The Interplay of FCPA and Export Control Violations: When Bad Decisions and Lack of Internal Controls Lead to Severe Consequences

Weatherford International and Subsidiaries Agree to Pay $252 Million in Penalties and Fines

On November 26, 2013, three subsidiaries of Weatherford International Limited (Weatherford International), a Swiss oil services company that trades on the New York Stock Exchange, agreed to plead guilty to anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA), and export control violations under the International Emergency Economic Powers Act (IEEPA) and the Trading With the Enemy Act (TWEA).  As a result, Weatherford International and its subsidiaries agreed to pay more than a combined $252 million in penalties and fines.

In regard to the FCPA violation, Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division, commented on how Weatherford International found itself in its current position, stating that “effective internal accounting controls are not only good policy, they are required by law for publicly traded companies – and for good reason. This case demonstrates how loose controls and an anemic compliance environment can foster foreign bribery and fraud by a company’s subsidiaries around the globe.”  Unfortunately, Weatherford paid a huge price for the illicit conduct of Weatherford International’s subsidiaries.

However, as stated previously, FCPA compliance was not Weatherford International’s only compliance issue.  In a separate matter, Weatherford International and four of its subsidiaries agreed to pay a combined $100 million to resolve a criminal and administrative export controls investigation conducted by the U.S. Attorney’s Office for the Southern District of Texas, the Department of Commerce’s Bureau of Industry and Security (BIS), and the Department of the Treasury’s Office of Foreign Assets Control (OFAC).  As part of the resolution of that investigation, Weatherford International agreed to enter into a deferred prosecution agreement for a term of two years, and two of its subsidiaries agreed to plead guilty to export control charges.

The Weatherford International settlement, and the investigation leading up to the settlement, demonstrate the close relationship between FCPA, sanctions law, and export control.  Furthermore, it parallels our experience in finding that those with FCPA compliance issues often have issues in regard to sanctions law and export controls as well.

Weatherford FCPA Violations

An investigation by the Justice Department determined that, prior to 2008, Weatherford International knowingly failed to establish an effective system of internal accounting controls designed to detect and prevent corruption, including FCPA violations.  The company failed to implement these internal controls despite operating in an industry with a substantial corruption risk profile, and despite growing its global footprint in large part by purchasing existing companies, often themselves in countries with high corruption risks.  As a result, a permissive and uncontrolled environment existed within which employees of Weatherford International’s wholly owned subsidiaries in Africa and the Middle East were able to engage in corrupt conduct over the course of several years, including both bribery of foreign officials and fraudulent misuse of the United Nations’ Oil for Food Program.

Payments to entities controlled by relatives of foreign officials

Specifically, court documents demonstrated that Weatherford Services employees established and operated a joint venture in Africa with two local entities controlled by foreign officials and their relatives from 2004 through at least 2008.  Weatherford Services, and Weatherford International employees, knew that the members of the local entities included foreign officials’ relatives and associates, but never investigated why these entities were involved in the joint venture.  In reality, the sole purpose of those local entities was to serve as conduits through which Weatherford Services funneled hundreds of thousands of dollars in payments to the foreign officials controlling them.  In exchange for these payments, the foreign officials awarded the joint venture lucrative contracts, by providing Weatherford Services with inside information about competitors’ pricing therefore allowing them to manipulate their bids.

Funneling money to foreign officials through freight forwarders

Weatherford Services also paid foreign officials through other ‘creative” means in order to secure lucrative contracts.  For example, they used a freight forwarding agent retained via a consultancy agreement in July 2006 in order to funnel money to foreign officials.  Weatherford Services generated fictitious purchase orders for consulting services that were never performed by the freight forwarding agent, and the agent, in turn, generated fictitious invoices for those same nonexistent services.  When paying for those invoices, the freight forwarding agent passed at least some of those monies on to the foreign official with the authority to approve Weatherford Services’ contract renewal.   In exchange for these payments, the foreign official awarded a renewal contract to Weatherford Services in 2006.

Payments to foreign officials disguised as volume discounts

Court documents also demonstrated a third scheme in the Middle East from 2005 through 2011.  In this instance, employees of Weatherford Oil Tools Middle East Limited (WOTME), another Weatherford International subsidiary, awarded improper “volume discounts” to a distributor who supplied Weatherford International products to a government-owned national oil company, believing that those discounts were being used to create a slush fund used to make bribery payments to decision-makers at the national oil company.  Between 2005 and 2011, WOTME paid approximately $15 million in volume discounts to the distributor.

