Co-authored by Angela M. Jimenez
- Four years ago, Brazilian authorities began Operation Car Wash, a wide-ranging and still ongoing corruption and money laundering investigation that has spanned 11 countries.
- The fallout continues with a recent U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC) announced settlement with Petroleo Brasileiro S.A. – Petrobras (Petrobras), a Brazilian state-owned and state-controlled energy company, for violations of the Foreign Corrupt Practices Act (FCPA).
- Petrobras entered into a non-prosecution agreement (NPA) with the DOJ and agreed to pay a criminal penalty of $853.2 million. In addition, Petrobras entered into a cease and desist order with the SEC and agreed to pay $933 million in disgorgement and prejudgment interest.
- Petrobras avoided a monitor, foreshadowing the new DOJ policy on corporate monitorships that discourages use of corporate monitors in situations where there is effective remediation and compliance.
U.S. enforcement authorities continue to benefit from Brazil's corruption cleanup. Four years ago, Brazilian authorities began Operation Car Wash, a wide-ranging and still ongoing corruption and money laundering investigation that has spanned 11 countries, resulted in charges against hundreds of individuals. In 2016, the investigation resulted in a $3.5 billion settlement with Odebrecht S.A., a global construction company based in Brazil, and Braksem S.A., a Brazilian petrochemical company, for corruption charges with authorities in the United States, Brazil and Switzerland. More recently, on Sept. 27, 2018, the fallout from Operation Car Wash continued when the U.S. Department of Justice (DOJ) and the U.S. Securities and Exchange Commission (SEC) announced that they had reached a settlement with Petroleo Brasileiro S.A.– Petrobras (Petrobras), a Brazilian state-owned and state-controlled energy company, for violations of the Foreign Corrupt Practices Act (FCPA). Petrobras shares are traded on the New York Stock Exchange; it is, therefore, an "issuer" under the FCPA. Petrobras agreed to pay about $1.8 billion in combined DOJ and SEC penalties, disgorgement and interest for FCPA violations in connection with a bribery scheme that allowed contractors and suppliers to obtain Petrobras contracts, and facilitated improper payments to politicians and political parties in Brazil.
The DOJ alleged that "executives at the highest levels of Petrobras – including members of its Executive Board and Board of Directors – facilitated the payment of hundreds of millions of dollars in bribes to Brazilian politicians and political parties and then cooked the books to conceal the bribe payments from investors and regulators." Petrobras acknowledged that "it failed to make and keep books, records and accounts that accurately and fairly reflected the company's capitalization of property, plant and equipment as a result of the bribes being generated by the company's contractors with the cooperation of certain Petrobras executives, and that certain Petrobras executives signed false Sarbanes-Oxley (SOX) 302 sub-certifications while they were involved in, and were aware that other executives at Petrobras were involved in, obtaining and facilitating payments of millions of dollars in bribes to Brazilian politicians, to Brazilian political parties and to themselves."
Petrobras entered into a non-prosecution agreement (NPA), an arrangement to avoid prosecution in exchange for fulfilling certain requirements, with the DOJ and agreed to pay a criminal penalty of $853.2 million to resolve the matter. Under the NPA, the DOJ will credit the amount that Petrobras pays to the SEC and Brazil under their respective agreements, with the DOJ and the SEC receiving 10 percent ($85.32 million) each and Brazil receiving the remaining 80 percent ($682.56 million). Petrobras also entered into a cease and desist order with the SEC and agreed to pay $933 million in disgorgement and prejudgment interest. (But this payment will be reduced by the amount Petrobras pays in a related class action settlement.)
Petrobras also agreed to continue to cooperate with the DOJ in any ongoing investigations and prosecutions relating to the conduct, including individuals, to enhance its compliance program and to report to the DOJ on the implementation of its enhanced compliance program. Petrobras took several remedial measures, including replacing the board of directors and the executive board, as well as disciplining employees and ensuring that the company no longer employs or is affiliated with any of the individuals known to the company to be implicated in the conduct at issue in the case.
Key Aspects of the Settlement
There are several noteworthy aspects to this case. First, the size: in total penalties. Petrobras will pay about $1.8 billion, which amounts to about 2 percent of its gross revenues last year and makes the settlement one of the largest in FCPA history (although U.S. authorities will receive only a small percentage of that amount). Second, Petrobras was the alleged criminal and the victim. The FCPA punishes the "supply side" of bribery. Thus in a typical FCPA case, the defendant is a company or individual who paid bribes to a foreign official, and the victim is the foreign government whose officials were corrupted. But here, Petrobras is a state-owned entity and its employees, "foreign officials" under the FCPA, received the bribes. In this case, however, the employees at Petrobras also facilitated and directed millions of dollars of improper payments to politicians and political parties in Brazil; and knowingly and willfully failed to implement a system of internal controls and falsified the company's books and records. Nevertheless, the DOJ only charged, and Petrobras only admitted, violating the accounting provisions of the FCPA.
Despite the egregious nature of the violations, the failure to voluntarily disclose those violations, and the high-level executives involved, Petrobras will not have an independent compliance monitor. Rather, Petrobras will continue to cooperate with the DOJ in any ongoing investigations and will enter into separate agreements with the Brazilian authorities that will subject Petrobras to unspecified oversight. The avoidance of a monitor was likely because of its extensive cooperation and remediation, which the DOJ credited in its news release. Specifically, Petrobras:
- conducted a thorough internal investigation
- proactively shared in real time facts discovered during the internal investigation and shared information that would not have been otherwise available to the DOJ
- made regular factual presentations to the DOJ
- facilitated interviews of and information from foreign witnesses
- voluntarily collected, analyzed and organized voluminous evidence and information for the DOJ in response to requests, including translating key documents
- replaced the board of directors and the executive board (the company's high-level managers)
- implemented governance reforms
- disciplined employees
- ensured that the company no longer employs or is affiliated with any of the individuals known to the company to be implicated in the conduct at issue in the case
The avoidance of a monitor in the Petrobras case demonstrates the value of extensive cooperation and remediation and foreshadowed the subsequent announcement of a new DOJ policy on corporate monitorships. Specifically, on Oct. 11, 2018, the DOJ announced a new policy for the imposition of corporate monitors in which it made clear that "[w]here a corporation's compliance program and controls are demonstrated to be effective and appropriately resourced at the time of resolution, a monitor will likely not be necessary." Accordingly, for companies in front of U.S. enforcement authorities with FCPA violations, offering full and complete cooperation and remediation is usually the wisest course to securing a favorable settlement.
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