Today I want to consider a couple of failures at the Board level around bribery and corruption.   

  1. VimpelCom 

Board of Directors and Senior Management Involvement

VimpelCom sought to enter the telecom market through the acquisition of a local player, Unitel, as an entrée into the Uzbekistan market. Unitel made clear to VimpelCom that to have access to, obtain and retain business in the Uzbeki telecom space, VimpelCom would have to, according to the VimpelCom DPA, “regularly pay Foreign Officials millions of dollars” who was Gulnara Karimova, the daughter of the then President of the country. VimpelCom also acquired another entity Butzel, that was at least partially owned by an Uzbeki government official, who hid their interest through a shell company, which was known to VimpelCom. VimpelCom did not articulate a legitimate business reason for the deal and paid $60MM for Buztel.

As laid out in the VimpleCom’s Information, its senior management was well aware of the potential FCPA risk. The Information stated, “From the beginning of VIMPELCOM’s deliberations concerning its entry into Uzbekistan, there was an acknowledgment of the serious FCPA risks associated with certain VIMPELCOM management’s recommendation to purchase Buztel in addition to Unitel… Documents prepared for the December 13, 2005 Finance Committee meeting explained that Buztel was owned by a Russian company “and a partner” without further detailing the identity of the “partner” who was in fact Ms. Karimova. The materials documented that “[t]hrough a local partner, [VIMPELCOM was] in a preferred position to purchase both assets . . . .”” The Finance Committee “identified the likelihood of corruption and expressed concerns.” Even with these reservations, the Finance Committee failed to identify the local partners.

But there was even more specific cautions around a FCPA violation when one Finance Committee member ““expressed concern on the structure of the deal and FCPA issues” and noted “that if [VIMPELCOM] goes into this deal under this structure and if the structure violates the FCPA picture, [VIMPELCOM’s] name could be damaged.”” The Finance Committee voted to move forward with the Buztel portion of the transaction “provided that all issues related to the FCPA should be resolved.”

These concerns moved up to the VimpelCom Board of Directors. In a December, 2005 Board meeting, “the likelihood of corruption was further discussed” and that “there was a recognition that a thorough analysis was needed to ensure that the Buztel payment was not merely a corrupt pretext for other services and favors. There were also numerous requests to ensure that the deal complied with the FCPA. Ultimately, VIMPELCOM’s board approved the Buztel and Unitel acquisitions, with a condition that FCPA analysis from an international law firm be provided to VIMPELCOM.”

Here VimpelCom management defrauded its own Board of Directors. The Information states, “VIMPELCOM’s management then sought FCPA advice that could be used to satisfy the board’s requirement while allowing VIMPELCOM to proceed with a knowingly corrupt deal. Despite the known risks of Foreign Official’s involvement in Buztel, certain VIMPELCOM management obtained FCPA legal opinions from an international law firm supporting the acquisition of Unitel and Buztel; however, certain VIMPELCOM management did not disclose to the law firm Foreign Official’s known association with Buztel. As a result, the legal opinion did not address the critical issue identified by the VIMPELCOM board as a prerequisite to the acquisition. Management limited the law firm’s FCPA review of the transaction to ensure that the legal opinion would be favorable. Having obtained a limited FCPA legal opinion designed to ostensibly satisfy the board’s requirement, certain VIMPELCOM management then proceeded with the Buztel acquisition and corrupt entry into the Uzbek market.”

Fraudulent Stock Transfer

But that was only the start as VimpelCom then entered into a partnership with the foreign official who was given an ownership interest in Unitel, through the shell corporation. The shell company held an option to sell this interest back to VimpelCom in 2009. It would appear that the owner of the shell corporation was well known within both VimpelCom and Unitel but both entities referred to this person as the “partner” or “local partner”. VimpelCom set up partnership where, “Shell Company obtained an indirect interest of approximately 7% in Unitel for $20 million, and Shell Company received an option to sell its shares back to Unitel in 2009 for between $57.5 million and $60 million for a guaranteed net profit of at least $37.5 million.”

