After They're Gone

Muammar al-Gaddafi at the 12th AU summit, February 2, 2009, in Addis Abeba.

By Bill Waite and Martin Stone

A by-product of the type of regime changes seen recently in Tunisia and Egypt, and appearing likely in Libya, is a wave of overseas asset traces.

Once change comes, business relationships with politically exposed persons and their web of companies can be unwound but can never be undone. The past relationships are always discoverable by determined investigators. That’s what many will soon discover when they’re hit with information requests from the prosecutors.

Long-time rulers such as Mubarak and Ben Ali accumulated power over a long period of time, and they, their families, and associates used that power to accumulate enormous wealth, often illegally. When they do fall, the new regimes move to recover national wealth, both to boost their treasuries and to discredit their predecessors.

The asset tracing can move quickly. Once a regime falls, evidence immediately becomes identifiable and accessible by prosecutors. And new governments leverage their investigation and prosecutorial capabilities by bringing in third parties to help.

Since Ben Ali’s departure from Tunis, for example, the new government has set up an independent panel to investigate corruption. It seems inevitable that the investigations will uncover irregularities that will at least embarrass – and at worst inculpate – some of his family’s foreign partners.

The situation in Egypt is more complex. In an apparent attempt to distance itself from some of its most controversial supporters, the outgoing Mubarak regime froze the assets of several former ministers and senior ruling National Democratic Party members, banned them from traveling abroad and placed most of them under investigation for theft of public money, profiteering, fraud and corruption.

In Libya, meanwhile, Gaddafi clings to power but his hold there looks increasingly fragile. The U.S., EU, and U.N. have already reimposed sanctions including travel bans and asset freezes.

The most obvious lesson from recent events? Know your foreign partner, agent, or intermediary’s political or ruling-family connections before you enter the market, and know about any allegations of corruption concerning  them that might emerge after a local regime change.

Bill Waite is a founder of The Risk Advisory Group and an expert on anti-bribery and corruption legislation. He formerly practiced as a criminal barrister before joining the Serious Fraud Office in 1991 as a prosecutor. Bill is frequently called upon to comment in the media and is a regular speaker in Europe and the US.

Martin Stone has more than 20 years due diligence, intelligence and investigations experience in the Middle East and North Africa and divides his time between Risk Advisory’s London and Dubai offices. 

The full version of this article can be found here.

Graft And Political Risk

Muammar Abu Minyar al-Gaddafi, also known as Colonel Gaddafi, leader of Libya since 1969. Photo by James GordonPredicting what leaders will fall from power is never easy, even for the pros ("Who lost Iran?).

But a quick test for stability is to check how long the leader has hung on, and how corrupt his or her country is perceived to be by the rest of the world. Although inexact, it can provide clues about what might happen.

The test works because corrupt rulers always become unpopular. To stay in power, they become increasingly repressive. Eventually the cork may blow. President Kennedy put it more eloquently: Those who make peaceful revolution impossible will make violent revolution inevitable.

Recent events in Tunisia are an example. The people rose up against President Ben Ali and pushed him and his greedy family out. He'd been in office since 1987 and his country had a ranking on the corruption perception index of 59 -- higher than most Tunisians probably thought their country deserved.

A WikiLeaks diplomatic cable from June 2008 written by the American ambassador to Tunisia, Robert F. Godec -- classified as secret, to be declassified in 2018 -- made the link between the country's long-time ruler, corruption, and political risk:

[C]orruption in Tunisia is getting worse. Whether it's cash, services, land, property, or yes, even your yacht, President Ben Ali's family is rumored to covet it and reportedly gets what it wants. Beyond the stories of the First Family's shady dealings, Tunisians report encountering low-level corruption as well in interactions with the police, customs, and a variety of government ministries. The economic impact is clear, with Tunisian investors -- fearing the long-arm of "the Family" -- forgoing new investments, keeping domestic investment rates low and unemployment high. These persistent rumors of corruption, coupled with rising inflation and continued unemployment, have helped to fuel frustration with the [government of Tunisia] and have contributed to recent protests in southwestern Tunisia. . . .

The full cable can be viewed here.

