderson who both died the same week in January 2016 in the great rock and roll music hall in the great forever. Anderson left the band after their first album, she was replaced by Grace Slick and the classic Airplane line up was formed.

The band had a great run from 1966 to 1971. Balin was a smoothly soulful tenor who sang counter-point to Slick’s contra-alto. You only need to check out the YouTube clip of his signature classic Airplane song Volunteers at Woodstock to see how he and Slick played off each other. He also wrote the ballad Miracles for the group’s return as Jefferson Starship in 1975. If you were in high school or college in 1975, you not only remember this haunting love song but who you were with at the time. So here’s to you Marty, I hope you Kantner and Anderson have joined up again and are cranking out the tunes in that great rock and roll hall in the sky.

The Petrobras FCPA enforcement action came in the form of a Non-Prosecution Agreement (NPA) with the Department of Justice (DOJ) and Cease and Desist Order (Order) with the Securities and Exchange Commission (SEC). The penalties were stunning. The FCPA Blogreported the settlement “included a criminal penalty of $853.2 million. Under the NPA, Petrobras will pay 10 percent or $85.3 million of the criminal penalty to the DOJ and another 10 percent to the SEC. Petrobras will pay the remaining 80 percent or $682.5 million to the Ministerio Publico Federal in Brazil.” The DOJ fine represents a 25% discount off the low end of the range of the US Sentencing Guidelines. (We will explore how this was achieved in a subsequent blog post.) In addition to the eye-popping monetary fine and penalty, there was no independent monitor required by the DOJ or SEC.

In a DOJ Press Release, “Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division, U.S. Attorney G. Zachary Terwilliger of the Eastern District of Virginia and Assistant Director Robert Johnson of the FBI’s Criminal Investigative Division made the announcement. “Executives at the highest levels of Petrobras—including members of its Executive Board and Board of Directors—facilitated the payment of hundreds of millions of dollars in bribes to Brazilian politicians and political parties and then cooked the books to conceal the bribe payments from investors and regulators,” said Assistant Attorney General Benczkowski.  “The Criminal Division’s Fraud Section—together with our partners in the Eastern District of Virginia, the SEC, and the FBI—are grateful for the assistance provided by our Brazilian law enforcement counterparts.  This case is just the most recent example of our ability to work with our foreign counterparts to investigate companies and other criminal actors whose conduct spans multiple international jurisdictions.”

In the SEC Press Release, Steven Peikin, Co-Director of the SEC Enforcement Division, said, “Petrobras fraudulently raised billions of dollars from U.S. investors while its senior executives operated a massive, undisclosed bribery and corruption scheme,” said. “If an international company sells securities in the United States, it must provide truthful information about its business operations.” This included “Petrobras’s false and misleading filings included materially false and misleading statements to U.S. investors in a $10 billion stock offering completed in 2010. The filings misrepresented Petrobras’s assets, infrastructure projects, the integrity of its management, and the nature of its relationships with its majority shareholder, the Brazilian government.”

These fines and penalties are on top of Petrobras’s settlement of a class action securities action in the US in January of this year for $2.95 billion for which it received credit in the SEC settlement. The D&O Diary noted at the time, the Petrobras settlement is “the fifth largest U.S. securities class action settlement ever, exceeded only by Enron ($7.2 billion), WorldCom ($6.1 billion), Tyco International ($3.2 billion), and Cendant ($3.2 billion). The Petrobras settlement is also the largest settlement in that order of magnitude for many years; the other large settlements ahead of Petrobras on the top ten list were all settled several years ago. The only recent settlement anywhere remotely close to the Petrobras settlement in sheer size is the Household International case, which settled in June 2016 for $1.575 billion.” Finally, and according to the plaintiffs’ lawyers’ press release, “the Petrobras settlement is the largest settlement in a decade. It is also, according to the press release, the largest settlement of a securities class action lawsuit involving a non-U.S. company.”