VimpelCom’s Board was required to and did approve the partnership but as with the original acquisition, “approval again was conditioned on “FCPA analysis by an international law firm” and required that the “the identity of the Partner . . . [be] presented to and approved by the Finance Committee.” VIMPELCOM received an FCPA opinion on the sale of the indirect interest in Unitel to Shell Company on or about August 30, 2006. The FCPA advice VIMPELCOM received was not based on important details that were known to certain VIMPELCOM management and that certain VIMPELCOM management failed to provide to outside counsel, including Foreign Official’s control of Shell Company. In addition, documents, including minutes from the Finance Committee’s meeting on August 28, 2006, failed to identify the true identity of the local partner by name while noting the “extremely sensitive” nature of the issue.”

Some three years later, the shell company exercised its option to be bought out of the partnership for $57.5MM, after having invested $20MM. This netted a profit of $37.5MM. Unfortunately for all involved, they routed the payments for the transaction through financial institutions in the US, thereby creating FCPA jurisdiction.

  1. BizJet

Another FCPA enforcement action involved the Tulsa-based company BizJet, which had four senior executives convicted for their participation in a bribery scheme. But this case also involved the Board of Directions. In the Criminal Information it stated, that in November 2005, “at a Board of Directors meeting of the BizJet Board, Executive A and Executive B discussed with the Board that the decision of where an aircraft is sent for maintenance work is generally made by the potential customer’s director of maintenance or chief pilot, that these individuals are demanding $30,000 to $40,000 in commissions, and that BizJet would pay referral fees in order to gain market share.”

In both cases, this is where the rubber hits the road. If a company is willing to commit bribery and engage in corruption to secure business no amount of doing compliance is going to help. If senior management is ready, willing and able to lie, cheat and steal, the Board is the final backstop to prevent such conduct. Both the VimpelCom and BizJet Boards sorely failed in their compliance duties.

Three Key Takeaways

  1. Board liability will be severe based upon similar conduct going forward.
  2. Board members must critically challenge management on its conduct.
  3. The Board is the ultimate backstop against bribery and corruption.

Today we honor what was called by British Lord Nelson, “the most daring act of its age”; the capture and burning of the US frigate Philadelphia in Tripoli harbor. In October 1803, the ship had run aground near Tripoli and was captured. The Americans feared that the well-constructed warship would be both a formidable addition to the Tripolitan navy and an innovative model for building future Tripolitan frigates. Hoping to prevent the Barbary pirates from gaining this military advantage, President Thomas Jefferson sent Lieutenant Stephen Decatur to lead a daring expedition into Tripoli harbor to destroy the captured American vessel. The Americans recaptured the ship and then set it alight. Decatur and his men escaped without the loss of a single American. The Philadelphia subsequently exploded when its gunpowder reserve was lit by the spreading fire.

A most “daring act” seems to be a good way to introduce a multi-part look at the recent Foreign Corrupt Practices Act (FCPA) enforcement action involving the Chilean chemicals and mining company Sociedad Química y Minera de Chile (SQM), which agreed to pay a criminal penalty of $15.5 million and a civil penalty of $15 million for a total fine and penalty of $30.5 million. The company settled with the Department of Justice (DOJ) via a Criminal Information and Deferred Prosecution Agreement (DPA) and the Securities and Exchange Commission (SEC) via a Cease and Desist Order (Order).

There were a couple of unusual aspects to this matter which bear review and consideration by any Chief Compliance Officer (CCO) and compliance practitioner, particularly for those with companies headquartered or domiciled outside the United States. The first is that the case was rare for its criminal violations of the FCPA for the Accounting Provisions; both the Books and Records and Internal Controls provisions. The second was that the company’s illegal actions appeared to have no US nexus to the conduct involved and the jurisdictional hook was that the company’s shares trade on the New York Stock Exchange (NYSE) as American Depository Receipts (ADRs) and the company is required to file periodic reports with the SEC. There were however some excellent points for review by any compliance practitioner regarding the underlying conduct involved.

