What was to become Operation Car Wash began in 2008 as a routine investigation by Brazilian authorities into Brazilian money launderers who laundered criminal profits through car washes and other small businesses. A decade later, the Operation Car Wash investigation has brought down numerous Brazilian politicians and officials at Brazilian state-owned energy company Petróleo Brasileiro S.A. (“Petrobras”), and led to criminal charges and multilateral resolutions against both Brazilian and international companies, including the construction giant Odebrecht S.A., oil and gas service company SBM Offshore, and ship and rig company Keppel Offshore & Marine (“Keppel Offshore”)—all for their involvement in a massive bribery scheme to distribute Petrobras contracts and generate kickbacks to Petrobras officials and their political patrons.
As may have been inevitable, the investigation has now led to a criminal resolution with Petrobras itself. On September 27, 2018, Petrobras agreed to Foreign Corrupt Practices Act (“FCPA”) resolutions with the US Department of Justice (“DOJ”) and US Securities and Exchange Commission (“SEC”), as part of one of the largest ever global anti-corruption resolutions, involving a total of over $850 million in penalties payable to US and Brazilian authorities. The law enforcement resolutions also come on the heels of the company’s nearly $3 billion settlement of a shareholder lawsuit in US federal court. Petrobras’s resolution with DOJ resulted in a Non-Prosecution Agreement (“NPA”) based on a violation of the FCPA’s books-and-records and internal controls provisions and $85,320,000 in criminal penalties payable to DOJ; the SEC resolution was set forth in a cease-and-desist order (the “SEC Order”) and included $85,320,000 in penalties payable to the SEC.
Structure of Petrobras
The Brazilian state-owned company Petrobras is involved in multiple facets of the energy business: it builds and operates oil and gas refineries, performs work in the areas of oil and gas distribution and exploration, and is also involved in the biofuels industry. The company owns or controls significant energy assets around the globe, and is responsible for producing almost 2.8 million barrels of oil equivalent per day. Though it is Brazilian-owned, Petrobras has American Depository Shares traded on the New York Stock Exchange, making it an “issuer” for purposes of FCPA jurisdiction.
A Board of Directors oversees the company, which is managed by a Board of Executive Officers, comprising the Chief Executive Officer, the Chief Financial Officer, and the various heads of the company’s operating and support divisions. The Brazilian government’s ownership interest in Petrobras gives it, and notably the political parties and politicians in power, the ability to appoint Petrobras’s Board of Directors and influence in the selection of its executive officers.
The Bribery Scheme
According to the NPA and the SEC Order, between 2004 and 2012, Petrobras executives and managers (the “corrupt officials”) executed a bribery scheme that allowed a cartel of contractors and suppliers to rig bids and unfairly obtain Petrobras contracts at inflated prices, and simultaneously allowed Petrobras to curry favor with Brazilian politicians and political parties.
Specifically, the corrupt officials ensured that Petrobras contracts were awarded to cartel members at inflated prices by, among other things, providing the cartel with inside information, manipulating the contract-bid process, approving contracts that did not conform to Petrobras’s procurement rules, and assisting the contractors in artificially inflating the contract costs by 1% to 3%. The contractors then used these additional contract proceeds to pay kickbacks to the corrupt officials and others, in some cases through intermediaries. In some instances, the corrupt officials used their bribe proceeds to make payment to Brazilian politicians. For example:
Abreu e Lima Refinery: In 2008 or 2009, Petrobras issued tenders for two contracts related to services and supplies for its Abreu e Lima Refinery. Just before the tenders issued, a Petrobras official passed inside information about the contracts to potential contractors, who together decided which among them should win the contracts. The two companies selected by the group then formed a consortium and, using the inside information, submitted the lowest bids and were awarded the contracts. In exchange, the consortium paid approximately R$80 million collectively to a Brazilian political party and to Petrobras officials, one of whom directed that R$20 million of the bribe proceeds be paid to the campaign of a Brazilian politician “who had oversight over the location” where the refinery was being built.
Rio de Janeiro State Petrochemical Complex: In 2010, Petrobras officials leaked confidential bid information to contractors bidding for work on the Rio de Janeiro State Petrochemical Complex, and accelerated the work schedule to benefit those contractors. All of this was done in exchange for millions in bribes paid to those officials and to the campaign of the Brazilian politician who had oversight over the location where the Complex was being built.
Shipping & Drilling: From 2008 to 2010, a Singaporean shipyard company secured a contract with Petrobras without submitting to the competitive bidding process, and a drilling company was awarded a drilling-vessel-chartering contract with Petrobras, in exchange for paying millions in bribes to a Brazilian political party and a Petrobras official.
Additional companies have already admitted involvement in the Petrobras bribery scheme and resolved criminal investigations with DOJ, the SEC, and Brazilian and other foreign law enforcement authorities.
Odebrecht/Braskem: In December 2016, the global construction conglomerate Odebrecht and Brazilian petrochemical company Braskem admitted paying bribes totaling approximately $788 million to government officials in multiple countries, including to Petrobras officials and Brazilian politicians and political parties. The companies agreed to pay $3.5 billion to resolve charges with US, Brazilian and Swiss authorities.