The Petrobras FCPA settlement comes in at Number 3 of the Top 10 International Anti-Corruption Enforcement Penalties:

  1. JBF-Brazil-$3.6 bn-Brazil
  2. Odebrecht/Braskem-$2.6 bn-US, Switzerland and Brazil
  3. Petrobras-$1.78bn in US and Brazil
  4. Siemens-$1.6bn-Germany and US
  5. Telia Company -$965MM –US and Sweden
  6. Alstom-$814 in US and Switzerland
  7. Rolls-Royce-$809MM -UK, US and Brazil
  8. Veon (formerly Vimpelcom)-$795MM-US and The Netherlands
  9. Halliburton-$604MM-US and Nigeria
  10. Société Générale-$585 MM – US and France

According to the FCPA Blog, it now leads the all-time FCPA enforcement list:

  1. Petrobras-$1.78 bn in 2018
  2. Telia Company-$965MM in 2017
  3. Siemens-$800 MM in 2008
  4. Veon (formerly VimpelCom) – $795MM in 2016
  5. Alstom-$772 MM in 2014
  6. Société Générale-$585 MM in 2018
  7. Teva Halliburton-$579 MM in 2009
  8. Teva Pharmaceutical-$519MM in 2016
  9. Keppel Offshore & Marine Ltd.-$422 MM in 2017
  10. Och-Ziff-$412 MM in 2016

(Read Dick Cassin’s blog post for his calculus in bringing in the full fines and penalties to FCPA credit).

Whatever way you slice and dice it, the Petrobras corruption case was one of the most massive ever. It literally ran from the top of the organization all the way down and permeated the entire Brazilian economy and political scene. Tomorrow I will consider the bribery schemes used for this massive fraud. 

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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2018

As Tom and Mrs. Compliance Evangelist trek to Ann Arbor MI to attend his law school reunion, Go Blue and watch the Wolverines trounce Nebraska and enjoy some cool autumn weather, he and Jay are back with a look at some of the week’s top compliance and ethics stories.

  1. Due diligence is not a nice to have, it’s a mandatory. Scott Shaffer explains in the FCPA Blog.
  2. Kavanaugh and compliance? Matt Kelly considers in Radical Complaince. Tom and Matt explore in this week’s Compliance into the Weeds.
  3. Why does a law firm admit its internal investigation was designed to be a whitewash (in the internal investigation report)? More on the very strange Dansk Bank money laundering imbroglio. Patricia Kowsmann and Drew Hinshaw report in the Wall Street Journal. Tom dishes on the FCPA Compliance and Ethics Blog.
  4. Mark Cuban makes $10MM donation. Is it enough to make up for 15 years of toxic corporate culture of sexual abuse and harassment? Kaelne Jones reports in Sports Illustrated.
  5. Big oil on trial in the UK. What will be the fallout? Mara Lemos Stein reports in the WSJ Risk and Compliance Journal.
  6. KPMG study finds slow adoption of tech in compliance. See full report here.
  7. Matthew Stephenson continues his two-part consideration of the Hoskins decision. In the Global Anti-Corruption Blog.
  8. SEC proposal to limit whistleblower awards draws withering criticism from commentary period. Sam Rubenfeld reports in the WSJ Risk & Compliance Journal.
  9. Want the top compliance training from the guy who wrote the book on compliance? Tom will put on a Compliance Master Class in Boston, September 25 & 26, hosted by Affiliated Monitors. Registration and information, click here.
  10. Want a 50% discount to one of the top compliance conferences around? Join Tom and AMI’s Eric Feldman at CONVERGE18 in Denver on October 9-11. I hope you can join me at the event. For information on the event, click here. As an extra benefit to fans of This Week in FCPA, CONVERGE18 is offering a 50% discount off the registration Enter discount code TOMFOXVIP.
  11. In this week’s podcast series I internview Rebecca Turco and Paul Johns from SAI Global on their current innovations in compliance learning. Part 1-the changing marketplace; Part 2-adaptive learning; Part 3-EthicsAnywhere; Part 4-trends in compliance; and Part 5-integrated risk management.

For more information on how an independent monitor can help improve your company’s ethics and compliance program, visit our sponsor Affiliated Monitors at www.affiliatedmonitors.com.