The Securities and Exchange Commission announced Friday that Italian oil company Eni will pay $24.5 million in disgorgement and prejudgment interest to settle charges that it violated the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act concerning the award of certain contracts to Eni’s former subsidiary Saipem in Algeria.
According to the SEC’s order, Saipem entered into at least four sham contracts with an intermediary between 2007 and 2010 to assist in obtaining contracts awarded by Algeria’s state-owned oil company. The order finds Saipem paid approximately €198 million (U.S. $215 million) to the intermediary, which directed a portion of the money to Algerian government officials or their designees, including the energy minister at the time.
The SEC order goes into significant detail about Eni’s failure to maintain accurate books and records. It also describes how a former senior executive at Saipem orchestrated the scheme and, after he was hired to be Eni’s CFO, how he continued to facilitate Saipem’s improper payments to the intermediary.
“Saipem claimed the intermediary payments as a legitimate business expense and obtained an approximately $57 million tax benefit as a result,” the SEC order states. “That inaccurate expense accounting was also reflected in Eni’s financial statements by virtue of its consolidation of Saipem’s financial statements.”
Saipem was previously charged by the SEC in 2010 for violating the same FCPA provisions concerning a bribery scheme in Nigeria by its then-wholly owned subsidiary Snamprogetti Netherlands.
Ineffective accounting controls
The SEC order goes on to describe Saipem’s failure to maintain internal accounting controls. “Eni, as the controlling minority shareholder, required Saipem to maintain its own internal controls policies, including adopting Eni’s directives of transparency, traceability, and anti-bribery compliance,” the SEC order states. As a result of the CFO’s misconduct at Eni and others at Saipem, however, “Saipem’s internal accounting controls were not adequately implemented and were ineffective.”
Specifically, Saipem conducted no substantive review of the intermediary contracts. “For example, Saipem’s legal department conducted a pre-review of the sham contracts prior to anyone signing them, but these contracts had no names inserted, not even the name of the intermediary,” according to the SEC order. “Accordingly, Saipem’s legal department did not conduct any review of the intermediary’s business or reputation.”
Saipem’s CFO at the time and other senior officers “bypassed contracting and procurement controls to enter into contracts with the intermediary, including by falsifying and backdating documents concerning the intermediary contracts in board notes and approvals,” the SEC order states. “Saipem also made payments to the intermediary on at least one occasion without approval from the appropriate senior officer until nearly a year after the payment had been made.”
It was not until late 2012 that Eni became aware Saipem had entered into four agreements with the intermediary without conducting adequate due diligence, according to the SEC. Eni also learned the CFO had continued to involve himself in Saipem’s payments to the intermediary. Immediately upon discovering those facts, Eni separated the CFO from the company, notes the order.
Because Saipem’s accounting for intermediary fees was inaccurate, and because the CFO participated in the approval of and payments to the intermediary while at Saipem and continued to take certain actions to facilitate payments to the intermediary while CFO of Eni, “Eni failed to proceed in good faith to cause Saipem to devise and maintain sufficient internal accounting controls.”
In determining to accept the offer, SEC staff considered remedial acts promptly undertaken by Eni and its cooperation efforts, “including compiling financial data and analysis relating to the transactions at issue; making substantive presentations on key topics; and providing translations of key documents and foreign proceedings.”
Under the settlement terms, without admitting or denying the SEC’s findings, Eni will pay disgorgement of $19.75 million and prejudgment interest of $4.75 million. It also has consented to the entry of an order to cease and desist from violating the books and records and internal accounting controls provisions of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.