Tuesday, November 16, 2010

Azeri Tax Officials and More On Nigeria TIPs

Next up in the analysis of CustomsGate enforcement actions is Tidewater.

See here for the prior post on the Noble Corporation enforcement action and here for the prior post on the GlobalSantaFe enforcement action.

The Tidewater enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $15.7 million ($7.35 million criminal fine via a DOJ deferred prosecution agreement; $8.3 million in disgorgement and a civil penalty via a SEC complaint).

DOJ

The DOJ enforcement action included a criminal information (here) filed against Tidewater Marine International Inc. ("TMII), a wholly-owned subsidiary of Tidewater Inc. ("TDW") and the primary international operating entity for TDW.

TDW (see here) operates offshore service and supply vessels designed to support all phases of offshore energy exploration, development and production throughout the world. TDW is headquartered in New Orleans and has publicly traded shares on the New York Stock Exchange.

The criminal charges against TMII were resolved via a deferred prosecution agreement (here) between the DOJ and TMII and TDW "on behalf of its wholly-owned subsidiary TMII."

Criminal Information

According to the criminal information, TMII "had managerial and administrative operations in the United States, and it exercised contractual rights and control over Tidewater's vessel operations in Nigeria and Azerbaijan, among other areas."

The criminal information concerns: (1) "bribes paid to Azeri tax inspectors", and (2) "payment of bribes to Nigerian customs officials through the freight fowarding agent [Panalpina]."

Azerbaijan

According to the information, "in 2001, 2003, and 2005, the Azeri Tax Authority [a government entity responsible for administering and collecting tax assessments and duties for the Republic of Azerbaijan] initiated tax audits of TMII's business operations in Azerbaijan."

The information states that TMII employed the "Consulting Firm" [a U.S. consulting company incorporated in Texas and headquartered in Baku, Azerbaijan to provide a broad range of services including accounting services and tax advice and assistance] including the "Azerbaijan Agent" [the Managing Director of the Consulting Firm] to assit with the audits.

The information charges that "in 2001, 2003, and 2005, TMII, through its employees and agents, paid bribes to Azeri tax inspectors to improperly secure favorable tax assessments."

According to the information, TMII "caused approximately $160,000 to be paid to the Dubai Entity [an entity associated with the Consulting Firm], while knowing that some or all of the money would be paid, with the assistance of the Azerbaijan Agent to Azeri tax inspectors."

The information states that "the benefit received and the potential tax liability avoided by TMII as a result of the payment of the bribes was approximately $820,000."

Nigeria

According to the information, between January 2002 through March 2007, Tidex Nigeria Limited ("Tidex") [a Nigerian company 60% majority owned by Tidewater Marine" that "provided agency and operational support, at the direction of TMII, for all vessels that Tidewater operated in Nigeria during the relevant period"], through its employees, affiliates, and agents, authorized the payment of approximately $1.6 million to [Panalpina] as reimbursements for bribes paid by [Panalpina], made on Tidex's behalf, to Nigeria Customs Service ("NCS") employees to induce the officials to disregard certain regulatory requirements in Nigeria relating to the temporary importation of Tidewater vessles into Nigerian waters." The information charges that by August 2004, "TMII managers and employees were aware of and condoned the payments."

The regulatory requirements set forth in the information concern Nigeria's rules and regulations relating to temporarily importing vessels and the "temporary importation permit" ("TIP"). For more on the TIP process see here.

According to the information, between August 2004 and 2007, TMII employees and other Tidewater employees authorized the payment of approximately $1,089,000 to [Panalpina], on Tidex's behalf, knowing that some or all of the monies had been paid by [Panalpina] to NCS officials to induce them to disregard Nigerian regulations, to not impose fines and penalties, and to allow Tidewater vessels to operate in Nigerian waters without a valid TIP."

The information states that the "total benefit in avoided costs, duties, and penalties received by TMII in exchange for these payments was approximately $5,800,000."

