Resolution of Panalpina and Related Cases Yields Significant Penalties, New Enforcement Theories

On November 4, 2010, the US Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) announced enforcement actions against Panalpina World Transport (Holding) Ltd. and six of its customers in Nigeria: Royal Dutch Shell plc, Pride International Inc., Transocean Corp., GlobalSantaFe Corp., Noble Corp., Tidewater Inc., and certain of their subsidiaries, to resolve their long-running investigations into alleged violations of the US Foreign Corrupt Practices Act (“FCPA”). These settlements arise from a more than three-and-a-half-year initiative by the DOJ and SEC to investigate and prosecute Panalpina World Transport (Holding) Ltd. and its subsidiaries and affiliates (“Panalpina”) in connection with payments to customs officials in numerous countries around the world, and Panalpina’s oil and gas industry customers for their knowledge and authorization of such payments. On a combined basis, the charged companies will pay approximately $156.5 million in criminal fines and penalties to the DOJ and approximately $80 million in disgorgement of profits, prejudgment interest, and civil penalties to the SEC. None of these companies were required to appoint a compliance monitor.

Investigation into Panalpina’s and Its Customers’ Dealings with the NCS

These investigations began as a result of a prior DOJ FCPA investigation into several subsidiaries of UK-based oil and gas equipment and service provider Vetco International Ltd. in Nigeria. The Vetco entities disclosed to the DOJ in May 2005 potential FCPA violations in connection with their dealings with freight forwarders and customs brokers in Nigeria and their payments to Nigerian Customs Service (“NCS”) officials on the Vetco entities’ behalf.[1]

DOJ announced settlements with the four Vetco entities on February 6, 2007, in which three of the four companies involved pleaded guilty to violating and conspiring to violate the anti-bribery provisions of the FCPA and paid combined fines of $26 million.[2] The documents filed with the court that day referred to a “major international freight forwarder” that had made payments on the Vetco entities’ behalf. That freight forwarder was well-known in the Nigerian oil and gas industry to be Panalpina and its Nigerian subsidiary.

As a result of the February 2007 Vetco Gray settlements, Global Industries Inc., GlobalSantaFe Corp., Noble Corp., and Tidewater Inc. each announced internal investigations into their dealings with freight forwarders and customs agents in Nigeria and elsewhere.[3] On July 2, 2007, at least 11 other companies received letters from the DOJ voluntarily requesting production of documents in connection with their dealings with Panalpina in Nigeria.[4]

Industry-Wide Investigation Results in 13 Enforcement Actions Against 7 Companies, Substantial Fines and Penalties

The DOJ's and SEC’s November 4, 2010 announcements represent the first time the agencies have announced coordinated settlements with a substantial number of companies operating in the same industry sector.

  • Panalpina: Panalpina entered into a two-tiered settlement with the DOJ and a separate settlement with the SEC pursuant to which it agreed to pay $81.8 million in fines, penalties, and disgorgement. With DOJ, Panalpina World Transport (Holding) Ltd., the Swiss parent corporation, entered into a Deferred Prosecution Agreement (“DPA”) and agreed to a two-count criminal information charging conspiracy to violate and violation of the FCPA’s anti-bribery provisions in connection with more than $49 million in payments to customs officials to circumvent customs rules and regulations in Nigeria and numerous other countries, including Angola, Brazil, Russia, Kazakhstan, Azerbaijan, and Turkmenistan. Panalpina Inc., a US subsidiary, agreed to plead guilty to a two-count criminal information charging conspiracy to violate the FCPA’s accounting provisions and aiding and abetting certain of Panalpina’s issuer customers in violating the accounting provisions of the FCPA in connection to the same conduct. The two Panalpina entities jointly agreed to a $70.56 million criminal penalty to resolve the DOJ case.

Panalpina also reached a settlement with the SEC, which alleged that Panalpina Inc., acting as an agent of its issuer customers, committed violations of the FCPA’s anti-bribery provisions, aided and abetted its customers’ violations of the anti-bribery provisions, and aided and abetted its customers’ violations of the FCPA’s books and records and internal controls provisions. Panalpina agreed to disgorge $11.3 million in profits from the charged conduct.

