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ABB FCPA Resolution: Part 3 – The Bribery Schemes

Post author By admin
Post date December 7, 2022
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We continue our exploration of the latest resolution of a Foreign Corruption Practices Act (FCPA) violation involving the Swiss construction giant, ABB Ltd. The most obvious significance is from the fact that ABB is now the first three-time convicted violator of the FCPA, having prior FCPA resolutions in 2004 and 2010. The moniker of a three-time FCPA violator is certainly not one that any corporation wants to claim, yet here we are. The total fine and penalty for the violation was $315 million, with credited amounts going to South Africa, Switzerland, and Germany for ABB’s violations of those country’s anti-corruption laws. There was also a $75 million fine credited to the Securities and Exchange Commission (SEC). In addition to the SEC Order, the DOJ Press Release and Plea Agreement are also available. Conspicuously missing at this point are resolution documents from South Africa, Switzerland, and Germany.

We are exploring this FCPA enforcement action to see what lessons might be garnered from it. While we are doing so, please keep three key questions in mind: (1) How did ABB obtain such a superior resolution? (2) As a three-time FCPA violator, how did the company avoid a monitor? (3) Why was there no requirement for Chief Compliance Officer (CCO) certification? Today, we consider the bribery schemes used by ABB to fund the bribes.

Bribery Pre-Payment

One of the things we rarely see is the pre-payment of a bribe for a contract to be awarded corruptly in the future as usually there is a quid pro quo or payment made after a contract is corruptly awarded. Perhaps the corrupt Eskom official who awarded the contract to ABB saw their actions in passing on internal and confidential information, which ABB used to secure the contract, as worthy of payment, perhaps the Eskom official wanted a show of ‘good-faith’. Whatever the reason, the corrupt Eskom official wanted an upfront, pre-payment for the corruption award of the contract to ABB.

As I detailed previously the corrupt Subcontractor 1 who was the lead bribe facilitator was awarded a contract worth $7.2 million and then paid, according to the Plea Agreement, $798,000 as an ‘advanced payment’ ($720,000 according to the SEC Order) and that money was to be paid to the corrupt Eskom official. However corrupt Subcontractor 1 balked at making the payment and kept the money for themselves. ABB’s answer was to bring in a corrupt Subcontractor 2 to facilitate this pre-payment to the corrupt Eskom official.

Funding Through Variation Orders

Because of the original contract with the corrupt Subcontractor 1, ABB had to come up with another mechanism to fund the bribe payments to the corrupt Eskom official. The solution was elegantly simple, the ‘Variation Order’. Under this, “The scheme was effectuated through the abuse of “variation orders” provided for in the contract between ABB-South Africa and Eskom. These provisions allowed Eskom to make changes to the contract and resulted in ABB-South Africa claiming additional costs from Eskom. Eskom Official and Capture Team Lead agreed upon a target price, which ABB-South Africa would then quote based on proposals that included inflated, unnecessary, or unjustified costs and Eskom would officially approve. An official at Service Provider B then ensured that money was transmitted to Eskom Official and his family members from the payments.”

The Variation Orders were not based on the value of additional work but were costed out by the corrupt Eskom official and ABB jointly. They would figure out how much the bribe needed to be and then would hit on a “target price” for the Variation Order. In less than two years, from 2016-2017, ABB corruptly paid some $37 million in bribes to the corrupt Eskom official. As the SEC Order somewhat dryly noted, “The various payments to Service Provider B, much of which was intended as bribes for Eskom Official, were inaccurately reflected in ABB-South Africa’s books and records as legitimate engineering services and involved the use of false purchase orders and contracts. ABB-South Africa’s books and records were consolidated into ABB’s for purposes of Commission filings.”

While these bribery schemes were not all that sophisticated, they do point out a key issue for compliance professionals. In high-risk jurisdictions, there must be continual monitoring of billings from and payments to government and state-owned entity customers. As previously detailed the mechanisms by which corrupt Subcontractors 1 and 2 were onboarded clearly presented red flags which were not followed up on by ABB compliance. These funding mechanisms also demonstrated significant red flags which should have been more scrupulously reviewed as well. Compliance does not stop when the contract is signed, it must be an ongoing prevention, detection, and remediation program.

In short, there is much to unpack in this matter. Join us tomorrow where we look at the ABB self-disclosure, investigative and remedial responses which led to its superior result.

Tags ABB, bribery, corruption, Corruption in South Africa, DOJ, FCPA, SEC, South Africa

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ABB FCPA Resolution: Part 2 – The Corruption Partners

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Post date December 6, 2022
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Capture Team and Sales Shark

In reading the resolution documents, one can only wonder at the culture of corruption which permeated ABB in the 2014-2017 timeframe. After finding out a business opportunity existed in South Africa with the national power company Eskom, ABB created a ‘Capture Team’ which was staffed largely by executives in the corporate headquarters as “The capture team did not possess confidence in personnel at ABB-South Africa to get access to the people at Eskom that would be making the decisions in regard to the C&I contract. As a result, Executive B, who had experience with obtaining business from Eskom with a previous employer, became directly involved in coordinating the efforts to win the business.” In other words, the corporate office did not believe the ABB South African operation was corrupt enough to get the job done so they stepped in to do so.

