Yet another Foreign Corrupt Practices Act (FCPA) recidivist was announced last week as the Securities and Exchange Commission (SEC) announced that Tenaris SA would pay more than $78 million to resolve charges of FCPA violations in connection with a bribery scheme involving its Brazilian subsidiary. Back in 2011, Tenaris entered into a Non-Prosecution Agreement (NPA) with the Department of Justice (DOJ) and a Deferred Prosecution Agreement (DPA) with the SEC as a result of alleged bribes the company paid to obtain business from a state-owned entity in Uzbekistan. Interestingly even though the company had received sanction from both the DOJ and SEC, there was nothing in the Cease and Desist Order (Order) which indicated that Ternaris self-disclosed this additional FCPA violation nor anything to indicate why it was not uncovered until many years after the bribery scheme was implemented and executed.
According to the SEC Press Release, “the resolution with Tenaris is the result of an alleged bribe scheme involving agents and employees of its Brazilian subsidiary to obtain and retain business from the Brazil state-owned entity Petrobras. Specifically, the order finds that between 2008 and 2013, approximately $10.4 million in bribes was paid to a Brazilian government official in connection with the bidding process at Petrobras. The bribes were funded on behalf of Tenaris’ Brazilian subsidiary by companies affiliated with Tenaris’ controlling shareholder.”
Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit, said of the resolution, “Tenaris failed for many years to implement sufficient internal accounting controls throughout its business operations despite known corruptions risks. This failure created the environment in which bribes were facilitated through a constellation of companies associated with its controlling shareholder.”
The Bribery Scheme
The bribery scheme was created to create a business opportunity for Tenaris’ operating subsidiary in Brazil, Confab Industrial S.A. (Confab). The bribery scheme was created with a corrupt Petrobras official who “would use his authority to influence Petrobras to forgo an international tender process for certain contracts for pipes and tubes, thereby favoring Confab, by continuing its status as the only domestic supplier, and allowing direct negotiations with it. Confab would benefit through the elimination of international competitors which may have submitted lower bids and forced Confab to lower its price, if not lose the contract altogether.” In exchange the corrupt Petrobras official received “approximately 0.5% of Confab’s revenue from these contracts” which amounted to some $10 million in illegal payments.
The bribery scheme was effectuated through the formation of Uruguayan-domiciled shell company and creation of a bank account in its name, where bribery payments were deposited. During the relevant period, the bribes were paid into Uruguayan Company’s bank account for the benefit of Government Official. The funding for the bribes came from another Tenaris affiliated company, San Faustin SA, which had bank accounts in the US and elsewhere which funded the bribe. To hide the payments in the Tenaris books and records, fake contracts were executed between Uruguayan Company and the shell company in which payments were made to the Uruguayan Company “for purported past and future consultancy and advisory services that Uruguayan Company performed.” All of this was done with the knowledge of “a senior Confab employee about the bribe scheme including about the timing of bribe payments being deposited into the Uruguayan Company bank account.”
This matter really is a head scratcher. The first thing that jumps out is the time of the bribery scheme, which was 2008-2013. This overlaps the time frame from the 2011 NPA and DPA, which was for conduct from 2007-2010. Although the conduct at issues in those resolutions was centered on bribery and corruption in Central Asia and not Brazil and South America. It is more than difficult to understand how this bribery scheme was not uncovered when the company went through an allegedly comprehensive FCPA investigation for those resolutions.
Even more troubling is that the company continued engaging in bribery and corruption right through the signing of those settlements and the reporting periods set out in both; for two years under both the DPA and NPA. Under both agreements, Tenaris was to turn over evidence of any additional FCPA violations. Obviously Tenaris did not uncover the additional illegal actions, it certainly appears they did not look very diligently either.
Perhaps one answer is found in the undertakings section of the Order which states “During a two-year term as set forth below, Respondent shall report to the Commission staff periodically, at no less than six-month intervals, the status of its remediation and implementation of compliance measures related to the effectiveness of the anti-corruption policies, procedures, practices, internal accounting controls, recordkeeping, and financing reporting processes particularly as to preventing the use of unaccounted funds for illicit purposes to benefit Tenaris, including the use of funds available to Tenaris’ officers, directors, employees and/or agents as a result of their dual affiliation with Tenaris and San Faustin and related entities.” [emphasis supplied]
This sounds suspiciously like a slush fund was operating which allowed Tenaris’ officers, directors, employees and/or agents to make payments across different (but related) entities. Such payments could be easy to disguise and hard to trace. This might be a reason why Tenaris itself did not uncover the illegal payments and why it did not self-disclose to the SEC. This is also something that every Chief Compliance Officer (CCO) needs be on the lookout for your organization.
Tenaris is required to provide two separate follow-up reviews to the SEC. These reviews are to incorporate “comments provided by the Commission staff on the previous report, to further monitor and assess whether the policies and procedures of Respondent are reasonably designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws (the Follow-up Reports).” Additionally, Tenaris is required to “undertake a final review to further monitor and assess the operation of its FCPA and anti-corruption compliance program and whether Respondent’s policies and procedures are reasonably designed to detect and prevent violations of the FCPA and other applicable anti-corruption laws.” One can only hope Tenaris will be more thorough under this requirement in the Order than it was under the prior NPA or DPA.
Where did the information which led to this recidivist Order derive? Obviously Brazilian prosecutors is one good guess. Another clue is found in the SEC Press Release which stated, “The SEC appreciates the assistance of the Superintendencia del Mercado de Valores (SMV) in Panama, the Brazilian Federal Prosecution Service, and the Procura della Repubblica presso il Tribunale di Milano, Italy.” Panama makes sense as a home of one of the Ternaris family of shell companies. but note the inclusion of prosecutors from Italy as well.
We can only hope that Tenaris does not become the first three time recipient of a FCPA enforcement action.