Lafarge Part 2: The Funding Schemes and Red Flags | Thomas Fox – Compliance Evangelist

We continue our exploration of one of the most public cases of corporate moral bankruptcy where Lafarge SA and its Syria unit Lafarge Cement Syria, or LCS, each pled guilty to a count of conspiring to provide material support to foreign terrorist organizations and will pay a total of $777.78 million.  According to the Plea Agreement, this amount consisted of a total criminal fine of approximately $91 million and forfeiture of $687 million. As I noted in Part 1, this is not a Foreign Corrupt Practices Act (FCPA) enforcement action, but an enforcement action based on USC §2339B for one count of conspiracy to provide material support to one or more foreign terrorist organizations. While this is not a FCPA enforcement action, the mechanisms by which Lafarge paid bribes or otherwise funded the terrorist organizations ISIS and ANF are instructive for the anti-corruption compliance professional. These strategies were laid out in the Statement of Facts.

As noted in the Department of Justice (DOJ) Press Release, “After the start of the Syrian Civil War in 2011, Lafarge and LCS negotiated agreements to pay armed factions in the Civil War to protect LCS employees, to ensure continued operation of the Jalabiyeh Cement Plant, and to obtain economic advantage over their competitors in the Syrian cement market… LCS executives purchased raw materials needed to manufacture cement from ISIS-controlled suppliers; paid monthly “donations” to armed groups, including ISIS and ANF, so that employees, customers and suppliers could traverse checkpoints controlled by the armed groups on roads around the Jalabiyeh Cement Plant; and eventually agreed to make payments to ISIS based on the volume of cement that LCS sold to its customers, which Lafarge and LCS executives likened to paying “taxes.” Lafarge and LCS executives intentionally structured their agreements with ISIS to compensate the terrorist organization based on the amount of cement that LCS was able to sell – effectively, a revenue-sharing agreement – to incentivize the terrorist group to act in LCS’s economic interest.”

From August 2013 through October 2014, Lafarge and LCS paid ISIS and ANF, through intermediaries, the equivalent of approximately $5.92 million, through a variety of schemes. One consisting of fixed monthly “donation” payments to ISIS and ANF. According to the Statement of Facts, “LAFARGE and LCS conspired to make various payments, through intermediaries, to and for the benefit of ISIS and ANF, which the government estimates totaled the equivalent of approximately $5.92 million. These payments consisted, at various times, of flat monthly “donation” payments totaling approximately $816,000.”

There was also a variable payment scheme based on the amount of cement LCS sold that totaled approximately $1,654,466. Under this variable payment scheme, it tied Lafarge’s and LCS’s obligation to pay ANF and ISIS to the amount of cement sold from the plant. This arrangement should ensure “that the payments would be made by LCS’s customer-distributors directly to ANF and ISIS, and to ensure that PYD and ISIS were able to collect the full amount of the payments from the customer-distributors, LCS would provide PYD and ISIS with records of LCS’s sales to its customer-distributors.”

Finally, there were the “payments to ISIS-controlled suppliers to purchase raw materials needed to produce cement that totaled approximately $3,447,528.” These payments were made through intermediary brokered material supply agreements. These ISIS controlled suppliers then paid monies to ISIS based on the amount of their sales to LCS.

Lafarge and LCS executives actively concealed their scheme to provide material support to ISIS and ANF. According to the Press Release:

  • Lafarge and LCS executives required intermediaries to create business entities with names not obviously linked to the intermediaries and created invoices with false descriptions of services rendered for an intermediary to submit to LCS.
  • LCS executives structured the revenue-sharing payments to ISIS so that LCS’s customers would pay ISIS the amounts owed under LCS’s agreement with ISIS, while LCS discounted the prices it charged to the customers to reimburse them. To ensure that LCS’s customers did not underpay ISIS, LCS agreed to provide ISIS with periodic sales reports, which ISIS could use to verify that LCS’s customers were paying the amounts owed under the terms of LCS’s agreement with ISIS.
  • To further conceal the arrangements, Lafarge and LCS executives attempted to require ISIS not to include the name “Lafarge” on the documents memorializing and implementing their agreements.
  • Many of the Lafarge and LCS executives involved in the scheme used personal email addresses, rather than their corporate email addresses, to carry out of the conspiracy.
  • In October 2014, as a condition of paying an intermediary for having negotiated with ISIS and other armed groups, Lafarge and LCS executives required the intermediary to sign an agreement terminating his agreement to provide services to LCS. Critically, the Lafarge and LCS executives backdated the termination agreement to Aug. 18, 2014, a date shortly after the United Nations Security Council had issued a resolution calling on member states to prohibit doing business with ISIS and ANF, to falsely suggest that he had not been negotiating with ISIS on behalf of LCS after the UN resolution.

Once again there are multiple compliance lessons from this recitation. The use of ‘donations’ to cover the payments to ISIS should have been a glaring red flag for anyone looking. The lack of due diligence on the intermediaries and suppliers is also a glaring oversight. The attempts to hide the nature of the transactions by Lafarge’s executives by requiring the intermediaries to create entities with names not associated is another red flag. Of course, the fraudulent descriptions for services should also be considered. Finally, there was the deletion of the name of Lafarge of LCS from its written contracts with ISIS.

There is one other area that bears consideration by the compliance professional. It is in the area of internal communications. As noted, “Many of the Lafarge and LCS executives involved in the scheme used personal email addresses, rather than their corporate email addresses, to carry out of the conspiracy.” In September, the Securities and Exchange Commission (SEC) announced “charges against 15 broker-dealers and one affiliated investment adviser for widespread and longstanding failures by the firms and their employees to maintain and preserve electronic communications. The firms admitted the facts set forth in their respective SEC orders, acknowledged that their conduct violated recordkeeping provisions of the federal securities laws, agreed to pay combined penalties of more than $1.1 billion, and have begun implementing improvements to their compliance policies and procedures to settle these matters.”

Now consider that whopping fine and enforcement action in the context of the fraud of Lafarge executives. They were using communication tools outside standard communication channels to facilitate their crimes with ISIS and ANF. While in this matter, the emails were preserved (and made a part of the Statement of Facts); compliance professionals need to work with their corporate IT folks to make sure no executives or employees are using tools outside standard communications channels like AOL accounts or Gmail.

Join us tomorrow for some final thoughts on this sordid matter.

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