In order to provide an overview for busy in-house counsel and compliance professionals, we summarize below some of the most important international anti-corruption developments from the past month, with links to primary resources. This month we ask: Which countries are perceived to be the most and least corrupt? Which company was sentenced to the largest corporate criminal penalty in UK history? Which two companies entered into Foreign Corrupt Practices Act (FCPA) resolutions for the second time? The answers to these questions and more are here in our January 2017 Top Ten list.
1. UK-based Engineering Group Enters Into $800 Million Global Settlement to Resolve Bribery Charges.
On January 17, 2017, the Department of Justice (DOJ) announced that Rolls-Royce plc (“Rolls-Royce”), the UK-based designer, manufacturer, and distributor of power systems for the aerospace, defense, marine, and energy sectors, had agreed to an $800 million global resolution with U.S., UK, and Brazilian authorities, to resolve charges related to a scheme to pay bribes to government officials in various countries in exchange for government contracts. The company entered into a three-year Deferred Prosecution Agreement (DPA) with DOJ in connection with a one-count criminal information, filed in the Southern District of Ohio, charging it with conspiring to violate the FCPA’s anti-bribery provisions. According to the information, between 2000 and 2013, the company conspired to pay more than $35 million in bribes to officials in Thailand, Brazil, Kazakhstan, Azerbaijan, Angola, and Iraq in exchange for their assistance in obtaining confidential information and awarding contracts. Citing the company’s cooperation and remediation, DOJ agreed to a criminal penalty of $169.9 million, reflecting a 25 percent reduction off the bottom of the U.S. Sentencing Guidelines range, plus a credit of $25.6 million based on the penalty agreed to with Brazilian authorities. The company agreed to pay $30 million of the total penalty to the Consumer Financial Fraud Fund. In the Brazilian proceeding, Rolls-Royce entered into a leniency agreement with the Brazilian Ministério Público Federal (MPF) in which it agreed to pay a penalty of approximately $25.6 million for the company’s role in a conspiracy to bribe foreign officials in Brazil between 2005 and 2008.
Also on January 17, 2017, Southwark Crown Court in London approved a five-year DPA with the UK Serious Fraud Office (SFO) in which Rolls-Royce agreed to pay $604.8 million in connection with an indictment, suspended for the term of the agreement, which covers 12 counts of conspiracy to corrupt, false accounting, and failure to prevent bribery. This represents the largest British fine ever imposed on a company for criminal conduct and the SFO’s third approved DPA. As explained in our client alert, the company received the DPA and a 50 percent discount off the potential fine in spite of allegedly aggravating factors such as the widespread nature of the criminal conduct, the involvement of senior employees, and substantial illicit funds paid, based on mitigating factors such as extensive cooperation, including a limited waiver of privilege over internal interview memoranda, and remediation through enhancement of the company’s ethics and compliance program and disciplinary proceedings. The $604.8 million fine included a penalty, disgorgement, and payment of the SFO’s costs.
2. Transparency International Releases Annual Corruption Perceptions Index, Cuts Ties with U.S. Chapter.
TI Releases Corruption Perceptions Index. On January 25, 2017, Transparency International (TI) released its annual Corruption Perceptions Index (CPI). The CPI scores and ranks 176 countries based on perceived levels of public sector corruption, providing an important source of data used by the compliance and enforcement communities in assessing the corruption-related risks of doing business in particular countries. This year, Denmark and New Zealand tied for the top-ranking spot, perceived as the least corrupt countries, while Somalia was in last place. Qatar had the largest decline in ranking, dropping 10 points (71 to 61), likely because of its association with the FIFA corruption scandal around the 2022 World Cup, in addition to allegations of human rights labor-related abuses of migrant workers. According to TI, over two-thirds of the 176 countries in the 2017 index scored below 50—the mid-point between “highly corrupt” (0) and “very clean” (100)—with a global average score of 43, indicating “endemic corruption.” (See our January 2016 Top Ten for a summary of last year’s CPI.)
