The FCPA Blog

San Jose, California-based VOiP company Veraz Networks, Inc. paid $300,000 to settle charges brought by the SEC that it violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) by making illegal payments to foreign officials in China and Vietnam.

The SEC said the company hired a consultant in China who in 2007 and 2008 gave gifts and offered improper payments worth about $40,000 to officials at a government-controlled telco to win business for Veraz. Also in 2007 and 2008, a Veraz employee made improper payments to the CEO of a government-controlled company in Vietnam to win.

Veraz had disclosed the $300,000 settlement with the SEC in March. It said then that because of the ongoing compliance investigations, it had to delay filing its quarterly reports for March and May 2008. That resulted in NASDAQ warning Veraz "that its common stock may be subject to delisting." NASDAQ ultimately granted an extension for the filings, which were made in July 2008, allowing Veraz's common stock to continue to be listed.

The company said in November 2009 that it had spent $2.5 million to investigate and handle the FCPA compliance issues. The SEC began investigating the company in early 2008. Veraz then launched an internal investigation and discovered potential FCPA violations in China and Indonesia, which it self-reported. The SEC then requested documents related to Vietnam.

The SEC said without elaborating that it had help in its investigation from the U.S. Department of Homeland Security.

Veraz Networks trades on NASDAQ under the symbol VRAZ.

View the SEC's Litigation Release No. 21581 (June 29, 2010) in Securities and Exchange Commission v. Veraz Networks, Inc., Case No. CV-10-2849 (PVT) (N.D. Cal. filed June 29, 2010) here.

View the SEC's civil complaint against Veraz here.

In the latest edition of Foreign Policy magazine, Ray Fisman, a professor at the Columbia Business School, has a short commentary with an unusual slant: Corruption that's predictable and stable is easy for investors to deal with and may not do that much harm to local economies.

He's not saying corruption is ever a good thing. Just that some corruption -- the knowable kind -- isn't as damaging as graft that surprises and spooks investors. His example of the latter: China's arrest and trial of four Rio Tinto employees.

"The Bad Kind of Corruption" can be found here. Here's the lead:

By the end of President Suharto's 30-year rule in 1998, Indonesia ranked as one of the half-dozen most corrupt economies on the planet, according to Transparency International (TI). Yet in those three decades, the country also experienced growth in per capita income of 6 percent per year, a rate almost unparalleled in recorded human history. The past 30 years have seen comparable economic progress in China: since the 1976 death of Mao Zedong, the Chinese economy has eclipsed even Suharto-level growth rates despite also holding position 79 in TI's latest ranking, tied with Burkina Faso.

We hit a similar note in the Wall Street Journal's Asia edition in 1998, saying:

An American executive working in Jakarta complained to me in 1992 that every time he tried to do anything, one of Mr. Suharto’s kids or cronies would show up and demand a piece of the action. He said it happened on everything, from a $100 million project to routine purchase orders. It was easy to do business in the Philippines during Marcos’s time, likewise in Iran during the Shah’s or Nicaragua during Somoza’s. Foreign investors cut through the red tape by working with one of the few wired local partners. Well-greased insider deals always look good at the time, but are usually too good to be true.

Ray Fisman is right. No corruption is good but it's not all created equal.

The U.K.'s Serious Fraud Office today reported in dramatic fashion the arrest of three top executives of French industrial giant Alstom's British unit. They're suspected of paying bribes overseas to win contracts.

After today's arrests, the company said:

Several Alstom offices in the United Kingdom have been raided on Wednesday 24 March by police officers and some of its local managers are being questioned. The police apparently executed search warrants upon the request of the Swiss Federal justice. Alstom has been investigated by the Swiss justice for more than 3 years on the motive of alleged bribery issues. Within this frame, Alstom’s offices in Switzerland and France have already been searched in the past years. Alstom is cooperating with the British authorities.

In August 2008, we reported that Swiss police had arrested a former Alstom manager and searched for evidence as part of a corruption and money-laundering investigation. Offices near Zurich and in Baden were raided, as were homes in several cantons.

