On November 26, 2013, Weatherford International Ltd., a Swiss-based oilfield services company with significant operations in Houston, Texas, and a number of its overseas subsidiaries (Weatherford or the Company), comprehensively settled long-running Foreign Corrupt Practices Act (FCPA), export controls and economic sanctions (foreign trade controls) investigations with five separate US law enforcement agencies. Those concurrent settlements resulted in two Deferred Prosecution Agreements (DPAs) and a settled civil complaint filed in US District Court against the parent company, three criminal plea agreements with Company subsidiaries, two administrative settlements, over $252 million in monetary sanctions and two compliance monitoring arrangements to which the Company will be subject for up to three years.
These settlements, long anticipated, break new ground in a number of respects. They collectively represent the most significant resolutions to date in which FCPA, export controls and sanctions violations have been concurrently resolved1, and mark the first time that foreign trade control violations have been resolved through a settlement structure common in recent FCPA cases. They include the largest combined foreign trade control-related fines and penalties levied against any company outside of the financial services and defense industries, even though most of the violations appear to have occurred before October 2007, when monetary penalties regarding most foreign trade control violations were enhanced. Significantly, these actions remind foreign companies knowingly transshipping or diverting basic US-origin items to prohibited destinations and engaging in activity to evade or conceal such trade, and US persons facilitating, supporting, or providing services to embargoed countries or users, that they can be criminally prosecuted for such actions.
They also mark the first time that the SEC has used the FCPA's accounting provisions to charge foreign commercial bribery and foreign trade control violations, in addition to bribery of foreign public officials, and the first time that the SEC has alleged violations of the FCPA's internal control provisions in connection with the diversion of company funds, some of which are kept for the employees' personal benefit as well as used to make payments to foreign officials.
Consequently, it may be that the enforcement agencies intend the Weatherford settlements to serve as a counterexample to recent FCPA charging decisions, where the agencies have declined to bring enforcement actions altogether (for example in the recent Morgan Stanley/Peterson matter), or brought only civil actions in connection with conduct that could be charged criminally, such as with respect to Wyeth LLC in the recent Pfizer/Wyeth settlements (for the Steptoe International Law Advisories addressing Morgan Stanley/Peterson and Pfizer/Wyeth settlements, click here and here, respectively). At the very least these settlements highlight the increasing incidence of cases that involve conduct that raises issues under multiple enforcement regimes, and emphasize the need for companies to ensure that their compliance efforts cover the relevant range of risks.
The Settlements
FCPA
The Company entered into the following FCPA-related settlements with the DOJ and SEC:
- DPA and Criminal Plea Agreement. The parent company,
Weatherford International Ltd., entered into a three-year DPA with
the US Department of Justice (DOJ), charging criminal violations of
the FCPA's internal control provisions2, in
connection with its knowing failure to implement internal
accounting controls sufficient to detect and prevent bribery in its
and various subsidiaries' operations in Africa and the Middle
East. Weatherford Services Ltd. (WSL), a Company subsidiary
doing business in Africa, agreed to plead guilty to a one-count
criminal information alleging violations of the FCPA's
anti-bribery provisions in connection with its activities in
Angola. These combined criminal resolutions resulted in $87.2
million in criminal fines, and an 18-month compliance monitorship
followed by an additional 18-month self-monitoring period.
The FCPA internal control-related DPA includes three sets of conduct leading to the criminal internal control charges, in addition to the Company's failure to maintain adequate anti-corruption controls generally. First, between 2004 and 2006, Africa- and Houston-based Company executives, including in-house counsel at the time, approved the entry by WSL into a joint venture in Angola with two local companies that they knew to be beneficially owned by senior executives of Sonangol, the Angolan state-owned oil company, and close relatives of senior Angolan government officials, while being nominally owned by unrelated nominee shareholders. The Company conducted no due diligence on the joint venture companies, despite the fact that Company executives knew that the purpose of the joint venture was to make payments to the beneficial owners of the joint venture companies in exchange for Weatherford capturing up to 100% of the Angolan market for well screens. Company in-house counsel sought outside legal advice regarding the arrangement, but failed to follow counsel's initial compliance-related recommendations, and subsequently falsely represented to separate outside counsel that the Angolan joint venture had already been vetted and approved externally. As a result, Sonangol officials awarded substantial business to WSL in Angola, including after canceling contracts already won by competitors, despite the fact that WSL's bids in some cases were not price-competitive.
