In early January, Alcoa Inc. and a U.S. subsidiary, Alcoa World Alumina LLC, agreed to pay the SEC $161 million and the Department of Justice $223 million, respectively, to resolve charges arising from the payment of millions of dollars in bribes to government officials in Bahrain in violation of the U.S. Foreign Corrupt Practices Act, or FCPA.
The total settlement of $384 million is the fourth largest of its kind. How did Alcoa, an eminently reputable company with long experience in worldwide operations, run afoul of the FCPA?
Before answering this question, it will be helpful to explain first that in broad terms the FCPA prohibits any U.S. citizen or resident, or any U.S. company, from bribing foreign government officials to obtain or retain business.
Moreover, the anti-bribery rules of the FCPA are backed by provisions that require companies whose securities are listed for trading in the United States (such as Alcoa Inc.) to keep accurate accounting records of their business affairs and transactions, and to maintain sufficient internal controls to detect and prevent bribes to foreign officials.
The story behind the Alcoa case is complicated, but here are its key elements, according to the SEC and Department of Justice releases for the settlement.
Between 1989 and 2009, Alcoa World Alumina LLC and another Alcoa subsidiary, Alcoa of Australia, retained a consultant to assist in negotiations for the sale of alumina under multiyear contracts to an aluminum smelter company in Bahrain called Aluminium Bahrain B.S.C., or Alba, majority-owned by the government of Bahrain. Alba was one of Alcoa’s largest alumina customers. Members of the Bahrain royal family and government representatives sat on and controlled Alba’s board.
The consultant, who resides in London and operates through shell companies and offshore bank accounts, had close contacts with members of the Bahrain royal family and senior officials in the government of Bahrain.
Under his arrangements with the Alcoa subsidiaries, the consultant (acting through one or another of his shell companies) was paid a commission on sales to Alba when he was supposedly acting as a sales agent, and received a markup on sales when he was supposedly acting as a distributor.
The SEC settlement order found that no due diligence was conducted by Alcoa or its two subsidiaries to determine whether there was any legitimate business purpose for inserting the consultant as a sales agent or distributor in the supply chain.
Moreover, the consultant performed no legitimate services to justify the role of a “distributor.” Unlike a true distributorship, the shell companies used by the consultant never took possession of the alumina, assisted with the shipping arrangement, or performed any of the other services and duties associated with a distributorship; the only function of the shell companies was to invoice Alba for the alumina shipments at a significant markup.
Internal documents showed that employees at the two Alcoa subsidiaries either knew or were “willfully blind” to the “high probability” that the consultant would use his commissions and sales markups to pay bribes.
The sales and distribution arrangements with the consultant were thus found to be merely sham transactions intended to disguise the funneling of bribes to Bahraini officials order to obtain or retain business with Alba.
To conceal the illicit payments, the consultant and Bahraini officials, including senior members of Bahrain’s royal family, used offshore bank accounts, some held under aliases, at major financial institutions in Guernsey, Luxembourg, Liechtenstein and Switzerland.
The commission payments and alumina sales to the consultant were improperly recorded by the two Alcoa subsidiaries involved in the transactions, and the false entries were then consolidated into Alcoa Inc.’s own books and records and reported in its own financial statements.
To conclude the story, Alcoa Inc. was found during the relevant period to have lacked sufficient internal controls to detect and prevent the illicit payments. In addition to the $161 million Alcoa Inc. has agreed to pay the SEC, the company has also undertaken a comprehensive compliance review to enhance its anti-corruption policies and controls, including those governing its relationships with intermediaries.
The Alcoa case provides an object lesson in several areas for any U.S. business executive or company engaged in international business.
Under the long arm of the FCPA, responsibility for the bribery of foreign officials cannot be avoided by outsourcing the bribery to third-party agents of any sort, including consultants, distributors or other intermediaries.
In enforcing the FCPA, the SEC and Department of Justice will look to the substance of a transaction to determine its true nature, and will not be beguiled by efforts, including false accounting, to disguise or characterize bribery as something legitimate.
Vet carefully any agents, consultants or intermediaries to determine that their services are for a legitimate business purpose, and that they are qualified to provide those services. And if the main qualification of an agent, consultant or middleman appears to be personal relationships with government officials who can fix a problem, back off.
Gordon Kaplan is an international business attorney in San Diego and can be contacted at www.gordonkaplanlaw.com. Send comments to firstname.lastname@example.org. All comments are forwarded to the author and may be used as Letters to the Editor.