SBM Offshore: In November 2017, Netherlands-based oil-drilling-equipment manufacturer SBM Offshore admitted that it paid commissions to intermediaries, knowing that a portion of those payments would be used for bribes to government officials, including Petrobras officials. SBM agreed to pay a $238 million penalty to US authorities to resolve the FCPA violations, resulting in global penalties and disgorgement of over $470 million to US and Dutch authorities.
Keppel Offshore: In December 2017, Singapore-based shipyard company Keppel Offshore agreed to pay approximately $422 million to US, Brazilian, and Singaporean authorities to resolve FCPA and other anti-corruption violations arising out of a decade-long scheme to pay millions of dollars in bribes through an intermediary to Petrobras officials and to the then-governing Brazilian political party.
Based on Petrobras’s involvement in the bribery scheme described above, DOJ found, and Petrobras admitted in the NPA, that it failed to maintain accurate books and records and to implement adequate financial and accounting controls to detect and prevent bribery. Petrobras officials also falsely signed Sarbanes-Oxley 302 certifications stating that Petrobras’s Form 20-F submission to the SEC did not contain materially false or misleading statements, knowing the submission failed to disclose the bribery scheme.
For these violations, DOJ assessed Petrobras a total criminal penalty of $853.2 million, which reflected a 25% discount off of the bottom of the United States Sentencing Guidelines fine range. This penalty, however, was offset by up to 80% to reflect the penalties Petrobras will pay the Brazilian government to resolve Brazilian law violations, and by 10% for civil penalties Petrobras must pay to the SEC, resulting in an effective US criminal penalty of $85,320,000. DOJ did not impose a compliance monitor on Petrobras, noting that the company is expected to resolve with, and be subject to supervision by, Brazilian authorities.
In agreeing to the NPA and penalty, DOJ considered that, although Petrobras failed to voluntarily disclose its illegal conduct to DOJ in a timely manner and could not receive voluntary-disclosure credit, full cooperation and remediation credit was appropriate because the company:
- Conducted a thorough internal investigation, including interviews of foreign witnesses;
- Collected, analyzed, and organized voluminous evidence for DOJ;
- Shared in real time the facts uncovered, and information that would not otherwise have been available to DOJ; and
- Engaged in extensive remedial measures, such as terminating implicated individuals; replacing its entire Board of Directors; implementing significant governance reforms; elevating and redefining the compliance function; adding and enhancing compliance policies, procedures, and enforcement; making anti-corruption training more robust; and building better procurement and contracting controls.
In addition, DOJ considered that Petrobras settled with the SEC, and recently settled a related shareholders’ class action lawsuit, In re Petrobras Securities Litigation, No. 14-cv-9662 (S.D.N.Y.) (the “shareholders’ suit”), for $2.95 billion. DOJ also explicitly recognized as mitigating factors that Petrobras is a Brazilian-owned company that will need to reach a resolution with the government of Brazil, and that the company was also the victim of an embezzlement scheme perpetrated by its officials.
The SEC Order provided further detail about Petrobras’s violation of the FCPA’s recordkeeping provision. For example, Petrobras asserted in disclosures that its executives were disinterested, even though some received bribes and kickbacks, and had been promoted based on political patronage. Petrobras also falsely disclosed that its internal controls were effective while the bribery scheme was taking place. In addition, the SEC noted that Petrobras executives made false certifications on Forms 20-F and 6-K, which they submitted to the SEC.
The SEC ordered that Petrobras pay $933.4 million in disgorgement and prejudgment interest, but that amount will be entirely offset by the amount paid to settle the shareholders’ suit. It further assessed an $853.2 million civil penalty, but offset that by 90% to account for payments to Brazil and DOJ, resulting in an effective SEC penalty of $85,320,000.
Insights and Key Takeaways
Nature of the Bribes and Structure of the Resolution
The resolution was reached under the FCPA’s books-and-records and internal controls provisions, rather than the statute’s anti-bribery provisions, and with an NPA rather than a deferred prosecution agreement (“DPA”) or criminal conviction that might have been more consistent with prior resolutions of this size and reflecting the same culpability. Although the NPA does not explicitly state why these decisions were made, they could have resulted from the unusual nature of the bribes at issue and the unusual status of Petrobras as a state-owned entity.
Specifically, in a typical FCPA anti-bribery case, private actors direct bribes to government officials, potentially including officials of state-owned enterprises, to secure business advantages. Indeed, such conduct was alleged against other companies involved in the Car Wash scandal, such as Odebrecht, SBM Offshore, and Keppel Offshore, each of which paid bribes to “foreign officials,” including Petrobras employees.
