The year 2016 may well be one for the books in the enforcement of the Foreign Corrupt Practices Act (FCPA). In February there were nearly as many FCPA enforcement actions as there were in all of 2015. Yet the summer of 2016 brought some significant enforcement actions which may well portend long-term changes in FCPA enforcement. In my new eBook,  I explore these enforcement actions, discuss the underlying facts of each and provide the lessons for the compliance practitioner. I will also look at the enforcement actions in the context of the Yates Memo and recently announced change in the way the Department of Justice (DOJ) will assess damages in its prosecutions based upon the FCPA Pilot Program, announced in April, 2016.

My latest eBook is published by Corporate Compliance Insights and joins a list of books which I have partner with CCI to publish. You can download this eBook for free by clicking here. At the 2016 FCPA enforcement year moves towards conclusion, it may well be one for the books. The summer of 2016 may prove to be as significant a three month period of FCPA as we have seen in some time.

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 Not Your Father’s FCPA-Summer 2016, the New Era of Enforcement

 

QuestionsWe had an interesting week of anti-corruption enforcement actions last week, both in the US and the UK. We have now had four Foreign Corrupt Practices Act (FCPA) enforcement actions since the announcement of the Depart Of Justice (DOJ) Pilot Program in April. I thought this would be a good time to review some of the recent enforcement actions, to see what lessons they may impart to the compliance practitioner. So this week will be dedicated to blog post dealing with enforcement. I will begin with a troubling report issued by a committee of the US House of Representative over the Department of Justice’s handling of the money laundering enforcement action against the UK bank, HSBC back in 2012.

Of all the things that US Congress criticized former Attorney General (AG) Eric Holder over, one might think his protections of financial institutions might not have been one of them. Yet last week there was a scathing report issued, entitled “Too Big To Jail, by the GOP staff of the House of Representatives Financial Services Committee, which was discussed by Gretchen Morgenson in her New York Times (NYT) Fair Game column entitled “Kid Gloves For a Bank With Clout. The report deals with the DOJ investigation into the UK financial institution HSBC and subsequent resolution of allegations that the bank “laundered nearly $900 million for drug traffickers” and sanctioned countries.

While the report does not deal with the DOJ’s lack of prosecution of individuals from the 2008 financial crisis, it certainly provides insight into how Holder conducted such resolutions with large financial institutions and may well explain how it occurred that there were no individual prosecutions. The piece begins that even with a nearly $2bn fine, it was not “a body blow” to HSBC. Of course, there was the ubiquitous Deferred Prosecution Agreement (DPA) put in place, where the DOJ would “delay or forgo prosecution of a company if promises to change its behavior.”

While I am most generally supportive of the practice of using corporate DPAs to help enhance compliance programs, Morgenson’s article does bring up some troubling questions about how and why HSBC was able to get off with not only an agreement not to prosecute any individuals at the bank going forward, but even have individual incentives removed from the final DPA. The House report found that DOJ leadership, in the form of AG Holder, “overruled an internal recommendation to prosecute HSBC” because of concerns that prosecution of HSBC “could result in a global financial disaster.”

That final line is one we have (unfortunately) heard before. However, the NYT article also reports on how HSBC was able to “soften the deal”. The original agreement with HSBC had language which “provide no protection from prosecution for employees who ‘knowingly and willfully” processed financial transactions with countries under American sanctions”. University of Pennsylvania Law School Professor David A. Skeel, who was quoted in the piece, said, “This is one case where it looks like the government might have been able to prosecute misbehaving executives during the crisis period, yet waived its right to do so.” Not failed to do so, but waived its right to do so.

Even more inextricably, the DPA waived future penalties for bank executives who failed to comply with the DPA. Originally there were sanctions against bank executives who did not meet the compliance obligations set forth in the DPA. These sanctions were financial penalties in the form of loss of bonuses. However, in the final version this language was removed and the House report noted the DPA, “apparently leaves open the possibility for executives to get their bonuses, despite failing to meet compliance standards.”

Another troubling aspect unearthed by the House report was ‘how much influence officials at the Financial Services Authority – Britain’s top financial regulator at the time – had on the Justice Department’s process in the HSBC matter”. Morgenson quoted a Washburn University School of Law professor, Mary Kreiner Ramirez for the following, “It would seem that in making the decision with respect to HSBC, (AG) Holder gave more attention to the concerns expressed by the F.S.A than he did with respect to our own agencies.” Moreover, the FSA got the documents on apparently something close to a real-time basis as “at the time events were unfolding.”

There has been both legal and academic criticism of DPAs. However the article brings up another criticism of the settlement vehicles, which is less discussed, the internal process by which a settlement is reached. Edward J. Kane, a professor of finance at Boston College, noted, “The fact that so many of these cases are settled rather than going to court means we don’t get an airing of facts and challenges of fact.”

