On November 26, the Securities and Exchange Commission (“SEC”)1 and the Department of Justice (“DOJ”)2 announced settlements with Weatherford International Limited (“Weatherford”) and its subsidiary, Weatherford Services Limited (“WSL”), involving a wide variety of FCPA violations in Africa, the Middle East and Europe occurring from 2000 to 2011. The settlements – involving a financial resolution of $152.5 million for FCPA violations, the imposition of a monitor for 18 months and an additional 18 months self-reporting obligation – were part of a $252 million global settlement between Weatherford and several of its subsidiaries and the U.S. government for violations of the FCPA and U.S. sanctions laws prohibiting certain transactions with Cuba, Iran, Syria and Sudan.
Weatherford is a Swiss oil equipment and services corporation. Prior to 2009, Weatherford’s headquarters was in Houston, Texas, where it still has significant operations. WSL is a wholly-owned subsidiary of Weatherford, incorporated in Bermuda with operations in, among other places, Angola and Congo. As part of the recent resolution, Weatherford entered into a three-year deferred prosecution agreement with the United States,3 supported by an information detailing criminal violations of the FCPA’s internal controls requirements.4 Weatherford also settled a civil complaint brought by the SEC.5 Separately, WSL entered a guilty plea6 for violating the FCPA’s anti-bribery provisions, as detailed in a criminal information.7
The differences between the SEC Complaint and the DOJ Informations reflect just how far the FCPA can extend beyond the classic cases of six-figure payments to foreign officials, such as in the context of procurement. The SEC included allegations relating to travel and entertainment, embezzlement, commercial bribery (for the second time in as many months) and a books-and-records charge for violating U.S. sanctions laws. The settlement’s focus on the lack of internal controls at Weatherford and its subsidiaries provides a reminder of the importance of third-party due diligence. It also underlines expectations from the enforcement agencies as to what kind of sensitivity to important red flags and controls are necessary to meet the requirements of 15 U.S.C. § 78m(b)(2)(A) and (B), the internal controls provisions applicable to “issuers” under the 1934 Securities Exchange Act.
The bulk of the improper payments alleged in both the SEC and DOJ settlement documents arise out of transactions in Angola, in an unnamed “Middle Eastern Country”8 and as part of the Iraqi Oil-for-Food Program. In Angola, WSL made a $250,000 payment to an official at Sonangol, the Angolan National Oil Company, by entering into a sham contract with a Swiss freight forwarding agent.9 Also in Angola, WSL formed a joint venture with two companies, selected by Sonangol, owned by relatives of Angolan officials.10 The joint venture enabled WSL to dominate the market for well screens11 in Angola, allowing it to obtain information regarding competitors’ bids, charge higher prices than its competitors and have competitors’ contracts revoked.12 Owners of the joint venture partners eventually received more than $800,000 in dividends, which were paid in 2008.13 Senior executives at Weatherford, as well as a senior in-house lawyer, were involved in setting up the joint venture, and the in-house lawyer misled outside counsel, which had asked about potential FCPA risk.14
Between 2005 and 2011, Weatherford’s subsidiary in the Middle East paid improper “volume discounts” totaling over $11 million to a distributor in an unnamed Middle Eastern country. The distributor was recommended to Weatherford’s subsidiary in 2001 by the country’s national oil company, and employees of the subsidiary believed that the volume discounts were used as a slush fund to make payments to officials at the national oil company.15 The same subsidiary also made payments of just under $1.5 million to Iraqi officials involved in the Oil-for-Food Program between 2002 and 2003.16
In addition to the payments detailed in both the DOJ and SEC documents, the SEC identified in its resolution documents four other sets of improper payments, which evidence the broad reach of FCPA enforcement efforts.
First, the same Swiss freight forwarding agent used to make payments in Angola was used to pay over $500,000 in bribes to the subsidiary of an Italian energy company in Congo.17 The inclusion of commercial bribes in the SEC’s Complaint, charged under the books-and-records provisions of the statute, highlights the recent efforts by the U.S. enforcement agencies to use the FCPA’s accounting provisions to punish commercial bribery, as illustrated in the Diebold settlement.18 Unlike in Diebold, in which the commercial bribery was unrelated to violations of the anti-bribery provisions, the commercial bribery in the SEC’s Weatherford complaint appears to relate directly to one of the public bribery schemes in Angola.