Separately in Angola in 2006, Company executives also approved the entry into a third party agent relationship with a Swiss-based freight forwarder for the purpose paying up to $250,000 to a Sonangol official who had demanded the payment in return for re-approving an existing WSL contract due for renewal. The Company entered into the agreement and authorized the payments despite the fact that it had conducted no due diligence on the arrangement, and that the freight forwarder had objected to an FCPA-related clause in the agency agreement as not compatible with the "nature of the business" to which the agreement related, which in-house counsel at the time also approved. WSL and freight forwarder personnel created false invoices and work orders to justify the payments, which resulted in Sonangol's approval of the contract in question.
The Company also failed to conduct any due diligence before entering into a distributor relationship in an unnamed Middle Eastern country, despite the fact that the distributor relationship exhibited a number of "red flags". Those "red flags" included the fact that the local Weatherford subsidiary had been directed to sell products to the national oil company by that company's executives through that specific distributor, and that Company executives knew that a member of that country's royal family maintained an ownership interest in the distributor. Although few sales were made through this arrangement between 2001 and 2005, from 2005-2011 – including during the period when Weatherford was under active investigation -- Company executives approved "volume discounts" on product sales to the distributor that they understood would be used to create a "slush fund" with which to make payments to officials of the national oil company to facilitate sales. Weatherford realized significant profits from this arrangement from 2005-2011.
The DPA also charged the Company in connection with employees' authorization and unlawful payment of funds to the government of Iraq in connection with the UN Oil-For-Food Program, under which the Company also realized significant profits during the period 2001-2003.
- SEC Settlement. Weatherford International Ltd.
agreed to the filing of a settled complaint against it by the SEC,
requiring the payment of $65.6 million in disgorgement, prejudgment
interest and civil penalties – including $1.875 million in
civil penalties as a result of its failure to cooperate with the
SEC at the outset of the investigation -- and to the entry of a
permanent injunction against it prohibiting future
violations. The SEC complaint alleged violations of the
FCPA's anti-bribery provisions in connection with the
Angola-related facts detailed in the DPA and WSL plea agreement,
and the "volume discounts" awarded to a distributor which
Company executives knew to be payments to officials of the
aforementioned Middle Eastern national oil company to secure sales
of Weatherford products.3
The SEC alleged violations of the FCPA's books and records provisions4 in connection with the Company's conduct in Angola, the unspecified Middle Eastern country and Iraq Oil-For-Food program-related payments described in the DOJ DPA's Statement of Facts. Significantly, the SEC also alleged violations of the FCPA's books and records provisions in connection with the recording of amounts paid to a Swiss freight forwarder for the purposes of bribing employees of a private Italian company in "Congo"5, and in connection with Company employees' widespread creation of false accounting, inventory and other records to conceal unlicensed shipments of products to and dealings with US-sanctioned countries and other violations of US foreign trade controls. This represents the first time that the SEC has used the FCPA's accounting provisions to charge foreign commercial bribery and foreign trade control violations, in addition to bribery of foreign public officials and/or payments to the Iraqi government in connection with the UN Oil-for-Food program.
The SEC also charged violations of the FCPA's internal control provisions generally in connection with numerous compliance and control failings, and management's awareness of unlawful conduct. The complaint alleged internal control violations in connection with Weatherford's failures: to scrutinize payments to or conduct due diligence on third parties, and to conduct training on relevant international regulatory compliance obligations for employees or third parties; to maintain controls over documentation for sales to sanctioned countries or maintain a process for capturing employees' complaints and concerns regarding international regulatory compliance issues; or to follow-up on those complaints when they were made to Company executives.
It alleges internal control violations in connection with two specific sets of conduct: (1) cash payments and improper travel benefits approved by Company executives to be provided to high-level officials of Sonatrach, the Algerian state oil and gas company, during a visit to the US, and (2) the embezzlement and misappropriation of funds from a Company operation in Italy, some of which were used to pay bribes and provide other benefits to Albanian tax auditors, and some of which the employees sought for their own personal benefit. When an employee confronted those responsible and raised the issue to the Company's audit committee, that person's employment was terminated while the employees responsible for the conduct remained in their positions.
