In this series, we examine compliance violations and the resulting fines paid by companies. We will also explore the details of the violations to help other organizations steer away from these pitfalls.
In this second post, we will examine Trafigura’s FCPA settlement.
What is FCPA?
The Foreign Corrupt Practices Act (FCPA) is a U.S. law that prohibits U.S. citizens and. Companies from bribing foreign officials to obtain or retain business. Since 1998, the anti-bribery provisions have also applied to foreign firms and individuals who further corrupt practices within the United States territory.
Also, the FCPA requires companies listed in the U.S. to maintain accurate books and records and implement adequate internal controls to prevent and detect corruption. Enacted in 1977, the FCPA is enforced by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC).
Background of the Case
Trafigura is a multinational company involved in commodity trading, with operations spanning oil and petroleum products, metals, and minerals. Founded in 1993, the company has grown to become one of the largest independent trading firms in the world, with a presence in over 40 countries. Trafigura’s extensive network and scale of operations make it a significant player in the global commodities market. Domiciled in Singapore, this company has operations in major economic hubs like Geneva, Houston, Montevideo, and Mumbai.
The Bribery Scheme
From 2003 to 2014, Trafigura was involved in corrupt practices to secure business with Petrobras, Brazil’s state-owned oil company. The scheme was elaborate and involved multiple layers of deception and financial maneuvering to facilitate the bribery.
Trafigura engaged in a scheme to pay bribes to Petrobras officials to secure contracts for the purchase and sale of oil and petroleum products. These contracts were highly lucrative and provided Trafigura with a significant competitive edge.
The bribes were not paid directly. Instead, Trafigura used intermediaries, like consultants and agents, to funnel the payments. Offshore accounts were utilized to transfer the funds, making it difficult to trace the money back to the bribes. These intermediaries received payments under the guise of consulting fees, commissions, or other legitimate business expenses.
For example, in 2009, a Houston oil agent joined Trafigura as a representative to Brazil. He entered into an agreement with Petrobras officials to pay 2 to 20 cents per barrel as bribes. Also, a former official funneled the money from Trafigura through his offshore banking account to convert it into cash and delivered the same to Petrobras officials. All bribes were tracked through spreadsheets. Cash was withdrawn outside Brazil and it was then transported to the country. Moreover, all payments were processed through a Singapore intermediary and were billed as consultant services for the oil industry issues. Senior executives at Trafigura were aware of the bribery and actively participated in the decision-making process to authorize the payments.
Furthermore, to conceal the true nature of the payments, Trafigura falsified its financial records. The bribes were recorded as legitimate business expenses, like service fees or marketing costs, to avoid detection by auditors and regulators.
Discovery and Investigation
The bribery scheme came to light as part of a broader investigation into corruption within Petrobras, which had already been implicated in many corruption scandals. The investigation revealed that Trafigura was one of several companies involved in bribing Petrobras officials, with some other ones being Vitol and Gunvor.
The DOJ and SEC, in collaboration with Brazilian authorities, conducted a thorough investigation. This included analyzing financial records, interviewing key personnel, and tracking the flow of funds through various accounts. The investigation revealed clear evidence of the bribery scheme and the involvement of senior executives at Trafigura.
Financial Penalties and Settlement
As a result of the investigation, Trafigura agreed to a settlement with the DOJ. The company pleaded guilty to the charges and agreed to pay $126 million in penalties. Out of this, $80 million was for conspiring to violate the FCPA’s anti-bribery regulations and $46 million was for forfeiture. The DOJ agreed to pay $26 million back to settle Brazilian corruption cases. Also, the DOJ convicted 20 individuals for money laundering, totaling $1.7 billion in fines.
Besides financial penalties, Trafigura was required to implement comprehensive compliance measures to prevent future violations. The DOJ noted that though Trafigura provided access to documents and employees, it failed to preserve and produce evidence. More importantly, this company didn’t have a risk-based policy and procedure related to anti-corruption, bribery, consultants, and third-party payments. There was no employee training and compliance testing and no processes around high-risk transactions and compliance monitoring controls. Also, it was slow to implement disciplinary action against certain employees.
As a result, the DOJ wanted Trafigura to revise its compliance programs, conduct regular audits, and enhance internal controls.
Regulatory Actions and Broader Implications
The Trafigura case is part of a larger effort by the DOJ to combat corruption in the commodities trading industry. This industry is particularly susceptible to corrupt practices due to the high value of contracts and the complex nature of transactions.
The DOJ emphasized the importance of holding companies accountable for their actions and ensuring that they do not profit from illegal activities. The settlement with Trafigura serves as a warning to other companies about the severe consequences of engaging in corrupt practices.
Learnings from the Settlement
You can learn many invaluable lessons from this Trafigura settlement.
Importance of Compliance Programs
Establish and maintain robust compliance programs that ensure regular checks and controls over high-value transactions and processes. Develop clear anti-bribery policies, provide regular training for employees, and implement strong internal controls to detect and prevent misconduct. Effective compliance programs help create a culture of integrity and reduce the risk of violations.
Top-Down Commitment
Your senior management must demonstrate a commitment to ethical conduct. Leadership is responsible for setting the tone for the organization and ensuring adherence to compliance standards. When executives prioritize compliance and model ethical behavior, it reinforces the importance of integrity throughout the organization.
Transparency and Accountability
Maintain accurate record-keeping and transparency in transactions. Ensure that your financial records reflect true business activities and are not used to conceal illicit payments. Regular audits and reviews help identify discrepancies and ensure compliance with legal requirements.
Due Diligence
Perform rigorous due diligence when dealing with third parties, like agents and intermediaries. Thoroughly vet your partners to avoid becoming complicit in corrupt activities. This includes conducting background checks, assessing the integrity of potential partners, and monitoring their activities.
Whistleblower Mechanisms
Establish whistleblower mechanisms to uncover unethical practices. Employees should feel safe reporting suspicious activities without fear of retaliation. Anonymous reporting channels, clear policies on whistleblower protection, and prompt investigation of reported concerns are critical for an effective whistleblower program.
Continuous Monitoring and Improvement
Compliance is an ongoing process. Regular audits, risk assessments, and updates to compliance programs are necessary to address emerging risks and maintain adherence to laws. Evaluate your existing processes and make the necessary changes to adapt to changing regulations and business environments.
Other than the above broad learnings, make sure to have a risk-based policy that takes into account financial and business risks, including cybersecurity breaches. Moreover, track all transactions and ensure they have a clean audit trail.
Final Thoughts
Trafigura was embroiled in a complex bribery scam with Petrobras which violated many anti-bribery provisions of the FCPA. The hefty fines coupled with the broad guidelines provide insights into what you must not do to avoid the same fate.
We hope these insights help you navigate the complex landscape of regulatory compliance and safeguard your operations against costly violations.