Given the enforcement agencies' interpretations of the FCPA, a wide variety of seemingly routine interactions with "foreign officials" are subject to FCPA scrutiny.
For instance, in February, Tyson Foods, one of the world's largest processors of chicken and other food items, agreed to resolve an FCPA enforcement action focused on payments to Mexican veterinarians responsible for certifying product for export. As noted in this prior post, the enforcement action involved both a DOJ and SEC component and the total settlement amount was approximately $5.2 million - a figure in addition to the pre-enforcement action and post-enforcement action fees and expenses.
The Tyson Foods enforcement action was an example of yet another recent Foreign Corrupt Practices Act enforcement action dealing with licenses, permits, certifications, and the like.
On January 4, 2011, President Obama signed the Food Safety Modernization Act ("FSMA") (here for more information).
In a recent piece published by Law360 ("Growing Risk: FCPA Exposure For Foreign Food Food Cos. - March 16, 2011), Foley & Lardner attorneys Lisa Noller (here) and Carmen Couden (here) state that new provisions in the FSMA "unintentionally create foreign bribery risks for foreign importers of food."
The FCPA risk, the authors note, is all about foreign certifications. The FSMA will require importers of food to have a certification issued by "an agency or a representative of the government of the country from which the article of food at issue originated" that the "article of food complies with applicable requirements" under the FSMA.
As further noted by the authors, "food is often a commodity that cannot wait for clearances - if it does not ship immediately, it spoils and the value is destroyed."
This dynamic would seem to increase the motivation a low-ranking, poorly paid "foreign official" has to make an improper, extortionate payment related to food certification.
A facilitating payment exempted from the FCPA (at least per the FCPA's terms - enforcement is separate question) or prosecutable bribe payment?
What type of journey did your banana, scallop - create your own dish - take on its way to the U.S.?
Interesting food for thought.
Showing posts with label Permit / License Payments. Show all posts
Showing posts with label Permit / License Payments. Show all posts
Wednesday, April 6, 2011
Monday, March 28, 2011
Ball Corporation Quietly Resolves FCPA Enforcement Action
Magic has returned to the Butler campus for a second straight March. Perhaps it is not magic. Just hard work, a bend-but-don't-break attitude, and poise under pressure. Whatever it is, Butler basketball continues to be an amazing story and teaches lessons beyond the hardwood.
*****
Last week, Ball Corporation (here), a publicly traded company with divergent business segments including an aerospace and technologies segment that derived 96% of 2010 sales from contracts funded by various agencies of the U.S. federal government (see here), resolved an SEC enforcement action.
In an administrative cease and desist proceeding (here) the SEC found, in summary fashion, as follows.
"From July 2006 through October 2007, Ball, through its Argentine subsidiary Formametal, S.A., offered and paid at least ten bribes, totaling at least $106,749, to employees of the Argentine government to secure the importation of prohibited used machinery and the exportation of raw materials at reduced tariffs."
"Although certain accounting personnel at Ball learned soon after Ball acquired Formametal in March 2006 that Formametal employees may have made questionable payments and caused other compliance problems before the acquisition, the Company failed to take sufficient action to ensure that such activities did not recur at Formametal after Ball took control of the Argentine company. Within months of Ball’s acquisition of Formametal, two Formametal executives—the then-Formametal President and then-Formametal Vice President of Institutional Affairs (hereinafter the “President” and “Vice President of Institutional Affairs,” respectively)—authorized improper payments to Argentine officials. The true nature of the payments was mischaracterized as ordinary business expenses on Formametal’s books and records and went undetected for over a year."
As set forth in the SEC's findings, Ball acquired Formanmetal in March 2006 and the wholly-owned subsidiary's (a manufacturer of aerosol cans) financial results are reported on a consolidated basis in Ball's financial statements.
According to the SEC's findings, the improper payments were in connection with equipment imports, copper scrap export waivers.
As to equipment imports, the SEC found as follows.
"Formametal paid bribes totaling over $100,000 in 2006 and 2007 to secure the importation of equipment for use in its manufacturing process. Formametal’s President authorized at least two of these payments. In most cases, the bribes were paid to induce government customs officials to circumvent Argentine laws prohibiting the importation of used equipment and parts. The bribes often appeared on invoices from a non-governmental customs agent for Formametal. The payments were invoiced as separate line items described inaccurately as “fees for customs assistance,” “customs advisory services,” “verification charge,” or simply “fees,” were invoiced in addition to other customs-related fees, and were sometimes in rounded peso amounts. To further obscure that the payments were really bribes, Formametal posted the payments inaccurately identified as “customs advice” or “professional fees” to an “Other Expenses” account or in some instances to an account named for the related equipment."