The Yates Memo would seem to be one response to pre-emptively address some of the concerns raised by the lack of individual prosecution. For if the DOJ now requires prosecutors to go after culpable individuals in white collar crime cases such as the HSBC money laundering prosecution or cases under the FCPA for that matter, any settlement via a DPA would not exempt out future prosecutions against culpable individuals. Further, it would also seem that the DOJ would strengthen up the compliance program components of any DPA to have appropriate financial disincentives for the lack of compliance program adherence. When you put on top of this the Yates Memo requirement that companies must dig up facts on culpable individuals and turn those facts over to the DOJ, it would seem that individuals would be more in the sights of DOJ for prosecution.

The other factor not fully explored by commentators is that DPAs, Non-prosecution agreements (NPAs) and other settlement mechanisms are the product of negotiations by the parties, i.e. the government and the company involved. In the context of FCPA resolutions with the Securities and Exchange Commission (SEC), no company is going to put facts supporting a criminal indictment or even claim of criminal conduct in a civil based Cease and Desist Order or other form of civil based resolution. To do so would open up the company to a very high degree of liability, which is not required if the DOJ declines to prosecute a company for criminal violations of the FCPA. That explains why there is never evidence of criminal liability in a resolution document if there is no criminal charge.

Yet the House report does point up some troubling questions about not only how the HSBC settlement was reached but also the lack of prosecutions against any financial institutions after the 2008 financial crisis.

 

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, 2016

CorruptionToday, I continue my exploration of the lessons to be learned from the VimpelCom Ltd. (VimpelCom) Foreign Corrupt Practices Act (FCPA) enforcement action. While it is clear that the company and its Uzbeki subsidiary, Unitel LLC (Unitel), engaged in an intentional bribery scheme and probably not even a best practices compliance program would have helped prevent the corrupt acts admitted by the company, there remain significant education to be mined from both VimpelCom’s and Unitel corrupt acts. Yesterday, I explored the role of VimpelCom’s Board of Directors and senior management in the failure, together with the fraudulent stock transfer. Today I want to look at the more mundane bribery schemes to instruct the Chief Compliance Officer (CCO) or compliance practitioner regarding what to look for going forward.

It must be emphasized, and even re-emphasized, that VimpelCom knew exactly what it was doing, worked very hard to hide it and lied internally about what it was doing. Of course it lied publicly as well via fraudulent books and records.

For review, Unitel funded its bribes to the Uzbeki government official through a variety of mechanism. The summary is as follows:

Bribery Scheme Amount of Bribe Paid Time Frame
Fraudulent Buy-Out $37.5MM March, 2007
Outright Cash bribe for 3G network $25MM November, 2011
False Consulting Invoices for 4G Network $2MM

$30MM

2008

2011

Corrupt Reseller Payments $10MM

$10MM

2011

2013

Total $114.5MM

Bribes Paid for 3G and 4G Networks

According to the Unitel Deferred Prosecution Agreement (DPA), the company paid bribes related to the acquisition of 3G frequencies in 2007. They were falsely recorded in VimpelCom’s consolidated books and records as the acquisition of an intangible asset, namely 3G frequencies, and as consulting expenses. In 2008 another bribe was falsely recorded in the consolidated books and records as “submission and support documentation packages seeking assignment of 24 channels to Unitel” and treated as an acquisition of an intangible asset and consulting services. Finally, the 2011 bribe related to consultancy services associated with the acquisition of 4G frequencies in 2011 was falsely recorded in their consolidated books and recorded as “consulting services” and treated as consulting services and as an acquisition of an intangible asset, namely 4G frequencies.

All of these bribes were paid to a shell company that was controlled by a daughter of a foreign official. The $2MM bribe paid, according to the DPA, was an additional obligation incurred “from the moment of payment for the acquisition of Unitel.” There was a vague attempt to hide this bribe for services but the in-house counsel involved noted that the “payout term of the amount was not specified” and the in-house attorney did “not know if all the services listed in the presentation [had] to be fulfilled as a condition for the payment.” There was a later attempt to create a sham contract for these services and backdate the contract to cover this bribe payment.

The payment of $30MM in 2011 was equally fraudulent on the company’s books and records. While it was allegedly for help in procuring some 4G licenses from the Uzbeki government, the company neither needed nor wanted these 4G licenses. The whole deal smelled so bad that one witness said, “I cannot see how I can be able to sign off on this…unless the legal FCPA analysis can clarify this and settle my concerns.”

