Panalpina, Shell Near FCPA Settlements, Paper Says

The Wall Street Journal is reporting that Swiss logistics giant Panalpina and its customer Shell are close to settlement of FCPA charges with the DOJ and SEC. The paper said Panalpina may pay about $85 million in penalties and Shell about $30 million.

In April this year, Panalpina said had reserved an amount now equivalent to about $130 million for an expected FCPA settlement with the DOJ and SEC, and for a separate antitrust resolution. It said then the settlements should happen "in the near future."

Two weeks ago, Panalpina announced the settlement with the DOJ of violations of the antitrust laws. The company pleaded guilty to three counts of conspiring to violate the Sherman Act, and paid a fine of about $12 million. 

The corruption investigation of Panaplina dates back to at least February 2007. The DOJ noted then in connection with Vetco's FCPA settlement that bribes in Nigeria "were paid through a major international freight forwarding and customs clearance company to employees of the Nigerian Customs Service . . .”

In the following months, about a dozen leading oil and gas-related companies received letters from the DOJ and SEC asking them to "detail their relationship with Panalpina . . . ." Shell, Schlumberger, Tidewater, Nabors Industries, Transocean, GlobalSantaFe Corp., Noble Corp. and Pride International were among those involved.

In July 2007, Panalpina disclosed that some customers of its U.S. subsidiary had “been requested by U.S. authorities to produce documents related to the provision of its services to Nigeria . . . ." It said the federal investigation also related to Kazakhstan and Saudi Arabia for some customers.

In its Annual Report for the year ended December 31, 2007, Royal Dutch Shell plc included an FCPA disclosure related to Panalpina. Shell said,

In July 2007, Shell’s U.S. subsidiary, Shell Oil, was contacted by the U.S. Department of Justice regarding Shell’s use of the freight forwarding firm Panalpina, Inc and potential violations of the U.S. Foreign Corrupt Practices Act (FCPA) as a result of such use. Shell has started an internal investigation and is cooperating with the U.S. Department of Justice and the United States Securities and Exchange Commission investigations. While these investigations are ongoing, Shell may face fines and additional costs.

In October 2007, Schlumberger said it was under investigation because of Panalpina's freight-forwarding and customs clearance practices. Last week, the Wall Street Journal reported that the DOJ is investigating potential bribery in Yemen by Schlumberger Ltd. The story didn't say whether the Yemen investigation was connected with Schlumberger's earlier disclosure about Panalpina.

In July this year, Tidewater Inc. said in its annual report that it expected a settlement soon with the SEC and possibly the DOJ. It said its SEC settlement would require a total payment of about $11.4 million, consisting of $8.4 million in disgorgement and prejudgment interest, and a contingent civil penalty of $3 million. The disgorgement would be payable right away, while the contingent civil penalty would be due within 18 months, but only to the extent Tidewater has not paid a penalty to the DOJ for the same FCPA offenses.

Compliance concerns forced Panalpina in August 2008 to withdraw completely from the Nigerian domestic market. It had suspended local logistics and freight forwarding services there in September 2007 for all oil and gas-related customers. It said in 2008 it was cooperating with the DOJ and SEC in an FCPA investigation.

In July 2009, an investment fund that owns about 5% of Panalpina World Transport (Holding) Ltd. filed a federal civil suit in Texas against the company, some current and former officers and directors, and its owner before its 2005 IPO in Switzerland.

The fund sued to recover damages caused by Panalpina's withdrawal from Nigeria. There's no private right of action under the FCPA. Private litigants have to resort to other claims. In its case against Panalpina, the investment fund alleged violations of Sections 10(b) and 20 of the Securities Act, common law fraud, aiding and abetting common law fraud, and negligent misrepresentation.

The company operates through 500 branches in 80 countries with about 14,000 employees worldwide. It serves the rest of the world through local partners.

Panalpina Welttransport (Holding) AG (also known as Panalpina World Transport Holding Ltd.) trades on various European exchanges, and in the U.S. OTC pink sheets under the symbol PLWTF.PK.

Schlumberger's Signing Bonus

Schlumberger, the Wall Street Journal reported last week, hired Zonic Invest Ltd., a consulting firm run by the  nephew of Yemeni President Ali Abdullah Salehto, and agreed to pay a $500,000 signing bonus, plus other compensation.