It sounded familiar. A few months after President Suharto was forced out of office in 1998 by street demonstrations across Indonesia, we wrote about an American businessman in Jakarta who'd complained for years that in any deal, one of Mr. Suharto’s kids or cronies would show up and demand a piece of the action.

Drawing out the lesson, we said 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, often a member of the leader's family. "Well-greased insider deals always look good at the time," we said, "but are usually too good to be true."

No one can predict a country's history before it happens, and that goes for Tunisia's neighbors. But here are some numbers to think about. In Egypt, Hosni Mubarak has been president since 1981; on the latest CPI the country ranked 98. In Libya, Mu‘ammar al-Qaḏḏāfī has been in power since 1969 and the country ranked 146 on the CPI.

SEC Charges Second Pride Exec

The former country manager in Venezuela for Pride International, Inc. last week settled civil FCPA charges with the SEC.

Joe Summers, a U.S. citizen who lives in John Day, Oregon, agreed to pay a civil penalty of $25,000.

From 2003 to 2005, Summers arranged payments of about $384,000 to third-party companies, "believing that all or a portion of the funds would be given to an official of Venezuela's state-owned oil company in order to secure extensions of three drilling contracts." Summers also approved a $30,000 payment through an intermediary to an employee of Venezuela's state-owned oil company to obtain the payment of receivables.

Summers' former employer, Pride International, said in February this year it has set aside $56.2 million for an expected settlement with the DOJ and SEC of FCPA offenses. The Houston-based oil-rig operator first disclosed potential compliance problems in 2006.

In December last year, the SEC accused a former Pride vice president, Bobby Benton, of violating the FCPA. The civil complaint against Benton alleged among other things that he deleted references in Pride's audits to about $384,000 in payments made by “the manager of the Venezuelan branch of a French subsidiary of Pride” to third-party companies. Pride self-disclosed the payments and cover-up after it learned about them through its internal investigation. The SEC's complaint against Summers included details about the Venezuelan bribes.

Pride has also disclosed that it found evidence of illegal payments from 2001 through 2006 directly or indirectly to government officials in Saudi Arabia, Kazakhstan, Brazil, India, Nigeria, Libya, Angola, and the Republic of the Congo. The payments related to clearing rigs and equipment through customs, resolving customs disputes, immigration, tax, licensing, and merchant marine issues.

The SEC's complaint against Summers charged him with violating Sections 13(b)(5) and 30A of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(5) and 78dd-1] and Rule 13b2-1 [17 C.F.R. § 240.13b2-1], and aiding and abetting Pride's violations of Sections 13(b)(2)(A), 13(b)(2)(B), and 30A of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(B), and 78dd-1].

Pride International, Inc. trades on the NYSE under the symbol PDE.

View the SEC's Litigation Release No. 21617 and Accounting and Auditing Enforcement Release No. 3169 (both dated August 5, 2010) in SEC v. Joe Summers, Civil Action No. 4:10-cv-02786 (S.D. Texas, August 5, 2010) here.

Download the SEC's civil complaint against Summers here.

Pride Discloses Possible Settlement

Pride International, Inc. said this week it has set aside $56.2 million for an expected settlement with the Justice Department and the Securities and Exchange Commission of Foreign Corrupt Practices Act offenses. The Houston-based oil-rig operator first disclosed potential FCPA compliance issues in 2006.

In December last year, the SEC accused a former Pride vice president, Bobby Benton, of violating the FCPA. He allegedly bribed Mexican officials in 2004 and altered the company's accounts to hide the payments. The SEC's December 10 civil complaint, filed in federal court in Houston, seeks a civil penalty and disgorgement from Benton, as well as an injunction against future violations.

Pride earlier disclosed that its internal investigation found evidence of illegal payments from 2001 through 2006 directly or indirectly to government officials in Saudi Arabia, Kazakhstan, Brazil, India, Nigeria, Libya, Angola and the Republic of the Congo. The payments related to clearing rigs and equipment through customs, resolving customs disputes, immigration, tax, licensing and merchant marine issues.