As to copper scrap export waivers, the SEC found as follows.
"Formametal paid a bribe that its President authorized in October 2007 in an attempt to bypass high government duties imposed on copper scrap exports. These duties, which were generally 40 percent of the value of the copper, were imposed by Argentina in an effort to discourage export sales of domestically produced copper and copper scraps. The President estimated the additional profit from exporting this copper scrap with the export duty waivers versus selling it inside Argentina would be approximately $1.5 million annually."
"For six months prior to August 2007, Formametal unsuccessfully sought to gain government approval to export the scrap without the customarily high duties. After giving up on obtaining the waiver legitimately, on October 18, 2007, Formametal disbursed $4,821, representing the first of five bribe installments authorized by its President to obtain an export duty waiver. The payment was funneled through Formametal’s third party customs agent. Obscuring that the transaction was a bribe, Formametal inaccurately recorded the payment as “Advice fees for temporary merchandise exported” in an “Other Expenses” account. Although the President believed that the payments were requested by a customs official and would result in a copper scrap export duty waiver, no copper scrap export shipments were made pursuant to the improper payment."
As to Ball's internal controls, the SEC found as follows.
"Ball’s and Formametal’s weak internal controls, which included importing equipment into Argentina in 2006 and 2007 without appropriate invoices and documentation, made it difficult to detect that the subsidiary was repeatedly violating Argentine law through the payment of bribes. Ball’s weak internal controls also factored into the Company’s failure to prevent further abuses at Formametal, after Ball accountants learned of a bribe paid by Formametal to import machinery for use in its manufacturing process. As a result, Formametal continued to make improper payments during 2007."
"Further, Ball lacked sufficient internal controls to bring about effective changes after information available to Ball’s executives indicated anti-bribery compliance problems at Formametal. For example, key personnel responsible for dealing with customs officials remained at Formametal, even though external due diligence performed on Formametal suggested that Formametal officials may have previously authorized questionable payments."
Based on the above findings, the SEC found that Ball violated the FCPA's books and records and internal control provisions.
The SEC's order notes that the "Commission considered remedial acts promptly undertaken by Respondent, Respondent's voluntary disclosure of these matters to the Commission, and cooperation afforded the Commission staff."
Without admitting or denying the SEC's findings, Ball agreed to a cease and desist order prohibiting future FCPA book and records and internal controls violations and agreed to pay a $300,000 civil penalty.
The last paragraph of the SEC order states "that the Commission is not imposing a civil penalty in excess of $300,000 based upon [Ball's] cooperation in a Commission investigation and related enforcement action."
Charles Smith (Skadden - here) represented Ball.
SEC FCPA enforcement actions, including administrative actions, are often announced with a SEC press release. However, there was no SEC press release issued last week as to the Ball enforcement action.
Ball's most recent annual report, filed February 28, 2011, stated as follows.
"As previously reported, the company investigated potential violations of the Foreign Corrupt Practices Act in Argentina, which came to our attention on or about October 15, 2007. The Department of Justice and the SEC were also made aware of this matter, on or about the same date. The Department of Justice informed us in 2009that it had completed its investigation and would not bring charges. The SEC’s staff has concluded its investigation and a resolution is expected during 2011. Based on our investigation to date, we do not believe this matter involved senior management or management or other employees who have significant roles in internal control over financial reporting."
*****
Last week, Ball Corporation (here), a publicly traded company with divergent business segments including an aerospace and technologies segment that derived 96% of 2010 sales from contracts funded by various agencies of the U.S. federal government (see here), resolved an SEC enforcement action.
In an administrative cease and desist proceeding (here) the SEC found, in summary fashion, as follows.
"From July 2006 through October 2007, Ball, through its Argentine subsidiary Formametal, S.A., offered and paid at least ten bribes, totaling at least $106,749, to employees of the Argentine government to secure the importation of prohibited used machinery and the exportation of raw materials at reduced tariffs."
"Although certain accounting personnel at Ball learned soon after Ball acquired Formametal in March 2006 that Formametal employees may have made questionable payments and caused other compliance problems before the acquisition, the Company failed to take sufficient action to ensure that such activities did not recur at Formametal after Ball took control of the Argentine company. Within months of Ball’s acquisition of Formametal, two Formametal executives—the then-Formametal President and then-Formametal Vice President of Institutional Affairs (hereinafter the “President” and “Vice President of Institutional Affairs,” respectively)—authorized improper payments to Argentine officials. The true nature of the payments was mischaracterized as ordinary business expenses on Formametal’s books and records and went undetected for over a year."
