International Law Advisory - DoJ Imposes Record 26 Million Penalty on Vetco Gray Companies for FCPA Violations Other Enforcement Developments

Last week, the US Department of Justice ("DoJ") announced a $26 million settlement with subsidiaries of Vetco International Ltd. relating to improper payments made through an agent to Nigerian customs officials. At the same time, the Securities and Exchange Commission ("SEC") and the DoJ also announced settlements with El Paso Corporation over allegations that El Paso had indirectly paid surcharges to Iraq through third party companies. These actions come on the heels of a DoJ Foreign Corrupt Practices Act ("FCPA") Opinion Procedure Release issued in late December 2006, in which the DoJ declined to take enforcement action against a company due to safeguards adopted in a commission-based engagement of a foreign law firm.

Vetco International Subsidiaries Plead Guilty to New FCPA Antibribery Charges, Agree to Pay $26 Million in Criminal Penalties

On February 6, 2007, the DoJ announced that three wholly-owned subsidiaries of the UK-based oil and natural gas equipment and services provider Vetco International Ltd.—Vetco Gray Controls, Inc., Vetco Gray Controls, Ltd. and Vetco Gray UK Ltd.—had pleaded guilty to violating, and conspiracy to violate, the antibribery provisions of the US FCPA by making more than $2 million in improper payments to officials of the Nigerian Customs Service ("NCS") over a period of almost three years.1 The Vetco Gray subsidiaries agreed to pay penalties of $6 million, $7 million and $13 million, respectively, and another subsidiary of Vetco International, Ltd., UK corporation Aibel Group, Ltd., entered into a deferred prosecution agreement relating to its participation in the scheme. Vetco International announced it would engage independent compliance monitors for all four entities for a period of three years. The $26 million total fine is the largest imposed by the DoJ in an FCPA enforcement action, and the second highest ever imposed to resolve FCPA charges. In 2005, Titan Corp. agreed to pay $28.5 million to settle charges brought by the DoJ and the SEC.

The plea agreements represent the second time that Vetco Gray companies have pleaded guilty to FCPA anti-bribery violations. In a previous prosecution announced in 2004, ABB Vetco Gray UK, Ltd. and its US affiliate, the former ABB Vetco Gray, Inc., based in Houston, Texas, admitted paying more than $1 million to officials employed by the Nigerian National Petroleum Investment Management Services ("NAPIMS"), the agency responsible for awarding oil and natural gas exploration and development rights in Nigeria including the award to ABB Ltd. of natural gas rights in the Bonga oil field project.2 Subsequently, ABB Ltd. sold the Vetco companies to a private equity firm. In the new enforcement action, the DoJ charged that between September 2002 and April 2005, Vetco Gray Controls, Inc. (the successor to ABB Vetco Gray, Inc.), Vetco Gray Controls, Ltd. and Vetco Gray UK Ltd. (the successor to ABB Vetco Gray, Ltd.), had conspired to make, and had authorized to be made on their behalf, payments of more than $2.1 million, on 61 separate occasions, to NCS officials, through a "major" but unidentified international freight-forwarder, in connection with the Bonga project.

According to the charging documents filed with Federal District Court in Houston, Texas, Vetco Gray employees in the United States, the United Kingdom and Nigeria knowingly authorized the payments to induce NCS officials to disregard their official duties. In entering into the plea agreement, the Vetco Gray companies effectively admitted that the payments were not made to facilitate routine governmental action by customs officials. Rather, these payments were made for the purpose of securing customs clearance (a) for goods or equipment that was improperly or illegally imported into Nigeria; (b) for goods whose "documentation … was not in order"; (c) for goods delayed "due to the failure to post bonds with sufficient funds to cover duties and tariffs"; and (d) in instances in which other infractions of NCS laws committed by or on behalf of the Vetco Gray companies and/or the employees working on their behalf had taken place. The conduct came to light when the parent company, Vetco International, made a voluntary disclosure to the DoJ. The resolution of liability with the DoJ clears the way for the acquisition of the Vetco Gray division by GE.

