December 2009 Indictment of Haiti Teleco Executives Shows Continuing DOJ FCPA and Anti-corruption Focus in Latin and South America If you have any questions regarding the matters discussed in this memorandum, please contact the following attorneys or call your regular Skadden contact. Gary DiBianco London 44.20.7519.7258 gary.dibianco@skadden.com Colleen P. Mahoney Washington, D.C. 202.371.7900 colleen.mahoney@skadden.com Warren Feldman New York 212.735.2420 warren.feldman@skadden.com Charles F. Smith Chicago 312.407.0516 charles.smith@skadden.com Wendy E. Pearson Washington, D.C. 202.371.7084 wendy.pearson@skadden.com * * * This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws. In December 2009, the U.S. Department of Justice (DOJ) indicted two former executives of a Florida-based telecommunications company, two former executives of a state-owned telecommunications company, Telecommunications D Haiti (Haiti Teleco), and the president of an intermediary, Florida-based Telecom Consulting Services Corp. The indictment charges the former executives of the Florida-based telecommunications company with substantive Foreign Corrupt Practices Act (FCPA) and money laundering violations, conspiracy to commit those offenses, and conspiracy to commit wire fraud. Specifically, the indictment states that from November 2001 through March 2005 the former executives paid more than $800,000 to shell companies to be used as improper payments to the Haiti Teleco officials in order to obtain favorable telecommunications rates and to reduce payment obligations. Notably, the indictment also charges the two former Haiti Teleco officials with conspiracy to commit money laundering in order to conceal corrupt payments, and charges one of the officials with multiple counts of money laundering. 1 The FCPA s anti-bribery provisions do not criminalize receipt of a bribe by a foreign government official, and therefore such officials have not historically been charged in FCPA cases. However, US anti-money laundering statutes broadly apply to transactions involving the proceeds of unlawful activity here violations of the FCPA, violations of the criminal bribery laws of Haiti and wire fraud. The DOJ acknowledged the significant cooperation of Haitian regulators in the investigation, highlighting the continued trend of increased information sharing and coordination among law enforcement agencies internationally. The Haiti Teleco indictment underlines that businesses in Latin and South America have been a particular target of the ongoing and enhanced efforts by the DOJ and the U.S. Securities and Exchange Commission (SEC) under the FCPA. U.S. regulators are well educated on specific practices in the region, and are conducting investigations that arise out of competitor complaints, whistleblower reports, law enforcement action and voluntary disclosures. Based on public reports and disclosures, the SEC and DOJ have at least 10 open investigations relating to Latin and South America, including Argentina, Brazil, Mexico and Venezuela. The investigations are not limited to U.S. regulators: Mexican, Costa Rican and Honduran authorities reportedly have been investigating improper payments in their jurisdictions, and German and French regulators are investigating improper payments in South America by companies domiciled in Europe. The U.S. government continues to hold a broad interpretation of the FCPA s obtain or retain business element and increased focus on non-sales bribery such as the telecommunications discounts in Haiti Teleco. As Haiti Teleco shows, the DOJ investigates and prosecutes individuals for FCPA violations as well as corporate entities. These investigations highlight the importance of comprehensive anti-corruption compliance policies and procedures, particularly regarding controls over retention of and payments to third-party consultants who might pass all or part of a payment on to a government official. Strong preventative measures, such as detailed anti-corruption compliance guidelines and tailored training of employees, also are prudent. If a potential issue is w w w.ska d d e n.co m 1 Earlier this year, the former controller of the Florida-based telecommunications company and the president of another shell company intermediary pleaded guilty to conspiring to commit FCPA violations and money laundering.
