Tag: bribery schemes

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The Gunvor FCPA Enforcement Action: Part 2 – The Bribery Schemes

We continue our exploration of the resolution of the FCPA enforcement action involving the Swiss trading firm Gunvor S.A. The enforcement action came in with a $661 million penalty against the company, which has pleaded guilty to bribing Ecuadorian government officials through the 2010s in exchange for intelligence about upcoming business contracts with the state-owned oil company of Ecuador. The matter was resolved via a Plea Agreement. Information detailing the company’s conduct was also issued.

The Gunvor bribery schemes ran for nearly 8 years. Between 2012 and 2020, Gunvor paid more than $97 million to intermediaries, knowing that some money was used to bribe Ecuadorean officials. Those officials included Nilsen Arias Sandoval, a then-high-ranking official at Petroecuador. To show the blatantness of the bribery scheme, Gunvor managers and agents attended meetings in the United States and elsewhere, and bribe payments were routed through banks in the United States using shell companies in Panama and the British Virgin Islands controlled by Gunvor’s co-conspirators. According to the DOJ, a Gunvor employee also directed one of the intermediaries to use the money to purchase an 18-karat gold Patek Philippe watch.

According to the Plea Agreement, the Brothers Ycaza, Antonio Pere, and  Enrique Pere were agents for Gunvor who exercised control over companies and bank accounts in the United States and elsewhere. These accounts were used to facilitate the payment of bribes to Ecuadorian government officials to, among other things, obtain and retain business for Gunvor.

Gunvor paid over $97 million to the Brothers Ycaza via their companies, EIC and OIC. Several Gunvor employees, including Kohut, Gunvor Manager #1, and Gunvor Manager #2, knew and intended that some payments would be used to bribe Ecuadorian officials. After that, the Brothers Ycaza made millions of dollars in bribe payments on Gunvor’s behalf, directly and indirectly, to Ecuadorian officials identified by number in the Plea Agreement.

To do so, the Brothers Ycaza set up shell companies to launder Gunvor’s corrupt payments, entered into several service agreements to facilitate the payment of bribes, created fake invoices for purported consulting services, and used email accounts with pseudonyms to transfer funds to offshore shell companies involved in the conspiracy. The illegal payments were made through multiple bank accounts in the United States and abroad to conceal the bribes.

Gunvor Singapore made the corruption payments through a services agreement with the Brothers Ycaza and their company through EIC, which enabled the payment of bribes to Ecuadorian officials on Gunvor’s behalf. The agreement provided for certain prepayments and success fees, but the bulk of the compensation was through per-barrel “volume fee” payments to EIC that depended on the amount of oil purchased in connection with the oil-backed loan contract. Gunvor and EIC amended the services agreement several times to change, among other things, the amount of the volume fees due to be paid to EIC. The Brothers Ycaza used portions of the volume fees to pay bribes to Ecuadorian officials on Gunvor’s behalf. The volume fee compensation model for the Brothers Ycaza was increased multiple times to increase both their compensation and the amount of bribes being paid on behalf of Gunvor over the length of the bribery scheme.

In exchange for the bribes, Ecuadorian officials provided improper advantages to Gunvor, including (a) helping to direct Petroecuador to award contracts to State-Owned Entities for the ultimate benefit of Gunvor and (b) providing Gunvor, through certain of its employees and agents, information about Petroecuador that assisted Gunvor in corruptly obtaining and retaining business for Gunvor in connection with Petroecuador. This structure allowed Gunvor and its co-conspirators to avoid a competitive bidding process and obtain contractual terms they could not have otherwise. Gunvor also received confidential Petroecuador information in exchange for the bribes. Gunvor earned more than $384 million in profits from the contracts it obtained corruptly from Petroecuador.