Coincidentally, a reader asked us a couple of days before the WSJ report appeared if signing bonuses for agents and consultants are illegal under the FCPA.

Like other unusual payment arrangements, they're not banned outright. But they're a compliance red flag -- a clear signal that an FPCA violation might be about to happen.

Sales agents and other intermediaries cause most FCPA offenses. All too often they allocate some of their fees to bribe potential public customers, with their principals either not knowing or not caring about the illegal conduct.

But knowing enough to believe a violation might occur satisfies the FCPA's "knowledge" requirement. And the principal's willful blindness or deliberate ignorance won't protect it against FCPA liability. See 15 U.S.C. §§ 78dd-1(f)(2), 78dd-2(h)(3), 78dd-3(f)(3).

The DOJ warns about "unusual payment patterns or financial arrangements" with intermediaries. And a white paper from Michael Volkov, a partner at Mayer Brown, and World Compliance, one of our sponsors, lists some of the weird payment patterns and financial arrangements that are red flags and should always trigger more due diligence.

 They include:

• Paying a commission substantially above the going rate for agency work in a particular country. An excessive commission might suggest that a portion of the funds is going to a foreign official. Then again, your agent might just be greedy.

• Payments through convoluted means. If your agent asks for payment to a numbered account in the Bahamas, the DOJ or SEC could consider a failure to investigate this as culpable conduct under the FCPA.

• Over-invoicing (i.e., the intermediary asks you to cut a check for more than the actual amount of expenses).

• Requests that checks be made out to “cash” or “bearer,” that payments be made in cash, or that bills be paid in some other anonymous form.

• Requests that payments be made to a third party.

• Payment in a third country, which suggests a plan to divide the commission in the third country away from government scrutiny.

• Requests for unusual bonuses, one-time success fees, or extraordinary payments.

Agents and other intermediaries bring the most value -- and the greatest FCPA compliance risks -- in the most confusing and opaque economies. When high commissions, diverted payments, and signing bonuses are also involved, red flags abound.

Paper Reports Schlumberger Investigation

The DOJ is investigating potential bribery in Yemen by oil field services giant Schlumberger Ltd., according to a report today by Dionne Searcey of the Wall Street Journal.

The investigation focuses on payments to a consulting firm with ties to Yemen’s government when Schlumberger needed approval to create an oil-exploration databank there.

The report cited "two people familiar with the matter and . . .  company documents reviewed by The Wall Street Journal."

The paper didn't say if its sources are seeking to be FCPA whistleblowers under the Dodd-Frank provisions.

Schlumberger was among the dozen or more oil and gas-related firms investigated in connection with Panalpina's freight-forwarding and customs clearance practices. It disclosed an FCPA-related investigation in its October 2007 quarterly filing with the SEC.

It said:

In July 2007, Schlumberger received an inquiry from the United States Department of Justice ("DOJ") related to the DOJ’s investigation of whether certain freight forwarding and customs clearance services of Panalpina, Inc., and other companies provided to oil and oilfield service companies, including Schlumberger, violated the Foreign Corrupt Practices Act. Schlumberger is cooperating with the DOJ and is conducting its own investigation with respect to these services.

It isn't clear whether the new investigation is connected with Schlumberger's earlier disclosure. There were no comments about the investigation from the DOJ or the company.

Schlumberger Ltd. -- with 105,000 employees in 80 countries -- is the world's biggest oil and gas services company.

It trades on the New York Stock Exchange under the symbol SLB.

Speaking Out

George Terwilliger -- formerly of the DOJ and now in private practice -- had some wise words about decisions to launch internal investigations. His article in law.com included this tightly packed and well-mannered exhortation:

Most corporate decision-makers do not have the experience necessary to anticipate the judgments and proclivities of enforcement officials. Understanding how prosecutors think and what factors are important to them is essential to deciding whether and to what extent to conduct an internal investigation. Animated discussion, in the confines of privilege, with professionals who understand what prosecutors expect and why, is essential to sound analysis of an investigation's results and good decisions based on its results. This kind of analysis also is best broadened -- within the confines of privilege -- to include in-house personnel with financial, public relations and investor-relations expertise, as the decisions made will significantly affect the portfolios of each.

Great advice, with a serious reminder about the attorney-client privilege. It protects the normal give-and-take that's essential for sound decision-making.

