This is the sixth issue of WilmerHale's 10-in-10 Hot Topics in Energy Series. Over the course of 10 weeks, our attorneys will share insights on current and emerging issues affecting the US energy sector. Attorneys from across various practice groups at the firm will offer their take on issues ranging from congressional investigations, to the impact of key regulatory reforms, to emerging trends in domestic litigation and international arbitration. Read our other recent publications.

The year 2018 marked a year of active Foreign Corrupt Practices Act ("FCPA") enforcement, with a significant focus on the energy sector.1 Monetary penalties and individual prosecutions both rose in 2018, driven predominantly by the US government's focus on combatting corruption at some of Latin America's most prominent energy companies. The total monetary penalties imposed on corporations for FCPA-related conduct rose from $1.9 billion in 2017 to $2.9 billion in 2018, due in no small part to the $1.8 billion settlement with Brazil's state-run oil company Petróleo Brasileiro S.A. ("Petrobras"). The sharp jump in the number of the Department of Justice's ("DOJ") and Securities and Exchange Commission's ("SEC") actions against individuals, which rose from 16 in 2017 to 28 in 2018, is a result of actions against individuals connected to the corruption scandal at Petróleos de Venezuela, S.A. ("PDVSA"), Venezuela's national oil and natural gas company. DOJ also continued to charge individuals in 2018 in connection with its investigation of Empresa Pública de Hidrocarburos del Ecuador ("PetroEcuador"), Ecuador's state-owned oil company.

Petrobras

Petrobras' settlement with US and Brazilian authorities made headlines in 2018 as one of the largest settlements in FCPA history. In September, Petrobras entered into agreements with authorities in both countries in connection with Petrobras' role in facilitating millions of dollars in illicit payments made to Brazilian politicians and political parties. The resolution—in which Petrobras agreed to pay $1.78 billion in total penalties and disgorgement—is one of the major actions to date coming out of Brazil's Operation Lava Jato ("Car Wash"), a long-running investigation that has resulted in the arrest and prosecution of politicians and corporate executives in Brazil and across Latin America.2 This blockbuster settlement demonstrates the continued strength of US cross-border cooperation, and particularly the United States' relationship with Brazil. Eighty percent of the $853.2 million criminal penalty will be paid to Brazil, with the DOJ and SEC splitting the remainder of the penalty.3

The DOJ and SEC papers describe "massive bid-rigging and bribery schemes" led by Petrobras executives, who doled out inflated contracts through a non-competitive process.4 The contractors then paid bribes, equivalent to roughly 1% to 3% of the contract values, to Petrobras executives, Brazilian politicians, and Brazilian political parties. DOJ estimates that contractors paid more than $2 billion in bribes from 2004 to 2012, with approximately half that amount paid to Brazilian politicians and political parties.

The Petrobras resolution marked only the second time that US authorities have settled with a state-owned enterprise.5 The resolution is also unique in that DOJ acknowledged that, unlike the typical FCPA defendant, Petrobras was itself victimized by the corrupt scheme on which its settlement was based.6 This unusual circumstance may explain why, despite the scope and magnitude of the corrupt conduct, DOJ did not actually charge the company with criminal violations, electing instead to settle with a non-prosecution agreement.

PDVSA

Misconduct at PDVSA has led to more individual FCPA-related prosecutions than any other corrupt scheme in the history of the FCPA, with more than 30 individuals charged and 18 guilty pleas so far. The DOJ papers describe corrupt conduct dating back to 2014 and allege a scheme involving an elaborate web of PDVSA officials, international third-party money launderers, and members of the Venezuelan elite.7 Apart from paying bribes in exchange for business with PDVSA, conspirators also exploited Venezuela's highly favorable government currency exchange rate.8 Ill-gotten gains and bribe payments were allegedly laundered through complex international arrangements, including real estate investments and transfers using banks and shell companies in the United States and across Latin America.

In 2018, DOJ brought 14 new actions and unsealed seven actions filed in 2017 against individuals connected to PDVSA. Individuals charged in the new actions included former officials from PDVSA and other Venezuelan government agencies; US-based owners of businesses that were awarded PDVSA contracts; and alleged "professional money launderers" from the United States, Venezuela, and other parts of Latin America who helped transfer and conceal the proceeds of the PDVSA embezzlement scheme.9 Although several of the charged individuals were not covered by the jurisdictional provisions of the FCPA, they were nevertheless charged with other criminal violations arising from bribery-related conduct, such as money laundering or wire fraud offenses.

