During the fourth quarter of 2018 there were three corporate Foreign Corrupt Practices Act (FCPA) settlements with disgorgement and penalties totaling approximately $44.1 million. These corporate settlements included a case related to the ongoing scandal with Brazilian state-owned oil and gas company, Petrobras (Vantage Drilling), and two cases involving allegations of books and records and internal controls violations (Eletrobras and Polycom). In addition, one of the settling companies received a declination letter (with disgorgement) from the United States Department of Justice (DOJ) pursuant to the FCPA Corporate Enforcement Policy (Polycom). Furthermore, two individuals pleaded guilty to FCPA-related conspiracy counts, notably Tim Leissner, former chairman of Goldman Sachs in Southeast Asia related to the Malaysia Development Berhad scandal. Two other individuals entered into civil settlements with the U.S. Securities and Exchange Commission (SEC), both related to the Panasonic Avionics Corporation case, which was settled earlier in 2018.
As has been the case in previous years, the DOJ keynote speaker at the American Conference Institute FCPA conference took that opportunity to announce a significant policy change. At the November 2018 conference, Deputy Attorney General Rod Rosenstein announced revisions to the Memorandum on Individual Accountability for Corporate Wrongdoing (Yates Memo). The new policy now requires that companies seeking cooperation credit no longer need to identify “all” individuals involved in the misconduct. Instead, companies need to focus on identifying those individuals “substantially involved in or responsible for” the criminal misconduct. This is not a move away from individual accountability. Rather it is a recognition of practical concerns related to resources and inefficiencies created by the all-or-nothing requirement.
I. Enforcement Activity in Q4 2018
A. Vantage Drilling International
On Nov. 19, Vantage Drilling International (Vantage Drilling) (NASDAQ: VTGDF), a Houston-based drilling company, agreed to pay the SEC disgorgement in the amount of $5 million to settle internal accounting control offenses by its predecessor, Vantage Drilling Company (VDC). According to the SEC order, VDC appointed a director to its board in 2008 and issued 40% of its stock to the director, making that director the largest shareholder. The director was also VDC’s only supplier of drilling assets. Before the appointment, VDC did not conduct any due diligence into the director, his companies, or his capabilities to meet commitments. During VDC’s bid to win a drilling contract from Petroleo Brasileiro S.A. (Petrobras), a state-owned oil and gas company, the director worked with a third-party agent to facilitate improper payments to Petrobras officials to win the contract. After the director paid $31 million in bribes through the agent, VDC won the contract, which was for eight years and valued at approximately $1.8 billion. VDC also unknowingly reimbursed the director for the improper payments. Brazil’s “Operation Car Wash” investigation ultimately revealed the improper payments from the director to Petrobras officials. Due to VDC’s failure to implement and follow internal accounting controls, VDC allowed the improper payments to happen despite red flags that should have alerted VDC to the suspicious activity. The SEC considered the financial state of Vantage Drilling when determining the $5 million disgorgement amount, as VDC entered bankruptcy in 2015 after Petrobras terminated the contract. Petrobras previously agreed to pay $1.78 billion to the DOJ and SEC to settle allegations of both receiving bribes from companies trying to win contracts and paying bribes to government officials.
On Dec. 26, the SEC charged Brazil-based Centrais Elétricas Brasileiras S.A. (Electrobras) (NYSE: EBR) with violating the books and records and the internal controls provisions of the FCPA. Eletrobras, without admitting or denying the charges, agreed to pay a civil money penalty of $2.5 million to the SEC. Eletrobras is a Brazilian power generation, transmission, and distribution company and is 51% owned by the Brazilian federal government. The SEC order stated that from 2009 to 2015, a majority-owned subsidiary of Eletrobras, Eletrobras Termonuclear S.A. (Eletronuclear), engaged in illicit activity involving the construction of a nuclear power plant. Eletronuclear officials received bribes as part of an illicit bid-rigging and bribery scheme among private Brazilian construction companies. The Eletronuclear officials misused their position to authorize unnecessary costs to inflate the cost of Eletronuclear’s project. In return, the construction company paid Eletronuclear officials approximately $9 million. Due to weak and ineffective internal controls around financial reporting, Eletrobras did not detect the bribery scheme.