Another international investigation of Alstrom involving suspected corrupt payments in Asia and South America between 1995 and 2003 has been ongoing. Reports in May 2008 said Swiss authorities found evidence Alstom paid around €20 million via shell companies to agents and others in Singapore, Indonesia, Venezuela and Brazil. Reports also mentioned payments of $6.8 million in connection with a $45 million contract for the Sao Paolo subway and a Brazilian energy plant.

The press said in June 2008 that French judges had charged a former Alstom consultant for his role in suspected overseas bribes. The company apparently appeared as a civil plaintiff in that case, claiming it may have been a victim of embezzlement.

Paris-based Alstom is a global leader in equipment and services for power generation and high-speed rail transport. It operates in more than 70 countries with about 80,000 employees. Revenues last year were €18.7 billion. It has an office in Windsor, Connecticut and its securities trade in the pink sheets (Other OTC: AOMFF.PK).

Here's the full text of the today's SFO release:

Three members of the Board of Alstom in the U.K. have been arrested on suspicion of bribery and corruption, conspiracy to pay bribes, money laundering and false accounting, and have been taken to police stations to be interviewed by the Serious Fraud Office.

Earlier this morning search warrants were executed at Alstom business premises and residential addresses at locations in Warwickshire, Leicestershire, Cheshire, Shropshire, Derbyshire, Staffordshire and London. This operation has involved 109 SFO staff and 44 police officers and Accredited Financial Investigators from Warwickshire, Leicestershire, Cheshire, West Mercia and Staffordshire Police Forces and the Metropolitan Police Service. The three men arrested during this operation are aged 52, 51 and 44.

Code-named Operation Ruthenium, the investigation by the SFO is into the suspected payment of bribes by companies within the Alstom group in the U.K. It is suspected that bribes have been paid in order to win contracts overseas, and that this has involved associated money laundering and other offences. The SFO has been working closely with the Office of the Attorney General and Federal Police in Switzerland and a number of Police Forces in the U.K.

Commenting on today's action, SFO Director Richard Alderman said, "The SFO is committed to tackling corruption. We are working closely with other criminal justice organisations across the world and are taking steps to encourage companies to report any suspicions of corruption, either within their own business or by other companies or individuals."

Photo by MJCdetroitWhat stands out about Innospec's FCPA guilty plea yesterday is the hands-on role former top managers had in the criminal activity. For nearly a decade they used bribery as just another sales tool, a manipulative and cynical revenue spinner, and did what they could to cover it up.

By 2000, the company's flagship product, TEL, an additive used only in leaded gasoline, was in trouble. The market was drying up after the U.S. and other countries ordered the switch to cleaner, healthier unleaded fuels. But under their go-team bosses, Innospec's salesmen and agents began paying bribes to move TEL into mainly third-world markets.

The SEC's complaint said "Innospec’s former management did nothing to stop the bribery, and in fact authorized and encouraged it."

An email from a former agent in October 2005 to Innospec’s then business director and another executive said Iraqi officials were demanding a 2% kickback on sales. The e-mail said: “We are sharing most of our profits with Iraqi officials. Otherwise, our business will stop and we will lose the market. We have to change our strategy and do more compensation to get the rewards.” 

The Business Director authorized over $195,000 in bribes, and in an e-mail discussing the wording of the invoice, said: "The fewer words the better!”

Innospec acted like a classic corrupter. According to the SEC complaint, it paid lavish travel and entertainment expenses for Iraqi officials, including a seven day honeymoon. It handed out mobile phone cards and cameras and paid thousands in cash for “pocket money.”  It even paid bribes to ensure the failure of a 2006 field test of MMT, a fuel product manufactured by a competitor.

In Indonesia, the bribes to push TEL sales came when the country was planning to go unleaded. At government-linked BP Migas, Innospec paid “special commissions” to a Swiss account and a “one off payment” of $300,000. The greed was mutual. The SEC said one Indonesian official indicated he would assist Innospec in landing TEL sales but he wanted more than just “cents” in return.

The case is far from over. The DOJ said as part of its guilty plea, the company "agreed to fully cooperate with the Department of Justice and other U.S. and foreign authorities in ongoing investigations of corrupt payments by Innospec employees and agents."

Download a copy of the SEC's civil complaint here.

View the DOJ's March 18, 2010 release here.