The DoJ settlement highlights continuing trends in, and significant new aspects of FCPA enforcement:

• Rapidly increasing fines. The combined $26 million settlement amount paid by the Vetco Gray entities is the single largest penalty imposed by the DOJ in a criminal FCPA enforcement action to date. With increased enforcement activity, however, it is doubtful this case will hold this distinction for long.
• Repeat offenders pay additional fines. In imposing penalties of $13 million on Vetco Gray UK, Ltd. and $6 million on Houston-based Vetco Gray Controls, Inc. the DoJ took into account the fact that the most recent violations had taken place in breach of the significant compliance undertakings assumed by the companies and the private equity groups that had acquired the companies in 2004. Those undertakings were memorialized in the DoJ’s opinion release of July 12, 2004, which stated that, as a condition of taking no further enforcement action against the Vetco Gray entities’ new owners, the Vetco Gray businesses were obligated to adopt rigorous corporate anticorruption policies, standards and procedures, extensive FCPA and anticorruption training initiatives, extensive due diligence requirements for third-party service providers, and appropriate disciplinary procedures for employees engaging in corrupt practices. The failure of those efforts to identify and stop the instant conduct contributed to the large penalty in this case.
• Continued imposition of compliance monitors with scope beyond the FCPA. As a condition of the Vetco Gray companies’ guilty plea, the DoJ has required an independent compliance monitor be attached to Vetco Gray’s worldwide operations. The use of such monitors has become commonplace in settlements of serious FCPA antibribery charges where the government deems the violator’s program to be ineffective. Recently, their role appears to be expanding. As in the October 2006 FCPA enforcement action against Schnitzer Steel and its subsidiary, US authorities have required that the Vetco Gray compliance monitor review compliance not only with the FCPA, but also with commercial bribery and foreign anti-bribery laws.
• Increased enforcement action against non-US entities and conduct. The enforcement action against Vetco Gray UK, Vetco Gray Controls, Ltd. and Aibel Group, Ltd. continues the trend of enforcement actions against, and successfully concluded plea agreements with, non-US entities for FCPA violations involving conduct taking place largely outside the United States.
• Risk associated with payments to Customs authorities. This case also vividly illustrates the risks the need for heightened care in relying upon the facilitating payments exception to the FCPA anti-bribery provisions. Even though many payments to NCS officials were for smaller amounts (less than US$1,000 in some instances), the DoJ alleged that the payments were made to induce NCS officials to ignore improper importations, improper or incomplete documentation, failure to post sufficient bonds or pay customs duties, or other infractions of Nigerian law. Accordingly, companies seeking to rely on the "facilitating payments" exception of the FCPA must ensure strict compliance with all local law requirements associated with the foreign government action they seek to facilitate. This can be especially difficult when the use of local agents is necessary, in light of the significantly reduced control over the facilitating payment process companies enjoy.
• Enforcement scrutiny of third-party dealings. This case highlights the need for FCPA compliance programs to cover dealings with third parties that have significant dealings with the government, such as customs agents and freight forwarders. Actions of such third parties can create significant risks for companies that engage them.

Criminal Prosecutions and Civil Litigation In Connection With Iraq-related Corruption Highlight Need for Strong Compliance Programs when Doing Business in Iraq

In recent weeks, several new US corruption cases were announced in connection with the UN-Iraq Oil for Food Program. These cases highlight the anti-corruption risks associated with doing business in Iraq, and the continued aggressiveness of US authorities in investigating and prosecuting corruption in Iraq.

El Paso Settlement Shows Cooperation with US Authorities Can Yield Significant Benefits, Penalties Remain Substantial

On February 7, 2007, the SEC announced the first US prosecution of a publicly-traded US company for violations stemming from the UN Oil-for-Food Program. The SEC filed a settled enforcement action alleging violations of the FCPA books and records and internal controls provisions by El Paso Corporation, the largest natural gas transmission company in the United States.3 The SEC alleged that, between June 2001 and June 2002, El Paso purchased Iraqi crude oil from third parties who had allegedly paid nearly $5.5 million in illegal surcharges to accounts in Jordan and Lebanon controlled by Iraq’s State Oil Marketing Organization ("SOMO"), at a time when UN sanctions and US law prohibited payments to Iraq. The SEC alleged that these surcharges were factored into the price of the oil sold to El Paso by the inclusion of a premium. Because El Paso booked the entire purchase price as "cost of goods sold", the SEC alleged that the books and records of the company were inaccurate. The SEC also alleged that the internal controls at El Paso were inadequate to detect and prevent the payment of surcharges. Finally, although the SEC did not bring anti-bribery charges against El Paso, the SEC complaint alleges that El Paso knew, or was reckless in not knowing, that between 25 and 30 cents per barrel of crude oil purchased from Iraq during that time period was "kicked back" to the Iraqi government as a surcharge. The SEC alleged that written certifications El Paso had obtained from third party sellers representing that surcharges had not been paid were contradicted by statements made in recorded telephone conversations with El Paso oil traders.