On Dec. 26, Polycom Inc. (Polycom), a California-based provider of communication products, agreed to pay the SEC approximately $16.3 million to settle charges that it violated the FCPA. Polycom paid approximately $10.7 million in disgorgement, approximately $1.8 million in prejudgment interest, and a $3.8 million civil penalty. Polycom organized a company in China, Polycom Communications Solutions (Beijing) Co., Ltd. (Polycom China), to distribute products and services in China. From 2006 to 2014, Polycom China allegedly implemented a scheme to improperly pay government officials to obtain additional business. The scheme involved Polycom China selling its products to distributors, who then sold the products to resellers, who further sold the products to the end users. Polycom China’s distributors obtained business from its customers by offering and making cash payments to government officials who influenced the customers’ decisions to buy. Polycom China would provide a fake discount to the distributor when selling the product to cover the cost of the illegal payments made to government officials. Polycom China also kept track of the fraudulent sales in a separate system outside of Polycom’s company-approved systems. Polycom China’s senior executives would later record the fraudulent sales in the company-approved system and provide false justifications for the discounts. Polycom failed to maintain a sufficient system of controls and did not have an effective compliance program to detect the scheme.The DOJ declined prosecution of Polycom consistent with the FCPA Corporate Enforcement Policy.The declination letter cited (1) Polycom’s identification of the misconduct; (2) Polycom’s prompt, voluntary self-disclosure; (3) Polycom’s thorough investigation; (4) Polycom’s full cooperation, including providing the DOJ with all relevant facts, making employees available for interviews, translating foreign language documents into English, and identifying unrelated misconduct; (5) Polycom’s remediation, including the steps that Polycom took to enhance its compliance program and its internal accounting controls, terminating the employment of eight individuals involved in the misconduct, disciplining 18 other employees, and terminating the company’s relationship with one of its channel partners. Pursuant to the letter agreement, Polycom agreed to disgorge $30,978,000, split between the SEC, the U.S. Treasury Department, and the U.S. Postal Inspection Service Consumer Fraud Fund.
A. Ivan Alexis Guedez
On Oct. 30, Ivan Alexis Guedez pleaded guilty to one count of conspiracy to launder money. Guedez was a former procurement officer for Petroleos de Venezuela S.A. (PDVSA), which is a Venezuelan state-owned and state-controlled energy company. While at PDVSA, Guedez orchestrated an international money laundering scheme with other PDVSA officials, which also included FCPA violations, by accepting bribes from U.S. companies to gain business. In addition, Guedez will forfeit all proceeds from his criminal activities.
B. Tim Leissner
On Nov. 1, the guilty plea of Tim Leissner, former chairman of Goldman Sachs in Southeast Asia, was unsealed. Leissner pleaded guilty to conspiracy to launder money and conspiracy to violate the FCPA by paying bribes to various Malaysian and Abu Dhabi officials, and circumventing controls at Goldman Sachs. Pursuant to his plea deal, Leissner forfeited $43.7 million. As alleged in the court filings, Leissner was part of a scheme along with Low Taek Jho and Ng Chong Hwa to launder billions of dollars embezzled from 1Malaysia Development Berhad, Malaysia’s investment development fund. Leissner, Low, and Hwa conspired to bribe government officials to obtain lucrative business for Goldman Sachs, while enriching themselves.They conspired to launder the criminal proceeds by purchasing luxury items, such as real estate and artwork in the U.S. As part of the unsealing of Leissner’s guilty plea, a three-count criminal indictment was unsealed charging Low and Hwa with conspiracy to launder money and conspiracy to violate the FCPA. Hwa was also charged with conspiracy to violate the FCPA by circumventing internal controls.
C. Alejandro Andrade Cedeno
On Nov. 27, the DOJ announced Alejandro Andrade Cedeno, a former Venezuelan national treasurer, was sentenced to a 10-year prison sentence for his involvement in a bribery and money laundering scheme. Cedeno pleaded guilty to one count of conspiracy to commit money laundering after accepting bribes in exchange for allowing his co-conspirators to conduct currency exchange transactions at favorable rates in December 2017. In addition, Cedeno agreed to forfeit a billion dollars and all assets related to the corrupt scheme.
D. Gabriel Arturo Jimenez Aray
On Nov. 29, Gabriel Arturo Jimenez Aray, the former owner of Banco Peravia, was sentenced to three years in prison. Aray plead guilty on March 20, 2018, to one count of conspiracy to commit money laundering. Aray pleaded guilty to acquiring Banco Peravia to pay bribes to Venezuelan government officials in exchange for contracts to conduct currency exchange schemes and to launder the money obtained from running those currency exchange schemes.
E. Paul A. Margis
On Dec. 18, the SEC announced that Paul A. Margis, a former chief executive of Panasonic Avionics Corporation (PAC), agreed to pay $75,000 to the SEC to resolve FCPA charges. The SEC order stated that Margis, in 2007, allegedly authorized PAC, a wholly owned subsidiary of Panasonic Corporation (Panasonic)(NYSE: PAC), to offer a $200,000 consulting position to a government official who helped PAC negotiate contracts with a government-owned airline worth more than $700 million. Ultimately, PAC retained the government official and paid him approximately $875,000. Margis arranged for the payments to the government official to be made through a third-party vendor. Margis continued to use the same method to pay $900,000 to two other individuals hired as consultants, who provided minimal or no services. Margis knowingly circumvented internal accounting controls and caused Panasonic to violate the books and records and internal accounting controls provisions of federal securities laws. In April 2018, Panasonic and PAC agreed to pay the SEC $280 million to resolve FCPA offenses.