According to the DOJ Press Release, “SQM knowingly failed to implement internal controls sufficient to ensure that payments from a fund under the control of one of its officers and high-level executives were made for services received and in compliance with Chilean law. Between 2008 and 2015, SQM made donations to dozens of foundations controlled by or closely tied to Chilean politicians. During this period, for example, SQM funneled approximately $630,000 to foundations controlled by a Chilean official with influence over the government’s mining plans in Chile, a key segment of SQM’s business.” It went on to add, “SQM also admitted to falsifying its books and records to conceal payments to vendors associated with politicians, logging them as consulting and professional services SQM never received. For example, in 2009, SQM paid approximately $11,000 to the sister-in-law of a Chilean official, recording the payment in SQM’s books as a payment for services received, despite the fact that the official’s sister-in-law submitted the false invoice solely to disguise payment to a Chilean senatorial campaign.” The sum total was that “SQM admitted having paid nearly $15 million between 2008 and 2015 to vendors despite having no evidence any goods or services were actually received.”

Yet in none of the resolution documents was there discussion of specific bribes paid or obtaining or retaining business by SQM. Moreover, as noted above, none of the payments were routed through the US or the US banking system. Finally, although there were numerous emails cited in the resolution documents, there was no evidence presented that they were stored on a US server or even went through the US in cyberspace.

What does come through loud and clear from the Information is the discretionary fund used by the person designated as “SQM Executive” and identified as Mr. Patricio Contesse G. – former Chief Executive Officer (CEO) of SQM. When I say discretionary fund, it was apparently at his sole discretion. Simply put, according to the Information “SQM paid approximately US $14.75 million to PEPs [Politically Exposed Persons] and related parties without effective internal accounting controls, such as appropriate due diligence, documentation or oversight.”

Going more deeply into the results of the company’s internal investigation than was reported in the Information, the company made the following Form 6-K SEC disclosure in December 2015.

“(a) payments were identified that had been authorized by SQM’s former CEO, Mr. Patricio Contesse G., for which the Company did not find sufficient supporting documentation;

(b) no evidence was identified that demonstrates that payments were made in order to induce a public official to act or refrain from acting in order to assist SQM obtain economic benefits;

(c) regarding the cost center managed by SQM’s former CEO, Mr. Patricio Contesse G., it was concluded that the Company’s books did not accurately reflect transactions that have been questioned, notwithstanding the fact that, based on the amounts involved, these transactions were below the materiality threshold defined by the Company’s external auditors determined in comparison to SQM’s equity, revenues, expenses or earnings within the reported period; and(d) SQM’s internal controls were not sufficient to supervise the expenses made by the cost center managed by SQM’s former CEO and that the Company trusted Mr. P. Contesse G. to make a proper use of resources.”

This same disclosure also specifically noted that Mr. Contesse G. (the former CEO) and “Mr. Patricio Contesse F. – former director of SQM,” declined to be interviewed by company’s designated outside counsel performing the internal investigation.

Contesse G.’s involvement and fraud was more than simply using his unlimited discretion to facilitate shady payments. He was actively and intentionally involved in falsifying the company’s books and records. The Information stated, “From 2008 to 2013, at the end of each fiscal year, SQM’s books and records, including those that SQM Executive and others intentionally falsified to justify payments to vendors connected to PEPs, were used for the purpose of preparing SQM’s financial statements. In addition, during each of these years from 2008 to 2013, SQM Executive signed financial certifications as part of SQM’s securities filings that he knew to be false.”

Regarding the internal controls violations, the company’s auditors noted payments made to third parties which “had a ‘high-risk’ connection to PEPs.” These findings were even presented to the full company Board of Directors with the recommendation that adequate internal controls be put in place to prevent such conduct going forward. However, none were.

Also interesting was the lack of notation of how the company’s illegal actions came to attention of the US government. There was no company self-disclosure, no reported whistleblower, no reported referral from another law enforcement agency, domestic or foreign. It may well be there was some type of tip or even electronic information obtained by government regulators.