2 identified, a company should take steps to fully understand its nature and scope and to implement appropriate remedial actions. Recent FCPA Settlements Relating to Latin and South America Nature s Sunshine. In July 2009, the SEC filed a settled enforcement action against Nature s Sunshine Products Inc. in connection with payments to customs officials in Brazil totaling over $1 million. The SEC alleged that Nature s Sunshine paid customs brokers who in turn made payments to customs officials violating the FCPA anti-bribery provisions in order to import unregistered products into the country during 2000 and 2001. The SEC additionally alleged that Nature s Sunshine falsified its books and records (e.g. by booking payments as importation advances ) to disguise these payments, and failed to disclose these payments to Brazilian customs agents. The SEC further charged Nature s Sunshine for violating Section 10(b) of the Exchange Act and Rule 10b-5. Specifically, the SEC alleged that, although Nature s Sunshine disclosed in its 2001 Annual Report that its Brazilian subsidiary faced a significant drop in sales due to Brazilian import regulations, Nature s Sunshine did not disclose any material information related to the cash payments. The SEC also charged the CEO and CFO of Nature s Sunshine in their capacities as control persons due to their failure to supervise personnel who were directly or indirectly responsible for making and keeping the company s books and records and maintaining an adequate system of internal controls. This is particularly interesting because it does not appear that the CEO or CFO participated in or had knowledge of any of the alleged improper conduct. Helmerich and Payne. Also in July 2009, oil and gas company Helmerich and Payne (H&P) entered into an agreement with the DOJ to resolve allegations of improper payments made to government officials in Argentina and Venezuela. The DOJ alleged that H&P subsidiaries, employees and agents made payments to Argentinean and Venezuelan customs officials in order to import and export goods that were not within regulations or could not lawfully be imported or in order to avoid high duties and taxes. Helmerich and Payne also reached a settlement with the SEC based on the same allegations, as a result of which the SEC entered an administrative cease-and-desist order. Latin Node. In April 2009, Latin Node pleaded guilty in the Southern District of Florida to onecount criminal information charging a violation of the FCPA s anti-bribery provisions based on improper payments to government officials in Honduras and Yemen. The improper payments were identified by elandia after the closing of its acquisition of Latin Node. Latin Node agreed to pay a $2 million criminal fine in installments over a three-year period. Specifically, the settlement papers state that, between March 2004 and June 2007, Latin Node made approximately $1.1 million in questionable payments to third parties, knowing that payments would be made to officials of the Honduran state-owned telecommunications company. The improper payments were made to obtain an interconnection contract and reduced interconnection rates. The plea agreement further states that an additional $1.15 million was paid to a third-party consultant between July 2005 and April 2006 with knowledge that some or all of the money would be passed on to Yemeni officials to reduce interconnection rates.
3 Siemens AG. In December 2008, German manufacturer Siemens AG settled its long-running U.S. and German anti-corruption investigations by agreeing to significant civil and criminal penalties, future monitoring and an admission of improper conduct. The settlements confirm that U.S. and European regulators are devoting continued and unprecedented resources and cooperation to anticorruption and internal-controls issues. The criminal settlement with the DOJ comprises: A guilty plea by parent Siemens AG to failing to devise and maintain sufficient internal controls and to falsifying books and records under the FCPA. Guilty pleas by Siemens Argentina to conspiracy to violate the FCPA books and records provisions and Siemens Venezuela to conspiracy to violate the FCPA anti-bribery and books and records provisions. Payment of a criminal fine of $450 million. The civil settlement with the SEC comprises: Consent to judgment in a civil case by the SEC finding that Siemens violated the anti-bribery, books-and-records, and internal-controls provisions of the FCPA. Civil disgorgement of profits of $350 million, in addition to the criminal fine. Siemens agreed to appoint former German Finance Minister Theodor Waigel as a corporate compliance monitor for up to four years. As has been the case with the majority of recent anti-corruption settlements, the Siemens agreement requires the company to retain an independent U.S. law firm to support Minister Waigel. According to the charging and plea documents, starting in 1998, Siemens Argentina paid Argentinean officials for favorable treatment related to a national identity card project valued at approximately $1 billion. Between 2001 and 2007, those payments totaled approximately $31.3 million. Siemens Argentina made those payments, which were improperly characterized in its records as consulting and legal fees, through sham contracts with various third-party consultants and other conduit entities. Similarly, according to the charging and plea documents, Siemens Venezuela paid approximately $18.8 million to Venezuelan officials between 2001 and 2007. Those payments were made in exchange for favorable treatment in connection with two mass transit projects. The payments, which were made through sham invoices and contracts with third-parties for consulting, transportation studies and workshop equipment, were improperly characterized in Siemens Venezuela s records as legitimate payments for commissions, consulting fees, and shipping and marketing costs. Willbros Group. In May 2008, the DOJ and SEC announced settlements with Willbros Group, Inc. (Willbros Group), a construction and engineering services company headquartered in Panama City, Panama and its subsidiary Willbros International, Inc. (Willbros International) relating to alleged improper payments in Bolivia, Ecuador and Nigeria. The DOJ entered into a three-year deferred prosecution agreement and filed a criminal information in the Southern District of Texas charging conspiracy to violate the FCPA, two counts of FCPA anti-bribery violations, and three counts of FCPA books and records violations. Willbros Group agreed to pay a criminal penalty of $22 million and to retain an independent compliance monitor.