Second, as in numerous recent FCPA resolutions, the SEC chose to detail improper travel19 and entertainment provided to officials at Sonatrach, the Algerian national oil company. These included a trip to the World Cup in Germany in 2006, a honeymoon trip for the daughter of an official and a family trip to Saudi Arabia, as well as cash support paid to Sonatrach officials visiting Houston. These payments totaled $35,260 between 2005 and 2008.20
Third, between 2001 and 2006, two executives of Weatherford’s Italian subsidiary embezzled over $200,000 of company funds. After being confronted by a co-worker, the executives drafted a memorandum claiming that $41,000 of these funds was used to bribe Albanian tax officials. The executives also provided laptops to executives of the Albanian National Petroleum Agency at the subsidiaries’ expense.21 All of this activity, according to the SEC, violated the internal controls provisions of the FCPA. By including these embezzlement allegations in a complaint already chock-full of serious corruption issues, the SEC is sending the message that companies need to view embezzlement cases as presenting significant internal controls issues that will be evaluated in the context of FCPA investigations.
Finally, the DOJ, assisted by several other federal agencies, including the Office of Foreign Assets Control, brought separate charges against Weatherford for violations of U.S. sanctions laws. The SEC included related allegations in its FCPA complaint as part of a recitation of evidence that Weatherford covered up sanctions violations and falsified Weatherford’s books and records.22
Weatherford’s DPA defers criminal prosecution for violating the internal controls provisions of the FCPA. The Weatherford Information begins with six paragraphs detailing these internal control failures, and the SEC Complaint highlights these failures throughout its Complaint. Most of these introductory paragraphs detailing internal controls deficiencies in the Weatherford Information begin with the phrase “Prior to 2008.”23 Given the industry and jurisdictions in which Weatherford was operating, stronger controls might have been expected to have been in place in the pre-2008 period. However, as has been pointed out elsewhere,24 many companies have drastically improved internal controls in the wake of the focus on FCPA enforcement beginning around the time of the Siemens investigation in 2007 and 2008. That said, the focus on internal controls in the various.
Weatherford settlement documents provides a reminder, in unusual detail, about the kinds of controls the enforcement agencies now expect and the red flags to which companies should be attuned. Some of the more noteworthy details from the settlement documents include:
- The importance of a dedicated compliance officer and compliance personnel, at least for large complex companies with substantial risk profiles.25 Although it might be acceptable for small or simply structured companies to overlap the legal and compliance function, Weatherford suggests that a division of duties, if not independent reporting lines, is expected in larger companies operating in higher risk markets.
- Effective third-party due diligence relating to the ownership of third parties, the business justification for retaining the third party and screening for “derogatory information” about the third party.26 The Information refers to a failure of controls concerning diligence on “appropriate third parties,”27 recognizing the need for a risk-based approach to due diligence. An example of “red flags” that would require diligence is provided in the settlement documents. No due diligence was done on the distributor in the unnamed Middle Eastern country, “despite: (a) the fact that the Distributor would be furnishing Weatherford goods directly to an instrumentality of a foreign government; (b) the fact that a foreign official had specifically directed [Weatherford’s subsidiary] to contract with that particular distributor, and (c) the fact that executives at [the subsidiary] knew that a member of the country’s royal family had an ownership interest in the distributor.”28
Similarly, no due diligence was done on the freight agent used in Angola and Congo, even though the freight agent flatly refused to sign a contract including “an FCPA clause prohibiting the Freight Forwarding Agent from giving anything of value, directly or indirectly, to an official or employee of any government,” a clear red flag.29
- Effective due diligence on joint venture partners. In its joint venture in Angola, Weatherford partnered with companies owned by relatives of government officials who did not appear to bring expertise, funds or equipment to the joint venture.30 On two occasions, Weatherford executives appear to have discouraged internal counsel’s suggestions that due diligence was needed.31 Another internal counsel is alleged to have deliberately misled outside counsel, by suggesting that due diligence on the joint venture partners was necessary but not undertaking any.32 These allegations of deliberately avoiding due diligence and misleading outside counsel are arguably the most serious internal controls allegations in the Weatherford Information.33
- Effective limits of authority. The volume discounts paid to the distributor in the unnamed Middle Eastern country caused some of these transactions to breach the dollar limits Weatherford imposed on the employees of its subsidiaries with respect to the authorization of transactions. Nevertheless, Weatherford (apparently without further investigation) permitted the payments.34
- Effective internal reporting mechanisms. On two occasions, employees of Weatherford’s subsidiaries reported improper conduct and were subsequently fired or transferred without any investigation.35
Weatherford and Diebold: How to make sense of the fines?
The $152 million in fines and penalties paid by Weatherford make it the eighth largest FCPA settlement in history. Although the monetary resolution is objectively large, comparing it to the monetary resolution in another recent enforcement action points to the difficulty of ascertainting the logic of penalty determinations.