TI Cuts Ties with U.S. Chapter. On January 10, 2017, TI’s board of directors decided to disaccredit its U.S. chapter, Transparency International-USA (TI-USA), which was established in 1993. TI-USA issued a statement regarding its disaffiliation on January 23, 2017, in which it confirmed that it would become a national membership organization due to its “fundamentally different strategy and approach to combatting bribery and corruption.” The chairman of TI-USA stated, “[w]e are converting our structure to become a national membership organization that will be a broadly based coalition dedicated to fighting against corruption wherever it occurs, locally, nationally, and internationally.” TI confirmed the disaffiliation in a statement released on January 24, 2017, citing “differences in philosophies, strategies, and priorities between the former chapter and the Transparency International Movement.”
3. U.S.-based Medical Device Company Settles “Repeat” FCPA Allegations.
On January 12, 2017, Indiana-based Zimmer Biomet Holdings Inc. agreed to pay $30 million to settle parallel DOJ and SEC investigations into what SEC referred to as “repeat” violations of the FCPA related to conduct in Brazil and Mexico. DOJ announced that the company entered into a DPA, in which it agreed to pay a criminal penalty of $17.46 million and to maintain a compliance monitor for three years, and that a subsidiary, JERDS Luxembourg Holding S.ár.l. (JERDS), will plead guilty to a one-count criminal information, charging it with causing the parent company to violate the FCPA’s books and records provision. The DOJ resolutions were filed in the District of Columbia. Zimmer Biomet also agreed to pay SEC $6.5 million in combined disgorgement and prejudgment interest and a $6.5 million penalty pursuant to an administrative order. In March 2012, Biomet, previously a separate company, had resolved allegations with DOJ and SEC relating to conduct in Argentina, Brazil, and China. DOJ had extended the three-year DPA, which included a monitor requirement, in March 2015 and April 2016. The Zimmer Biomet resolution is therefore a rare example of a successive DPA and a successive monitor requirement.
4. Texas-based Medical Device Company Resolves Brazil FCPA Allegations.
On January 18, 2017, SEC announced that medical device company Orthofix International had agreed to admit wrongdoing, pay more than $6 million in combined disgorgement and penalties, and retain an independent compliance monitor for one year, to resolve allegations that it made improper payments to doctors at government-owned hospitals in Brazil to increase sales. According to the SEC order, the company’s Brazilian subsidiary entered into multiple schemes to make improper payments through third-party commercial representatives and distributors to induce doctors at government-owned hospitals to use the company’s products. SEC alleged that the improper payments were improperly recorded in the parent company’s books and records and that the parent company’s internal controls were inadequate, despite the fact that the company had previously been charged by SEC with violating the FCPA. In 2012, the company had agreed to pay $7.4 million to resolve charges that it violated the FCPA’s accounting provisions in connection with bribes paid to Mexican officials by its Mexican subsidiary. In a separate SEC order also announced on January 18, 2017, the company agreed to pay an $8.25 million penalty to resolve allegations relating to improper booking of revenue. Four former executives at Orthofix agreed to pay penalties to settle cases related to the accounting failures, which caused the company to materially misstate certain financial statements. Both of the January 18, 2017 orders included relatively rare admissions of wrongdoing by Orthofix. The company also announced that DOJ had declined to take further action with respect to the FCPA matter. Nevertheless, the SEC resolution is another relatively rare instance of a second FCPA resolution for the same company.