To settle the charges, El Paso, whose shares are traded on the New York Stock Exchange, consented to the entry of a permanent injunction prohibiting future FCPA books and records and internal controls violations, requiring the disgorgement of $5.4 million in profits from the underlying transactions, and requiring the payment of a civil penalty of $2.25 million. The disgorgement obligations will be satisfied by paying an identical amount to the US Attorney’s Office in the Southern District of New York, as part of a non-prosecution agreement with the DOJ relating to alleged civil violations of the Iraqi Sanctions Regulations. In statements to the media on February 7, 2007, US Attorney for the Southern District of New York Michael J. Garcia cited El Paso’s continuing cooperation with the UN Oil-For-Food corruption investigation and the DOJ in its FCPA investigation, El Paso’s voluntary cessation of its participation in the UN Program after June 2002 in part out of concern over the possibility of that illegal surcharges were being paid, and the company’s confirmation that employees responsible for the offending conduct were no longer with the company as significant contributing factors to the DOJ’s decision not to prosecute the company. Meanwhile, US authorities continue to pursue the criminal prosecution of former Chairman of Costal Corporation Chairman Oscar Wyatt and several of his associates for, among other alleged conduct, payment of kickbacks to Iraq during the UN Oil-for-Food Program.4 El Paso acquired Costal Corporation in 2001.

The enforcement action against El Paso shows that the SEC is using the FCPA accounting provisions to root out improper payments beyond bribery of government officials. In announcing the settlement with El Paso over indirect payments to the Government of Iraq, the Assistant Director of Enforcement at the SEC explained that the FCPA books and records and internal controls provisions are "important tools to combat illicit kickback schemes." The possibility of further extension of the FCPA accounting provisions to cover kickback schemes involving publicly-traded companies will be an important issue to monitor.5

Prosecutions of Individuals In Connection with Iraq Corruption Continues; Charges Not Confined to FCPA or UN Oil-For-Food Program

Further highlighting the continued prosecution activity in the United States with respect to business dealings in Iraq, in January US authorities in the Southern District of New York announced the indictment of Benon Sevan, the former director of the UN Oil-for-Food Program, and Ephraim "Fred" Nadler, a Sevan associate, for their role in the widespread corruption scheme involving the UN program and corrupt payments to the Saddam Hussein-led government of Iraq.6 The seven-count indictment, of which three apply to Sevan, charges wire fraud, conspiracy to commit wire fraud, engaging in prohibited transactions with the government of Iraq, and theft and bribery concerning a program receiving federal funds, among other US criminal charges.

Weeks later, the federal District Court for the District of Columbia sentenced Faheem Salam, a former US army civilian interpreter in Iraq, to three years in prison for violating the FCPA in connection with bribes paid to an Iraqi police official for the award of a contract to supply the Iraqi police. The sentencing comes shortly after the Special Inspector General for the Reconstruction of Iraq ("SIGIR") stated in January 18, 2007 to the House Armed Services Committee that it was investigating 87 cases of corruption in Iraq, with another 23 cases being investigated or prosecuted by the DoJ.

Civil RICO Suit against BNP Paribas and Australian Wheat Board Illustrates Risk of Exposure to Civil Suits Associated with Alleged FCPA Violations

