The U.S. Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") sent a stern warning to companies engaged in international trade last week with a settlement, disgorgement of profits and fines worth a combined US$384 million against Alcoa Inc. ("Alcoa") for violations of the Foreign Corrupt Practices Act ("FCPA"). A subsidiary of Alcoa, Alcoa World Alumina LLC ("AWA"), also pled guilty to criminal charges and paid fines to the DOJ, while the parent company paid its fine to the SEC for bookkeeping offences. This was the fourth-largest FCPA settlement ever and provides a valuable lesson to Canadian companies subject to the FCPA and even those subject only to the Canadian equivalent, the Corruption of Foreign Public Officials Act ("CFPOA"), which was recently revised to strengthen provisions on internal controls and recordkeeping.
What Alcoa Did Wrong
Beginning around 1989, Alcoa of Australia began to engage in dealings with Bahrainian officials, allegedly including members of its royal family, in order to secure lucrative supply contracts with Aluminium Bahrain, B.S.C. ("Alba"), which operates the state-controlled aluminum smelter in Bahrain. At the request of Bahrainian officials, the Australian subsidiary (and later AWA, who took over the relationship) used a "sham sales agent" or middleman who, according to court papers, set up a complex structure of shell companies and offshore accounts to mark-up prices by approximately US$188 million between 2004 and 2009. At least US$110 million of these funds, which were classified as legitimate mark-ups and commissions, were then allegedly dispersed as kickbacks to Bahrainian officials including members of its royal family.
While it was clear that AWA and Alcoa of Australia were engaged in a corrupt scheme for some time, there is no indication that Alcoa Inc. actively knew about or participated in any of the corruption. However, the DOJ and SEC still cracked down on the parent company finding that Alcoa "did not conduct due diligence or otherwise seek to determine whether there was a legitimate business purpose for the use of a middleman." The SEC then imposed an 'enhanced global anti-corruption compliance program' on Alcoa, stating the invaluable lesson to other companies that:
This demonstrates the level of vigilance that companies must
maintain over their subsidiaries and agents in order to avoid
FCPA violations; a failure to do so will not be seen as a
defense but rather culpability and wilful blindness.
In addition to the need for due diligence and control in third
party relationships, the FCPA contains a number of
accounting and recordkeeping offences which also led to significant
civil charges against Alcoa Inc. According to the SEC, the failure
to maintain "sufficient internal controls to prevent and
detect the bribes, which were improperly recorded in Alcoa's
books and records as legitimate commissions or sales to a
distributor" cost Alcoa US$161 million in disgorgement of
profits.
Internal Controls and Third Party Due Diligence: The Lesson for Canadian Companies
For Canadian companies issuing securities in the US market, or who have a US affiliate (thus subject to the FCPA), the Alcoa settlement serves as just the latest reminder of the SEC and DOJ's ability to recover massive sums in fines and settlements for violations anywhere in the world. The fact that the company in question did not technically bribe anyone itself is also a valuable lesson on the need to properly monitor and conduct due diligence on the actions of subsidiaries and their business relationships.
However, for Canadian companies only covered under our domestic legislation, it was only recently that Alcoa's actions and inactions were even a clear violation of the CFPOA. When Canada's anti-bribery statute was first introduced in 1998 it omitted any of the strict requirements for recordkeeping or internal controls that are found in the FCPA and served as the cornerstone of the settlement with Alcoa Inc. This omission wasn't rectified until this past June when Bill S-14 was enacted, that amended the CFPOA to introduce a new series of offences targeting business records, among other amendments. (For more information on the anti-corruption amendments in Bill S-14, please see our prior bulletins here and here). These new offences criminalize any of the following activities when done in conjunction with the bribery of foreign public officials:
- keeping a second set of books outside of what records are legally required;
- making false records of transactions in the relevant corporate records, or failing to record actual transactions;
- incorrectly identifying liabilities in the corporate records;
- knowingly using false documents; and
- intentionally destroying accounting books and records earlier than permitted by law.
The fact that Alcoa's books improperly recorded bribes as legitimate commissions may not have been a CFPOA offence for the first 14 years of the law's existence but it would certainly appear to be a clear violation now. This means that any Canadian companies that deal with foreign officials in any sort of capacity should have effective anti-corruption policies and training programs in place to maintain the integrity of all company books and records and ensure an accurate account of all transactions.
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