Foreign Trade Controls
Concurrently with the FCPA resolutions, the Company also entered into foreign trade control-related settlements with the US Attorney's Office for the Southern District of Texas (S.D. Texas), the Department of Commerce Bureau of Industry and Security (BIS) and OFAC. Those settlements are structured similarly to the FCPA-related settlements, including a DPA (this time for two years) and two criminal pleas by Company subsidiaries with the S.D. Texas, $100 million in criminal fines and civil penalties, and the obligation to hire an independent compliance auditor to verify foreign trade control compliance over the 2012-2014 time period, in addition to the FCPA compliance monitor.
- S.D. Texas DPA and Criminal Pleas. The Company
agreed to pay a combined $50 million in criminal penalties in
connection with the S.D. Texas resolutions, including $48 million
by parent company Weatherford International Ltd. pursuant to the
DPA, and $1 million each by subsidiaries Weatherford Production
Optimisation (U.K.) Ltd. (f/k/a eProduction Solutions U.K. Limited)
(eProd U.K.) and P.D. Drilling Holdings Inc. (P.D. Drilling)
pursuant to criminal plea agreements.
According to the DPA's statement of facts, persons at various management and employment levels based in the United States, and foreign or non-US persons employed by subsidiaries based in Canada, Dubai, the U.K. and elsewhere, knowingly facilitated, approved, supported, or participated in restricted country business, and in certain cases deliberately circumvented what controls were in place relating to the export of US origin goods and services to, and otherwise deal in the property of, sanctioned countries without the required US government approvals. For example, subsidiary Precision Drilling Corporation and Precision Energy Services Ltd., a Canadian company acquired in 2005, exported and reexported US-origin goods, technology, and services to Cuba from or through Canada without the TWEA-required US government authorization. Additionally, US persons were involved in approving or supporting decisions affecting Cuban business, and the Human Resources department in Houston provided services to personnel in Cuba. Employees created elaborate systems of false documentation to circumvent what controls the Company maintained in its IT and other systems in order to continue to ship US-origin items to Cuba, including creating fictitious ship-to destinations in company systems such as "Barcelona, Venezuela", known by certain Company employees to mean Cuba.
Similar patterns of conduct were involved in connection with criminal violations of the International Emergency Economic Powers Act (IEEPA) with respect to Iran, Syria and Sudan. For instance, subsidiary Weatherford Oil Tools Middle East (WOTME) knowingly shipped equipment used in underbalanced drilling operations from the parent company in the United States to Iran via the United Arab Emirates. WOTME and Weatherford employees misrepresented the final destination for these US-origin items and services by mislabeling documents and mislabeling or removing country-of-origin information from the products, and using code words such as "Dubai across the water" to conceal that Iran was the ultimate destination of the products. US persons, including in the United States working for the parent company, were involved in and played "instrumental roles" in supporting the acquisition by WOTME of two foreign companies - Neyfor Weir of the United Kingdom and Drilling Tools (International) Ltd. - doing business almost exclusively in Iran. US persons' prohibited actions included preparing bid documents, analyzing assets and liabilities, determining and setting bid pricing, engaging company and third party personnel to conclude the transaction, negotiating on behalf of WOTME, seeking (and receiving) advice and approval on the transactions from senior management in Houston, and preparing key transaction documents. Company employees referred to Iran as "Offshore Dubai" and used other code words in working on the transactions. WOTME also entered into a Consultancy Agreement with a former affiliated entity known as Energy Ventures Middle East, Inc., whose Managing Director was a US person and provided services related to conducting business in Iran.