Thereafter, “at the suggestion of Executive B that a ‘sales shark’ was needed in pursuing the C&I contract, the capture team appointed Capture Team Lead, “a highly experienced sales expert” with a reputation for non-transparency about how he went about interactions with clients.” That is exactly what ABB commenced to do as thereafter Capture Team Lead, Executive B, brought in the ABB South Africa, Local Senior Manager to “set up private meetings and sent clandestine communications with Eskom officials to obtain and share confidential information regarding the Kusile C&I tender, including Eskom’s budget price and ABB’s schedule.”

Corrupt Subcontractor 1 and Bribe Pre-Payment

This led to a business relationship with corrupt Subcontractor 1, whose sole function was to funnel bribe payments to corrupt Eskom executive(s) to facilitate ABB South Africa winning the contract. But there was a problem as the corrupt Subcontractor 1 did not meet the required business criteria to work with ABB. Indeed, “A supply chain manager at ABB-South Africa, who was not aware of the bribery scheme, raised concerns that Service Provider A was unqualified for the work for which it was being considered and that its proposed price was excessive. Given that Executive B and Capture Team Lead were part of the bribe scheme, the concerns went unaddressed by ABB management in South Africa and Switzerland.” Just to demonstrate that Subcontractor 1 was brought in to facilitate the payment of bribes, when Subcontractor 1 joined the bid team, the cost immediately went up by some $9 million. Finally, to top how unusual the arrangement with Subcontract 1 had become “ABB-South Africa signed its subcontract with Service Provider A for approximately $7.2 million which, contrary to internal company policy, was awarded without competitive bidding. The subcontract included a provision for an advanced payment of ten percent, as Eskom Official wanted an upfront payment.”

Corrupt Subcontractor 1 did their job in the corruption scheme by passing on internal and confidential information from their corrupt contact at Eskom, which ABB used to secure the contract. The Eskom official wanted an upfront, pre-payment for the corruption award of the contract to ABB. As odd as all of this was, or perhaps to demonstrate there is no honor among thieves, Subcontractor 1 decided it wanted to keep all the monies to be made as the pre-payment to the corrupt Eskom official. According to the SEC Order, “The bribe scheme nearly came undone when Service Provider A’s chair refused to share the spoils with the Eskom Official due to an apparent falling out between them. In order to save the illicit arrangement, Capture Team Lead attempted to broker a peace between the two, going so far as arranging a face-to-face meeting, but the efforts were unsuccessful.” This put the ABB bid at risk.

Corrupt Subcontractor 2 and a Waiver

The answer was simply to retain another corrupt South African business partner, who was a friend of a close friend of the corrupt Eskom official. (Reminds me of a great line from Dr. No – I like friends who have friends.) Once again, the problem was that corrupt Subcontractor 2 did not meet ABB’s internal requirements to become a business partner. This required an internal ABB waiver. ABB corporate arranged a US ABB employee from a US office, “who specialized in the SCM processes, travel to South Africa to manage the course of obtaining one. During the second week of February 2016, after spending a number of days in South Africa, the American employee was able to secure for [corrupt Subcontractor 2] a formal waiver premised on its working through two specific sub-subcontractors who were qualified for the job.” However, all of this was ruse and sham corrupt Subcontractor 2 was already on the worksite “and the message from ABB-South Africa was that Service Provider B was required to be used by Eskom, the American employee felt he had no choice but to arrange this waiver” corrupt Subcontractor 2.

In short, there is much to unpack in this matter. Join us tomorrow where we look at the bribery schemes.

Tags ABB, corrupt business partners, corruption, DOJ, Eskom, FCPA, SEC, South Africa

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ABB FCPA Resolution: Part 1 – Introduction

Post author By admin
Post date December 4, 2022
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Late last week, the Department of Justice (DOJ) announced a highly anticipated resolution of Foreign Corruption Practices Act (FCPA) violation involving the Swiss construction giant, ABB Ltd. The most obvious significance is from the fact that ABB is now the first three-time convicted violator of the FCPA, having prior FCPA resolutions in 2004 and 2010. The moniker of a three-time FCPA violator is certainly not one that any corporation wants to claim. The total fine and penalty for the violation was $315 million, with credited amounts going to South Africa, Switzerland and Germany for ABB’s violations of those country’s anti-corruption laws. There was also a $75 million fine credited to the Securities and Exchange Commission (SEC). Over the next several blog posts, we will explore this FCPA enforcement action, and, most particularly, three key questions: (1) How did ABB obtain such a superior resolution? (2) As a three-time FCPA violator, how did the company avoid a monitor? (3) Why was there no requirement for Chief Compliance Officer (CCO) certification?