Copies of the criminal information, sentencing memorandum, and plea agreement can be download from our post here.

Specialty chemical maker Innospec Inc. resolved more than a dozen criminal charges in the U.S. and U.K. today, including Foreign Corrupt Practices Act (FCPA) and U.N. oil for food program offenses, and violations of the U.S. embargo against Cuba.

The Delaware company pleaded guilty to a 12-count criminal information charging wire fraud in connection with kickbacks to the former Iraqi government under the U.N. oil for food program, as well as FCPA violations for bribes to officials in the Iraqi Ministry of Oil. It will pay a $14.1 million criminal fine and retain an independent compliance monitor for three years.

Innospec manufactures the anti-knock compound tetraethyl lead (TEL) used in leaded gasoline. Demand for TEL dropped after enactment of the Clean Air Act. Its managment knew about and encouraged the bribery to boost sales.

It will disgorge $11.2 million in profits to the SEC to settle a civil complaint charging violations of the FCPA's anti-bribery, internal controls, and books and records provisions.

It also agreed to pay $2.2 million to the Office of Foreign Assets Control (OFAC) for violating the U.S. embargo against Cuba.

In London, a U.K. subsidiary pleaded guilty today to paying about $2.9 million in bribes to Indonesian officials to secure sales. The Serious Fraud Office, which charged the U.K. unit in late February, said Innospec Ltd will pay a criminal fine of $12.7 million. 

The DOJ said the British action started after "a referral from the Department of Justice in October 2007." The SFO said, "This case is part of the first 'global settlement' reached with a co-operating Company and has been resolved in cooperation with U.S. government authorities - DOJ, SEC and OFAC."

The SEC explained the bribery and management's role:

From 2000 to 2007, Innospec routinely paid bribes to sell Tetra Ethyl Lead (“TEL”), a fuel additive that boosts the octane value of gasoline, to state owned refineries and oil companies in Iraq and Indonesia. TEL was a significant source of revenue for Innospec; however, TEL sales were declining due to the passage of clean air legislation in the U.S. and abroad. Innospec also paid kickbacks to Iraq to obtain contracts under the United Nations Oil for Food Program (the “Program”). Innospec’s former management did nothing to stop the bribery, and in fact authorized and encouraged it. In addition, Innospec’s internal controls failed to detect the illicit conduct, which continued for nearly a decade. In all, Innospec made illicit payments of approximately $6,347,588 and promised an additional $2,870,377 in illicit payments to Iraqi ministries, Iraqi government officials, and Indonesian government officials in exchange for contracts worth approximately $176,717,341 in revenues and profits of $60,071,613.

From 2000 to 2003, Innospec's Swiss subsidiary, Alcor, was awarded contracts worth more than €40 million to sell TEL to refineries run by the Iraqi Ministry of Oil under the oil for food program. Alcor paid or promised to pay at least $4 million in kickbacks to the former Iraqi government. It inflated the price of the contracts by about 10 percent to fund the kickbacks before asking for U.N. approval. It then falsely characterized the payments on its books as "commissions" paid to Ousama Naaman, its agent in Iraq.

Naaman was indicted in August 2008 and arrested in Germany in July 2009. He was charged with one count of conspiracy to commit wire fraud and to violate the FCPA and two counts of violating the FCPA. The U.S. is trying to extradite him.

Innospec also admitted that a subsidiary sold nearly $20 million in oil soluble fuel additives from 2001 to 2004 to state-owned Cuban power plants without a license from OFAC, in violation of the Trading With the Enemy Act.

Innospec Inc. trades on NADAQ under the symbol IOSP.

View the SEC's litigation release No. 21454 / March 18, 2010 in Securities & Exchange Commission v. Innospec, Inc., Civil Action No. 1:10-cv-00448 (RMC) (D.D.C.) here.

Download a copy of the SEC's civil complaint here.

View the DOJ's March 18, 2010 release here.

Download a copy of the March 17, 2010 criminal information in U.S. v. Innospec, Inc. here.

Download a copy of the government's sentencing memorandum here.

Download a copy of the Innospec's plea agreement here.

View the SFO's March 18, 2010 release here.

Please check back for the DOJ's charging documents and plea agreement.