5. Chile-based Mining and Chemical Company Resolves Chile FCPA Allegations.
On January 13, 2017, DOJ and SEC announced that Sociedad Quimica y Minera de Chile S.A. (SQM) had agreed to pay a total of $30.5 million to resolve allegations that it had made approximately $15 million in donations to dozens of foundations controlled by or closely tied to Chilean politicians, including a Chilean official with influence over the government’s mining plans in Chile, between 2008 and 2015. As part of the DPA with DOJ filed in the District of Columbia, the company admitted to knowingly failing to implement internal controls sufficient to ensure that its payments complied with Chilean law and to falsifying its books and records to conceal the payments and agreed to pay a $15.5 million criminal penalty and to retain a corporate compliance monitor for two years. According to DOJ, the company received a 25 percent reduction off the low end of the U.S. Sentencing Guidelines because, although it did not voluntarily disclose the conduct, it fully cooperated with U.S. authorities once news of an investigation by Chilean prosecutors emerged and because it undertook “substantial and ongoing remediation.” SEC settled the case through an administrative order in which it agreed to pay an additional $15 million civil penalty. SQM’s ADRs trade on the New York Stock Exchange.
6. U.S. and UK-based Food Giant Resolves India FCPA Allegations.
On January 9, 2017, SEC announced that Illinois-based Mondelēz International and UK-based Cadbury Limited—a former issuer that was acquired by Mondelēz’s predecessor, Kraft Foods Inc., in February 2010—had agreed to resolve allegations related to improper payments allegedly made by Cadbury’s Indian subsidiary. According to SEC’s order, in 2010, the Indian subsidiary paid an agent to obtain from Indian government officials licenses and approvals to build additional production facilities, without conducting appropriate due diligence on the agent, monitoring the agent’s activities, or accurately recording the nature of the services rendered by the agent. Notably, the administrative order does not allege that improper payments were ever made to Indian government officials, but rather that the subsidiary’s shortcomings “created the risk that funds paid to [the agent] could be used for improper or unauthorized purposes.” Without admitting or denying the charges, the companies agreed to pay $13 million to settle the charges. This resolution may contain an interesting application of the concept of successor liability. Because Cadbury itself was an issuer, it was subject to the FCPA’s accounting provisions and, therefore, SEC’s jurisdiction. SEC specifically noted in the order that, “[a]s a result of Mondelēz’s subsequent acquisition of Cadbury stock, Mondelēz is also responsible for Cadbury’s violations,” which sounds like successor liability for pre-acquisition conduct. However, the order also alleges that the agent submitted five inaccurate invoices in and after February 2010, which sounds more like liability for post-acquisition conduct.
7. Nevada-based Casino Operator Resolves China and Macao FCPA Allegations.
On January 19, 2017, DOJ announced that Las Vegas Sands Corporation had agreed to enter into a three-year non-prosecution agreement (NPA) and pay a $6.96 million criminal penalty to resolve charges that it violated the FCPA’s accounting provisions in connection with business transactions in China and Macao. According to the NPA, between 2006 and 2009, the company paid approximately $5.8 million to a business consultant who assisted it with promoting its brand in Macao and China, without any discernable legitimate business purpose. The consultant was used to disguise the company’s involvement in the purchases of a Chinese basketball team and a building in Beijing. Although the company did not self-disclose the improper conduct, DOJ stated that the penalty reflects a 25 percent discount off the bottom of the applicable U.S. Sentencing Guidelines fine range, based on the company’s full cooperation and remediation. Notably, the resolution follows nine months after the company’s April 7, 2016 resolution with SEC, in which it agreed to pay a $9 million penalty and retain an independent compliance consultant, based on the same conduct. At the time, it appeared from the lack of a parallel resolution that DOJ had declined prosecution. Although not unprecedented, the lack of simultaneous resolutions is unusual.
8. Former Executives of New York-Based Hedge Fund Sued for Civil FCPA Violations.
On January 26, 2017, SEC announced that it had sued two former executives of Och-Ziff Capital Management Group LLC (“Och-Ziff”) in connection with allegations that they caused bribes to be paid by Och-Ziff and its subsidiary, Oz Management LP (the “subsidiary”), to officials in several African countries. In addition to four claims related to alleged violations of the FCPA’s anti-bribery and accounting provisions, the complaint alleges claims based on violations of the Investment Advisers Act (the “Act”) and aiding and abetting the subsidiary’s violations of the Act. In September 2016, DOJ and SEC announced corporate resolutions with Och-Ziff and the subsidiary that involved a combined monetary penalty of $412 million, as well as SEC charges against the parent company’s CEO and CFO. In December 2016, a Gabon national pleaded guilty to a one-count information charging him with conspiring to violate the FCPA by bribing officials in three African nations in order to obtain mining rights for a joint venture related to Och-Ziff.
