FCPA Allegations Involving Customs Clearance in Kazakhstan

by Cadwalader, Wickersham & Taft LLP

[author: Raymond Banoun]

On June 6, 2012, the Wall Street Journal ("WSJ") reported allegations that Kazakhstan's Karachaganak Petroleum Operating BV ("KPO") and a logistics arm of an international freight provider had authorized improper cash payments to Kazakh customs officials in the city of Aksai. KPO describes itself as a venture between BG Group (UK), ENI SpA (Italy), Chevron Corporation (US), and Lukoil (Russia) that was formed to develop the Karachaganak field in northwest Kazakhstan. According to the WSJ article, KPO and the freight provider received allegations in March 2012 from an anonymous email source who gave the two companies details of the payments, including amounts, invoice numbers and manifest information. One of the emails, reportedly provided to the WSJ reporters for their review, alleged that employees of the freight forwarder had characterized the payments to customs officials as "extra verification" fees. Spokespersons for the companies contacted by the WSJ indicated that several separate internal investigations were launched upon receipt of the emails.

Similarities to Other FCPA Customs Investigations and Settlements

The KPO allegations are similar to the facts charged by the Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC") in previous cases involving the oil-and-gas industry. In November 2010, the DOJ and SEC settled a US Foreign Corrupt Practices Act ("FCPA") case with the Swiss freight forwarding company Panalpina World Transport (Holding) Ltd. and its US-based subsidiary, Panalpina Inc. ("Panalpina").1 The Panalpina cases followed a February 2007 FCPA settlement with Vetco International Limited and several of its subsidiaries ("Vetco") related to payments made to customs officials in Nigeria by a freight forwarding company - later identified as a Panalpina subsidiary.2 In the Vetco case, the defendants were charged with making numerous improper payments to Nigerian customs officials to expedite or avoid customs clearance. In the subsequent case against Panalpina, the company was charged with paying at least $27 million in bribes on behalf of its oil-and-gas industry clients to customs officials in Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia, and Turkmenistan. According to the court filings in both cases, the payments were made to expedite customs clearance, avoid local duties, and permit the importation of prohibited equipment. Employees used a variety of descriptions to characterize the improper payments in their financial records, including "local processing fees" and "special fees."

Following the Vetco settlement and the initiation of the government's Panalpina investigation, clients of several international freight forwarding companies, including Panalpina, either voluntarily disclosed, or were contacted by the DOJ to provide, information regarding their use of these customs clearing entities and potentially improper payments they had made to customs authorities. Ultimately, several companies, including some Panalpina customers, settled DOJ criminal and SEC civil FCPA cases involving their parent companies and/or operating subsidiaries. These included Royal Dutch Shell plc (Netherlands), Transocean Ltd. (Switzerland), Noble Corporation (Switzerland), Pride International Inc. (US), Tidewater Inc. (US), and GlobalSantaFe Corp. (which had subsequently merged with Transocean and was only charged by the SEC). The settling companies and Panalpina paid combined civil and criminal FCPA penalties totaling $236.5 million.

The DOJ's and SEC's Likely Reaction to the KPO Allegations

Although none of the companies identified in the WSJ story have yet stated publically that they are cooperating with the DOJ or SEC, given the high-profile nature of the allegations they may do so at some point. It is reasonable to assume that the DOJ and SEC will pursue an investigative course similar to the one taken in earlier customs cases - they will examine the companies' and customs brokers' records to identify code words or transaction descriptions (such as "extra verification" or "special fees") which may imply that improper payments were made. If the US government believes that companies have used customs brokers to pay bribes on their behalf in Kazakhstan or elsewhere, or are convinced that brokers on their own paid bribes for the benefit of their clients, then the DOJ and SEC will seek details of those payments. Those companies, including the brokers' customers, could well find themselves on the receiving end of information requests from US prosecutors.

Next Steps

Companies that have used freight forwarders or customs clearance brokers in Kazakhstan, or other high-risk markets, should move aggressively to undertake proactive steps to minimize any potential FCPA exposure. First, conduct a review of past transactions involving intermediaries in high-risk markets to identify any potentially improper payments or false books and records that may require further investigation or self-reporting. Second, assess your institution's compliance systems to ensure that they properly manage FCPA risks in interactions with these types of third parties. Confirm the implementation of solid controls, including employee training programs, that are designed to prevent and detect improper transactions.

Being well-prepared to explain to the US government, should a request arrive, that your company has a robust FCPA compliance program and is already examining these issues will create a positive first impression and lay the groundwork for a constructive dialogue with prosecutors and other regulators. One measure of the effectiveness of a company's compliance program is how quickly and effectively it is able to respond to new information concerning FCPA risks, like the allegations being made now in the KPO matter. For example, the DOJ noted in its settlement with Noble Corporation that the company had obtained a favorable resolution because it had voluntarily conducted a comprehensive self-investigation, cooperated fully with the DOJ and the SEC, and agreed to conduct future reviews and report back to the government on its findings. Noble Corporation's non-prosecution agreement stands in contrast to the more onerous three-year deferred prosecution agreements that were imposed on other settling companies. Stated simply, proactive FCPA compliance measures can pay real dividends.

1 See Cadwalader, Wickersham & Taft LLP, Panalpina, Shell, Four Oil Services Companies Settle FCPA Charges, FCPA Advisor (November 2011), http://www.cadwalader.com/list_newsletters.php?newsletter_type_id=8& newsletter_id=100.

2 See Cadwalader, Wickersham & Taft LLP, Vetco, FCPA Advisor 1, 1-6 (March 2007), http://www.cadwalader.com/ assets/newsletter/FCPAMar07.pdf; Cadwalader, Wickersham & Taft LLP; see also Vetco Aftermath, FCPA Advisor 8, 8-9 (October 2007), http://www.cadwalader.com/assets/newsletter/FCPAOct07.pdf.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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