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Alexandra Wrage
President and Founder, TRACE

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Nicola Bonucci 
International Lawyer and former
Director for Legal Affairs OECD
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Dave Lee
FCPA Compliance Consultant
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Sunny McCall
Senior Director II, Compliance Training, TRACE
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Lee Nelson
Independent Compliance and
Ethics Attorney
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Jessica Tillipman
Associate Dean for Government Procurement Law, The GW University Law School
Telefonica number

Last week, the U.S. Department of Justice announced that a subsidiary of Spanish company Telefónica S.A. agreed to pay $85.2 million to resolve an investigation into a scheme to bribe government officials in Venezuela. 

 

The enforcement is unusual not just because there is no parallel resolution with Securities Exchange Commission, but because the amount of the fine is lower than the improper advantage that the subsidiary received. This may signal that the DOJ had other interests in mind as it pursued the case – perhaps against Chinese equipment makers.

 

Under Venezuela’s strict currency controls, most companies cannot exchange domestic bolivars for foreign notes; instead, they have to use a government platform that takes bolivars from local companies and pays out U.S. dollars to their foreign vendors, using a fixed official exchange rate. Because the official rate artificially values the bolivar much higher than the free-market does (and because free market exchanges are illegal), allocations under the platform are highly oversubscribed. The subsidiary, Telefónica Venezolana, improperly paid nearly $29 million to access this platform in 2014.

 

To do so, it needed help from two of its vendors – described by the DOJ as “multinational telecommunications equipment and systems” companies. They agreed to pad their invoices and, when paid their U.S. dollars, pass those extra funds along to a shell company that would then pay out the bribes.

 

The settlement documents reveal that, all in all, Telefónica Venezolana was able to exchange about 1.27 billion bolivars for $115 million. What they do not say is that, at market rates, that same sum would have cost 5.77 billion bolivars or more. Instead, they simply describe the exchange rate as “favorable.” 

 

That favorable difference was worth at least $90 million, meaning the penalty amount does not even amount to disgorgement. 

 

So what does the DOJ gain from this settlement, and why did it gloss over the scope of the Telefónica subsidiary’s gains?

 

While there may have been some sympathy for Telefónica Venezolana, which faced price controls and runaway inflation and had to take massive losses as a result, it may also have been that the DOJ was ultimately more interested in the case as a way to collect evidence about the company’s vendors.

 

The vendors are not identified by name, but some of the main players in Venezuela’s telecommunications sector work with Chinese suppliers. Similarly, Spanish media have reported in May that Telefónica was facing a fine from U.S. regulators with respect to Chinese vendors in Venezuela. 

 

And the settlement documents include an interesting, seemingly extraneous detail – that employees from one of the vendors used U.S.-based email accounts in furtherance of the bribe. It is completely meaningless with respect to the Telefónica case, where jurisdiction is already clearly established; but given that many US email services are not available from Mainland China, it’s possible that these accounts were accessed while in the US – thus hinting at the jurisdictional hook needed to bring FCPA charges against that vendor.

 

At least one of the potential vendors has been reported to be the subject of FCPA scrutiny, and both are the targets of U.S. political ire.

 

To be sure, the DOJ would be brushing up against the statute of limitations, and we may yet see an announcement from the SEC. But given that these companies have been frequent targets of U.S. regulators and politicians, this enforcement might foreshadow more actions against Chinese telecom suppliers.

 


FCPA Compliance Consultant

Airplane

From its debut in 1966, the Grumman Gulfstream II jet stood out as a turbo-powered symbol of luxury business travel. With room for a dozen passengers, a transcontinental flight range, and aerodynamics that would make a NASA engineer blush, it was the vehicle of choice for discerning executives and heads of state worldwide.


Still, they didn’t quite sell themselves; that prerogative belonged to Page Airways, founded in 1939 by James P. Wilmot in his hometown of Rochester, New York. The company began as a flight instruction provider, taking advantage of the U.S. government’s eve-of-war interest in strengthening the nation’s aviation capacity. Over the years it grew in both size and scope, alongside Wilmot’s own formidable clout as a political fundraiser.