4 The SEC filed a settled complaint alleging that Willbros Group violated the antifraud provisions of the Securities Act and the Securities Exchange Act, the anti-bribery provisions of the FCPA, and the books and records and internal controls provisions of the Securities Exchange Act. Without admitting or denying the SEC s charges, Willbros Group settled with the SEC and agreed to pay $10.3 million ($8.9 million in disgorgement and $1.4 million in prejudgment interest). The settlement documents allege that, among other things, employees of Willbros Group and its subsidiaries: (1) paid a $300,000 bribe to officials of an oil and gas company owned by the government of Ecuador to obtain a $3 million contract; (2) made $6 million in payments to officials of a Nigerian state-owned oil company in order to secure a major gas pipeline construction contract and other government contracts in Nigeria; (3) fabricated invoices to procure cash from the company s administrative headquarters in Houston that were used to bribe Nigerian tax and court officials; and (4) schemed to avoid Bolivian VAT taxes. The SEC s allegations regarding avoidance of Bolivian VAT payments are notable in that the SEC focused on alleged inflation of income from the underpayment of taxes. In that regard, the SEC specified that Willbros Group issued false financial and registration statements, and that those statements were employed in connection with the sale of securities. Accordingly, the SEC alleged that the tax inflation scheme led to securities fraud violations. Willbros became aware of those tax issues through an investigation by Bolivian authorities, and the company took prompt action to investigate a response that was noted positively by the DOJ. The government s allegations regarding payments in Ecuador to employees of a state-owned oil and gas company demonstrate the government s continued view that such individuals are foreign officials for purposes of the FCPA. U.S. regulators have come to expect that businesses operating in areas with a significant presence of state owned entities will rigorously train their employees on corruption risks associated with these entities. A company s anti-corruption policies should provide clear guidelines on the definition of government officials, and where employees should turn in the event that they have questions or concerns. Employees should receive the policy in their local language, and training on the policy should be conducted. Christian Sapsizian/Alcatel SA. In June 2007, Christian Sapsizian, a French employee of Alcatel S.A. s (Alcatel) Paris-based subsidiary, Alcatel CIT, SA (CIT) pled guilty to (1) conspiring to make a corrupt payment to foreign officials and (2) making a corrupt payment to a foreign official. On September 23, 2008, Sapsizian was sentenced to 30 months imprisonment and was ordered to forfeit $261,500. Despite being a French citizen working for a French company and residing in Costa Rica, the DOJ asserted jurisdiction over Sapsizian as an employee of a U.S. registrant (Alcatel s American Depository Shares were traded on the New York Stock Exchange) and because Sapsizian had knowingly authorized U.S. dollar payments wired to and through U.S. banks. The plea agreement alleges that in between 2001 and 2003, Sapsizian arranged for payments to government officials to secure contracts for Alcatel CIT in Costa Rica. Sapsizian admitted to channeling the payments totaling approximately $16.5 million through a consulting firm. According to the plea documents and public disclosures, Alcatel became aware of the payments in October 2004 when the Costa Rican Prosecutors Office opened an investigation. Alcatel initiated an internal investigation, terminated both Sapsizian and the senior Costa Rican executive, and voluntarily disclosed its investigation to the DOJ and SEC.
