Two articles this week spoke about the continuing
struggle companies have with the issue of agents and other third party
representatives and the potential liability under the Foreign Corrupt Practices
Act (FCPA). In an article in the Wall Street Journal (WSJ), entitled "Kickback
Probe at Alcoa Heats Up", reporter Dionne Searcey takes a look at the
arrest of two figures in the bribery investigation of Alcoa's activities in
Bahrain in connection with the government owned manufacturing company known as
Alba. In an article in the New York Times, entitled "Acquisitions at Olympus
Scrutinized," reporter Hiroko Tabuchi reviews "a tale of deals and
advisors, with puzzling results." Both cases present novel twists and turns
that, if you told someone the facts, you would be accused of making up both
stories.
Alcoa
This case involves allegations that Alcoa overcharged
Alba by "hundreds of millions of dollars" for purchases of alumina. Alcoa and
its representative, Victor Dahdaleh then paid kickbacks to the former Alba
Chief Executive, Bruce Hall. Both Hall and Dahdaleh were arrested over the past
two weeks. One of the more interesting facts about this matter is that it was
brought to light in 2008, when Alba filed a lawsuit in federal district court
in Pennsylvania, the corporate home of Alcoa.
According to the FCPA Professor Alba alleged in the
lawsuit, "that Alcoa and its employees or agents (1) illegally bribed officials
of the government of Bahrain and (or) officers of Alba in order to force Alba
to purchase alumina at excessively high prices, (2) illegally bribed officials
of the government of Bahrain and (or) officers of Alba and issued threats in
order to pressure Alba to enter into an agreement by which Alcoa would purchase
an equity interest in Alba, and (3) assigned portions of existing supply
contracts between Alcoa and Alba for the sole purpose of facilitating alleged
bribes and unlawful commissions. As reported by the FCPA Blog, "Just weeks
after Alba sued Alcoa, the U.S. Justice Department intervened in the case" and
asked for a stay to investigate "possible criminal violations of the FCPA and
other laws by Alcoa and its executives and agent." The trial court granted the
stay.
The WSJ article provided further information on the
alleged actions of Dahdaleh. Searcey reported that he "set up a company that
acted as an intermediary for Alcoa, a move that officials at the metals company
supported". Further Dahdaleh's company "used Alcoa's logo on its letterhead in
communications with Alba". Although Alcoa had a commercial relationship
directly with Alba, at some point Dahdaleh's company acceded to this business
relationship.
Olympus
This case may join News Corp as yet another case that
keeps on giving. It is not often (as in never) that a former Chief Executive Officer
(CEO) claims he was fired for being a whistleblower. However, on October 14,
2011 Olympus Chairman, Tsuyoshi Kikukawa, dismissed the former head of the
company, the Briton Michael C. Woodford, citing cultural differences in
management styles. However, Mr. Woodford later said he had been fired after
raising questions about a series of acquisitions made by Olympus at what he
said were inexplicably high prices or involving disproportionately pricey
advisory fees. Woodford later provided documents to the Serious Fraud Office
(SFO) and is reported to be to meeting with the US Federal Bureau of
Investigation (FBI).
As reported earlier in Dealb%k, in an article entitled "2
Japanese Bankers at Heart of Olympus Fee Inquiry", reporter Ben Protess said
that two persons, Hajime Sagawa and Akio Nakagawa, were alleged to have
received $687 million payout by Olympus for advising Olympus on the 2008
takeover of a British company, the Gyrus Group. The money went to a "tiny
unknown firm run by Mr. Sagawa and Mr. Nakagawa...the bulk of the fee later went
to a Cayman Islands company that also had ties to at least one of the men."
Dealb%k said the fee in question was over 30 times the
norm on Wall Street for such transactional advice. After the "deal closed and
the fees were paid, both firms closed up shop." Dealb%k, citing securities
lawyers and corporate governance experts, said that "federal authorities will
probably examine whether the steep fees point to deeper ties between Olympus
and the bankers, or even kickbacks to Olympus officials involved in the deal."
Lessons Learned
Both matters provide clear lessons for the compliance
practitioner.
- Detection.
If there were ever two cases that screamed out for Paul McNulty's maxim
No. 2 "What did you do to detect it", these were the poster children. From
Alcoa, it is clear that your company must absolutely, positively have the
right to audit your agent AND then exercise that right. If Alba's federal
court suit allegations are anywhere close to hitting the mark, an audit
would have picked this up.
From the Olympus matter, if any of your company's agent
sends its money to the Cayman Islands or Jersey, for example, do not walk but
charter a plane and get there as fast as you can to audit the agent's books and
records.
- Due
Diligence, Due Diligence and then more Due Diligence.
What was the size of these agents companies? Dahdaleh formed a company to
act as Alcoa's agent for sales to Alba. Sagawa and Nakagawa were
characterized as a "tiny, unknown firm". Do you think this would have
turned up in any credible due diligence investigation on either of these
agents or their companies? I would say absolutely.
- Amount
of Commission. Any agent who receives a commission
which ranges in the neighborhood of more than 30 times the norm for such
transactions is receiving way too much money for whatever services he or
she is rendering. The Department of Justice is beginning to look at
any commission amount because any commission so far out of line can
provide money which can be used to pay a bribe or kickback.
- Agent
Oversight. Lastly, where were Alcoa and Olympus in
managing these agent relationships? Any best practice should
include an Oversight Committee to review agent commission rates and
payments.
- CEOs
and Whistleblowers. And finally, it is never a good
thing to fire your CEO because he wants to blow the whistle on potentially
criminal conduct and then say it is due to 'cultural differences". Strike
that-it is never a good thing to fire your CEO because he wants to blow
the whistle on potentially criminal conduct-period.
Visit the FCPA Compliance and Ethics Blog,
hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and
other forms of risk management for a worldwide energy practice, tax issues
faced by multi-national US companies, insurance coverage issues and protection
of trade secrets.
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© Thomas R. Fox, 2011
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