Based on the above information, the information charges TMII with conspiracy to violate the FCPA's anti-bribery provisions and to knowingly falsify books and records (in connection with both the Azeri and Nigeria payments) and knowing falsification of books, records, and accounts in connection with "129 payments totaling approximately $1,089,00, as [Panalpina] costs when, in fact, the payments were, in whole or in part, paid to NCS officials."

According to the information, the following individuals "authorized the payment of bribes" or "know, or were aware of a high probability" that bribes were being paid:

Director of Tax [a U.S. citizen located in New Orleans], the Dubai Area Controller[a U.S. citizen], the Regional Finance Director [a British citizen, but described as a "employee and agent of a domestic concern], the Azerbaijan General Manager A [a U.S. citizen] and the Azerbaijan General Manager B [a U.S. citizen] (as to Azeri payments); and

the Vice President of Operations [an Australian citizen who supervised, at various times, both Azerbaijan and Nigerian operations and described as an employee an agent of a domestic concern] and the Nigeria Area Manager [a British citizen] (as to Nigeria payments).

In addition, the information charges that certain money in furtherance of the bribe payments were wired from accounts located in the U.S.

Deferred Prosecution Agreement

Pursuant to the DPA, TMII admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, subsidiaries, and agents as set forth above.

The term of the DPA is three years and seven months and it states that the DOJ entered into the agreement "based on the individual facts and circumstances" of the case and TMII. Among the factors stated are the following.

"TMII and TDW promptly commenced an internal investigation into its dealings with [Panalpina] after becoming aware of information indicating potential issues with [Panalpina];"

"promptly after commencing its internal investigation, TMII and TDW voluntarily disclosed the conduct described in the Information to the Deparment;"

"TMII and TDW voluntarily expanded their internal investigation to numerous operations and areas of the world outside Nigeria where no misconduct had been reported or suspected, and reported all relevant findings to the Department;"

"TMII and TDW hired a General Counsel with substantial international compliance experience, appointed him the Chief Compliance Offcer, and established a Corporate Compliance Committee;"

"TMII and TDW issued an enhanced, stand-alone FCPA compliance policy, substantially revised its Code of Conduct, as well as additional relevant policies and procedures, including a vetting and approval process for third part service providers and business parners upon implementation of that policy, and instituted a worldwide training program for employees;"

"TMII and TDW expanded their internal investigation to cover additional countries and business activities;"

"TMII and TDW cooperated with the Department's investigation, including sharing all relevant investigation findings and making available numerous current and former employees;"

"TMII and TDW exhibited leadership in the oil and gas industry by leading an oil and gas industry initiative, both in the United States and abroad, to address the [Nigeria TIPs conduct];"

"TMII and TDW implemented an enhanced compliance program and have agreed to undertake further remedial measures as contemplated by this Agreement ...;"

"TDW, on behalf of TMII, agreed to provide a written report to the Deparment on its progress and experience in maintaining and, as appropriate, enhancing its compliance policies and procedures ...;" and

"TMII and TDW agreed to continue to cooperate with the Deparment in any ongoing investigation of the conduct of TMI and its directors, employees, agents, consultants, contractors, subcontractors, subsidiaries, affiliates,
and others relating to violations of the FCPA."

As stated in the DPA, the fine range for the above describe conduct under the U.S. Sentencing Guidelines was $10.5 million - $21 million. Pursuant to the DPA, TMII and TDW agreed that TMII shall pay a monetary penalty of $7.35 million - 30% below the minimum guideline amount.

As is standard in FCPA DPAs, TMII and TDW agreed not to make any public statement "contradicting the acceptance of responsibility by TMII as set forth" in the DPA and TMII and TDW further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.

SEC

The SEC's complaint (here) concerns the same core set of facts as set forth in the DOJ's DPA.

In summary fashion, the SEC alleges as to Azerbaijan conduct that "between August 2001 and November 2005, Tidewater Inc. [...] directly or through its subsidiaries, affiliates, employees and agents, violated [the FCPA's anti-bribery and books and records and internal control provisions] by paying $160,000 in bribes to foreign government officials in Azerbaijan through a third party disguised as legitimate services to influence acts and decisions by these officials to resolve local Azeri tax audits in a Company subsidiary’s favor."