PetroEcuador

In 2018, DOJ also continued its investigation into a sprawling bribery and money laundering scheme at PetroEcuador. DOJ announced charges against four individuals connected to PetroEcuador who allegedly facilitated approximately $3.2 million in bribes to PetroEcuador officials to secure approximately $27.8 million of business for GalileoEnergy S.A., an Ecuadorian company that provides services in the oil and gas industry.10 According to the indictments, the individuals concealed the bribes by funneling payments through intermediaries and offshore shell companies into bank accounts controlled by PetroEcuador officials.11

Enforcement by Foreign Regulators

Foreign regulators across Latin America have also increased their focus on corrupt conduct in the energy sector. Brazilian prosecutors recently levied corruption and money laundering charges against the former CEO of US oil services company Vantage Drilling, in connection with Vantage's contract with Petrobras.12 In May 2018, Mexico's state-owned oil company Petróleos Mexicanos ("PEMEX") published regulations requiring that service providers, contractors, suppliers, and other third parties maintain compliance programs in order to engage in business with PEMEX or its subsidiaries.13 And in Argentina, commentators are speculating that the Cuadernos ("Notebook") Scandal may become the next Operation Car Wash, involving an extensive bribery scheme to obtain public works contracts, including an estimated $200 million in energy-related projects and involving Argentina's high-ranking public officials.14

Conclusion

Looking forward from 2018, FCPA enforcement in the energy sector will likely continue to remain a priority for US authorities, especially considering DOJ's continued investigations into the Petrobras, PDVSA, and PetroEcuador bribery schemes. It is also likely that US authorities will continue to coordinate with foreign regulators. Companies in the energy sector, many of which conduct business in markets perceived to be affected by high levels of corruption, including those with cash-based economies or unstable governments, and in countries where contact with foreign government officials is unavoidable, should ensure that they have minimized FCPA risk by establishing an effective compliance program, conducting third-party due diligence tailored to the unique risks and circumstances of each country, and developing internal controls designed to prevent and detect bribery.