The actions of SQM senior management were certainly daring in the extreme, one might even say stupid, given their blatant disregard for US law. If companies want the benefits of US securities offerings and prestige, they need someone to counsel them on why they have to comply with US regulations, even in their actions exclusively outside the US. The matter also points to the need for a company’s Board of Directors to step up, ask the hard questions and then take action when management fails to fulfill its obligations to do business legally. Finally, the enforcement action makes clear the need for any company which crosses multiple borders to have a best practices compliance program in place as there will be at least one country which has an anti-bribery/anti-corruption compliance program.

In the next post we will consider how the company was able to receive a 25% discount off the minimum fine range through cooperation and remediation after the US government came knocking.

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, 2017

Show Notes for Episode 6, the Rolls-Royce Global Corruption Enforcement Action

This episode is dedicated exclusively to the Rolls-Royce global corruption enforcement action.

  1. Jonathan Armstrong leads a discussion the UK side of the enforcement action.

For the Cordery Compliance client alert on Rolls-Royce, see Rolls-Royce case sends a strong signal

  1. Jay Rosen considers what companies which did business with RR should do now or even companies in the same or similar industries should consider in the face of the enforcement action.

For Jay’s post on Rolls-Royce, see Rolls-Royce Takes Global Anti-Corruption to New International Heights + Potential Next Steps for a CCO Whose Company has Bid/Worked with Rolls-Royce

  1. Mike Volkov talks about the types of resolution documents used in anti-compliance enforcement and some of the key strategy used by RR during the process to achieve their positive result.

For Mike Volkov’s post on Rolls-Royce, see Serious Fraud Office Makes Big Splash with UK Bribery Act Resolution with Rolls Royce

  1. Matt Kelly brings it all home and ties it together by walking us through the global implications of this settlement.

For Tom Fox’s posts on these topics see the following:

  1. Part I
  2. Part II
  3. Part III

Rants will return next week.

The members of the Everything Compliance panel include:

  • Jay Rosen (Mr. Translations) – Jay is Vice President of Legal & Corporate Language Solutions at United Language Group. Rosen can be reached at rosen@ulgroup.com.
  • Mike Volkov – One of the top FCPA commentators and practitioners around and is the Chief Executive Officer (CEO) and owner of The Volkov Law Group, LLC. Volkov can be reached at mvolkov@volkovlawgroup.com.
  • Matt Kelly – Founder and CEO of Radical Compliance, is the former Editor of the noted Compliance Week Kelly can be reached at mkelly@radicalcompliance.com
  • Jonathan Armstrong – Rounding out is our UK colleague, who is an experienced lawyer with Cordery in London. Armstrong can be reached at armstrong@corderycompliance.com.

Show Notes for Episode 37, week ending January 27, the Jeff Sessions’ edition

  1. Brazilian Judge killed in plane crash. See article by Dick Cassin in the FCPA Blog.
  2. Two individuals charged in Och-Ziff matter. See article by Richard Cassin in the FCPA Blog.
  3. Trump announces White House Compliance Team. See White House Press Release.
  4. Jeff Sessions will continue robust FCPA enforcement. See Questions for the Record submitted January 17, 2017 from Senator Whitehouse in the nomination of Jeff Sessions to be Attorney General.
  5. $7MM whistleblower award by SEC to three persons and Whistleblower conference in NYC. See article in FCPA Blog and Tom Fox article on the Whistleblower Conference.
  6. China leads countries for 2016 FCPA cases and China announces 2 invoice requirement. See Tom Fox article in Compliance Week and Eric Carlson article in the FCPA Blog.
  7. Anything of value in FCPA cases. See Tom Fox article in Compliance Week.
  8. Jay Rosen Weekend Report on continued lessons from the Rolls-Royce global anti-corruption enforcement action in LinkedIn.

In this episode I visit with Carlos Ayers, a founding partner at the Sao Paulo law firm of Maeda, Ayres & Sarubbi about the state of anti bribery compliance in Brazil, how the Brazilian legal and compliance communities view the Odebrecht global anti-corruption settlement, what US companies who have done business with Odebrecht and Petrobras over the past 10 years need to be doing right now. Ayers also discusses the founding of his new law firm.