Show Notes:

  1. The SFO announces an investigation into the Swiss engineering giant ABB, Ltd. for allegations of corruption coming out of the Unaoil scandal. See article in the FCPA Blog.
  2. Former Magyar Telekom exec settles with SEC before trial. See article in FCPA Blog.
  3. Tom goes on an extended rant about the ISO 37001 certification process and why it is “worse the useless”. See Tom’s post on the topic on the FCPA Compliance and Ethics Blog.
  4. Jay Rosen’s discusses his new gig with Affiliated Monitors.
  5. Everything Compliance-Episode 7 is out. It is dedicated exclusively to the first two chaotic weeks of the Trump Administration.
  6. Jay Rosen Weekend Report preview.

For some additional reading see:

1.) Mike Volkov Article on Monitors

http://blog.volkovlaw.com/2017/02/yikes-perils-remediation-corporate-monitors/

2.) Jay Rosen Weekend Read

The “Real” FCPA, SCCE + Hello Goodbye

https://www.linkedin.com/pulse/real-fcpa-scce-hello-goodbye-jay-rosen-ccep

3.) Kristy Grant-Hart on The Top Five Myths about ISO-37001 Exposed

http://fcpablog.squarespace.com/blog/2017/2/14/the-top-five-myths-about-iso-37001-exposed.html

4.) Jay Rosen new contact info

Jay Rosen, CCEP

Vice President, Business Development

Monitoring Specialist

Affiliated Monitors, Inc.

Mobile (310) 729-6746

Toll Free (866)-201-0903

JRosen@affiliatedmonitors.com

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 38, for the week ending February 3, the M&M edition:

  1. January a month for the FCPA record books. See article in the FCPA Blog.
  2. Are hunting trips a FCPA violation? How about in Sweden? See article in by Tom Fox in Compliance Week.
  3. VW update-what the former CEO knew and when did he know it and CCO ‘departs’. What does it all mean? See Tom Fox articles in Compliance Week on the former CEO and the departure of the CCO.
  4. New Tom Fox series on One Month to a Better Board, FCPA Compliance Report.
  5. Everything Compliance-Episode 6 is out. It is dedicated exclusively to Rolls-Royce.
  6. Jay Rosen Weekend Report preview.
  7. Super Bowl predictions.

Under the US Sentencing Guidelines, the Board must exercise reasonable oversight on the effectiveness of a company’s compliance program. The US Department of Justice (DOJ) Prosecution Standards posed the following queries: (1) Do the Directors exercise independent review of a company’s compliance program? and (2) Are Directors provided information sufficient to enable the exercise of independent judgment? Moreover, the FCPA Guidance requires a CCO to have direct access to the Board or an appropriate sub-committee. The Guidance also requires a tangible commitment from the top levels of an organization, starting with the Board of Directors that the company create an ethical culture.

At the Board of Directors level, a Board Compliance Committee can devote itself exclusively to non-financial compliance, such as FCPA compliance. While many companies have fulfilled these obligations through an Audit Committee, clearly the better practice is to have a separate Compliance Committee. The reason is clear, that compliance has become not only central to any well-run business but it is critical to overseeing a wider variety of risks than the typical Audit Committee has experience with, which is usually only aimed towards financial risks.

The Board Compliance Committee should begin its inquiry with a basic: ‘How do we know it is working?’ In other words, is a company’s compliance program living up to the hallmarks of an effective compliance program in the eyes of the government. Here I lay out four areas of more specific inquiry.

The Board Compliance Committee should obtain information on the processes to carry out the compliance function, rather than details on specific compliance issues. They need to understand that there is a single individual or internal corporate discipline keeping track of the compliance function and making sure that it is being handled properly. They need to understand that there is a system in place that keeps track of compliance requirements.

Another area the Board Compliance Committee interest should be in is the area of hotlines or other internal reporting mechanisms. Here, the Board Compliance Committee needs to know details about both inbound issues and the responses thereto. In the inbound side this means details about who answers the reports, that come in either via email or phone, how this information is triaged and in what time frame. It also requires an understand of whether the reporting system is truly anonymous, with no use of caller-ID or GPS tracking.

The next series of questions deals with the responses to any information which comes to the attention of the company, including such basic inquiries as how are the reports classified and routed? Who gets notified for what types of calls? How the investigative process is divided among various functions or is it outsourced? Finally, what is the response rate and response time?

The Board Compliance Committee must know who is accountable and responsible for each segment of a compliance program. They should obtain assurance that the compliance function has developed a charter that makes it clear to them where obligations fall across management so it can assess accountability. While it is true an effective Board Compliance Committee will allow management do their job running the business on a day-to-day basis, and they understand that their job is to set long-term strategy.

Strategic planning is another area well suited for oversight by a Board Compliance Committee. For such a committee to be both effective and informed it must have an appreciation of where the corporate compliance function stands not only at the present moment, but also has a strategic plan for how the compliance and ethics program can continue to grow. Similarly, Stephen Martin, a partner at Arnold and Porter, has long advocated a 1-3-5-year compliance game plan. However, a Board Compliance Committee should demand the compliance function be nimble enough to respond to new information or actions, such as mergers or acquisitions, divestitures or other external events. If a dynamic changes, you want to get your board’s attention on the changes which may need to happen with the [compliance] program.

Today’s regulatory climate band hyper-transparency in social media make a Board Compliance Committee’s task seem Herculean. But more than simply the regulatory climate, shareholders are taking a much more active role in asserting their rights against Boards of Directors. It is incumbent that Boards seek out and obtain sufficient information to fulfill their legal obligations and keep their company off the front page of the New York Times, Wall Street Journal or Financial Times, just to name a few, to prevent serious reputational damage. A Board Compliance Committee is a good place to start.

Key Takeaways

  1. This committee exists to provide oversight and assist the CCO, not to substitute its judgment for that of the CCO.
  2. This committee should work to hold the CCO accountable to hit appropriate metrics.
  3. This committee is ideal for leading the efforts around strategic planning.

For more information, check out my book Doing Compliance: Design, Create and Implement an Effective Anti-Corruption Compliance Program, which is available by clicking here.