According to the agencies’ charging documents, the highest levels of Panalpina’s management, including its board of directors, knew of and condoned Panalpina’s bribery of customs authorities in connection with its business around the world. “Thousands” of such payments were made, in dozens of countries. In Nigeria, the country in which the most significant payments were made, Panalpina was responsible for at least $30 million in payments for the following purposes: (a) in connection with its “Pancourier” service, which reduced the time required to clear goods through Nigerian customs from approximately 40 days (or longer) to around ten days, via an arrangement through which Panalpina would wrap “Pancourier” shipments in special plastic sheeting so they were identifiable to NCS officials as not requiring inspection in return for the officials’ agreement to circumvent Nigerian customs laws; (b) to accept false documentation, generated by Panalpina, as evidence that a drilling rig imported into Nigeria on a Temporary Importation Permit (“TIP”) had been exported from Nigerian waters and a new TIP secured, when the rig in reality had not moved; and (c) other payments to NCS officials to secure reduced customs duties, reduced clearance times, or to induce them to disregard other Nigerian laws and regulations. Numerous other payments were made to customs, immigration, tax, and other officials in Angola, Russia, and other countries, including to secure contracts for Panalpina’s own benefit.

  • Pride: Pride International Inc., a major international drilling contractor, and its French subsidiary Pride Forasol S.A.S. (collectively “Pride”) entered into a two-tier settlement with the DOJ structured similarly to the Panalpina settlement. Pride International Inc., an issuer, reached a separate settlement with the SEC. Pride International Inc. and DOJ reached a DPA in connection with a three-count criminal information alleging (a) conspiracy to violate the anti-bribery provisions of the FCPA; (b) violation of the anti-bribery provisions of the FCPA; and (c) violation of the books and records provisions of the FCPA, in connection with three sets of conduct: (1) payments, via a third party intermediary, to a government official to extend drilling contracts in Venezuela; (2) payments to an administrative judge in India to resolve a customs dispute in Pride’s favor; and (3) payment of $10,000 cash to Mexican customs officials to avoid taxes and penalties resulting from non-compliance with Mexican customs regulations.

Pride Forasol separately agreed to plead guilty to a three-count information in connection with the same conduct, alleging (a) conspiracy to violate the FCPA’s anti-bribery provisions; (b) violation of the anti-bribery provisions; and (c) aiding and abetting the violation of the books and records provisions of the FCPA. Pride agreed to a criminal fine of $32.625 million in connection with both agreements.

Pride International Inc.’s settlement with the SEC required the company to (1) consent to the entry of judgment against it in connection with two causes of action: (a) violating the FCPA’s anti-bribery provisions and (b) violating the books and records and internal controls provisions; (2) agree to pay more than $23.5 million in disgorgement and prejudgment interest in connection with the Venezuelan, Indian, and Mexican payments described above, and additional payments in Nigeria, Kazakhstan, Saudi Arabia, Congo-Brazzaville, and Libya; and (3) consent to a permanent injunction against future violations of the FCPA.

  • Royal Dutch Shell: Royal Dutch Shell plc and its US subsidiary Shell International Exploration and Production Inc. (“SIEP”), and Shell Nigerian Exploration and Production Company Ltd. (“SNEPCO”), a Nigerian subsidiary, also reached settlements with the SEC and DOJ, respectively, in connection with their authorization and reimbursement of payments by their subcontractors and customs agents to NCS officials to circumvent Nigerian customs laws and regulations, in which the total fines, penalties, and disgorgement were $48.1 million.

SNEPCO entered into a DPA, agreed to pay a $30 million criminal fine, and not contest a two-count information alleging (a) conspiracy to violate the FCPA’s anti-bribery provisions and books and records provisions and (b) aiding and abetting a violation of the FCPA’s books and records provisions. Royal Dutch Shell plc and its subsidiary SIEP separately were subject to a cease-and-desist order from the SEC and agreed to pay $18.1 million in disgorgement and prejudgment interest in connection with the same conduct.