The FCPA had been around for only a few months when the SEC filed a civil action against Page, Wilmot, and five other Page executives. The allegations concerned the company’s sales activities in half a dozen countries in Africa, the Middle East, and Southeast Asia.


We see some familiar patterns: presidential kickbacks in Gabon, for example, and side payments to well-connected development organizations in Malaysia and the Ivory Coast. Others details stand out a bit more: certain third-party arrangements in connection with Morocco and Saudi Arabia that “left over $5 million of the proceeds of Gulfstream II sales unaccounted for” and the creation of a secret subsidiary to do business with Idi Amin’s Uganda. (Plus giving the dictator a Cadillac Eldorado—the one allegation tying the case to the FCPA proper, given the events’ timing.)


The case didn’t go to trial. After getting venue transferred from the District of Columbia to Rochester, the company’s lawyer served a subpoena on the CIA demanding any information it might have concerning the  above-described activities. Before long, the case was settled—individuals dismissed, company enjoined, monitor appointed—with the telling digest notation: “In reaching settlement of this action, the Commission and Page considered concerns raised by another agency of the United States Government regarding matters of national interest.”


Aviation and national interest have never been far apart. The FCPA itself was born amid concerns about corruption in the sale of military aircraft and its effect on the United States' international repute. It isn’t surprising that an intelligence agency might have connections with those selling private jets to world leaders in global hotspots. We’ll leave further speculation to others.



This post is part of "The FCPA Files" series, examining key enforcement cases under the Foreign Corrupt Practices Act and the lessons they offer for modern compliance.


Old files

Finbar Kenny was a philatelist and entrepreneur: postage stamps were his game. After decades as the manager of Macy’s stamp department, he was intimately familiar with both the community and the economy of stamp collectors.


In the early 1960s, Kenny saw an opportunity: a number of Persian Gulf sheikhdoms, informal British protectorates, had wrested domestic control over their mail systems. With few other sources of revenue (oil wasn’t yet a force in that part of the Arabian Peninsula), they could leverage their newfound franking authority into a valuable novelty for the philatelic market. Within a few years, these “Dunes” stamps—garishly decorated and generally bearing no thematic relation to their jurisdiction of origin—accounted for a significant share of the issuers’ budgets. The buzz eventually died down, and the stamps were mostly worthless by the time the sheikhdoms formed the United Arab Emirates in 1971.


Kenny made a similar deal in 1965 with the new prime minister of the Cook Islands, Albert Henry. It was a win-win: Kenny’s company printed the stamps, sold them abroad, and kept half the profits. The government, for its part, enjoyed a convenient source of passive income—a full fifth of its budget by the late 1970s.


In 1978, Henry was facing a tough re-election. Turnout was going to be key: the contest would eventually hinge on which party could fly in more expats from New Zealand. Air travel not being cheap, Henry asked Kenny to help him divert $337,000 of stamp revenue to charter flights for friendly voters. The scheme worked and Henry stayed in office. But not for long: the ruse was discovered, the subsidized votes were nullified, and Henry’s rival, Thomas Davis, became prime minister.


Guilty pleas followed: Henry for conspiracy and corruption, Kenny International for violating the FCPA’s anti-bribery provision—the very first conviction under the infant law. Kenny was levied a fine of $50,000 and required to make good on the diverted $337,000. Ironically, the company was invited to continue printing and selling stamps under the new government, as there really wasn’t anyone else who could do the job. No matter: soon enough collectable stamps would be displaced in the islands’ economy by the burgeoning industries of offshore financial services and tourism. There’s more than one way to leverage sovereignty and a sense of the exotic.



This post is part of "The FCPA Files" series, examining key enforcement cases under the Foreign Corrupt Practices Act and the lessons they offer for modern compliance.


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