9. Four Individuals Face FCPA Charges in Connection with Vietnam Bribery Scheme.
On January 10, 2017, DOJ announced charges against four individuals, including the brother and nephew of former UN Secretary General Ban Ki-moon, in the Southern District of New York for allegedly conspiring to bribe a foreign official in connection with a deal to sell Vietnam’s tallest skyscraper. According to prosecutors, the brother, Ban Ki-sang, a senior executive at the company that owned the 72-story building, and nephew, Joo Hyun (Dennis) Bahn, a broker at a Manhattan real estate firm, plotted to bribe an unnamed foreign official of an unspecified Middle Eastern country. An agent for the official, Malcolm Harris, allegedly agreed to receive bribes totaling $2.5 million on behalf of the official in exchange for the country’s sovereign wealth fund purchasing the building for $800 million. Ban and Bahn, with the help of a fourth man, San Woo—charged separately—allegedly made an initial payment of $500,000 to Mr. Harris; however, Mr. Harris allegedly kept the money for himself, never passing it on to the foreign official. As a consequence, the real estate deal fell apart, at which point Mr. Bahn allegedly forged fake documents to cover up the scheme. The father and son each face one count of conspiracy to violate the FCPA, three counts of violating the FCPA, one count of conspiracy to commit money laundering, and one count of money laundering. Bahn and Woo were arrested in New Jersey and JFK Airport, respectively, on January 10, 2017.
10. Update on Criminal FCPA Cases.
Two More Guilty Pleas in Venezuela Oil Case. On January 10, 2017, DOJ announced that two U.S. energy company executives pleaded guilty to FCPA charges in connection with payments to officials at Venezuela’s state oil company, Petróleos de Venezuela, S.A. (PDVSA). Juan José Hernandez Comerma, the former general manager of a Florida-based energy company, pleaded guilty in the Southern District of Texas to one count of conspiring to violate the FCPA and one count of violating the FCPA. He admitted to conspiring with two other U.S. executives—Abraham Jose Shiera Bastidas and Roberto Enrique Rincon Fernandez—to pay bribes to PDVSA purchasing analysts in the form of entertainment, travel, and cash payments from 2008 to 2012. Shiera and Rincon were arrested in December 2015; Shiera pleaded guilty in March 2016 and Rincon pleaded guilty in June 2016. Charles Quintard Beech III of Katy, Texas, pleaded guilty to one count of conspiring to violate the FCPA. Beech admitted to making payments to multiple PDVSA officials in 2011 and 2012, in exchange for putting his company on PDVSA bidding panels and receiving payments for previously awarded contracts. These mark the seventh and eighth guilty pleas in the long-running investigation, which remains ongoing.
Mexican Official Sentenced to 24 Months in Aircraft Conspiracy. In our December 2016 Top Ten, we reported that six individuals—four Texas businessmen and two Mexican officials—had pleaded guilty in the Southern District of Texas for their involvement in a scheme to bribe Mexican officials in order to secure aircraft maintenance and repair contracts with Mexican government-owned and -controlled entities. On January 12, 2017, one of the Mexican officials, Ernesto Hernandez-Montemayor, was sentenced to 24 months in prison for his role in the scheme. Montemayor had pleaded guilty to one count of conspiracy to commit money laundering. As part of his guilty plea, he admitted that, while employed by a Mexican state government, he received bribes from the Texas businessmen in exchange for assisting them with winning contracts from his employer, and that he conspired with the four businessmen to launder the proceeds.