  • Transocean Corp., GlobalSantaFe Corp., Tidewater Inc., and Noble Corp.: Offshore oil and gas drilling companies Transocean Corp., GlobalSantaFe Corp., and Noble Corp. each also reached settlements with the SEC and DOJ involving, collectively, the payment of approximately $50 million in fines, penalties, and disgorgement ($27.115 million to the SEC and $23.38 million to the DOJ). The SEC settlements focused on the authorization and reimbursement of Panalpina and other customs agents to provide false documentation and payments to NCS officials in connection with the renewal or issuance of new Temporary Importation Permits for drilling rigs not entitled to receive such permits. Vessel operator Tidewater Inc. also settled similar charges with the SEC in connection with its authorization of its Nigerian customs broker’s payments to NCS officials to circumvent Nigerian customs regulations relating to securing Temporary Importation Permits and renewals for its vessels working in Nigerian waters. Transocean, GlobalSantaFe, Noble, and Tidewater agreed, respectively, to pay $7.265 million, $5.85 million, $5.6 million, and $8.4 million in disgorgement, prejudgment interest, and civil penalties.

While GlobalSantaFe was not prosecuted by the DOJ, Transocean and Tidewater Marine International Inc., a Cayman Islands subsidiary of Tidewater Inc., each entered into DPAs with DOJ and agreed to a $13.44 million criminal fine and a $7.35 million criminal fine, respectively. Noble Corp. also entered into non-prosecution agreement with the DOJ in connection with its, and its Nigerian subsidiary’s, authorization of Panalpina’s payments to NCS officials to cause them to accept falsified paperwork in connection with securing Temporary Importation Permits and extensions for its drilling rigs in Nigeria. Noble Corp. also agreed to pay a $2.59 million criminal fine.

Compliance and Enforcement Lessons Learned

These settlements contain a number of significant developments in FCPA enforcement and highlight important compliance lessons for all companies doing business in high-risk markets and with third parties:

  • Industry-Wide Enforcement Efforts: The Panalpina cases represent the agencies’ widest enforcement efforts on an industry- and customer-targeted basis to date. They also represent the first time that the DOJ and SEC have brought a significant number of related investigations to a close at the same time. Companies doing business in high-risk industries or markets such as West Africa need not only to ensure they have robust compliance systems in place to manage their own FCPA risks, they also need to be aware of competitors’ activities that may signal industry-wide risks of which their compliance or legal department is not yet aware. Recent statements by DOJ and SEC officials regarding their enforcement intentions in the pharmaceutical industry,[5] the DOJ’s January 2010 arrest of 22 individuals in the military and law enforcement industry,[6] and the SEC’s recent focus on medical device makers, all confirm this trend.
  • Expanding Scope of FCPA Enforcement; Continued Focus on Third Party Service Providers: Panalpina’s settlement with the SEC represents the first time that agency has charged a corporation that is not an “issuer” of securities in the United States or a subsidiary of an issuer – but instead an independent third party acting as an agent for US issuers – with civil violations of the FCPA.[7] Similarly, the settlements with Royal Dutch Shell plc and SIEP, and SNEPCO, represent the first time those agencies have charged companies with FCPA violations for their authorization of reimbursements to contractors that subsequently reimbursed another subcontractor for improper payments.

These developments have the potential to significantly expand the universe of companies subject to the FCPA: on the SEC’s “agent” theory, all companies, including non-US companies doing business outside the United States with no affiliation with a US issuer, but that carry out business tasks for US issuers, may be targets of the SEC’s enforcement efforts. Likewise, DOJ’s focus on Shell’s reimbursement of its contractors’ and subcontractors’ payment activities adds yet another set of entities that corporate compliance departments need to monitor for anti-corruption risks, in addition to more traditional third party agents likely already subject to compliance scrutiny.