In another example of a civil suit based upon allegations of foreign corruption, a group of Northern Iraqi citizens filed a civil action against BNP Paribas, a French multinational banking institution, and AWB Ltd., the Australian corporation which supplied large quantities of wheat to Iraq under UN Sanctions, under the US Racketeer Influenced and Corrupt Organizations Act ("RICO") on December 22, 2006 in the federal district court in the Southern District of New York.7 The complainants alleged that, as multinational corporations that coordinated their roles in the kickback scheme through their offices based in New York in connection with the UN Oil-For-Food Iraq Escrow account, which was administered by BNP in New York, BNP and AWB committed the predicate acts of violating the US Travel Act, money laundering offenses, FCPA violations and violations of the United States Iraq embargo as the basis of their RICO claim. On behalf of the class, they seek $200 million in damages for humanitarian assistance they were allegedly deprived of, which was instead diverted to the former Saddam Hussein regime and its officials in the form of kickbacks paid for lucrative wheat supply contracts granted to the AWB. Although the complaint does not specify precisely which Iraqi officials received illicit payments of transport charges associated with Australian wheat exports to Iraq, and instead names only trading and other companies used as fronts for, and conduits to, the Saddam Hussein regime, this case demonstrates that companies that did business with Iraq during the UN embargo can face civil litigation risks.

DoJ FCPA Opinion Procedure Release 06-02 Highlights FCPA Compliance Issues in Engagement of Foreign Law Firm

The second DoJ FCPA opinion release of 2006, DoJ FCPA Op. Rel. 06-02 (Dec. 31, 2006), illustrates the importance of addressing FCPA issues in the retention of third parties beyond agents and consultants. In this case, the retention involved foreign legal counsel. The DoJ FCPA opinion procedure release, issued at the request of an unnamed US company, stated that the DoJ did not intend to pursue enforcement action with respect to the proposed retention by the US company's foreign subsidiary of a foreign law firm to help obtain foreign exchange from a government agency in the foreign country. The law firm in question was to be compensated in part by receiving a 0.6% of the total currency exchange they were to help establish.

The US company in question made several representations in seeking the opinion, including the following: no improper payments were made, requested, or contemplated; it conducted due diligence in selecting the law firm, which has a reputation for honest dealings; and it implemented a variety of anti-corruption safeguards. These included contract provisions prohibiting the law firm from making improper payments, requiring the law firm to know and understand the US company's government relations policy, and granting audit rights to the foreign subsidiary. In addition, the employees of the law firm would sign certifications stating that they have not and will not make any improper payments, and that they and their immediate family were not government officials in the last three years.

This opinion release confirms that more companies are conducting due diligence and establishing business policies and safeguards to ensure that activities of foreign counsel do not trigger US FCPA risks.

We will continue to keep you apprised of developments related to anti-corruption enforcement.  If you have any questions or for further information, please feel free to contact Lucinda Low at 202.429.8051, Ed Krauland at 202.429.8083, Erik Kitchen at 202.429.8132, Andrew Irwin at 202.429.8177, David Lorello at 44(0)20.7367.8007, Owen Bonheimer at 202.429.6266, Tom Best at 202.429.8079, or Negar Katirai at 202.429.8028. 

Read more about our FCPA/Anti-Corruption Practice.

1. United States v. Vetco Gray Controls et al., Case No. 07-cr-004 (S.D. Tex. 2007). See also Stephanie Kirchgaessner, Vetco hit by record fine for bribes, Financial Times (Feb. 7, 2007) at 14; Tom Fowler, Nigeria bribery charges settled; Vetco Gray will pay a record $26 million under plea agreements, Houston Chronicle (Feb. 6, 2007) (quoting Lucinda Low).
2. United States v. ABB Vetco Gray (UK) Ltd. et al., Case No. 04-cr-279 (S.D. Tex. 2004).
3. SEC v. El Paso Corporation, Case No. 07-CV-899 (S.D.N.Y. 2007); SEC Lit. Rel. No. 19991 (Feb. 7, 2007). See also Warren Hoge, El Paso Corp. to Pay $7 Million as Settlement in Oil-for-Food Case, N.Y. Times (Feb. 8, 2007).
4. United States v. Chalmers et al., Case No. 05-cr-59 (S.D.N.Y.) (Revised Indictment dated Sept. 18, 2006).
5. Foreign governments including in China recently announced a major investigation of kickbacks in the private sector. See David Barboza, Bribe Inquiry in Shanghai Aims at Firms from the West, Herald Tribune (Jan. 19, 2007) (citing Chinese investigation into private kickbacks involving McDonalds, Whirlpool, and ABB).
6. United States v. Nadler and Sevan, Case No. 05-cr-59 (S.D.N.Y. 2005) (unsealed Indictment filed Jan. 10, 2007).
7. Karim, et al. v. AWB Ltd. and BNP Paribas, Case No. 06-cv-15400 (S.D.N.Y. 2006) (complaint).