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Recent Bribery and Anti-Corruption Enforcement Trends in Global Construction Industry

Authors: Ralph A. Finizio and Anthony V. Finizio

7/12/2019
Recent Bribery and Anti-Corruption Enforcement Trends in Global Construction Industry

This article was originally published on July 12, 2019 on ConsensusDocs. It is reprinted here with permission.

Bribery and corruption have long plagued the construction industry, particularly in the developing world and emerging markets. Large contracts often trickle down through layers of subcontractors, presenting opportunities for corruption at each level. The risk is enhanced in certain foreign jurisdictions, where large corporations may be wholly or partially state-owned enterprises and public officials may expect payment in exchange for state-issued licenses or government contracts.

Recent enforcement trends indicate that both the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are increasingly targeting the construction industry for anti-bribery and corruption actions under the Foreign Corrupt Practices Act (FCPA). Several former DOJ officials also recently commented that the construction industry has become a focus of anti-corruption enforcement efforts.

The FCPA is a formidable tool for regulators, making it unlawful to influence a foreign government official with any type of payment or personal reward. While certain safe harbors apply — including de minimis payments made to expedite routine governmental action or the payment being lawful in the foreign jurisdiction — these exceptions are construed narrowly and can be difficult to apply in practice.

The FCPA also contains a separate provision requiring adequate internal accounting controls and maintenance of internal books and records that accurately and transparently reflect all payments. These provisions can give rise to FCPA liability, even if regulators do not establish an illegal payment was made, as the mere act of failing to implement appropriate accounting controls violates the FCPA.

While primarily designed to apply to U.S. companies or persons, FCPA jurisdiction extends to all companies controlled by a U.S. parent corporation or registered to conduct business in the United States. Even a wholly foreign corporation can come within the ambit of the FCPA if the payments at issue were made within the United States, including through electronic use of the U.S. banking system.

Several notable recent enforcement actions illustrate the trend:

Vantage Drilling: In November 2018, the SEC announced that Houston-based offshore drilling company Vantage Drilling International (Vantage) agreed to settle charges that its predecessor in interest, Vantage Drilling Company (VDC), failed to implement appropriate internal accounting controls after its former outside director and largest shareholder was convicted of bribery in Brazil as part of a wide-sweeping anti-corruption investigation known as “Operation Car Wash.”

According to the cease-and-desist order, in early 2007, VDC retained a third-party marketing agent to assist in responding to a request for proposal from Brazilian state-owned petroleum conglomerate Petroleo Brasileiro S.A. Petrobras seeking drilling operators capable of delivering a new ultra-deepwater drilling vessel. During the bidding process, VDC’s outside director coordinated with the marketing agent to arrange bribes exceeding $31 million to both Petrobras executives and Brazilian politicians in exchange for an eight-year drilling services contract valued at $1.8 billion.

The SEC found that VDC violated the FCPA’s internal accounting controls provision by failing to devise any meaningful accounting controls around its former director and/or conduct adequate due diligence on the marketing agent who coordinated the corrupt payments. Notably, the SEC found that VDC’s controls were “insufficient in relation to the heightened risk of conducting business in the oil and gas industry in Brazil,” suggesting that anti-corruption compliance efforts must be tailored to individual jurisdictions rather than merely meeting a global threshold of sufficiency.

Without admitting or denying the allegations, Vantage consented to a cease-and-desist order and a disgorgement payment of $5 million. The SEC declined to impose broader penalties in light of Vantage’s perilous financial condition, significant cooperation throughout the investigation, and voluntarily remedial efforts, including reconstituting its board of directors; replacing its core management team, including the chief executive officer, chief financial officer, chief compliance officer and general counsel; and undertaking a comprehensive review of its anti-corruption policies and procedures.

