On May 17, 2011, the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) announced that it entered into a deferred prosecution agreement (“DPA”) with Tenaris S.A. (“Tenaris”) to resolve Foreign Corrupt Practices Act (“FCPA”) allegations. The settlement marks the first time the SEC has used a DPA in an enforcement action. The use of this settlement tool was signaled by the SEC last year when it announced its Enforcement Cooperation Initiative, intended to encourage more individual and corporate cooperation during FCPA investigations initiated by the Commission. As part of the settlement, Tenaris also agreed to pay $5.4 million in disgorgement and prejudgment interest. The company resolved FCPA charges with the U.S. Department of Justice (“DOJ”) through a non-prosecution agreement (“NPA”) and a $3.5 million criminal penalty. Whereas the DOJ has long utilized DPAs and NPAs to aid in successfully negotiated FCPA settlements, until its announcement last year the SEC had not been inclined to follow a similar approach.
Tenaris is a Luxembourg-based global steel pipe manufacturer with American Depositary Receipts listed on the New York Stock Exchange. According to the SEC’s allegations, Tenaris employees and agents paid bribes to Uzbekistan government officials in order to win contracts to supply pipelines for oil and gas transportation. Specifically, the SEC alleged that improper payments were made during the contract bidding process in 2006 and 2007 to obtain confidential information about competitors’ bids and that access to such information enabled Tenaris to submit revised bids to its advantage. Consequently, Tenaris allegedly secured contracts worth almost $5 million in profits.
The DPA Tenaris entered into with the SEC stated that after discovering the FCPA violations, Tenaris voluntarily disclosed the conduct to the SEC and DOJ in a timely and complete manner, conducted a thorough internal investigation, cooperated in real-time with the U.S. government, and undertook extensive remediation efforts, including enhancements to its compliance program. The DOJ stated in its settlement release that the reduced criminal penalty was a result of Tenaris’s extraordinary cooperation. Under the terms of the DPA, the SEC will refrain from bringing an action against Tenaris if the company complies with certain undertakings, including enhancement of its compliance policies and procedures; implementation of due diligence requirements related to agents; provision of detailed FCPA and anti-corruption training to its employees; certification of compliance with the DPA; and notification to the SEC of any potential violations of anti-bribery or securities laws.
The Tenaris settlement indicates a change in SEC enforcement policy that has been developing since last year. When the Commission launched its Enforcement Cooperation Initiative in January 2010, Robert Khuzami, Director of SEC’s Division of Enforcement, said about the series of measures: “This is a potential game-changer for the division of enforcement.” “There is no substitute for the insiders’ view into fraud and misconduct that only cooperating witnesses can provide.”
The framework of cooperation incentives announced by the SEC includes enforcement tools traditionally used by criminal law enforcement agencies, such as a DPA. Under a DPA, a company avoids prosecution if it abides by the terms of its agreement with the enforcement agency, generally within a period of time set out in the agreement.
Companies and compliance professionals have debated the benefits of cooperation with the U.S. government, and whether credit for cooperation is indeed meaningful. Referring to the Tenaris case, Mr. Khuzami said, “The company’s immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training made it an appropriate candidate for the Enforcement Division’s first Deferred Prosecution Agreement. Effective enforcement of the securities laws includes acknowledging and providing credit to those who fully and completely support our investigations and who display an exemplary commitment to compliance, cooperation, and remediation.”
With the Tenaris settlement, it appears that the SEC is taking its cooperation initiative seriously. Tenaris provides valuable guidance for companies and compliance professionals who must decide the scope of their cooperative efforts during an FCPA investigation, weighing the benefits of the scope they are considering. In light of the Tenaris settlement, global companies should be even more mindful from the beginning of an investigation of the settlement options that may exist and consult experienced professionals to assist in making decisions related to cooperation and other reasonable steps that may be taken in connection with an investigation.