The criminal informations filed in connection with eProd U.K.'s and P.D. Drilling's plea agreements alleged similar facts with respect to Iran and Cuba, respectively. US persons allegedly engaged in willful conduct to conceal ship-to destinations in Company databases, and to otherwise circumvent what compliance systems the Company did maintain in order to export goods, services and technology without the required licenses to Iran and Cuba. Both of these pleas alleged that these companies in the 2000s had acquired entities already conducting business with Iran (e.g., with Kala Naft of the National Iranian Oil Company) and Cuba (e.g., with Peberco, Sherritt, and Cupet), but following the acquisitions, did not cease or secure the proper authorizations for such dealings and transactions despite knowing that the transactions were prohibited without US government authorization. - BIS Civil Settlement. The Company also agreed to
pay a $50 million civil penalty to BIS to settle charges that
parent company Weatherford International Ltd. and four foreign
subsidiaries exported oil and gas drilling equipment to Iran,
Syria, Cuba, Venezuela, and Mexico in alleged violation of the EAR,
15 C.F.R. Parts 730-774 (e.g., General Order No. 2,
Supplement No. 1 to Part 736 and 15 C.F.R. § 742.3), and the
Iranian Transactions Regulations (ITR), 31 C.F.R. Part 760 (now
known as the Iranian Transaction and Sanctions Regulations, see 31
C.F.R. § 560.204). The EAR charges against Weatherford
are divided into two distinct categories: (1) acting with knowledge
of a violation (15 C.F.R. § 764.2(e)); and (2) evasion of the
Regulations (15 C.F.R. § 764.2(h)). Most of the
unauthorized US-origin items were designated EAR99, a catch-all
category for items not considered to have a dual-use or military
application, such as mud motors, orientation modules, drill collars
and stabilizers, measuring-while-drilling orientation modules and
batteries, as well as consumables like gloves and solvents, but
which are restricted for the oil and gas industry in embargoed
destinations. Beyond the monetary penalty, all the
Weatherford affiliates committed to retain an unaffiliated third
party consultant with US foreign trade control expertise to conduct
annual external audits of compliance with exports or
reexports subject to the EAR to Cuba, Iran, North Korea, Sudan, and
Syria that occurred during calendar years 2012, 2013, and
2014. The audits will not be privileged, must be submitted to
BIS, and any identified violations must be promptly notified to BIS
with supporting documentation.
OFAC Settlement. The Company also reached a civil settlement with OFAC for alleged unauthorized exports, transactions, and dealings by US persons with Iran, Sudan, and Cuba in contravention of the ITR, CACR and the Sudanese Sanctions Regulations (SSR), 31 C.F.R. Part 538. OFAC asserted that US persons provided oilfield equipment and services in which the government of Cuba or blocked Cuban nationals had an interest, including travel-related transactions by Weatherford employees to and from Cuba, as well as conducted oilfield services in Iran and Sudan, which involved the direct or indirect exportation of goods, technology, and services to those countries, including the facilitation of those transactions by US persons. Although OFAC calculated the applicable penalties as $91,026,450 (with a base penalty amount of slightly over $107 million), the agency agreed to deem the amount satisfied by the $100 million in criminal and civil monetary penalties to be paid to S.D. Texas and BIS. As with the BIS settlement, independent external audits of the Company's sanctions compliance efforts for calendar years 2012, 2013, and 2014 are required.
Full-Scope Coordinated Enforcement Requires Full-Scope International Regulatory Compliance
US Government Charging Decisions
The wide-ranging Weatherford enforcement actions stand in contrast to the recent Morgan Stanley and Pfizer/Wyeth FCPA investigations that resulted in, respectively, outright declination of enforcement against the company as a result of the strength of Morgan Stanley's compliance program, voluntary disclosure and cooperation with US law enforcement officials, and Peterson's deliberate circumvention of applicable controls, and civil, not criminal, enforcement with respect to conduct discovered, disclosed and remediated during Pfizer's acquisition of Wyeth. DOJ's imposition of a criminal fine with no "discount" off the low end of the Federal Sentencing Guidelines fine range likely also highlights the challenges of avoiding immediate prosecution where a company has not voluntarily disclosed significant and pervasive compliance issues including high-level personnel. Weatherford's significant steps since 2008, noted in the FCPA-related internal control DPA, to remediate and invest in compliance (including building a department with 38 full-time compliance professionals), and its change in posture during the course of the investigation regarding cooperation, while perhaps making a DPA for the parent possible, were ultimately insufficient to secure a "discount" off the applicable fine range, or avoid a monitor, especially in light of the fact that some of the conduct apparently continued into 2011, long after the investigations had begun and the company had undertaken significant compliance efforts.