Weatherford paid at least $13 million in bribes in Algeria, Iraq and the unnamed Middle Eastern country, including six figure sums to clearly identified foreign officials, and allegedly earned profits of $54 million as a result of the bribes.36 The numbers are slightly higher if the SEC’s allegations of commercial bribery, travel for Algerian officials and payments to Albanian tax inspectors are included. As a multiple of bribes paid, Weatherford’s fine is less than the fine imposed in the Diebold DPA in October for ostensibly less blatant behavior.37 Moreover, unlike Diebold, Weatherford apparently did not self-report,38 and, at least initially, its employees actively impeded the investigation, earning it a $1.875 million penalty assessed by the SEC.39
Part of the difference in proportion between Weatherford and Diebold is the fact that Weatherford’s DPA relates only to books-and-records violations while Diebold’s involved both conspiracy and accounting provisions charges, resulting in different mathematical calculations under the U.S. Sentencing Guidelines.40 The Sentencing Guidelines calculus is, however, of limited value in explaining the difference between the two penalties, as the number of charges is a factor largely within the enforcement agencies’ discretion. Another potential reason for the apparent comparatively harsher penalty for Diebold is the fact that one of Weatherford’s subsidiaries pleaded guilty to a criminal anti-bribery charge, potentially exposing that subsidiary to more severe collateral consequences.41
Other Causes for Concern
Beyond the lack of transparency in the calculations that led to the financial resolution – a recurring feature of settled FCPA matters – the Weatherford settlement, like other recent settlements, is a disposition in which facts are included in the allegations or information without an explanation as to why they are relevant, potentially creating even more confusion as to what is or is not acceptable from the enforcement agencies’ point of view.
First, in at least one instance, the travelrelated allegations raise serious questions about whether the U.S. government adequately distinguishes between proper and improper travel arrangements. The WSL Information mentions travel in connection with the Angolan joint venture, when Weatherford and WSL employees met with the Angolan officials in Paris. WSL provided the Angolan attendees travel and accommodation for that meeting at which the joint venture agreement was discussed.42 This presumably does not mean that covering a joint venture partner’s travel and accommodation expenses for a legitimate business meeting is an improper payment. It is possible to infer from the information that the entire joint venture was a sham and that the government included the cost of the travel in the amounts received by the Angolan officials. However, there is no such explanation in the Information, merely a statement that travel and accommodation were paid for, injecting even more confusion in an area where it already abounds.
Second, the government’s recitation of the evidence pertaining to Weatherford’s distributor in the unnamed Middle Eastern country also lacks clarity. As noted, both the SEC and DOJ specifically list part ownership of the distributor by a member of the royal family as a red flag (along with selection by an instrumentality) requiring more due diligence. However, there is nothing in the Information or Complaint to suggest that payments to the distributor were themselves bribes paid to the owner/member of the royal family. Rather, both documents state that it was the volume discounts that were used to create slush funds to bribe decision makers at the national oil company.43 Just last year, the DOJ issued Opinion Release 12-01 stating that the mere fact of membership in a royal family does not make one a “foreign official.”44 As a result, although no such explanation appears in the resolution documents, one could conclude that, even though ownership of a third party by relatives of a foreign official does not automatically render the third party inappropriate, in most cases it would demand further due diligence and even more stringent controls than might have been thought reasonable before the Weatherford settlements to deal with the risk that an official’s relative who receives payments is somehow a conduit to an official.
It is also unfortunate that more information regarding the “FCPA clause prohibiting the freight forwarding agent from giving anything of value, directly or indirectly, to an official or employee of any government,”45 which was rejected by the Swiss freight forwarder in Angola, was not included in the settlement documents. It is alleged that the freight agent refused to accept the clause “in view of the nature of the business.”46 However, there are often legitimate or explainable objections to FCPA clauses (for example when a clause specifically mentions the FCPA and the objecting party believes it is not subject to the statute or, in many civil law jurisdictions, simply a belief that such clauses are too long and complex) and ways to draft around such objections (such as removing the specific reference to the FCPA and replacing it with the operative statutory language). This lack of explanation is compounded by the fact that both the SEC and DOJ quote the language that eventually was included in the contract as “simply requiring the agent ‘to comply with all applicable laws, rules and regulations issued by any governmental entity in the countries of business involved.’”47 The context of the quote suggests that the enforcement agencies believe that a general “compliance with law” clause is insufficient, even though, in this case, both parties appear to have been well aware of the true nature of the transaction and both the original and replacement clauses were intended to be ignored. This arguably amounts to elevating form over substance.48
The Weatherford settlements, which bring total 2013 FCPA financial resolutions to well in excess of the half billion dollar mark, illustrate once again the risks of enforcement by U.S. regulators, who remain, notwithstanding recurring political gridlock in Washington, DC, the most well-funded enforcement group among all major nations that have adopted transnational anti-bribery regimes. While the size of the resolution given the industry and the jurisdictions affected is not surprising, the details of several key features of the settlements, including those pertaining to travel and entertainment, the role of royal families in the Middle East, and the level of detail at which the government will assess retroactively the sufficiency of compliance documentation, make the settlement a sobering read for compliance personnel.