So VimpelCom moved forward to obtain an opinion from an outside counsel. However it did so without providing outside counsel its own knowledge that a foreign official owned the shell company, through which the payments were directed, and did not provide information on the nature of the transaction or its high dollar value. It was so bad that the same witness cited above asked if “VimpelCom had received any official ‘ok’ from US Governmental body/SEC”? Unfortunately VimpelCom’s in-house counsel did not bother to provide accurate information for outside counsel to review and opine upon; coupled with an outside counsel who did not appear to know to ask the basic questions about the ownership structure or to investigate on its own. Finally, VimpelCom’s in-house counsel viewed its sham due diligence report as a legal defense if a FCPA allegation arose.

False Reseller Payments

After the previously noted payments, the corrupt foreign official was paid another $20MM in 2011 and 2013. This is far past conduct in 2005 and is much nearer in time to the present. This clearly demonstrates a company’s commitment to continued bribery and corruption. However, “Because of significant currency conversion restrictions in Uzbekistan and the inability to use Uzbek som (the Uzbek unit of currency) to obtain necessary foreign goods, UNITEL frequently entered into non-transparent transactions with purported “reseller” companies to pay foreign vendors in hard currency for the provision of goods in Uzbekistan. Typically, UNITEL would contract with a local Uzbek company in Uzbek som, and that Uzbek company’s related companies located outside of Uzbekistan would agree to pay an end supplier using the hard currency (usually, U.S. dollars).”

To pay these bribes Unitel entered into contracts for services with certain resellers that were neither necessary or where payments were made at highly inflated prices. Additionally, these contracts were made through contravention of the company’s internal controls as they “were approved without sufficient justification and bypassed the normal competitive tender processes. How fraudulent were these resellers? It was noted, “the office was “located in an old run-down house [building], without any signage” and “[t]here were no specialists [or technicians] there.” The employee recommended against using the reseller company as a contractor for UNITEL, as it was “not qualified and there are big risks . . . .” The employee who reported this was forced to “voluntarily resign”. Finally, when there was an attempt to audit these fake resellers, executives at Unitel stalled their own internal auditors and, when finally forced to present them for audit, claimed the “transaction was “not a reselling operation,” which resulted in the purported reseller company contract being removed from the audit.”

Failures

The failures up and down the VimpelCom and Unitel chain are simply mindboggling. Even when confronted with an employee who clearly understood and articulated that the transactions at issue were potential FCPA violations, senior management engaged in conscious avoidance to the violation. VimpelCom’s in-house counsel most likely committed criminal acts by limiting the information presented to outside counsel to fraudulently obtain a favorable opinion of counsel that the transaction passed muster. Basic internal controls were lacking or were completely over-ridden in selecting and using the resellers for services the company did not need or want.

Further, the company did not have any system for conducting, recording or verifying due diligence on third parties. The company did not require that consulting agreements or other contracts with third parties be for actual services or have any way to verify services were performed. There was a lack of appropriate controls around payments to single sourced vendors and a failure to audit third parties.

The VimpelCom case will be studied for some time for the failure of an entire compliance system.

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, 2016

FCPA InvestigationsIn what can only be termed a stunning resolution, last week the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announced a resolution of a long-standing Foreign Corrupt Practices Act (FCPA) probe into the Dutch telecom giant VimpelCom Ltd. (VimpelCom) for a spectacular, long-standing bribery scheme for the company to garner the rights to the mobile communications business in Uzbekistan. The multiple bribery schemes used appear to have been approved at the highest levels of the company and should provide a wealth of case studies on bribery schemes for the compliance professional going forward.

According to the DOJ Press Release, VimpelCom the world’s sixth-largest telecommunications company and its wholly owned Uzbek subsidiary, LLC Unitel (Unitel) conspired to violate the FCPA by paying more than $114 million in bribes to a government official in Uzbekistan. Unitel pled guilty today to one criminal count of conspiracy to violate the FCPA. The DOJ entered into a Deferred Prosecution Agreement (DPA) with VimpelCom, who agreed to pay a total criminal penalty of $230.1million, including $40 million in criminal forfeiture.  VimpelCom further agreed to implement rigorous internal controls, retain a compliance monitor for a term of three years, and cooperate fully with the Government.

The Press Release also stated, “In related proceedings, VimpelCom reached a settlement with the U.S. Securities and Exchange Commission (“SEC”) and the Public Prosecution Service of the Netherlands (“PPS”). Under the terms of its resolution with the SEC, VimpelCom agreed to pay $375 million in disgorgement of profits and prejudgment interest. VimpelCom agreed to pay the PPS a criminal penalty of $230,163,199.20, yielding a total criminal penalty of $460,326,398.40, and a global resolution amount of more than $835 million. SDNY and the DOJ agreed under the DPA to credit the criminal penalty paid to PPS, and the SEC separately agreed to credit the forfeiture amount paid to the United States. Thus, the total of U.S. criminal and regulatory penalties paid by VimpelCom is $795,326,398.40.”