In 2017, when the corrupt Petroecuador official Arias left the company, the Brothers Ycaza engaged other corrupt Petroecuador officials through cash bribe payments. This new scheme included effecting bribe payments on Gunvor’s behalf in exchange for confidential Petroecuador information about shipping windows. To facilitate this scheme phase, Gunvor continued to pay fees to the Brothers Ycaza through another company, OIC, on each barrel of oil products purchased in connection with their oil-backed loan contracts with Petroecuador. As in the prior phase of the scheme, Gunvor employee Kohut continued to coordinate the processing and payment of the invoices by Gunvor. Upon receiving funds from Gunvor, the Brothers Ycaza wired money to intermediaries based in Ecuador, who then arranged for the bribes to be delivered in cash to Ecuadorian officials within Petroecuador, who provided confidential Petroecuador information to Gunvor.

Gunvor employees and officers participating in the bribery scheme worked to conceal their illegal actions. One Gunvor Manager instructed Kohut to communicate using personal email accounts. The Brothers Ycaza also used personal or pseudonymous email accounts to speak about the scheme. Alias were often used rather than their actual names.

Interestingly, and perhaps equally troublingly, Gunvor executives and compliance personnel knew that Gunvor had paid the Brothers Ycaza tens of millions of dollars. This was without receiving other supporting documentation for EIC’s or OIC’s business activities on Gunvor’s behalf. Between May 2018 and May 2020, Gunvor executives and compliance personnel requested the Brothers Ycaza (i) for supporting documentation to justify the commission payments and (ii) to meet with executives and compliance personnel. The Brothers Ycaza repeatedly failed to respond entirely to Gunvor’s documentary requests and would not travel to Gunvor’s headquarters for the requested meeting. Finally, the Plea Agreement dryly noted, “Notwithstanding these repeated failures, Gunvor continued to make corrupt payments to entities owned and controlled by Antonio Pere and Enrique Pere until approximately January 2020, at which time Gunvor suspended payments to OIC.”

It is unclear from any resolution documents or the DOJ Press Release how the bribery scheme was uncovered or even ended. It may have been through a DOJ investigation into one of the other corrupt companies that came to grief working in Ecuador or with Petroecuador. It is clear that Gunvor did not self-disclose.

Join us tomorrow, and we will consider Gunvor’s steps after the DOJ knocks.

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KT Corp. FCPA Enforcement Action: Part 2 – The Bribery Schemes – Flow Charts and Scorecards