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Who are we fighting for? Yemen's executive, judicial, and legislative accountability mechanisms are among the worst assessed in 2008. Although there are strong anti-corruption laws on the books, the anti-corruption agency is ineffective. Furthermore, political financing is generally unregulated, while civil society organizations are ineffective in fighting corruption. The media, which is subject to political interference, also receives poor ratings. Several journalists have been arrested, harassed, or imprisoned for their corruption-related investigative stories. Government control over private radio is among the most draconian in the world.

~ From a comment to Yemen's Grand Corruption on the Global Graft Report left by Jonathan Eyler-Werve at Global Integrity

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Kosmos Energy, Exxon Mobil, and Ghana. A huge oil find, a struggle for control, corruption allegations, and a Chinese subplot. Here.

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Words we like. From Justice Louis Brandeis, concurring in Charlotte Anna Whitney v. California, 274 U.S. 357 (1927) at 375:

Those who won our independence believed that the final end of the state was to make men free to develop their faculties, and that in its government the deliberative forces should prevail over the arbitrary. They valued liberty both as an end and as a means. They believed liberty to be the secret of happiness and courage to be the secret of liberty. They believed that freedom to think as you will and to speak as you think are means indispensable to the discovery and spread of political truth; that without free speech and assembly discussion would be futile; that with them, discussion affords ordinarily adequate protection against the dissemination of noxious doctrine; that the greatest menace to freedom is an inert people; that public discussion is a political duty; and that this should be a fundamental principle of the American government.

In Step With The DOJ

What does it mean to "cooperate with the government" after discovering serious Foreign Corrupt Practices Act compliance problems? There's a description of organizational cooperation in a recent sentencing memo the Justice Department filed in US v. Latin Node Inc.

Latinode was a privately held company. Publicly-listed eLandia bought it and soon discovered a history of corrupt payments in Yemen and Honduras. The strategy eLandia adopted for itself and Latinode was to cooperate with the DOJ. That culminated in Latinode's guilty plea earlier this month to a one-count criminal information charging it with violating the FCPA's antibribery provisions.

In describing the cooperation, the government said eLandia and Latinode made commendable efforts to uncover evidence of corrupt activities. The cooperation was authentic throughout the investigation, the DOJ said, with significant remedial efforts upon discovery of the misconduct.

Here, largely in the government's words, is what the companies did:

• Latinode and its corporate parent, eLandia, initiated an internal investigation of the corrupt payments immediately upon discovery of the potential problems. This investigation included numerous witness interviews and the review of thousands of documents.

• Within three months of discovering the improper payments, counsel for Latinode and eLandia visited the government to make a voluntary disclosure of the FCPA violations. Latinode and eLandia provided timely, thorough, and exemplary cooperation in connection with the investigation of Latinode's past corporate conduct.

• Through counsel, Latinode and eLandia produced thousands of non-privileged documents to the government and responded promptly and productively to all of its requests.

• The cooperation provided by Latinode and eLandia substantially aided the government in developing its investigation.

• Almost immediately upon determining the culpability of senior Latinode officers and employees, eLandia terminated those individuals.

• Although there is no evidence of misconduct by eLandia employees, the company took steps to strengthen its own anti-corruption compliance program, including training its employees in the FCPA and related laws and committing to anti-corruption due diligence in future acquisitions.

• Perhaps the greatest evidence of eLandia's remedial efforts, the government said, is that it dissolved Latinode from an operational perspective, at a cost to eLandia of millions of dollars, and ceased doing business relating to the tainted contracts.

Did their cooperation help the companies? You bet. eLandia wasn't charged at all in the criminal case (it may still face an SEC civil enforcement action). The government accepted a plea to a single criminal count from Latinode, eLandia's subsidiary that was already largely dormant. The government didn't put either company on organizational probation; nor did it impose a deferred prosecution agreement or require a compliance monitor, saving eLandia enormous out-of-pocket costs. Finally, the criminal penalty of $2,000,000 was far below the fine range in the U.S. sentencing guidelines -- $4,200,000 to $8,400,000 (U.S.S.G. § 8C2.7). eLandia was even given three years to pay.

The plea agreement obligates Latinode (i.e., eLandia) to continue to cooperate with any further investigations by law enforcement agencies. So individuals responsible for the corrupt payments may yet face prosecution.

Download the March 23, 2009 criminal information against Latinode here.

Download Latinode's April 3, 2009 plea agreement here.

Download the DOJ's April 3, 2009 sentencing memo here.
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