A most “daring act” seems to be a good way to introduce a multipart look at the recent Foreign Corrupt Practices Act enforcement action involving the Chilean chemicals and mining company Sociedad Química y Minera de Chile (SQM), which agreed to pay a criminal penalty of $15.5 million and a civil penalty of $15 million for a total fine and penalty of $30.5 million. The company settled with the Department of Justice via a Criminal Information and Deferred Prosecution Agreement (DPA) and the Securities and Exchange Commission via a Cease and Desist Order (Order).
There were a couple of unusual aspects to this matter that bear review and consideration by a compliance practitioner, particularly for those with companies headquartered or domiciled outside the United States. The first is that the case was rare for its criminal violations of the FCPA for the accounting provisions—both the books and records and internal controls provisions. The second was that the company’s illegal actions appeared to have no U.S. nexus to the conduct involved, seeing as the jurisdictional hook was that the company’s shares trade on the New York Stock Exchange (NYSE) as American Depository Receipts (ADRs) and the company is required to file periodic reports with the SEC. There were, however, some excellent points for review by any compliance practitioner regarding the underlying conduct involved.
The allegations. According to the DPA that SQM concluded with the Justice Department, the company (1) knowingly failed to implement internal controls sufficient to ensure that payments from a fund under the control of one of its officers and high-level executives were made for services received and in compliance with Chilean law, and (2) concealed payments to vendors associated with politicians, logging them as consulting and professional services SQM never received.
In none of the resolution documents, however, was there discussion of specific bribes paid for obtaining or retaining business by SQM. As noted above, none of the payments were routed through the United States or the U.S. banking system. Finally, although there were numerous e-mails cited in the resolution documents, there was no evidence presented that they were stored on a U.S. server or even went through the United States in cyber-space.
What does come through loud and clear from the information is the person designated as “SQM Executive” who used the discretionary fund was in fact SQM’s former CEO Patricio Contesse. And, the fund appeared to be used at Contesse’s sole discretion. Simply put, according to the Information, “SQM paid approximately U.S. $14.75 million to PEPs [Politically Exposed Persons] and related parties without effective internal accounting controls, such as appropriate due diligence, documentation, or oversight.”
The jurisdictional reach of the FCPA is quite broad. On the simplest level, the U.S. does not want companies that access U.S. investors to be so oblivious to basic anti-corruption as to expose investors to undue risk of fraud.
This same disclosure also specifically noted that Contesse declined to be interviewed by the company’s designated outside counsel performing the internal investigation.
Contesse’s involvement and fraud was more than simply using his unlimited discretion to facilitate shady payments. He was actively and intentionally involved in falsifying the company’s books and records. The information stated, “From 2008 to 2013, at the end of each fiscal year, SQM’s books and records, including those that SQM Executive and others intentionally falsified to justify payments to vendors connected to PEPs, were used for the purpose of preparing SQM’s financial statements. In addition, during each of these years from 2008 to 2013, SQM Executive signed financial certifications as part of SQM’s securities filings that he knew to be false.”
Regarding the internal controls violations, the company’s auditors noted payments made to third parties, which “had a ‘high-risk’ connection to PEPs.” These findings were even presented to the full company board of directors with the recommendation that adequate internal controls be put in place to prevent such conduct going forward. However, none were.
The comeback. The DPA acknowledged there was no self-disclosure, yet the company received full credit for its cooperation. The DPA also detailed the extensive remediation engaged in by the company during the pendency of the enforcement action. It noted, “the Company has … engaged in a number of remedial measures, including: (1) reconstituting and staffing new compliance and internal audit divisions; (2) implementing new internal accounting/payment process controls; (3) revising the corporate Code of Ethics and conducting training for all personnel; (4) voluntarily paying over $9 million in taxes, interest, and penalties to Chilean authorities in connection with the improper payments described in the Statement of Facts; (5) disciplining the employees involved in the improper payments and false books and records described in the Statement of Facts—including terminating the employment of a senior officer of the Company and demoting another employee; and (6) providing in-depth anti-corruption and compliance training and consultations with outside compliance and internal controls experts to an employee who failed to take appropriate steps in response to red flags regarding the misconduct.”
In a December 2015 Form 6K filing to the SEC, the company provided additional detail on the scope of its remediation. It stated, “The measures that have already been adopted include: (i) dismissing Mr. P. Contesse G. from his position as SQM’s CEO; (ii) filing corrected tax returns with the Chilean Internal Revenue Service; (iii) creating SQM’s Corporate Governance Committee, which is comprised of three of its directors; (iv) separating and strengthening the team and responsibilities of the Internal Audit and Compliance departments, both of which report to SQM’s board of directors, while the latter also reports to the Company’s CEO; (v) hiring KPMG, the auditing firm, to review SQM’s payment process controls; (vi) improving the Company’s payment process controls and approvals; and, (vii) reformulating SQM’s Code of Ethics.”
Finally, the company agreed to a two-year external monitor.
Lessons learned. This enforcement action provides numerous lessons for the compliance practitioner, senior management, and boards of directors around their roles in a best practices compliance program. First, and foremost, is the senior executive involvement, which demonstrates a clear risk for corruption at the highest levels of an organization. When you couple such blatant disregard for legal standards, with unlimited discretion and no board oversight, you have a recipe for disaster. The next point is the specific failure of the company’s board of directors in its oversight role for compliance. Apparently not realizing that by listing its shares in the U.S. public markets, it subjected itself to U.S. laws and the SQM board had a total abdication of its oversight responsibility. Even when presented with clear evidence of both FCPA violations and specific failures around internal controls, the board failed to act. One might well wonder if this had been company with a U.S. based board if there might finally have been a criminal prosecution of board members for failure to fulfill their obligations under the Ten Hallmarks of an Effective Compliance program.
Finally, there are the various schemes used by SQM to hide the dodgy payments. There were payments to relatives of foreign officials, through mechanisms such as “financial services” allegedly provided to the company, the always popular “consulting services,” and other, more incredulous-sounding euphemisms for bribery. There were also payments to various foundations and charitable entities run by or affiliated with Politically Exposed Persons (PEPs).
The jurisdictional reach of the FCPA is quite broad. On the simplest level, the U.S. does not want companies that access U.S. investors to be so oblivious to basic anti-corruption as to expose investors to undue risk of fraud. More importantly, the SQM enforcement points once again to the imperative of broad U.S. enforcement of the FCPA as the most powerful tool to combat the global scourge of corruption.
The actions of SQM senior management were certainly daring in their blatant disregard for U.S. law. If companies want the benefits of U.S. securities offerings and prestige, they need someone to counsel them on why they have to comply with U.S. regulations, even in their actions exclusively outside the United States. The matter also points to the need for a company’s board of directors to step up, ask the hard questions, and then take action when management fails to fulfill its obligations to do business legally. Finally, the enforcement action makes clear the need for any company that crosses multiple borders to have a best practices compliance program in place, as there will be at least one country that has an anti-bribery/anti-corruption compliance program.