According to the SEC, "these improper payments were authorized by senior employees at Tidewater and its subsidiaries while knowing, or ignoring red flags which indicated a high probability, such payments would be passed to government officials, inaccurately recorded in the Company’s or its affiliates’ books and records, and Tidewater failed to maintain sufficient internal controls to prevent such payments."

The SEC complaint alleges that the payments included: (i) "on or about August 14, 2001, Tidewater authorized and paid $50,000 to a third party that it knew, or was reckless in not knowing, would be passed to government officials in Azerbaijan; (ii) "in July 2003, Tidewater authorized and paid $40,000 to a third party in two installments that it knew, or was reckless in not knowing, would be passed to government officials in Azerbaijan; and (iii) "on or about November 11, 2005, a Tidewater subsidiary authorized and paid $70,000 to a third party that it knew, or was reckless in not knowing, would be passed to government officials in Azerbaijan."

The SEC's complaint provides additional detail regarding the Azeri tax audits than the DOJ's criminal information. The SEC's allegations seem to suggest that the payments to the Azeri tax officials were the result of extortionate demands communicated to Tidewater entities through the Azerbaijan Agent. For instance, in connection with the 2001 tax audit, the complaint states that "Executive A [Tidewater's CFO during the relevant period] believed that the 2001 Audit was sort of a 'shakedown' that the Azerbaijan Agent created in order to collect a fee." As to this audit, the complaint further alleges that "Executive A and [another company employee] learned that the Azeri tax auditors threatened to use an accounting method that would result in a higher tax assessment because the tax auditors did not feel 'respected.'" In connection with the 2002 tax audit, the complaint alleges that the Azerbaijan Agent informed Tidewater personnel "that the Azeri tax auditors had verbally identified a potential figure of up to $600,000 to resolve the 2003 audit" but that this "amount bore no relation to any actual tax assessment or penalty."

As to Nigeria conduct, the SEC complaint alleges, in summary fashion, that "from in or about January 2002 through March 2007, Tidewater, through its subsidiaries and agents, also authorized the reimbursement of approximately $1.6 million to its customs broker in Nigeria used, in whole or in part, to make improper payments to Nigerian Customs Services (“NCS”) employees to induce them to disregard certain regulatory requirements in Nigeria relating to the temporary importation of the Company’s vessels into Nigerian waters."

According to the SEC, both the Azeri and Nigerian payments:

"[W]ere improperly recorded as legitimate expenses in the Company’s books and records and all of them, with the exception of the 2003 Azerbaijan payments, were consolidated into Tidewater’s financial statements. Tidewater’s internal controls, including at least two internal audits, failed to detect numerous red flags which should have alerted its management that the Azerbaijan agent and Nigerian customs broker were likely using funds provided by Tidewater, in whole or in part, to make improper payments to government officials."

Based on the above conduct, the SEC charged Tidewater with violating the FCPA's anti-bribery and books and records and internal control provisions.

As to the company's internal controls, the SEC specifically alleged as follows.

"Tidewater’s controls over the engagement and activities of agents operating in high-risk jurisdictions outside of the marketing and sales area were inadequate. For example, the Company’s compliance program, including training provided to its employees, did not adequately address the applicability of the FCPA to customs, tax, and similar regulatory issues in its foreign subsidiary operations until March 2007. Moreover, employees in Azerbaijan easily circumvented the Company’s internal controls by setting up small cash reserves for contingencies, dividing the improper payments into increments below their discretional financial authority and processing a payment through a Company affiliate. Some of the payments for invoices that the Nigerian Agent submitted to Tidex were authorized, processed and funded without the work order or supporting documentation necessary to verify that the service was requested and rendered. Tidewater also conducted internal audits in 2001 and 2003 of its Nigerian operations that failed to detect the improper payments even though weaknesses with invoices from, and payments to, agents and consultants were identified."

Without admitting or denying the SEC's allegations, Tidewater agreed to an injunction and the payment of $8,104,362 in disgorgement and a $217,000 penalty.

Lucinda Low (here) (Steptoe & Johnson) represented Tidewater.

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