On May 17, 2011, the SEC and the U.S. Department of Justice (DOJ) announced their agreements with Tenaris S.A. (Tenaris) regarding alleged FCPA violations by Tenaris. Tenaris agreed to pay more than $5.4 million in disgorgement and prejudgment interest to the SEC and a $3.5-million penalty to the DOJ. The Tenaris case exemplifies the U.S. enforcement authorities’ continued global reach to fight foreign corruption, the typical payments that companies doing business in the former Soviet Union might be making, and the continued aggressive stand the U.S. enforcement agencies take on the definition of “foreign official” for purposes of the FCPA. The Tenaris case also is notable because for the first time in history, the SEC used a deferred prosecution agreement to resolve the matter.
According to the deferred prosecution agreement, Tenaris — a global manufacturer and supplier of steel pipe products and related services — was a corporation organized under the laws of Luxembourg. Tenaris’s ADRs were listed on the NYSE, and its operations included steel pipe sales in the Caspian Sea region, including the former Soviet Republic of Uzbekistan. Tenaris’s Caspian Sea business was run from offices in Azerbaijan and Kazakhstan and accounted for approximately one percent of global sales of $12 billion in 2008.
Between April 2006 and May 2007, Tenaris bid on a series of contracts with Open Joint Stock Company O’ztashqineftgaz (OAO) to supply OAO with pipeline for use in the development and production of oil and natural gas in Uzbekistan. OAO was a subsidiary of Uzbeknefegaz, a state-owned enterprise. During the bidding process, Tenaris was introduced to an agent who offered Tenaris information on various bids from OAO’s tender department. Tenaris hired the agent for a 3.5-percent commission and submitted various bids to OAO, using the information supplied by the agent. Tenaris won the bids, and OAO agreed to pay Tenaris more than $19 million on several contracts. Tenaris paid a commission to the agent through Wachovia Bank NY International. According to the deferred prosecution agreement, Tenaris’s employees knew that a portion of the agent’s commission would be used to pay OAO’s tender department employees who provided the bid information. The SEC alleged in the deferred prosecution agreement that OAO was an instrumentality of a foreign government and that its employees were therefore “foreign officials” for purposes of the FCPA.
As is typical in the post-Soviet space, the losing parties in the bid process complained to an Uzbekistani government agency, Uzbekexpertiza, that Tenaris had improperly obtained the bid information. Such agencies are common in the former Soviet Republics. They have broad power to certify that a manufacturing plant is compliant with local laws or that a certain product meets safety regulations. They also have powers to investigate the bid process. According to the deferred prosecution agreement, the agent recommended to Tenaris that it make a payment to Uzbekexpertiza. While there was no evidence that the payment was actually made, emails suggest that Tenaris had agreed to make the payment.
Certain contracts on which Tenaris made successful bids were canceled, but Tenaris received payments on others and had a combined profit of $4,786,438 from its dealings with OAO.
Tenaris agreed to pay $4,786,438 in disgorgement penalties, $641,900 in prejudgment interest to the SEC, and a $3.5-million criminal fine to the DOJ. Given Tenaris’s cooperation and full disclosure, the SEC agreed to enter into a two-year deferred prosecution agreement. The agreement allowed Tenaris to avoid an SEC action, which would have likely involved certain prohibitions for individuals to occupy board positions and other cease-and-desist measures and could have involved an acknowledgement of wrongdoing. The agreement also does not contain an injunction or an order of a court, which reduces the risk of collateral actions (securities class actions, shareholder breach of fiduciary duty actions). Undoubtedly, Tenaris’s full disclosure and cooperation played a major role in SEC’s deciding to use a deferred prosecution agreement for the first time.
The Tenaris case once again highlights the problems faced by companies in using agents and intermediaries in the former Soviet Union, the need for effective due diligence of those agents, and the need for an effective anti-corruption policy. The Tenaris case also demonstrates the U.S. enforcement authorities’ continued interpretation of “foreign official” in the FCPA to include employees of state-owned enterprises.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following:
Pamela L. Johnston
Chair, Government Enforcement, Compliance & White Collar Defense Practice
Los Angeles, California
David W. Simon
Max B. Chester