5 Oil States International, Inc. In April 2006, the SEC entered into a cease-and-desist order with Oil States International, Inc. (Oil States) settling FCPA books and records and internal controls charges. Specifically, the SEC alleged that Oil States, through its subsidiary Hydraulic Well Control, LLC (HWC), improperly paid $348,350 to a consultant who was hired to serve as a liaison with employees of Petróleos de Venezuela, S.A. (PDVSA), a government-owned energy company. The SEC s order alleges that HWC did not train the consultant regarding the company s FCPA obligations. The order further alleges that PDVSA proposed a kickback scheme and threatened to prevent HWC from continuing business if it did not participate. According to the order, HWC s consultant submitted inflated invoices to HWC and paid the PDVSA employees with the excess. The inflated invoices were improperly recorded as ordinary business expenses. In December 2004, U.S. management for HWC discovered the kickback scheme and reported it to Oil States management. Oil States terminated its relationship with PDVSA, disciplined the employees involved, and reimbursed PDVSA for the overbilling. Oil States also corrected its books and records and strengthened its compliance program. The SEC s settlement papers credit HWC s prompt corrective action and cooperation. The Oil States settlement highlights the SEC s broad use of books and records and internal controls charges. HWC s U.S. employees were not involved in improper payments, nor did any acts occur in the U.S. Instead, the charges settled relate to whether the payments were accurately recorded in Oil States books and records. Thus, the Oil States settlement underscores the importance of accurate reporting of all expenses in addition to a strong compliance program that prohibits benefits to government officials to obtain or retain business. Tyco International Ltd. In April 2006, the SEC filed a civil complaint alleging that Tyco International Ltd. (Tyco) employees violated the anti-bribery, books and records, and internal controls provisions of the FCPA. Specifically, the SEC s complaint alleges that when Tyco purchased Earth Tech Brasil Ltda. (Earth Tech Brazil), Tyco s due diligence identified improper payments, but that the payments and related improper practices were not ceased after the acquisition. Specifically, the complaint alleges that, from 1999 to 2002, Earth Tech Brazil employees repeatedly made improper payments to Brazilian officials to obtain business and engaged lobbyists who transferred funds to government officials. Earth Tech Brazil executives in the U.S. allegedly participated in telephone calls, attended meetings and received emails regarding the improper payments. The Tyco settlement reinforces the importance of transactional due diligence on anti-corruption issues and the need for post-closing compliance. The DOJ and SEC have emphasized their belief that transactional due diligence should include, as a matter of course, procedures to test compliance with the anti-bribery, books and records, and internal controls provisions of the FCPA. Post-closing compliance procedures should emphasize implementation of anti-corruption compliance policies and procedures. Accordingly, a company s standard transactional due diligence should include procedures to assess a target s compliance with the FCPA and other relevant anti-corruption laws, and post-closing compliance procedures should emphasis implementation of the successor s anti-corruption compliance policies and procedures.
6 Conclusion Recent investigations and settlements demonstrate the need for sensitivity to anti-corruption compliance in Latin and South American operations. Specific areas of importance include: Policies and training that are tailored to risks of interactions with government-owned or controlled enterprises and state entities in industries and geographies that have been the subject of publicized investigations and settlements. Compliance procedures for interacting with local regulators in areas such as licensing, customs and tax. Ongoing monitoring and auditing to ensure appropriateness of promotional expenses, including travel, gifts and entertainment. Transactional due diligence to identify corruption risks and compliance weaknesses in an acquisition or joint venture. Due diligence of third parties of potential and existing consultants, agents or intermediaries. Procedures for investigation and elevation of potential violations of company policies. Four Times Square, New York, NY 10036 Telephone: 212.735.3000