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FCPA Blog Daily News

Entries in China (783)

Monday
Sep242007

Paradigm's Pre-IPO Due Diligence Reveals FCPA Violations

Paradigm B.V., a Houston-based oil and gas services provider, entered into a non-prosecution agreement with the U.S. Department of Justice to resolve payments that violated the Foreign Corrupt Practices Act. Paradigm made prohibited payments to foreign officials in China, Indonesia, Kazakhstan, Mexico and Nigeria. It will "pay a $1 million penalty, implement rigorous internal controls, retain outside compliance counsel, and cooperate fully with the Department of Justice," according to the DOJ's September 24, 2007 announcement.

Paradigm's parent company, Paradigm Ltd., which is controlled by private equity fund Fox Paine, discovered the corrupt payments during due diligence for its planned NASDAQ IPO and self-disclosed them to prosecutors. The conduct at issue did not involve current senior management, according to the company. The DOJ said, “Paradigm’s actions in this matter, including voluntary disclosure and remedial efforts, are consistent with our view of responsible corporate conduct when FCPA violations are uncovered. Accordingly, the Department has resolved this case to permit the company to move forward on sound footing, governed by ethical business practices.”

The corrupt payments involved $22,250 deposited into the Latvian bank account of a British West Indies company recommended as a consultant by an official of KazMunaiGas, Kazakhstan’s national oil company, to secure a tender for geological software. The DOJ said Paradigm performed no due diligence, did not enter into any written agreement and apparently received no services.

In China, Paradigm used an agent to make commission payments to representatives of a subsidiary of the China National Offshore Oil Company in connection with the sale of software to the CNOOC subsidiary. Paradigm also directly retained and paid employees of Chinese national oil companies or state-owned entities as "internal consultants" to evaluate Paradigm’s software and to influence their employers’ procurement divisions to purchase Paradigm’s products. Employees of CNOOC and other state-owned enterprises in China are "foreign officials" for purposes of the FCPA.

Paradigm said it also made corrupt payments in Mexico, Indonesia and Nigeria. In Nigeria, it used intermediaries to pay between $100,000 and $200,000 to politicians to obtain a contract to perform services and processing work for a subsidiary of the Nigerian National Petroleum Corporation. In Mexico, it hired the brother of a Pemex decision maker, and paid for the decision-maker's $12,000 trip to Napa Valley, California and $10,000 to entertain him. In Indonesia, its agent paid employees of Pertamina through a New York bank account.

In a sign that the DOJ is encouraging more voluntary disclosure and self-directed remedial action -- which means implementing an "effective compliance program" -- Paradigm's non-prosecution agreement expires after just 18 months instead of the usual three-year period, and requires appointment of outside compliance counsel instead of an independent monitor. In addition to Paradigm's self disclosure and remedial actions, another major influence on the DOJ's handling of the case must have been the fact that the company's current senior management was not involved in the unlawful conduct.

View the Department of Justice's News Release Here.

View Paradigm's Non-Prosecution Agreement Here.

Sunday
Sep162007

Schnitzer’s Victory

The case was full of bad facts. For nearly ten years until late 2004, some $1.8 million in bribes went to foreign officials and private parties in South Korea and China. Officers and employees of Schnitzer Steel Industries Inc. and its Korean subsidiary, SSI International Far East Ltd., approved the bribes, then used elaborate means to fund and conceal them.

Cash, gift certificates, a Cartier watch, pens, perfume, entertainment, a golf club membership, even a condo timeshare – all these changed hands. Off-the-books bank accounts in Korea held slush funds. The bribes were falsely accounted for as “refund to customer” or “rebate to customer,” or “quality claims,” “discounts,” “credits” or “freight savings.” They were disguised as “gratuities” or “congratulations money." Some bribes were even masked as “condolence money.” The corruption was so habitual that even after it was discovered and ordered stopped, an executive approved two more bribes.

There were still more bad facts. Schnitzer had no Foreign Corrupt Practices Act compliance program of any kind – no education for employees, no training, no due diligence, no audits. In ignorance of the FCPA, senior managers emailed each other about arranging “kickbacks” and protecting the crooked recipients from legal trouble in their home countries. Schnitzer, a public company and one of America's largest recyclers of scrap metal, lacked even the basic financial controls needed to prevent or detect secret bank accounts, corrupt payments and false accounting.

Did prosecutors, as expected, seek the corporate death penalty? Not at all. In the end, Schnitzer was never charged with a crime. Its subsidiary, SSI Korea, pleaded guilty in October 2006 to violating the FCPA's anti-bribery and books and records provisions, as well as conspiracy and wire fraud. It paid a $7.5 million criminal fine. Schnitzer itself, however, escaped with a $7.7 million civil penalty and a deferred prosecution agreement, whereby it promised to keep its nose clean and take remedial actions. Thereafter, Schnitzer survived and has since flourished in the robust global steel market.

What accounts for this surprising result? For a start, Schnitzer accepted all responsibility. On first learning about the corrupt payments, the board's audit committee commissioned an aggressive internal investigation. At each stage of the investigation, Schnitzer voluntarily disclosed what it was learning to the Department of Justice and the Securities and Exchange Commission. Then, looking forward, Schnitzer set out to transform its culture. To make sure everyone inside the company and outside got the point, it replaced the chairman of the board, hired a new CEO, and brought in a fresh team of senior management.

The Department of Justice was satisfied, even impressed. “When companies voluntarily disclose FCPA violations and cooperate with Justice Department investigations, they will get a real, tangible benefit. In fact," the DOJ said, "Schnitzer Steel’s cooperation in this case was excellent and . . . the disposition announced today reflects that fact.”

The outcome was never inevitable. Like other companies facing a corruption scandal, Schnitzer had a crucial choice -- to retreat behind the corporate parapet and wait for prosecutors and public opinion to storm the gates, or to cooperate up to a point but try to keep defense options open, or to surrender peacefully, make a full confession, show a repentant spirit and seek forgiveness. By choosing the last option, the company was able to enjoy a quick rehabilitation and full restoration to corporate citizenship. Schnitzer's victory was no accident, but a product of its own decisions.

View the DOJ’s Press Release Here.

Tuesday
Aug072007

Fallout Continues From Schnitzer Steel Industries' FCPA Violations

The Securities and Exchange Commission announced in late June 2007 that it charged a former executive of Portland, Oregon-based Schnitzer Steel Industries, Inc. with violating the anti-bribery provisions of the FCPA. Si Chan Wooh of Tacoma, Washington, the former Executive Vice President and head of a Schnitzer subsidiary, agreed to pay approximately $40,000 in disgorgement, interest and penalties.

The complaint alleged that from at least 1999 through 2004, Wooh paid over $200,000 in cash bribes and other gifts to managers of government-owned steel mills in China to induce them to purchase scrap metal from Schnitzer. Schnitzer realized over $6.2 million in profits from sales to customers procured through these illicit payments. During the same period, Wooh made or authorized similar payments totaling over $1.7 million to managers of privately owned steel mills in both China and South Korea.

Without admitting or denying the charges, Wooh agreed to disgorge $14,819.38 in bonuses plus prejudgment interest of $1,312.52, to pay a $25,000 civil penalty, and to an order enjoining him from violations of the FCPA in the future.

In October 2006, Schnitzer settled related charges by the Commission by paying $7.7 million in disgorgement. Schnitzer also paid $7.5 million in penalties to settle related criminal charges brought by the U.S. Department of Justice.

View the SEC's Press Release here.

View the SEC's Complaint here.

View the October 2006 Schnitzer Cease and Desist here.

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