Pride's February 16, 2010 release said:

Pride International, Inc. (NYSE: PDE) today announced that it has accrued $56.2 million in the fourth quarter of 2009 in anticipation of a possible resolution with the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) of potential liability under the U.S. Foreign Corrupt Practices Act. As described in Pride's quarterly and annual reports, the company voluntarily disclosed in 2006 to the DOJ and the SEC information relating to initial allegations of potential improper payments to foreign government officials and has continued to cooperate with the agencies' investigations. The accrual in the fourth quarter 2009 represents the company's best estimate of potential fines, penalties and disgorgement related to settlement of the matter with the DOJ and SEC. The monetary sanctions ultimately paid by the company to resolve these issues, whether imposed on the company or agreed to by settlement, may exceed the amount of the accrual.

We talked about Pride's February 2008 disclosure of its internal investigation here.

Pride's Disclosure Tells The Story

We admire Pride International, Inc.'s approach to its Foreign Corrupt Practices Act disclosures. The company talks about the serious problems it had for years with sensitive payments, and how it's been dealing with them. The countries involved included Venezuela and Mexico, India and Malaysia, Saudi Arabia, Kazakhstan, Brazil, Nigeria, Libya, Angola and the Republic of the Congo, among others. Bribes apparently were paid directly or by intermediaries to clear rigs and equipment through customs, and to help solve problems with immigration, tax, and licensing authorities. Some of the payments in question involved global logistics firm Panalpina and other third parties.

Sadly, people near the top of the company probably knew what was going on. The ex-chief operating officer resigned his position in mid-2006 but has stayed as an employee during the FCPA investigation. If the audit committee or the board of directors think there's "cause" under his employment agreement to terminate his services, he could lose retirement benefits and maybe a lot more. Other senior people have already been fired or placed on administrative leave, and some resigned because of the FCPA investigation. The company says it has "taken and will continue to take disciplinary actions where appropriate and various other corrective action to reinforce our commitment to conducting our business ethically and legally and to instill in our employees our expectation that they uphold the highest levels of honesty, integrity, ethical standards and compliance with the law."

Who is Pride? It's a can-do Houston-based drilling contractor for the oil and gas industry. It has over 7,000 employees working around the world. "We have positioned our fleet," its website says, "in some of the world's largest and most active exploration and production areas, with a market presence in West Africa (Angola), Latin America (Brazil), the Gulf of Mexico, the Mediterranean and Middle East. Today, we operate a total of 45 rigs."

As we did a year ago here, we're reprinting below Pride International's FCPA disclosure from its annual report (Form 10-K), this one for the period ending December 31, 2008. Pride filed it with the Securities and Exchange Commission this week. It's a long read (for a blog post, anyway). But it's filled with details and admissions not usually found in similar disclosures. We think it also gives fair warning to shareholders and other stakeholders that an eventual resolution with the Justice Department and SEC could be expensive and disruptive.

Pride International, Inc. trades on the New York Stock Exchange under the symbol PDE.

Download Pride's February 25, 2009 Form 10K (annual report) here.
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During the course of an internal audit and investigation relating to certain of our Latin American operations, our management and internal audit department received allegations of improper payments to foreign government officials. In February 2006, the Audit Committee of our Board of Directors assumed direct responsibility over the investigation and retained independent outside counsel to investigate the allegations, as well as corresponding accounting entries and internal control issues, and to advise the Audit Committee.

The investigation, which is continuing, has found evidence suggesting that payments, which may violate the U.S. Foreign Corrupt Practices Act, were made to government officials in Venezuela and Mexico aggregating less than $1 million. The evidence to date regarding these payments suggests that payments were made beginning in early 2003 through 2005 (a) to vendors with the intent that they would be transferred to government officials for the purpose of extending drilling contracts for two jackup rigs and one semisubmersible rig operating offshore Venezuela; and (b) to one or more government officials, or to vendors with the intent that they would be transferred to government officials, for the purpose of collecting payment for work completed in connection with offshore drilling contracts in Venezuela. In addition, the evidence suggests that other payments were made beginning in 2002 through early 2006 (a) to one or more government officials in Mexico in connection with the clearing of a jackup rig and equipment through customs, the movement of personnel through immigration or the acceptance of a jackup rig under a drilling contract; and (b) with respect to the potentially improper entertainment of government officials in Mexico.

