On May 17, 2011, the SEC and the
U.S. Department of Justice (DOJ) announced their agreements with Tenaris S.A.
(Tenaris) regarding alleged FCPA violations by Tenaris. Tenaris agreed to pay
more than $5.4 million in disgorgement and prejudgment interest to the SEC and
a $3.5-million penalty to the DOJ. The Tenaris case exemplifies the U.S.
enforcement authorities' continued global reach to fight foreign corruption,
the typical payments that companies doing business in the former Soviet Union
might be making, and the continued aggressive stand the U.S. enforcement
agencies take on the definition of "foreign official" for purposes of the FCPA.
The Tenaris case also is notable because for the first time in history,
the SEC used a deferred prosecution agreement to resolve the matter.
According to the deferred
prosecution agreement, Tenaris - a global manufacturer and supplier of steel
pipe products and related services - was a corporation organized under the laws
of Luxembourg. Tenaris's ADRs were listed on the NYSE, and its operations
included steel pipe sales in the Caspian Sea region, including the former
Soviet Republic of Uzbekistan. Tenaris's Caspian Sea business was run from
offices in Azerbaijan and Kazakhstan and accounted for approximately one
percent of global sales of $12 billion in 2008.
Between April 2006 and May 2007,
Tenaris bid on a series of contracts with Open Joint Stock Company
O'ztashqineftgaz (OAO) to supply OAO with pipeline for use in the development
and production of oil and natural gas in Uzbekistan. OAO was a subsidiary of
Uzbeknefegaz, a state-owned enterprise. During the bidding process, Tenaris was
introduced to an agent who offered Tenaris information on various bids from
OAO's tender department. Tenaris hired the agent for a 3.5-percent commission
and submitted various bids to OAO, using the information supplied by the agent.
Tenaris won the bids, and OAO agreed to pay Tenaris more than $19 million on
several contracts. Tenaris paid a commission to the agent through Wachovia Bank
NY International. According to the deferred prosecution agreement, Tenaris's
employees knew that a portion of the agent's commission would be used to pay
OAO's tender department employees who provided the bid information. The SEC
alleged in the deferred prosecution agreement that OAO was an instrumentality
of a foreign government and that its employees were therefore "foreign
officials" for purposes of the FCPA.
As is typical in the post-Soviet
space, the losing parties in the bid process complained to an Uzbekistani
government agency, Uzbekexpertiza, that Tenaris had improperly obtained the bid
information. Such agencies are common in the former Soviet Republics. They have
broad power to certify that a manufacturing plant is compliant with local laws
or that a certain product meets safety regulations. They also have powers to
investigate the bid process. According to the deferred prosecution agreement,
the agent recommended to Tenaris that it make a payment to Uzbekexpertiza.
While there was no evidence that the payment was actually made, emails suggest
that Tenaris had agreed to make the payment.
Certain contracts on which Tenaris
made successful bids were canceled, but Tenaris received payments on others and
had a combined profit of $4,786,438 from its dealings with OAO.
Tenaris agreed to pay $4,786,438 in
disgorgement penalties, $641,900 in prejudgment interest to the SEC, and a
$3.5-million criminal fine to the DOJ. Given Tenaris's cooperation and full
disclosure, the SEC agreed to enter into a two-year deferred prosecution
agreement. The agreement allowed Tenaris to avoid an SEC action, which would
have likely involved certain prohibitions for individuals to occupy board
positions and other cease-and-desist measures and could have involved an
acknowledgement of wrongdoing. The agreement also does not contain an
injunction or an order of a court, which reduces the risk of collateral actions
(securities class actions, shareholder breach of fiduciary duty actions).
Undoubtedly, Tenaris's full disclosure and cooperation played a major role in
SEC's deciding to use a deferred prosecution agreement for the first time.
The Tenaris case once again
highlights the problems faced by companies in using agents and intermediaries
in the former Soviet Union, the need for effective due diligence of those
agents, and the need for an effective anti-corruption policy. The Tenaris
case also demonstrates the U.S. enforcement authorities' continued interpretation
of "foreign official" in the FCPA to include employees of state-owned
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