Na-Nu Na-Nu – Final Report to Ork From Mork – Information from FCPA Inquiries

by Thomas Fox

Mork from OrkEd. Note: Na-Nu Na-Nu. We interrupt our daily blog post to provide this final report to the Planet Ork. Na-Nu Na-Nu 

To say that the American culture lost two prime cultural champions this week would be an understatement. The effect that Robin Williams and Lauren Bacall had on a variety of areas in this country probably cannot be measured. Over the next two blogs I will honor each of these larger than life personas and try to examine how they may impact your Foreign Corrupt Practices Act (FCPA), UK Bribery Act or other anti-corruption program. Today Robin Williams; tomorrow Lauren Bacall.

Where does one begin or even end with Robin Williams? His early work in standup comedy; his sitcom television performances; to his many guest appearances on TV variety shows; his incredible movie career – both live and animated; or even his well-known and very public struggles with substance abuse and depression. He was one incredible body of work. For almost any American who grew up in the 70s, we were introduced to Williams in the sitcom Mork and Mindy. His role as an alien allowed him to rift and comment on many human foibles. This was most thoroughly on display at the end of every episode when, in character as Mork, he would report back to his home planet of Ork on some aspect of terran culture. (Na-Nu Na-Nu)

This weekly communication informed both his home planet and us here on Planet Earth about ‘social norms’. I considered this form of communication when I read a recent article in the Wall Street Journal (WSJ), entitled “Venezuelan Firm Is Probed In U.S.”, by José De Córdoba and Christopher M. Matthews. They reported on a Venezuelan company, Derwick Associates (Derwick), who are under investigation by the Department of Justice (DOJ) and Manhattan District Attorney’s office. Derwick was reported to have been “awarded hundreds of millions of dollars in contracts in little more than a year to build power plants in Venezuela, shortly before the country’s power grid began to sputter in 2009”. Also under investigation is a Missouri based engineering, procurement and construction company, ProEnergy Services (ProEnergy), “that sold dozens of turbines to Derwick and helped build the plants”. The article reported that the DOJ’s “criminal fraud section are reviewing actions of Derwick and ProEnergy for possible violations of the Foreign Corrupt Practices Act”.

The article noted that this issue might have come to the attention of the DOJ and Manhattan DA through a lawyer at Derwick who voluntarily contacted federal prosecutors last year. Although it was not clear from the WSJ article if it was related to or even played a part in instigating the FCPA investigation, was information that Otto Reich, “the top State Department official for Latin America during the Administration of President George W. Bush, had filed a federal court lawsuit in 2013, alleging among other things that “Derwick and the company’s owners, among others, obtained contracts to build power stations in return for paying multimillion dollar bribes to senior Venezuelan officials.””

At least one of the basis of regulatory scrutiny was funding of a bribery scheme through overcharging for goods and services. The article reported “Federal prosecutors are scrutinizing the difference been prices ProEnergy charged Derwick for its equipment and the prices Derwick charged the Venezuelan government, a person familiar with the matter said. The person said that in some past FCPA cases, excessive margins were used to conceal bribes to pay foreign officials.”

Derwick, in a statement from its President Alejandro Betancourt, which was provided by its lawyer Adam Kaufmann, said, “Neither Derwick nor its principals have been contacted by any U.S. law enforcement agency.” Clearly this begs the question of whether the company has been contacted by any representatives of the US government who are not from a “law enforcement agency”. In a statement from ProEnergy, it declined to comment on any investigation.

Consider some of the information from this WSJ article. First is how did this case come to the attention of the DOJ? About all that can be said from the article is that Derwick did not self-disclose to the DOJ. However, given the relationship between the government of Venezuela and the US, is it really a surprise that large commercial transactions by US entities into Venezuela are scrutinized by the US government? Did the investigation come about from a whistleblower, i.e. the lawyer for Derwick? If yes, what is the legal obligation of lawyer to his or her client? What if the lawyer sees, observes or even inadvertently stumbles upon criminal activity? What if the lawyer removes documentation, which the lawyer believes demonstrates evidence of a crime?

I was also very intrigued by the information about investigators looking into pricing margins as indicia of corruption. One of the more increasing areas of FCPA scrutiny has been that of commission rates. This is because under circumstances, a high or unusual commission rate can be indicia of monies which are available by a third party, paid via commission, to use as a pot of money to pay bribes to foreign officials. If your typical commission is 5% or you have a range of 5% to 10%, but provide one third party a commission rate of 15%, this may be evidence that the unusual amount is being used as a mechanism to fund bribes.

However, simply focusing on the commission rate alone is too facile an inquiry. Even a commission rate below 5% can create quite an amount of money if the sales price is sufficiently high. In the energy industry, large service contracts or construction contracts can be huge, i.e. in excess of $1bn, and five percent of such an amount is a very large sum of money. It is, therefore, not unusual that in some contracts, the percentage commission will decrease with an increased contract price. The point is there is no one right or wrong commission rate. It will be a fact intensive inquiry.

Borrowing from a noted compliance practitioner, William Athanas, who has suggested an appropriate inquiry along the lines of the following: Where the third party requests a commission above the standard range, the policy should require a legitimate justification. Evaluating and endorsing such a justification requires three steps: (1) relevant information about the contemplated increased commission must be captured and memorialized; (2) requests for increased commissions should be evaluated in a streamlined fashion, with tiered levels of approval (higher commissions require higher ranking official approval); and (3) increased commissions are then tracked, along with the requests and authorizations, in order to facilitate auditing, testing and benchmarking. The point is there needs to be a well thought-out protocol, which is followed and well documented through the entire process.

Another insight that I gleaned from the WSJ article comes from the seller/customer relationship between Derwick and ProEnergy. ProEnergy is reported to have sold turbines to Derwick and have assisted in constructing the power plants. When your company sells a product to a customer, a compliance practitioner typically does not become involved in the negotiations over final pricing between your company’s customer and the end-user. ProEnergy may not have been concerned with the final pricing that Derwick charged their customer, the Venezuelan government. Indeed, the compliance function may not be involved with the commercial pricing between your company and its direct purchaser. This article may require you to change this posture. Was ProEnergy asked to reduce its price to Derwick so that Derwick could mark the price up enough to the Venezuelan government to create a pool of money that could be used to pay bribes? What if ProEnergy received its full listed price book rate but then Derwick charged a premium to the Venezuelan government?

Finally, what about risk? The WSJ article reported that Derwick’s President said “the company’s margins [with the Venezuelan government] were consistent with general industry practice and reflected the high financial risk taken on during a difficult time to do business in Venezuela.” If your company has a business opportunity that presents a high financial reward, is it necessarily because there is some high risk involved? That risk can be risk of getting paid, bringing the project in on time and within budget, political risk, weather-related risk or almost any other type of risk, but that risk might also be a corruption risk. While the WSJ article does not report on the size of the US Company involved in the inquiry, ProEnergy, it would seem that its commercial relationship with Derwick generated a large amount of income for the company. If your company has one of its largest contracts for work overseas, should there be compliance function review and scrutiny of the risks involved?

Are these inquiries that a compliance practitioner now needs to make? If so, how does a Chief Compliance Officer (CCO) make such an inquiries? I think Donna Boehme would say that it all begins with the compliance function ‘having a seat at the senior management table’ so that the CCO or compliance practitioner can be aware when some unusual business opportunity arises. Questions, questions, and more questions.

Na-Nu Na-Nu – this is the final report to Ork from Planet Earth. Na-Nu Na-Nu 

For a viewing of one of Mork’s reports to his home planet Ork, click here.

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.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

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Thomas Fox

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