At this point, not all of the resolution documents are publicly available. The only two documents are the DOJ Press Release and Plea Agreement. Conspicuously missing at this point are resolution documents from the SEC and those from South Africa, Switzerland and Germany. As noted, the overall FCPA fine and penalty is $315 million with credit of $75 million to the SEC and according to the Press Release, “ABB’s total criminal penalty is $315 million. The department has agreed to credit up to one-half of the criminal penalty against amounts the company pays to authorities in South Africa in related proceedings, along with other credits for amounts ABB pays to resolve investigations conducted by the SEC and authorities in Switzerland and Germany, so long as payments underlying an anticipated resolution with German authorities are made within 12 months of today’s date.”

According to Assistant Attorney General Kenneth A. Polite, Jr. of the DOJ’s Criminal Division, “This is the department’s first coordinated resolution with authorities in South Africa, where much of ABB’s criminal scheme was carried out, reflecting our commitment to relationship-building and our ever-deepening partnerships in the global fight against corruption. ABB bribed a high-ranking official at South Africa’s state-owned energy company in order to corruptly obtain confidential information and win lucrative contracts. In addition, our partners in South Africa have brought corruption charges against that official. This resolution demonstrates the Criminal Division’s thoughtful approach to appropriately balancing ABB’s extensive remediation, timely and full cooperation, and demonstrated intent to bring the misconduct to the department’s attention promptly upon discovering it, while also accounting for ABB’s historical misconduct.” The DOJ also noted, “the assistance provided by law enforcement authorities in South Africa, Switzerland, and Germany.”

Certainly, the cooperation and partnering with South Africa is a welcoming sign, given the corrupt nature of the South African government under the prior regime of President Zuma. The allegations of state capture involving Zuma, his family and the Gupta brothers rocked the country for many years. Although this enforcement action involving ABB does not appear to have been a part of the state capture allegations, it may portend a reckoning of companies who have conducted business in the corrupt state over the past decade. It may be that ABB is only the opening salvo on corruption cases from South Africa which could rival Lava Jato from Brazil.

As for the actual resolution, the Press Release noted, “ABB entered into a three-year deferred prosecution agreement (DPA) with the department in connection with the filing of a criminal information in the Eastern District of Virginia charging the company with conspiracy to violate the FCPA’s anti-bribery provisions, conspiracy to violate the FCPA’s books and records provisions, and substantive violations of the FCPA. In addition, ABB subsidiaries ABB Management Services Ltd. (Switzerland) and ABB South Africa (Pty) Ltd. (South Africa) each pleaded guilty to one count of conspiracy to violate the anti-bribery provisions of the FCPA.” Once again there is a parent receiving a DPA with subsidiaries agreeing to make criminal pleas.

The bribery schemes themselves involved a series of actions between 2014 and 2017, where ABB subsidiaries paid bribes to a South African government official at the state-owned and controlled energy company, Eskom Holdings Limited (Eskom), to obtain business advantages in connection with the award of multiple contracts. Moreover, “ABB engaged multiple subcontractors associated with the South African government official and made payments to those subcontractors that were intended as bribes. ABB worked with these subcontractors despite their poor qualifications and lack of experience. In return, ABB received improper advantages in its efforts to obtain work with Eskom, including, among other benefits, confidential and internal Eskom information. As part of the scheme, ABB conducted sham negotiations to obtain contracts at inflated prices that ABB had pre-arranged with the South African government official, all on the condition that ABB employ a particular subcontractor associated with that official. ABB also falsely recorded payments to the subcontractors as legitimate business expenses when, in fact, a portion of the payments were intended as bribes for the South African government official.”

But as bad as ABB’s conduct was during this period, perhaps even more impressive was its conduct after it uncovered the bribery and corruption. Although ABB did not self-disclose the conduct before it was made public, the company “demonstrated intent to disclose the misconduct promptly to the department.” Thereafter, the company engaged in “extraordinary cooperation with the department’s investigation” as well as extensive remediation. The DOJ specifically called out the company “carrying out a root-cause analysis of the misconduct and making significant investments in compliance personnel, compliance testing, and monitoring through the organization.” There were also statements in the DPA which made inapplicable the DOJ’s prior statements on monitors and certifications, including “ABB’s commitment to further enhance its compliance program and internal controls, including enhanced reporting provisions that require ABB, during the pendency of the DPA, to meet with the department at least quarterly and to submit yearly reports regarding the status of its remediation efforts, the results of its testing of its compliance program, and its proposals to ensure that its compliance program is reasonably designed, implemented, and enforced, so that it is effective in deterring and detecting violations of the FCPA and other applicable anti-corruption laws.”

In short, there is much to unpack in this matter. Join us tomorrow where we look at the bribery schemes.