Footnotes

  1. For more information on global anti-bribery enforcement actions in 2018, please see WilmerHale's Global Anti-Bribery Year-In-Review: 2018 Developments and Predictions for 2019.
  2. US Department of Justice Press Release No. 18-1258: Petróleo Brasileiro S.A. – Petrobras Agrees to Pay More Than $850 Million for FCPA Violations (Sept. 27, 2018), www.justice.gov/opa/pr/petr-leo-brasileiro-sa-petrobras-agrees-pay-more-850-million-fcpa-violations; US Securities and Exchange Commission Press Release No. 2018-215: Petrobras Reaches Settlement With SEC for Misleading Investors (Sept. 27, 2018), www.sec.gov/news/press-release/2018-215.
  3. Non-Prosecution Agreement Between US Department of Justice and Petróleo Brasileiro S.A., (Sept. 26, 2018), www.justice.gov/criminal-fraud/file/1097256/download.
  4. Non-Prosecution Agreement Between US Department of Justice and Petróleo Brasileiro S.A. – Petrobras, Attachment A ¶ 14 (Sept. 26, 2018), www.justice.gov/criminal-fraud/file/1097256/download.
  5. The first instance of such a settlement was Norwegian oil company Statoil, which entered into a deferred prosecution agreement with DOJ in 2006. US Department of Justice Press Release No. 06-700: US Resolves Probe Against Oil Company that Bribed Iranian Official (Oct. 13, 2018), www.justice.gov/archive/opa/pr/2006/October/06_crm_700.html. Additionally, after the Petrobras settlement, the SEC reached a third state-owned-enterprise settlement with Eletrobras, the Brazilian state-owned electric utilities company, on December 26, 2018. US Securities and Exchange Commission Press Release No. 3-18962: SEC Charges Eletrobras With Violating Books and Records and Internal Accounting Controls Provisions of the FCPA (Dec. 26, 2018), www.sec.gov/enforce/34-84973-s.
  6. Non-Prosecution Agreement Between US Department of Justice and Petróleo Brasileiro S.A. – Petrobras, at 3 (Sept. 26, 2018), www.justice.gov/opa/press-release/file/1096706/download.
  7. Information, United States v. Ivan Alexis Guedez, No. 18-cr-00611 (S.D. Tex. Oct. 12, 2018); Criminal Complaint, United States v. Jose Manuel Gonzalez Testino, No. 18-MJ-03171 (S.D. Tex. July 27, 2018); Criminal Complaint, United States v. Francisco Convit Guruceaga, et al., No. 18-MJ-03119, ¶¶ 6-13 (S.D. Fla. July 23, 2018); Sealed Indictment, United States v. Juan Carlos Castillo Rincon, No. 18-CR-00200 (S.D. Tex. Apr. 11, 2018) (Indictment unsealed Sept. 13, 2018); Sealed Indictment, United States v. Luis Carlos de Leon-Perez, Nervis Gerardo Villalobos-Cardenas, Cesar David Rincon-Godoy, Alejandro Isturiz-Chiesa, and Rafael Ernesto Reiter-Munoz, No. 17-CR-00514 (S.D. Tex. Aug. 29, 2017) (Indictment unsealed Feb. 12, 2018); Sealed Indictment, United States v. Jose Orlando Camacho, No. 17-cr-00394 (S.D.Tex. July 5, 2017) (Indictment unsealed Sept. 13, 2018).
  8. US Department of Justice Press Release No. 18-1420: Texas Businessman Pleads Guilty to Money Laundering Charges in Connection With Venezuela Bribery Scheme (Oct. 30, 2018), www.justice.gov/opa/pr/texas-businessman-pleads-guilty-money-laundering-charges-connection-venezuela-bribery-scheme; US Department of Justice Press Release No. 18-980: Two Members of Billion-Dollar Venezuelan Money Laundering Scheme Arrested (July 25, 2018), www.justice.gov/opa/pr/two-members-billion-dollar-venezuelan-money-laundering-scheme-arrested.
  9. US Department of Justice Press Release No. 18-1188: Business Executive Pleads Guilty to Foreign Bribery Charge in Connection With Venezuelan Bribery Scheme (Sept. 13, 2018), www.justice.gov/opa/pr/business-executive-pleads-guilty-foreign-bribery-charge-connection-venezuelan-bribery-scheme; US Department of Justice Press Release No. 18-1527: Venezuelan Billionaire News Network Owner, Former Venezuelan National Treasurer and Former Owner of Dominican Republic Bank Charged in Money Laundering Conspiracy Involving Over $1 Billion in Bribes (Nov. 20, 2018), www.justice.gov/opa/pr/venezuelan-billionaire-news-network-owner-former-venezuelan-national-treasurer-and-former.
  10. US Department of Justice Press Release No. 18-1173: Financial Advisor Pleads Guilty to Money Laundering Charge in Connection With Bribery Scheme Involving Ecuadorian Officials (Sept. 11, 2018), www.justice.gov/opa/pr/financial-advisor-pleads-guilty-money-laundering-charge-connection-bribery-scheme-involving.
  11. Indictment, United States v. Chatburn Ripalda and Larrea, No. 18-20312, 9-10 (S.D. Fla. Apr. 19, 2018); Information, United States v. Escobar Dominguez, No. 18-20108 (S.D. Fla. Feb. 20, 2018); Information, United States v. Baquerizo Escobar, No. 18-20596 (S.D. Fla. July 11, 2018).
  12. Clara Hudson, "American CEO's Knowledge of Bribery Scrutinized in Petrobras Dispute," Global Investigations Review (Oct. 31, 2018), globalinvestigationsreview.com/article/jac/1176147/american-ceo's-knowledge-of-bribery-scrutinised-in-petrobras-dispute.
  13. General Procurement Rules and Standards for Pemex and Subsidiaries, Federal Register of Mexico (May 18, 2018); Luis Dantón Martínez Corres, "PEMEX Requires Compliance Programs for Contractors," The FCPA Blog (May 22, 2018), www.fcpablog.com/blog/2018/5/22/pemex-requires-compliance-programs-for-contractors.html.
  14. Maximiliano N. D'Auro, Francisco Grosso & Virginia Frangella, "Will the Notebooks Scandal Be Argentina's Operation Carwash?," The Anti-Corruption Report, Nov. 14, 2018.

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