As set forth in the SEC's findings, Ball acquired Formanmetal in March 2006 and the wholly-owned subsidiary's (a manufacturer of aerosol cans) financial results are reported on a consolidated basis in Ball's financial statements.
According to the SEC's findings, the improper payments were in connection with equipment imports, copper scrap export waivers.
As to equipment imports, the SEC found as follows.
"Formametal paid bribes totaling over $100,000 in 2006 and 2007 to secure the importation of equipment for use in its manufacturing process. Formametal’s President authorized at least two of these payments. In most cases, the bribes were paid to induce government customs officials to circumvent Argentine laws prohibiting the importation of used equipment and parts. The bribes often appeared on invoices from a non-governmental customs agent for Formametal. The payments were invoiced as separate line items described inaccurately as “fees for customs assistance,” “customs advisory services,” “verification charge,” or simply “fees,” were invoiced in addition to other customs-related fees, and were sometimes in rounded peso amounts. To further obscure that the payments were really bribes, Formametal posted the payments inaccurately identified as “customs advice” or “professional fees” to an “Other Expenses” account or in some instances to an account named for the related equipment."
As to copper scrap export waivers, the SEC found as follows.
"Formametal paid a bribe that its President authorized in October 2007 in an attempt to bypass high government duties imposed on copper scrap exports. These duties, which were generally 40 percent of the value of the copper, were imposed by Argentina in an effort to discourage export sales of domestically produced copper and copper scraps. The President estimated the additional profit from exporting this copper scrap with the export duty waivers versus selling it inside Argentina would be approximately $1.5 million annually."
"For six months prior to August 2007, Formametal unsuccessfully sought to gain government approval to export the scrap without the customarily high duties. After giving up on obtaining the waiver legitimately, on October 18, 2007, Formametal disbursed $4,821, representing the first of five bribe installments authorized by its President to obtain an export duty waiver. The payment was funneled through Formametal’s third party customs agent. Obscuring that the transaction was a bribe, Formametal inaccurately recorded the payment as “Advice fees for temporary merchandise exported” in an “Other Expenses” account. Although the President believed that the payments were requested by a customs official and would result in a copper scrap export duty waiver, no copper scrap export shipments were made pursuant to the improper payment."
As to Ball's internal controls, the SEC found as follows.
"Ball’s and Formametal’s weak internal controls, which included importing equipment into Argentina in 2006 and 2007 without appropriate invoices and documentation, made it difficult to detect that the subsidiary was repeatedly violating Argentine law through the payment of bribes. Ball’s weak internal controls also factored into the Company’s failure to prevent further abuses at Formametal, after Ball accountants learned of a bribe paid by Formametal to import machinery for use in its manufacturing process. As a result, Formametal continued to make improper payments during 2007."
"Further, Ball lacked sufficient internal controls to bring about effective changes after information available to Ball’s executives indicated anti-bribery compliance problems at Formametal. For example, key personnel responsible for dealing with customs officials remained at Formametal, even though external due diligence performed on Formametal suggested that Formametal officials may have previously authorized questionable payments."
Based on the above findings, the SEC found that Ball violated the FCPA's books and records and internal control provisions.
The SEC's order notes that the "Commission considered remedial acts promptly undertaken by Respondent, Respondent's voluntary disclosure of these matters to the Commission, and cooperation afforded the Commission staff."
Without admitting or denying the SEC's findings, Ball agreed to a cease and desist order prohibiting future FCPA book and records and internal controls violations and agreed to pay a $300,000 civil penalty.
The last paragraph of the SEC order states "that the Commission is not imposing a civil penalty in excess of $300,000 based upon [Ball's] cooperation in a Commission investigation and related enforcement action."
Charles Smith (Skadden - here) represented Ball.
SEC FCPA enforcement actions, including administrative actions, are often announced with a SEC press release. However, there was no SEC press release issued last week as to the Ball enforcement action.
Ball's most recent annual report, filed February 28, 2011, stated as follows.
"As previously reported, the company investigated potential violations of the Foreign Corrupt Practices Act in Argentina, which came to our attention on or about October 15, 2007. The Department of Justice and the SEC were also made aware of this matter, on or about the same date. The Department of Justice informed us in 2009that it had completed its investigation and would not bring charges. The SEC’s staff has concluded its investigation and a resolution is expected during 2011. Based on our investigation to date, we do not believe this matter involved senior management or management or other employees who have significant roles in internal control over financial reporting."
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.
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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