The Audit Committee, through independent outside counsel, has undertaken a review of our compliance with the FCPA in certain of our other international operations. In addition, the U.S. Department of Justice has asked us to provide information with respect to (a) our relationships with a freight and customs agent and (b) our importation of rigs into Nigeria. The Audit Committee is reviewing the issues raised by the request, and we are cooperating with the DOJ in connection with its request.

This review has found evidence suggesting that during the period from 2001 through 2006 payments were made directly or indirectly to government officials in Saudi Arabia, Kazakhstan, Brazil, Nigeria, Libya, Angola, and the Republic of the Congo in connection with clearing rigs or equipment through customs or resolving outstanding issues with customs, immigration, tax, licensing or merchant marine authorities in those countries. In addition, this review has found evidence suggesting that in 2003 payments were made to one or more third parties with the intent that they would be transferred to a government official in India for the purpose of resolving a customs dispute related to the importation of one of our jackup rigs. The evidence suggests that the aggregate amount of payments referred to in this paragraph is less than $2.5 million. We are also reviewing certain agent payments related to Malaysia.

The investigation of the matters described in the prior paragraph and the Audit Committee’s compliance review are ongoing. Accordingly, there can be no assurances that evidence of additional potential FCPA violations may not be uncovered in those or other countries.

Our management and the Audit Committee of our Board of Directors believe it likely that then members of our senior operations management either were aware, or should have been aware, that improper payments to foreign government officials were made or proposed to be made. Our former Chief Operating Officer resigned as Chief Operating Officer effective on May 31, 2006 and has elected to retire from the company, although he will remain an employee, but not an officer, during the pendency of the investigation to assist us with the investigation and to be available for consultation and to answer questions relating to our business. His retirement benefits will be subject to the determination by our Audit Committee or our Board of Directors that it does not have cause (as defined in his retirement agreement with us) to terminate his employment. Other personnel, including officers, have been terminated or placed on administrative leave or have resigned in connection with the investigation. We have taken and will continue to take disciplinary actions where appropriate and various other corrective action to reinforce our commitment to conducting our business ethically and legally and to instill in our employees our expectation that they uphold the highest levels of honesty, integrity, ethical standards and compliance with the law.

We voluntarily disclosed information relating to the initial allegations and other information found in the investigation and compliance review to the DOJ and the Securities and Exchange Commission and are cooperating with these authorities as the investigation and compliance reviews continue and as they review the matter. If violations of the FCPA occurred, we could be subject to fines, civil and criminal penalties, equitable remedies, including profit disgorgement, and injunctive relief. Civil penalties under the antibribery provisions of the FCPA could range up to $10,000 per violation, with a criminal fine up to the greater of $2 million per violation or twice the gross pecuniary gain to us or twice the gross pecuniary loss to others, if larger. Civil penalties under the accounting provisions of the FCPA can range up to $500,000 and a company that knowingly commits a violation can be fined up to $25 million. In addition, both the SEC and the DOJ could assert that conduct extending over a period of time may constitute multiple violations for purposes of assessing the penalty amounts. Often, dispositions for these types of matters result in modifications to business practices and compliance programs and possibly a monitor being appointed to review future business and practices with the goal of ensuring compliance with the FCPA.

We could also face fines, sanctions and other penalties from authorities in the relevant foreign jurisdictions, including prohibition of our participating in or curtailment of business operations in those jurisdictions and the seizure of rigs or other assets. Our customers in those jurisdictions could seek to impose penalties or take other actions adverse to our interests. We could also face other third-party claims by directors, officers, employees, affiliates, advisors, attorneys, agents, stockholders, debt holders, or other interest holders or constituents of our company. In addition, disclosure of the subject matter of the investigation could adversely affect our reputation and our ability to obtain new business or retain existing business from our current clients and potential clients, to attract and retain employees and to access the capital markets. No amounts have been accrued related to any potential fines, sanctions, claims or other penalties, which could be material individually or in the aggregate.

We cannot currently predict what, if any, actions may be taken by the DOJ, the SEC, any other applicable government or other authorities or our customers or other third parties or the effect the actions may have on our results of operations, financial condition or cash flows, on our consolidated financial statements or on our business in the countries at issue and other jurisdictions.
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