Eletrobras: In December 2018, the SEC announced the settlement of charges against Brazilian state-owned utility company Centrais Elétricas Brasileiras S.A. (Eletrobras) for a similar scheme violating the books and records and internal accounting controls provisions of the FCPA. According to the SEC, former officers at Eletrobras’s nuclear power generation subsidiary engaged in a bid-rigging and bribery scheme with private Brazilian contractors in connection with the construction of a nuclear power plant. The Eletrobras officers allegedly agreed to inflated construction costs in exchange for kickbacks from the contractors totaling approximately $9 million.

The SEC found that material weaknesses in Eletrobras’s internal financial reporting controls contributed to the bribery scheme flourishing undetected. Eletrobras — publicly traded on the New York Stock Exchange — was permitted to accept a cease-and-desist order and civil penalty of $2.5 million without admitting or denying the findings because it took prompt remedial action, including conducting an internal investigation and voluntary document production, disciplining numerous employees involved in the alleged misconduct, enhancing internal accounting controls, and adopting new anti-corruption policies and procedures.

Cognizant Technology: In February 2019, the SEC announced that New Jersey-based Cognizant Technology Solutions Corporation agreed to pay $25 million to settle charges that it violated both the anti-bribery and books and records provisions of the FCPA when two of its former executives — including its chief legal officer — allegedly facilitated the payment of bribes to an Indian government official to obtain permits and operating licenses required for the construction of Cognizant’s new campus in Chennai, India. The construction firm responsible for building the campus allegedly paid the bribes directly to the government official and was later reimbursed by Cognizant through inflated change orders.

While former executives were indicted on criminal charges, the DOJ declined criminal prosecution of Cognizant itself based on several mitigating factors, including Cognizant’s voluntary and timely self-disclosure of the matter, thorough and comprehensive internal investigation, and the robust nature of Cognizant’s preexisting compliance program.

Walmart: Most recently, on June 20, 2019, the DOJ and the SEC announced settlements with Walmart Inc., resolving a longstanding probe into alleged corruption in Mexico, Brazil, China and India. The company signed a three-year non-prosecution agreement, agreed to hire a corporate monitor, and will pay a combined $283 million as a result of the violations.

The allegations first arose in 2012, when an in-house lawyer with Walmart’s Mexico division publicly claimed that previous attempts to blow the whistle on millions of dollars in bribes had fallen on deaf ears within the company. The investigation quickly expanded across the globe, focusing on the use of third-party intermediaries and construction firms to improperly secure government-issued building permits.

According to the terms of the plea agreement, certain Walmart personnel responsible for maintaining the company’s internal anti-corruption accounting controls were aware of red flags — including potentially improper payments to government officials in jurisdictions where Walmart subsidiaries were expanding — but nevertheless failed to implement adequate controls and/or conduct sufficient due diligence on third-party intermediaries and construction firms interacting with government officials.

While Walmart did not receive voluntary disclosure credit because it failed to timely disclose knowledge of the misconduct, it did receive full cooperation credit as a result of conducting a thorough internal investigation, including regular factual presentations to the DOJ. This credit resulted in a payment 25 percent below the applicable sentencing guidelines. Remedial efforts include hiring a global chief ethics and compliance officer with direct reporting lines to both the audit committee and the board of directors, conducting enhanced monthly and quarterly anti-corruption monitoring, enhancing onsite global anti-corruption audits to test adherence to internal accounting controls and procedures, enhancing anti-corruption scrutiny of third-party intermediaries, and implementing annual in-person and computer-based anti-corruption training for all employees likely to interact with government officials.

As demonstrated by the above cases, contractors can manage the risks presented by projects in foreign jurisdictions through a comprehensive compliance program, including annual FCPA-related training for company employees and appropriate due diligence on all subcontractors, third-party agents or intermediaries, suppliers and vendors. Contractors should also incorporate anti-bribery and anti-corruption provisions in their contracts, including language granting the contractor the right to audit payments made or received by the third parties.

If a contractor uncovers conduct that may run afoul of the FCPA, prompt self-disclosure; appropriate remedial measures, including a thorough internal investigation; and a robust preexisting compliance program may result in leniency from the SEC and/or the DOJ.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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