This blog post concludes my multi-part exploration of the Petróleo Brasileiro S.A. – Petrobras (Petrobras) Foreign Corrupt Practices Act (FCPA) enforcement action. Today we consider the stunning result achieved by Petrobras – a Non-Prosecution Agreement (NPA).
The Petrobras FCPA enforcement action came in the form of a 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 Blog reported 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. In addition to the eye-popping monetary fine and penalty, there was no independent monitor required by the DOJ or SEC.
Dick Cassin has found the Petrobras FCPA enforcement action to be the highest amount of all-time, landing it as Number 1 on the Top Ten list. Even if you disagree with that assessment, it clearly comes in at Number 3 on the international enforcement list based upon the corruption fine and penalty. If you add in the $2.95 million paid in the shareholder action here in the US, the overall fine, penalty and settlement payments take Petrobras to the top of the international list.
What is a Chief Compliance Officer (CCO), compliance practitioner, General Counsel (GC) or even a Board of Directors to make of the NPA? Clearly, from the NPA and Order, Petrobras engaged in corruption of the highest order and at the highest levels, right up to the Board of Directors. The starting point for any discussion is the FCPA Corporate Enforcement Policy (Policy) announced by Rod Rosenstein last November.
Under the Policy, there is a presumption of a declination if four criteria are met: (1) self-disclosure; (2) extensive cooperation; (3) extensive remediation; and (4) profit disgorgement. However, even if a company meets these four criteria, if there are “aggravating circumstances” defined as “involvement by executive management of the company in the misconduct; a significant profit to the company from the misconduct; pervasiveness of the misconduct within the company; and criminal recidivism” a declination may not be achieved. All of this turns on self-disclosure. If there is no self-disclosure this section does not come into play.
Yet that is not the end of the inquiry as the Policy goes on to state, “If a company did not voluntarily disclose its misconduct to the Department of Justice (the Department) in accordance with the standards set forth above, but later fully cooperated and timely and appropriately remediated in accordance with the standards set forth above, the company will receive, or the Department will recommend to a sentencing court, up to a 25% reduction off of the low end of the U.S.S.G. fine range.” This section has no qualifying language involving “aggravating circumstances” so it would appear that if a company meets the twin requirements of (1) full cooperation and (2) timely and appropriate remediation, they can garner up to a 25% discount. That is apparently what Petrobras did and it explains how they received the discount.
The cooperation included a “thorough” internal investigation followed by real-time sharing of the information with the DOJ and SEC. The company translated documents and made witnesses available to the government. Petrobras assisted the DOJ, SEC and Brazilian authorities in other investigations and provided information on individuals involved in the bribery and corruption.
The remediation was very extensive. It included tossing out the corrupt Board of Directors and Executive Board and bringing in a clean slate. These groups were insulated from political control or interference. A new corporate governance structure was put in place, including a new Division of Governance and Compliance. A ‘four-eyes’ policy was put in place to provide oversight on key purchasing functions and other functions which award company business.
The old and ineffective compliance policies and procedures were thrown out and a new set of best practices, compliance policies and procedures were put in place. A new internal reporting system, including an Ombudsman, and a new internal compliance controls were implemented. There were multiple terminations and employment separations for employees involved in the bribery and corruption as well as other forms of discipline. Extensive training was put on for all levels of the company as well as more robust financial controls including segregation of duties (SODs) and delegations of authority (DOAs) were revised. In short, an entire new compliance regime was installed and (hopefully) all the bad actors were thrown out.
Yet all of that does not fully explain how or why Petrobras received a NPA instead of a DeferredProsecution Agreement (DPA). I think one must go outside the eight corners of the documents (both the NPA and Order) to consider the massive penalty paid by the company, $1.87 bn + $2.95 bn in the shareholder case, and one can only imagine the pre-settlement investigative costs of a minimum of 2 times the corruption fine and penalty. There are also the numbers of Brazilians convicted criminally around the Petrobras matter, Car Wash scandal and the massive disruption to the Brazilian political system. Another factor to consider is the cooperation by Petrobras in not only its own investigation but the assistance the company provided in a number of other FCPA enforcement actions, including at least SMB Offshore NV; Keppel Offshore & Marine Ltd. and Rolls-Royce PLC. There may well have been others in Brazil.
While the remediation is most directly tied to the 25% reduction of the minimum from the Sentencing Guidelines, it no doubt also played a part in the NPA calculus. While no US monitor was appointed, the NPA specifically noted there would be Brazilian authorities oversight, coupled with an ongoing reporting requirement and end of NPA certification. This must portend a high degree of DOJ confidence in Petrobras to follow through with its agreements in the NPA.
Finally, there may be the message the DOJ is sending. The facts in this case were as bad as almost any FCPA enforcement action around. The only other ones which rival it are the other billion-dollar international corruption settlements: Siemens, Odebrecht and JBF. Perhaps one of the intended messages is that no matter how bad the corruption was, if you meet the requirements, even with no self-disclosure, you can make a significant comeback. If that was one of the messages the DOJ intended to send, I think it was heard loud and clear throughout every compliance function, legal department and Board of Directors; literally, across the globe. With that type of message, just think how much more powerful a self-disclosure can be.
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© Thomas R. Fox, 2018