The Petrobras case differs from the typical fact pattern because the gravamen of the scheme as described in the NPA was not that Petrobras paid bribes to other Brazilian officials to benefit Petrobras, but rather that Petrobras officials were foreign officials, and that those officials, together with Brazilian politicians, used the company to extract bribe payments from private contractors. Although the Petrobras officials also helped facilitate payments from the contractors to other Brazilian officials, the NPA did not directly allege that they did so to benefit the company. It suggested that this was a possibility—asserting, as noted above, that some payments were directed to officials “with oversight” over Petrobras or the locations where Petrobras did business. But it also noted that the Petrobras officials were engaged in an embezzlement scheme that victimized the company.
At the same time, it is exceptionally rare for US authorities to pursue a state-owned entity for FCPA violations. Petrobras may have been prepared to question whether a state-owned enterprise can, or should, be charged by US authorities consistent with sovereign immunity and comity concerns; in fact, the NPA notes that Petrobras does not prospectively waive any argument that it is protected from criminal prosecution by sovereign immunity. Petrobras also may have been prepared to argue that its status as a state-owned enterprise undercut the factual theory that it bribed state officials to secure a business advantage. It is thus possible that DOJ would have faced some difficulty in establishing that the company was liable for violating the FCPA’s anti-bribery provisions, or even subject to the statute in the first place. Alternatively, it is possible that given the overwhelming proof of the books and records violations, the company’s status as an enterprise owned by a sovereign nation, and the likelihood that the penalty calculations would have been similar under either provision, that DOJ and Petrobras agreed to resolve the case with an NPA under the accounting provisions without insisting on a DPA or conviction, or seeing a need to resolve whether anti-bribery liability also would apply.
Limits on Respondeat Superior?
Along the same lines, it is difficult to read much into the NPA’s citation of Petrobras officials’ embezzlement activity and the lack of anti-bribery charges. DOJ has historically taken a very broad view of corporate criminal liability for the acts of employees and agents, even where those acts violated company policy and even where they were taken in part to benefit the employee or agent. The Petrobras resolution suggests that DOJ may be interested in hearing whether employees were acting for their own profit in addition to the company’s—but it certainly does not suggest that evidence to that effect will result in a free pass. First, as noted above, the Petrobras resolution had other unique aspects that may have driven the structure of the resolution. And second, the company was, in any event, held liable for books and records violations and subject to penalties that would have been similar to the ones resulting from anti-bribery violations. Companies should certainly pursue opportunities to investigate whether their employees’ acts are not attributable to the company itself under traditional principles of respondeat superior; and even where the evidence establishes a mixed motive, companies can argue to DOJ that the employees’ motives are a mitigating factor. But it is difficult to discern how much such considerations moved DOJ in the Petrobras case.
Importance of Robust Corporate Governance and Meaningful Internal Controls
The resolution with DOJ and SEC highlights the myriad ways in which Petrobras failed to implement a robust anti-corruption compliance program—from the highest levels of management to the effective implementation and monitoring of its procurement process—particularly in a “country with a well-known history of corruption in its business and politics.” Rather than a Board with informed, independent directors capable of meaningful oversight, the Petrobras Board contained a super-majority of directors appointed by the Brazilian government who lacked anti-corruption and general compliance training. Petrobras did not have a Chief Compliance Officer, or a typical compliance function, until late in 2014, long after the bribery and embezzlement schemes were well underway, a gap that permitted self-interested executives and Board members to operate without an independent review of their activities.
Petrobras also lacked the basic control framework of checks and balances that could be capable of detecting and preventing misconduct. For example, the same executives had the authority to award and approve contracts, where a “four eyes” principle could have prevented them from abusing their authority. Business managers had authority to amend contracts without having to seek review and approval from the legal department, effectively removing another potential avenue for meaningful oversight. When it came to the procurement process and third party risk mitigation, Petrobras had the veneer of a procurement process. Yet, its processes existed primarily on paper. As the SEC highlighted, senior management consistently approved and permitted bidding and contracting outside of the company’s detailed procurement manual. Ad hoc committees of inexperienced and low-ranking employees, who were subject to the influence of conflicted executives, often handled bids—a process that circumvented company policy.
Petrobras’s compliance failures thus serve as a reminder that compliance is not a check-the-box exercise. It is not sufficient to have an anti-corruption policy or a detailed procurement process with a nod to corruption risk. Instead, companies are well-served to assess their compliance efforts against their unique risk profile, and regularly evaluate the efficacy of those efforts from the top rungs of management to the nuts and bolts of internal controls.
Value of Full Cooperation
This case reinforces the impact that full cooperation with the government investigation, even in the absence of voluntary self-disclosure, can have on a final resolution of FCPA violations. Petrobras received a 25% discount off of the bottom of the US Sentencing Guidelines fine range because it cooperated with the DOJ and SEC investigations, including providing real-time updates from its own thorough internal investigation—as provided for in the FCPA Corporate Enforcement Policy, which is now part of the “Justice Manual,” the recently renamed US Attorneys’ Manual. This discount was potentially worth well over a hundred million dollars, although it is difficult to know how DOJ would have calculated offsets in the absence of cooperation, or whether it would have done so at all.
This alert was originally published as a contributed “Expert Analysis” piece in Law360 on October 9, 2018.