F. Takeshi “Tyrone” Uonaga
Also in connection with the Panasonic and PAC matter, the SEC announced Takeshi “Tyrone” Uonaga, a former CFO of Panasonic Avionics, agreed to pay a penalty of $50,000 to the SEC on Dec. 18. In addition, the SEC barred him from practicing and appearing as an accountant before the SEC for a period of five years. The SEC order states that in July 2012, Uonaga improperly recorded an $82 million agreement by backdating the contract to increase revenue for the Q2 2012 financial report. In addition, Uonaga misled external auditors by certifying PAC internal auditing controls and books records had no deficiencies; thus causing PAC and Panasonic to fail to comply with books and records, internal accounting controls, and reporting provisions of the securities laws.
II. What the Enforcers are Saying
At the Nov. 29, 2018, American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act, Deputy Attorney General Rod J. Rosenstein announced revisions to the DOJ’s policy for pursuing individuals responsible for corporate wrongdoing.The revised policy now requires that companies seeking cooperation credit no longer need to identify “all” individuals involved in the misconduct. Instead, companies need to focus on identifying those individuals “substantially involved in or responsible for” the criminal misconduct. Rosenstein noted that, absent extraordinary circumstances, a corporate resolution should not protect individuals from criminal liability. However, Rosenstein recognized the need for DOJ policies to work “in the real world of limited investigative resources,” acknowledging that under certain circumstances it is not practical for a company to identify every employee who played a role in the misconduct, especially when they occurred over long periods of time or when the company and the government are attempting to resolve a matter but disagree on the scope of the misconduct. Similarly, he announced that DOJ civil attorneys will no longer pursue a strategy of “all or nothing” when prosecuting civil enforcement actions. Instead, the DOJ will seek that a company identify all wrongdoing by members of senior management or the board of directors rather than every individual employee. This revision in the policy regarding civil cases enables flexibility for the DOJ to award partial or full cooperation credit on a discretionary basis, accept settlements that remedy harm and deter wrongdoing, and focus on more important cases.
Rosenstein further clarified the revised policy was also reflective of the need for practical enforcement of the FCPA, which should encourage companies to improve their compliance programs, cooperate in investigations, and identify wrongdoing committed by individuals.
In the same speech, Rosenstein noted the new DOJ policy against “piling on” was part of a new initiative to avoid disproportionate and inefficient enforcement of the FCPA. The DOJ will seek to cooperate and coordinate with foreign and domestic law enforcement agencies to avoid duplicative penalties for the same misconduct. As evidence of this new policy, Rosenstein revealed that of the eight corporate resolutions the FCPA reached in 2018, four were coordinated with foreign authorities and three with the SEC.
Lisa Osofsky, director of the UK Serious Fraud Office (SFO), similarly emphasized the SFO’s focus on coordinating with foreign authorities when reaching global settlements with companies involved in misconduct, at the Program on Corporate Compliance and Enforcement at New York University School of Law on Oct. 16, 2018. She stated, “…law enforcement [cannot] afford to work in geographic enforcement siloes” and noted the need for cooperating law enforcement authorities to understand that they operate under different rules and that they have differing criminal discovery and data privacy rules. As more cross-border investigations are undertaken, it is necessary that law enforcement and the private sector understand the differences and successfully recover the proceeds of crime and deter future wrongdoing.
On Nov. 21, 2018, Matthew Wagstaff, joint head of bribery and corruption for the SFO, spoke at The Lawyer’s Managing Risk and Litigation 2018 Conference where he similarly noted the need for collaboration with foreign law enforcement and labeled the DOJ a “key partner” in achieving global settlements. In the wake of the UK’s Deferred Prosecution Agreement reached with Rolls-Royce PLC in 2017, which was a consequence of “truly exceptional” cooperation by Rolls-Royce with law enforcement, the SFO is now working on defining and providing guidance on what cooperation looks like. Unlike the U.S., where cooperation clearly now requires the identification of individuals involved in wrongdoing, the UK is working on providing context on what cooperation looks like in order for a company to be invited to deferred prosecution agreement (DPA) negotiations. This will likely be an issue revisited throughout 2019.
Special thanks to Andrew Lind, Klaas Hinderdael, Sofia Heredia and Stephanie Cade-Ferreira who contributed to this report.