  • Continued Focus on Non-US Companies: These settlements further demonstrate US authorities’ pursuit of non-US companies in FCPA enforcement. As a Swiss-domiciled corporation, Panalpina’s $81.9 million in criminal fines and disgorgement are significant – and yet rank only as the seventh-highest combined fine in the FCPA enforcement history. Of the remaining companies in the top ten, seven are non-US companies.[8]
  • Use of Criminal Books and Records Charges: DOJ’s settlements with Panalpina and the four other companies charged (SNEPCO, Pride, Transocean, and Tidewater; GlobalSantaFe did not reach a settlement with the DOJ, and Noble Corp. reached a non-prosecution agreement) all include charges of criminal books and records violations, or conspiracy to commit or aiding and abetting such violations. These settlements may signal an increased focus on the FCPA’s criminal books and records provisions by DOJ, which in turn may signal an expansion of the range of cases that it is willing to prosecute criminally, as books and records and internal control charges have historically been pursued more often by the SEC in a civil context.
  • Better Understanding of the Benefits of Self-Reporting, Cooperation, and Pre-Existing Compliance Programs? The benefits of voluntary disclosure to DOJ and SEC, or at least how to quantify these benefits, has been fertile ground for debate for a number of years.[9] These settlements – at least with DOJ – may represent DOJ’s attempt to more clearly demonstrate the benefits of self-reporting and cooperation in FCPA investigations. For example, while DOJ cited Panalpina for its “exemplary” cooperation with its investigation from mid-2007 onwards, Panalpina did not voluntarily disclose its conduct to the DOJ or cooperate with the DOJ’s investigation for approximately a year after the investigation began.[10] That decision appears to have raised the applicable Federal Sentencing Guidelines culpability score multiplier from 1 to 2, to 1.6 to 3.2, and the corresponding low end of the applicable base fine range from $45.5 million to $72.8 million – a $27.3 million difference. Panalpina also received the lowest “discount” off the low end of the applicable fine range of any company included in this round of settlements: 3%. The next lowest discount was 12.3% off the low end of the guidelines range, for SNEPCO, which also did not voluntarily disclose.

These stand in contrast to the companies that voluntarily disclosed and exhibited strong cooperation throughout the investigation: Tidewater Marine International Inc., which “exhibited leadership in the oil and gas industry by leading … an initiative to address the [Nigeria Temporary Importation-related conduct],”[11] received a 30% “discount” off the low end of the guidelines fine range, in addition to receiving credit under the guidelines for voluntary disclosure. Pride received an even larger (55%) discount, and Transocean, 20%.

Likewise, the DOJ appears to have rewarded Noble Corp. for its early detection and attempts to remediate its customs agent’s practice of making payments to NCS officials in connection with the “paper process” as a significant factor in resolving its matter through a non-prosecution agreement. Noble also voluntarily disclosed.[12]

Notably, no company included in this round of settlements was required to retain a compliance monitor. This may also signal the SEC and DOJ’s intent to reward companies for the cooperation, and more importantly, implementation of effective remedial measures and compliance programs once an investigation has begun.

  • Risks of the “Facilitating Payments” Exception: According to the SEC’s complaint, Noble designated an account for “facilitating payments” expenses, had trained its personnel on the appropriate use of that account, and had otherwise instituted a robust compliance program. When the improper payments were recorded in that account, SEC nevertheless charged that “Noble-Nigeria did not consistently or properly use the account … [and] … did not analyze whether amounts recorded in the facilitating payments account were truly facilitating payments. Noble had no policy or procedure to ensure that such an analysis occurred.”[13] For its part, the DOJ cited Noble’s recordation of improper payments that did not meet the definition of “facilitating payments” in their designated general ledger account in the Statement of Facts accompanying the NPA filed with the court.

Both Noble settlements illustrate the risks associated with the FCPA’s facilitating payments exception, including how easily unlawful payments can be confused with facilitating payments, even when they are subsequently booked in a manner that would have been appropriate had they been true facilitating payments. These settlements also highlight companies’ need to closely monitor their facilitating payment activity, consistently train their employees, and conduct periodic follow-up sessions in order to mitigate the associated risks, even when senior management and board oversight is strong.