Ineffective internal controls permitted kickbacks to foreign officials for contracts

Weatherford International’s failure to implement effective internal accounting controls also permitted corrupt conduct relating to the United Nations’ Oil for Food Program to occur, according to court documents.  Between approximately February 2002 and July 2002, WOTME paid around $1,470,128 in kickbacks to the government of Iraq on nine contracts with Iraq’s Ministry of Oil, as well as other ministries, to provide oil drilling and refining equipment.  WOTME then disguised these kickbacks in their books as legitimate and insignificant types of costs and fees.  WOTME also hid the kickbacks from the U.N. by overvaluing contract prices by 10 percent.  Weatherford earned $54,486,410 in profits from these transactions.

Corrective measures required by the settlement

In addition to the guilty plea by Weatherford Services, the deferred prosecution agreement entered into by Weatherford International and the Department required the company to cooperate with law enforcement, retain an independent corporate compliance monitor for at least 18 months, and continue to implement an enhanced compliance program and internal controls designed to prevent and detect future FCPA violations.  The agreement acknowledged Weatherford International’s cooperation, which included conducting a thorough internal investigation into bribery and related misconduct, and making extensive remediation and compliance improvement efforts.

Export Control Violations

In a separate matter, an investigation by the Justice Department determined that, between 1998 and 2007, Weatherford International and some of its subsidiaries violated various U.S. export control laws and sanctions programs by exporting or re-exporting oil and gas drilling equipment to, and conducting Weatherford business operations in, sanctioned countries without U.S. Government authorization.  This scheme not only involved lower level Weatherford employees of the subsidiaries, but also included Weatherford International executives and high level managers, on multiple occasions participating in, directing, approving, and facilitating illicit transactions within its various subsidiaries.

Unlicensed exports to Cuba, Iran, Syrian and Sudan

Weatherford International’s violations stemmed from their foreign subsidiaries’ unlicensed exports or re-exports of U.S.-origin goods to Cuba, Iran, Sudan, and Syria. Specifically, Weatherford subsidiaries Precision Energy Services Colombia Ltd. (PESC), and Precision Energy Services Ltd. (PESL), both headquartered in Canada, conducted business in Cuba.  Weatherford’s subsidiary, Weatherford Oil Tools Middle East (WOTME), headquartered in the United Arab Emirates (UAE), conducted business in  Iran, Sudan, and Syria, while subsidiary Weatherford Production Optimisation f/k/a e Production Solutions U.K. Ltd. (eProd-U.K.), headquartered in the United Kingdom, conducted business in Iran. Weatherford generated approximately $110 million in revenue from its illegal transactions in these countries. Executives often actively participated in these violations, going so far as to invent code names for the sanctioned countries in order to encrypt their communications within the various business transactions.

Weatherford and its subsidiaries ultimately agreed to pay a total penalty of $100 million, with a $48 million monetary penalty paid pursuant to a deferred prosecution agreement, $2 million paid in criminal fines pursuant to the two guilty pleas, and a $50 million civil penalty paid pursuant to a Department of Commerce settlement agreement to resolve 174 violations charged by Commerce’s Bureau of Industry and Security.   Weatherford International and certain affiliates are also signing a $91 million settlement agreement with the Department of the Treasury to resolve their civil liability due to the same underlying course of conduct, which will be deemed satisfied by the payments previously mentioned.

The Take Away

The investigation into Weatherford International began with alleged violations of the FCPA, however, as often happens, the probe expanded to include an investigation into sanctions law and export control law violations.  This is not surprising, since our experience shows us that a company with lax compliance in one area often has lax compliance in others.  This is especially true for FCPA, sanctions law, and export control law, as they all have several risk factors in common.  The two principle risk factors are: owning foreign subsidiaries, and conducting transactions in countries with high levels of instability or corruption.

FCPA, sanctions law, and export control law risks are often magnified when a company owns foreign subsidiaries, because each area of law contains broad provisions allowing enforcement agencies to hold parent companies liable in the event that a foreign subsidiary engages in a transaction that is prohibited.  This is compounded by the fact that parent companies may lack control over the day- to- day functions of the subsidiary, and therefore may not be able to ensure compliance as effectively as it is handled for their offices in the U.S.  Furthermore, employees at foreign subsidiaries often lack knowledge of U.S. laws concerning FCPA, sanctions law, and export control law. In many cases, even if they have knowledge, they may not realize the severity of the penalties associated with violations of the laws.  Thus, owning foreign subsidiaries creates risks on both fronts for the same reasons.

In addition, conducting transactions in countries with high levels of instability or corruption often creates risks in each of these areas because these particular countries often tend to be associated with the most stringent export controls.  For instance, China has figured prominently in past FCPA cases, and as a result has been of the highest concern in regard to enforcement of the EAR and ITAR.

While a lack of compliance in one regulatory area probably indicates a lack of compliance in another, this especially holds true for FCPA, sanctions laws, and export control laws.  We therefore highly recommend that any review of export compliance be coupled with a review of FCPA compliance and vice versa.

By Adrienne Braumiller, Partner