Foster Wheeler FCPA Action: Dancing with the Devil – Risky Third Parties (Part II of III)
FCPA settlement actions often underscore specific compliance risks for legal and compliance professionals. If there ever was a case where third-party risks were bungled, and even intentionally embraced, the Foster Wheeler case provides an important reminder for any organization focusing on third-party risk management.
The Foster Wheeler FCPA resolution could not be timed any better – with the expected increase in FCPA enforcement activity, DOJ and the SEC have sent a clear message – deal with risky third parties at your peril. Clearly, Foster Wheeler did so, and was burned accordingly.
At bottom, Foster Wheeler ignored clear and present third-party risks in the hope of landing a golden deal for a $190 million contract for the design of a gas-to-chemical fertilizer plan for Petrobras, the Brazilian state-owned oil and gas company. The project was referred to as the “UFN-IV project.” To land the deal, Foster Wheeler made improper payments to Brazilian officials through third-party agents, including one agent who failed Foster Wheeler’s due diligence process for sales agents but was permitted to continue “unofficially” working on the project.
Foster Wheeler paid approximately $1.1 million in bribes to win the UFN-IV contract. Foster Wheeler generated $17.6 million in profits from the project.
In 2011, Foster Wheeler entered the Brazil market to develop business opportunities in the oil and gas sector. In the summer of 2011, an Italian third-party agent (Italian Agent) learned from a Brazil Agent from a small engineering services firm in Rio De Janeiro about a specific opportunity involving Petrobras and potential bids for the UFN-IV project. The Brazil Agent was a former Petrobras employee and learned of the upcoming opportunity from “very good friends” at Petrobras.
In a moment of serendipity, the Italian Agent and outgoing Chairman of the Board at Foster Wheeler became acquainted at a high-end clothing store in New York City. The clothing store manager arranged an introduction, and the Italian Agent email information about the UFN-IV project to the Chairman of the Board, who forwarded the information to the acting CEO at Foster Wheeler, who forwarded the information to the acting CEO. The Brazil Country Manager was reluctant to use the Italian Agent because it “would send a wrong message in the market here.”
To address “compliance issues” identified by Foster Wheeler, the Italian Agent enlisted the support or Unaoil, a Monaco intermediary company in the oil and gas industry. The Italian Agent proposed to have Unaoil receive payments for his services. Unknown to the Italian Agent, Foster Wheeler already rejected Unaoil as part of its due diligence process.
The Italian Agent continued to press Foster Wheeler’s Brazil Country Manager to engage the agent to secure the project. The Brazil Country Manager forwarded the Italian Agent’s communications, suggesting that the Italian Agent was proposing to make improper payments to Petrobras officials. The Italian Agent tried to reassure the Brazil Country Manager that he was working on a commission basis for himself and the Brazil Agent, and claimed “[a]bsolute discretion in the future as well: I shall be the only one involved and I shall take the risk to be accused if you lose the project.”
In April 201, Foster Wheeler offered the Italian Agent a 2 percent commission. The UFN-IV bid was due within days. Foster Wheeler’s Brazil Country Manager, an in-house attorney and the CEO, along with others, noted that the Italian Agent had ties to Unaoil, which Foster Wheeler rejected as a potential third party, but Foster Wheeler continued to work with the Italian Agent. Foster Wheeler’s General Counsel drafted an interim agency agreement to engage in the Italian Agent, which was not authorized by Foster Wheeler’s policies governing third parties.
In April 2012, Foster Wheeler submitted its bid to qualify. Petrobras required the winning bidder to negotiate and manage contracts with five pre-selected companies that owned the licenses needed for technologies used in the project. While the Italian Agent’s due diligence application was pending, the Italian Agent met with Petrobras officials and continued to pressure Foster Wheeler to retain the agent and the Brazil agent. The Italian Agent continued to report that Foster Wheeler’s proposal needed explanation and support with Petrobras officials.
On April 30, 2012, Petrobras announced that Foster Wheeler was the only application to qualify for the UFN-IV contract.
Several weeks later, Foster Wheeler’s due diligence review cited his links to Unaoil and a failure to corroborate the Italian Agent’s prior work history and experience. As a result, Foster Wheeler did not engage the Italian Agent. Foster Wheeler did not terminate his interim agency agreement, and the Italian Agent continued to work on the project during the rest of the project. The Italian Agent corresponded with the Brazil Country Manager using the manager’s personal email address.
Meanwhile, the Italian Agent introduced the Brazil Country Manager to the Brazil Agent so that the Brazil Agent could serve as the agent on the Petrobras contract. Brazil Agent’s due diligence application did not contain any reference to the Italian Agent.
Italian Agent and Brazil Agent paid bribes to a Petrobras official to obtain confidential information on Foster Wheeler’s behalf to win the contract and to negotiate favorable contract terms. At the last minute before an important meeting with Petrobras, the Brazil Agent was able to secure a favorable pricing and terms proposal for Foster Wheeler.
In August 2012, Foster Wheeler agreed to an unusual payment to Brazil Agent of $560,000 in commissions related to services allegedly performed by technology providers on the UFN-IV contract. Three days later, Petrobras awarded the UFN-IV contract to Foster Wheeler. A few days later, Brazil Agent told Italian Agent that their “friend” at Petrobras would send Brazil Agent’s copy of the contract.
Later in 2012, Foster Wheeler’s CEO expressed his concern that the Italian Agent promised to pay someone at Petrobras through the Brazil Agent. Despite a specific direction from in-house counsel not to pay Italian Agent for his work on the project, Brazil Country Manager and other managers knew that Italian Agent would receive his payment as a “finder’s fee.”
Throughout the contract, Italian Agent stayed in contact with the Brazil Country Manager to request additional payments for services he claimed to have provided. The Brazil Agent submitted quarterly reports and invoices for payments. The invoices did not document any meaningful work to justify payments. The Brazil Country Manager suggested the need to pay the Brazil Agent because his displeasure could make “life difficult for us.” Foster Wheeler eventually paid $1.1 million to a correspondent bank account in New York credited to the Brazil Agent. The Brazil Agent used offshore accounts to transfer a portion of the funds to the Italian Agent.
Over the next two years, 2013 and 2014, the Brazil and Italian Agents shared the UFN-IV related fees and provided payments to one or more Petrobras officials. To avoid Brazil taxes, the agents often discussed how to split the funds and used an escrow account of Italian Agent’s attorney in New York. In one case they used a doleiro – a money launderer to transfer Italian Agent’s share of a payment.