The Weatherford settlements can be seen as an expression of US government enforcement intentions to impose significant penalties against companies where violations are viewed as deliberate and companies do not uphold (or, indeed, company personnel deliberately circumvent) their compliance obligations. Weatherford, by its own admissions in the settlements, maintained no effective compliance program before 2008. It failed to integrate new acquisitions into what foreign trade control compliance systems it did have. Executives, management and employees knowingly engaged in both the FCPA- and foreign trade control-violative conduct, which included deliberate circumvention of Company policies, management's – including then in-house counsel's – deliberate failure to address compliance issues and in some cases active condonement of those practices. In further contrast to Morgan Stanley, where the personal benefit to Peterson from his actions was a key factor in the agencies' declination decision, the SEC still brought internal controls charges where employees diverted company funds and used a portion of them to make unlawful payments to Albanian tax officials while retaining some for themselves, as a result of the Company's failure to maintain a compliance program.
Key Compliance Takeaways
The settlements carry a number of key takeaways for companies' compliance programs. The FCPA-related internal control DPA clearly demonstrates the DOJ's acceptance of the view expressed by the SEC that FCPA compliance program elements form an essential part of a company's internal controls. They also clearly evidence the US government's – in particular the SEC's – intention to expand its enforcement focus to include foreign commercial bribery and foreign trade controls. That expansion has clear implications for compliance programs, as they will now need to take into account those risks, alongside the public sector bribery risks companies have focused on to date. Companies that have not taken steps to integrate these risks into their programs should do so. In some areas of a program, such as due diligence, a combined strategy — encompassing both anti-corruption and foreign trade controls -- can be effective and deliver efficiencies.
The settlements also reinforce the need for companies to focus on third-party risks, including in their joint venture relationships, and pay particular attention to the due diligence, remediation and integration efforts once in M&A transactions. With respect to foreign trade control compliance, companies should scrutinize their monitoring of EAR99 items exported "as is" from the United States; although such violations have typically been charged civilly to date, the Weatherford settlements demonstrate that those provisions will be criminally enforced against US and foreign persons where deliberate violations are present, in particular where US government enforcement actions are not the result of voluntary disclosures by subject companies.
Footnotes
1. In March 2010, Innospec Inc. agreed to plead guilty to a twelve-count criminal information alleging FCPA violations in connection with bribes paid to Iraqi and Indonesian government officials relating to the sale of a fuel additive for leaded gasoline, and with unlicensed sales to Cuba in violation of the Trading With The Enemy Act (TWEA). Innospec Inc. also reached a separate civil settlement with the US Securities and Exchange Commission (SEC) for FCPA violations, the US Treasury's Office of Foreign Assets Control (OFAC) for violations of the Cuban Assets Control Regulation (CACR), 31 C.F.R. Part 515, and UK subsidiary Innospec Ltd. separately reached a settlement relating to violations of UK anti-bribery laws with the UK Serious Fraud Office. Innospec agreed to pay a total of $40.2 million in monetary sanctions to the agencies in question. See US v. Innospec, Inc., 10-cr-00061 (D.D.C. 2010); Securities & Exchange Commission v. Innospec, Inc., Civil Action No. 1:10-cv-00448 (RMC) (D.D.C. 2010); OFAC Enforcement Information for March 19, 2010:, Innospec Inc. Settles Cuban Assets Control Regulations Allegations, (Mar. 19, 2010), http://www.ustreas.gov/offices/enforcement/ofac/actions/20100319.shtml; R. v Innospec Limited [2010] Lloyd's Rep. F. C. 462, [2010] Crim. L. R. 665.
2. See 15 U.S.C. §§ 78m(b)(2)(B), 78m(b)(5), and 78ff(a)).
3. 15. U.S.C. § 78dd-1.
4. 15 U.S.C. § 78m(b)(2)(A).
5. The SEC Complaint does not specify whether "Congo" refers to the Democratic Republic of the Congo (Congo-Kinshasa) or the Republic of Congo (Congo-Brazzaville).
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