In addition to the large fine and cooperation between multiple US government enforcement and investigatory bodies, there was significant involvement from overseas anti-corruption units, regulatory bodies and enforcement agencies. Preet Bharara, the US Attorney for the Southern District of New York (SDNY), and Leslie R. Caldwell, the Assistant Attorney General for the Criminal Division of the DOJ, both thanked the efforts of the US and International agencies for their assistance “in concluding the matter.”

The overall bribery scheme involved VimpelCom purchasing Unitel as an entrée into the Uzbekistan market. Contemporaneously with the acquisition of Unitel, which did have a legitimate business purpose, VimpelCom acquired another Uzbeki entitiy LLC Barkie Uzbekistan Telecom (Butzel) that was at least partially owned by an Uzbeki government official who had control or influence upon telecom regulation in the county. This foreign official hid their interest through a shell company that was known to VimpelCom. VimpelCom did not articulate a legitimate business reason for the Butzel deal.

After the acquisitions, Unitel funded its bribes to the Uzbeki government official through a variety of mechanisms, which I will explore more in upcoming blog posts. The Box Score summary (in honor of pitchers and catchers reporting to Spring Training last week) is as follows:

Bribery Scheme Amount of Bribe Paid Time Frame
Fraudulent Buy-Out $37.5MM March, 2007
Cash for 3G network $25MM November, 2011
Fake Consulting Invoices $2MM

$30MM

2008

2011

Fake Reseller Payments $10MM

$10MM

2011

2013

Total $114.5MM

Separately the SEC identified $38MM in charitable donations which had no adequate internal controls in place to determine if the donations were legitimate or violations of the FCPA.

Yet the company also engaged in an intentional program to falsify its books and records intended to conceal the bribe payments from its outside counsel which was asked to bless certain transactions as well as regulators who might ask difficult or troubling questions for some of the bribery schemes going forward. As set out in the VimpelCom Information these false books and records included, payments funneled through a shell corporation owned by the foreign officials and included the following bribery mechanisms:

  1. The bribe related to the partnership agreement in which Shell Company first purchased and then sold an indirect equity interest in Unitel was falsely recorded in VIMPELCOM’s consolidated books and records as the receipt of loan proceeds in 2007 to be repaid in 2009 and secured by shares in a VIMPELCOM subsidiary.
  2. The bribe related to the acquisition of 3G frequencies in 2007 was falsely recorded in VIMPELCOM’s consolidated books and records as the acquisition of an intangible asset, namely 3G frequencies, and as consulting expenses.
  3. The bribe in 2008 was falsely recorded in VIMPELCOM’s consolidated books and records as “submission and support documentation packages seeking assignment of 24 channels to Unitel” and treated as an acquisition of an intangible asset and consulting services.
  4. The bribe related to consultancy services associated with the acquisition of 4G frequencies in 2011 was falsely recorded in VIMPELCOM’s consolidated books and recorded as “consulting services” and treated as consulting services and as an acquisition of an intangible asset, namely 4G frequencies. Additionally bribes paid through a reseller “were falsely recorded in VIMPELCOM’S consolidated books and records as “professional services” expenses.

Interestingly there was no mention of how the case came to the DOJ or SEC. In Unitel’s criminal plea, there was no credit given for self-disclosure so it can only be assumed it came to the US government’s attention in some other manner. Apparently there were other telecom companies in on the bribery scheme in Uzbekistan as well. The DOJ Press Release noted, that it has “also filed a civil complaint today seeking forfeiture of $550 million held in Swiss bank accounts which represent proceeds of illegal bribes paid, or property involved in the laundering of those payments, to the Uzbek official by VimpelCom and two other telecommunications companies operating in Uzbekistan. A previous complaint filed by DOJ seeks $300 million in proceeds of illegal bribes paid, or property involved in the laundering of those payments, by these companies to the same Uzbek official. In that case, on January 11, 2016, United States District Judge Andrew L. Carter, Jr. entered a partial default judgment against all potential claimants other than the Republic of Uzbekistan. As alleged in the two complaints, the telecommunications companies paid $850 million in bribes to the Uzbek official to obtain and retain the ability to do business in Uzbekistan.”

Over the next few blogs posts, I will be exploring each of the bribery schemes and internal fraud engaged in by both Unitel and VimpelCom employees, managers, executives and board members which allowed this corruption to flourish for so long. The last word is probably best said by VimpelCom’s parent, the Norwegian company Telenor Group, who in turn is owned 54% by the government of Norway. Telenor is reportedly trying to divest its interest in VimpelCom. Indeed.

 

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, 2016