Last week the Vantage Drilling International (Vantage) Foreign Corrupt Practices Act (FCPA) enforcement action with the Securities and Exchange Commission (SEC) was announced via an Administrative Order(Order). The company was ordered to pay $5 million in disgorgement to the SEC. The case has had many interesting turns and twists over the years all the while providing the compliance practitioner with some new lessons to be learned for every compliance program.

Two of the stranger twists and turns of this enforcement action are that in the summer of 2017, Vantage received a full declination from the Department of Justice (DOJ). Yet another twist was that Petrobras had terminated its contract with Vantage in 2015, largely based upon information that the contract had been secured through bribery of corrupt Petrobras officials. Rather amazingly, Vantage took Petrobras to arbitration and in the summer of 2018, won a $622 million award.

Background Facts

Yet these strange twists and turns do not take away from significant lessons for the compliance practitioner. The first thing about the enforcement action was the unusual facts of this enforcement action. Vantage was a subsidiary of Vantage Drilling Company (VDC). VDC was formed in 2006 and went public in 2007 as a “high end driller” but rather amazing it had no drilling assets. VDC found a “Taiwanese shipping magnate” (Director A) who did have a drillship and through a series of machinations acquired the assets in exchange for $56 million in cash, 40% of VDC stock and a seat on the company Board of Directors. So far so good.

However VDC did no due diligence on Director A either before, during or after this series of transactions. Later in 2008, VDC contracted with Director A for a second drillship which was then under construction in Korea. Unfortunately or perhaps ominously, Director A “misrepresented the underlying terms of his payment plan with the Korean shipyard building the drillship and falsely represented to VDC that he would make the payments to the shipyard in advance of receiving a corresponding payment from VDC. In September 2008, VDC learned that – not only had Director A failed to make the installment payment to the shipyard – but he claimed to be incapable of making the payment.” In a very poor use of business judgment by VDC, “despite VDC’s knowledge of the misrepresentations by Director A, VDC did not enhance its internal accounting controls in regards to its transactions with respect to Director A.” This was clearly not someone who could be trusted to do business ethically and in compliance with laws such as the FCPA.

VDC had previously sought to market its drilling services to Petrobras. After its deal with Director A, it had the assets to do so. VDC contracted with an agent to market to Petrobras and “While VDC policies required due diligence and prudent safeguards against improper payments to be in place with an agent who acted on its behalf with regard to foreign governments on international business development before retaining the agent, neither was done with respect to the Agent.” This agent was contacted by an intermediary on behalf of a corrupt Petrobras official who indicated that he would award the contract to VDC “in return for a payment of money.”

This agent then communicated directly with Director A and arranged for him to make the necessary bribe payments to the corrupt Petrobras official. The bribe payments were to be made in three installments: (a) $6,200,000 when Petrobras signed the drilling services contract with VDC; (b) $4,650,000 six months after the contract was signed and (c) $4,650,000 when the drillship began working for Petrobras. The total bribe payments were $31 million “which equated to approximately 1.7% of the expected value.” Director A made the first two payments from his personal funds but was unable to make the third payment. It turned out the agent had made the third payment to the corrupt Petrobras official.

Compliance Failures

VDC not only missed multiple red flags but failed to follow its own compliance policy in this process. It failed to “conduct due diligence on the Agent” or intermediary as required by its own policy. Further, after red flags appeared that Director A and then the agent had made corrupt payments, there was no follow-up on these red flags. This information came directly to VDC’s Chief Executive Officer (CEO) when the agent reported it to him. Moreover, VDC was contacted by a Brazilian journalist who asked for comment about the three corrupt payments promised by Director A for the Petrobras contract.

As the Order dryly noted, “VDC did not follow-up on these red flags, and took no steps to determine whether any payments VDC made to Director A were made to fund or reimburse him for improper payments. Moreover, with regard to the reporter’s inquiry to the CEO, the CEO did not take or direct others to take any action to understand the nature of and basis for the payments described in the reporter’s email.”

The agent was unmasked during the Java Lato investigation. He plead guilty and entered into a collaboration agreement with Brazilian authorities. Director A was also indicted through this process. VDC was charged with failing to follow its own internal controls around agent due diligence and follow up on red flags. Further, there was no due diligence on Director A at any point during the relationship, either before he became a 40% owner and a member of the Board of Directors. The Order stated, “Specifically, VDC’s internal accounting controls in regards to its transactions with Director A were insufficient in relation to the heightened risk of conducting business in the oil and gas industry in Brazil. The lack of internal accounting controls surrounding VDC’s payments to Director A increased the risk that VDC provided or reimbursed Director A the funds used to make the corrupt payments.”

Lessons Learned

Vantage’s miniscule fine appears to be largely based on the financial condition of the company which seems to be almost non-existent. The Order stated, “in determining the disgorgement amount and not to impose a penalty, the Commission has considered Vantage’s current financial condition and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.” Yet the company did much more than plead poverty; it accomplished some actions which warranted this paltry amount of disgorgement.

The Order set out the following steps taken by the company:

1. Reconstituted its Board of Directors on February 10, 2016.
2. Reconstituted its management team, including a new Chief Executive Officer, Chief Financial Officer, and General Counsel, Chief Compliance Officer & Corporate Secretary.
3. Ended its relationship with the Agent.
4. Conducted a comprehensive review of and enhancing its anti-corruption policies and procedures in consultation with outside counsel and consultants.
5. Enhanced its third-party due diligence procedures.
6. Reviewed all of its relationships with joint venture partners, agents, customs brokers, and freight forwarders.
7. Finally, the company committed additional resources to the compliance and internal audit functions at a time when the company reduced its overall expenses.

This enforcement action drives home the need to perform due diligence before any high-risk transactions are entered into by a company. This is true whether the transaction is an arms-length transaction or something different like Vantage buying the assets of Director A and bringing him on to the Board. Due diligence is not a one-time activity but an ongoing process, so when the company found out about the shady business practices of Director A, it should have investigated him. It really does not matter how you characterize a transaction or the structure of the relationship, due diligence from the compliance perspective must be accomplished.

Lastly, when red flags appear, they must be investigated and cleared.

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