Matt Kelly and I did an episode on our podcast, Compliance into the Weeds, about the KT Corporation settlement Foreign Corrupt Practices Act (FCPA) with the Securities and Exchange Commission (SEC) via a Cease and Desist Order (the Order) for “disgorgement of $2,263,821, prejudgment interest of $536,457, and a civil money penalty in the amount of $3,500,000” bringing the total fine and penalty to just over $6.3 million. One of the most prescient lines that came out of the podcast was that you need a flow chart to follow all the bribery schemes and you needed a scorecard to follow all the persons and entities involved in those schemes. In today’s post we will look at the bribery schemes in some detail.
I. South Korea
a. Getting Cash
As I mentioned yesterday, the bribery schemes used by KT Corp. harkened back to some older FCPA enforcement actions in one respect as one of the key bribery schemes used involved cash. The cash was garnered to fund a series of bribes from 2009-2017. The Order noted, “high-level executives of KT maintained slush funds, comprised of both off-the-books accounts and physical stashes of cash, in order to provide items of value to government officials, among others. These included gifts, entertainment and, ultimately, illegal political contributions to members of the Korean National Assembly serving on committees relevant to KT’s business.”
The cash was obtained in two distinct ways. In the first scheme, 2009-2013,  the Chief Executive Officer (CEO) and another senior approved inflated bonuses to other executive officers and executives. The recipients laundered the bonus payments into cash and next returned the cash to the CEO. This generated a slush fund of approximately $1 million. Some of the funds were held in another executive’s personal bank account, while the cash was stored in a safe in the corporate offices. The CEO then used the cash as a slush fund for gifts and payments to Korean government officials with the ability to influence KT Corp.’s business. There was no accompanying spreadsheet recordation’s of the gift recipients, although these payments were apparently common knowledge within the executive ranks. In a massive accounting fraud, the company “booked the slush fund amounts as executive bonuses, even though the money was used for gifts and for payments to government officials.”
Eventually this bribery scheme was uncovered, and the CEO was criminally charged on this matter. This did not deter KT Corp. in moving forward to continue to engage in bribery and corruption. From 2014 to 2017, the company’s Corporate Relations (“CR”) Group was brought in as the funding mechanism to create the pot of money to pay bribes. However, this vendor did not deliver gift cards to the CR Group but cash. The corrupt vendor even kept a percentage of the overall amount of cash as a fee. To facilitate the accounting fraud, the company used the phrase “CR Case Benchmarking,” in the company purchasing system as the purported purpose for the purchase.
But the cloak and dagger style used by KT Corp. continued as the vendor would meet a representative from the CR Group outside the KT office building where the vendor would give the CR Group representative “a paper bag containing a large manila envelope of cash, corresponding to the value of the gift cards purchased, less a commission for Vendor.” The cash was kept locked in the CR Group offices.
Unlike the first bribery scheme which was run directly by the CEO, in this second phase the cash was provided “to KT officers and managers, with the understanding that they would transfer the funds electronically to the contributions accounts for various Korean lawmakers. Once the transfer was made, a CR employee would inform the particular lawmaker’s aide that the contribution came from KT. This scheme was used to evade Korea’s Political Funds Act, which prohibits corporations from making political contributions. Most of the funds went to lawmakers in the National Assembly who sat on committees with the ability to impact the telecommunications industry and KT’s business.”
b. Hiring of Princelings
Here we saw a variety of the Princelings scandal that engulfed JPMorgan and other entities in bogus hiring’s of sons, daughters and other family members to provide illegal benefits to foreign government officials. Yet another scheme involved hiring individuals, as KT Corp. employees, with personal connections to the South Korean White House and ruling party, (the “Blue House”). Once they were hired these individuals were given even more cushy jobs in the company. In a derivation of the Princelings hiring schemes, the company also hired an entire advertising agency which did not meet KT Corp. criteria for retention as a vendor. In addition to hiring this unqualified advertising agency, “KT paid the two individuals a total of $454,009 in salaries and the advertising firm a total of $5.88 million in fees.”
II. Vietnam
a. Solar Power Project
In this project, KT Corp. used a sophisticated business venture, which was not a formal partnership or Joint Venture (JV) partnership. Under this bribery scheme, KT Corp. had another company involved in the project wire some $95,000 to KT Corp, who then would facilitate the payment of the bribe. The money was wired to a KT Corp. employee’s personal bank account, who then withdrew as cash. The employee and a construction company subcontractor representative met the corrupt government official and he was paid the money. Internally, the payment was described as “a rebate to the project owner.”
However, that did not end the matter for KT Corp. as they had to repay the construction company for the $95K. The construction company billed KT Corp. for the bribe, describing it as “expenses for engaging in sales activities with the ordering organization . . . ($95K),” as well as other expenses. KT Corp. paid the construction company approximately $200,000 to settle all the claims, including reimbursement for the bribe payment, and it booked the payment as “Support/consulting for performance of the business (completed).”
b. Vocational College Project
KT Corp. participated with a consortium to bid on the Vocational Colleges Project. KT Corp. learned from its original consortium partner (“Partner 1”), which was to pay the agent fee, that 10% of the project cost would go to the agent, who would pass on 7% of the project cost to Official 1. However, Partner 1 informed KT Corp. that it did not want to be responsible for the agent’s fee due to the risk involved. KT Corp. agreed to reorganize the consortium and assume responsibility for paying the agent’s fee. KT Corp. and a corrupt agent agreed that the fee would be 8.5%, which included $550,000 for Official 1.
KT Corp. then arranged for a subcontractor in the consortium to become a consortium partner (“Partner 2”) and KT Corp. “tasked Partner 2 with the responsibility of paying the agent fee. The purpose of the arrangement was to distance KT from the agent, as well as to conceal the agent from KT’s agent review process. While the agent review process was a financial risk review, not an anticorruption review, the KT managers involved preferred to avoid any questions about KT’s relationship with the agent. Paying the agent through Partner 2 enabled KT managers to bypass the review.”
As I said at the start of this post, you need a flow chart to follow the bribery schemes and a scorecard to follow the players.
Join us tomorrow where we look at some lessons learned for the compliance professional.