First it was Petrobras but it certainly did not take long for the second shoe to drop for the other corrupt national energy company in Latin America, the Venezuelan national oil company Petróleos de Venezuela, also known as PdVSA. Anyone in the energy space has either heard the rumors or worse, experienced how the Venezuelan government tried to use the entity as not only a cash machine but also an extra-curricular machine to create cash to fund bribery and corruption. I had wondered how long the US government might go before they began to nose around into the company’s proclivities and the answer is they have been doing so for some time.
Last week saw two articles that focused on the US government’s investigation into the corrupt goings on of PdVSA and its senior management. The Wall Street Journal (WSJ) did so in piece by José De Córdoba and Juan Forero, entitled “U.S. Investigates Venezuelan Oil Giant”, and the New York Times (NYT) did so in an article by William Neuman, entitled “U.S. Graft Inquiries Turn to Venezuelan Oil Industry”. Interestingly the articles focused on different aspects of the investigation but both articles together send a very strong message to the Chief Compliance Officer (CCO) or compliance practitioner who might have business with PdVSA or even with the Venezuelan government or other state owned enterprise in the country.
The WSJ article focused on the conduct of Rafael Ramíerz, the former President of PdVSA, and that of his cousin Diego Salazar in facilitating a world wide and decade long scheme to have companies doing business with PdVSA. Ramíerz is now the Venezuelan ambassador to the United Nations (UN) and did not comment on the article.
The WSJ article reported that “directors of one of Spain’s leading construction companies were delighted to land an appointment with Rafael Ramírez”, but when they arrived they were met by Salazar. The article stated, “Mr. Salazar got right to the point, they say: The Spaniards would have to pay at least $150 million in kickbacks to be in the running. “If not,” Mr. Salazar told the businessmen, according to one person, “you should return to the airport.”” This and other conduct led the US government to launch “a series of wide-ranging investigations into whether Venezuela’s leaders used PdVSA to loot billions of dollars from the country through kickbacks and other schemes, say people familiar with the matter. The probes, carried out by federal law enforcement in multiple jurisdictions around the U.S., are also attempting to determine whether PdVSA and its foreign bank accounts were used for other illegal purposes, including black-market currency schemes and laundering drug money, these people say.”
To demonstrate how corrupt PdVSA is alleged to have become and how pervasive bribery was instilled in the DNA of the company, the article said, “A former official from an Asian oil services company says he routinely paid hundreds of dollars in cash in recent years or provided gifts like watches just to secure meetings with midlevel PdVSA officials.” When you have to give a Rolex as a gratuity just to get a meeting, you are dealing with one corrupt institution. Corruption in the company was so systemic that “The result was that up to $3 billion of the $15 billion in services and equipment that PdVSA contracted for annually represented overcharges that flowed back to top company executives, government officials and businessmen as kickbacks, say people knowledgeable about the alleged crimes.”
The NYT article focused on the US government investigation of PdVSA as part of a worldwide investigation into the illegal drug trade and money laundering. The article reported that the investigation gained speed in March when US Treasury Department officials accused a bank in the small European country of Andorra as a conduit for the money laundering schemes of PdVSA as well as organized crime groups. Government sources reported that more than $4bn in corrupt funds passed through the Andorran bank as a part of the bribery schemes. The article also said, “the money launderers used shell companies, fake contracts, mischaracterized loans and over-invoiced imports and exports to camouflage their actions.”
Rather amazingly not only did some of this money have a US nexus but the NYT article reported on a US based hedge fund which “paid at least $30MM in bribes to PdVSA officials to steer at least $100MM in pension money into his hedge fund and to give him access to profitable bond and currency transactions from 2006 to 2010.” Moreover there is another direct US connection to PdVSA. It owns the US entity Citgo. Neither article mentioned the US Company, and there is no evidence at this point that Citgo is under investigation.
However if you are the CCO of a US company that did business with PdVSA or Citgo over the past 10 years or so; now might be a very propitious time to review all of your business dealings with those entities. PdVSA was well known for having a Corporate Social Responsibility (CSR) requirement baked into its contract. Some part of the profit was required to be remitted back to a Venezuelan charity. The first thing I would suggest is that you investigate all such remits and charitable donations for such contracts. Did you perform any due diligence on the charitable entity involved? Do you know if any person at PdVSA who was involved in the contract award or renewal was on the Board or in some way associated with the charity? Did the award go through your normal internal charitable donation process?
After you finish with your charitable donation or CSR audit for Venezuela, you should also review each contract with PdVSA and Citgo. Were any agents involved in any of the contracts? If so were they properly vetted? Were any shell corporations involved in the transactions? Were there any payments to countries known for money-laundering or countries such as Andorra where neither the agent was not domiciled nor where the services were delivered? You should check all contracts to make sure they were legitimate and the services paid for were actually delivered. Were there any loans associated with the contracts? If so, were the loans actually repaid or mysteriously ‘written off’? Finally, you might also want to check for over-invoicing for such specific services as import or export controls?
Interestingly the NYT article referenced the DAP Partners case involving the FCPA and money laundering. However, the point of the reference was that if the US banking system is involved, a different set of triggers, other than bribery and corruption under the FCPA, may be tripped. The bottom line is that if you are going business with anyone in Venezuela, with a Venezuelan company or a company owned by a Venezuelan entity, you should review the relationship from the compliance perspective sooner rather than later.
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© Thomas R. Fox, 2015