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E-MailThe following post comes to us from Gregory M. Williams, partner focusing on complex commercial litigation and arbitration and the Foreign Corrupt Practices Act at Wiley Rein LLP, and is based on a Wiley Rein article by Mr. Williams, Ralph J. Caccia, and Richard W. Smith.
“This Order contains no findings that an officer, director or employee of Alcoa knowingly engaged in the bribe scheme.”
There are several notable aspects of aluminum producer Alcoa, Inc.’s (“Alcoa”) recent FCPA settlement. The $384 million in penalties, forfeitures and disgorgement qualify as the fifth largest FCPA case to date. Further, it is remarkable that such a large monetary sanction was imposed when the criminal charges brought by the U.K. Serious Fraud Office against the consultant central to the alleged bribery scheme were dismissed on the grounds that there was no “realistic prospect of conviction.” Perhaps most striking, however, is the theory of parent corporate liability that the settlement reflects. Although there is no allegation that an Alcoa official participated in, or knew of, the improper payments made by its subsidiaries, the government held the parent corporation liable for FCPA anti-bribery violations under purported “agency” principles. Alcoa serves as an important marker in what appears to be a steady progression toward a strict liability FCPA regime.
Background
The alleged scheme related to a supply arrangement between Alcoa subsidiaries and Aluminum Bahrain B.S.C. (“Alba”), a majority-government owned aluminum smelter. According to the DOJ’s criminal information and the SEC’s cease-and-desist order, an Alcoa subsidiary entered into a series of long-term alumina supply agreements with Alba. To assist with negotiations, the subsidiary retained a London-based consultant with close ties to the Bahraini royal family, identified in the government’s documents only as Consultant A but known to be Victor Dahdaleh. When Alba sought to increase its supply requirements, the subsidiary and affiliated entities, including a U.S.-based Alcoa World Alumina LLC (“AWA”), determined that the additional alumina should be provided through one of Dahdaleh’s shell companies. Ultimately, all product was routed through Dahdaleh’s shell companies. Under this arrangement, Dahdaleh was allegedly able to impose inflated markups on the purported sales, which he used to pay bribes to Bahraini officials.
In February 2008, Alba filed a civil suit against Alcoa in the U.S. District Court for Western Pennsylvania, alleging that Alcoa was bribing Alba officials and overcharging for alumina. The lawsuit led to DOJ and SEC investigations.
On January 9, 2014, AWA resolved the DOJ criminal information via a plea agreement, in which AWA agreed to plead guilty to one count of violating the anti-bribery provisions of the FCPA, pay a criminal fine of $209 million, and forfeit $14 million to the Internal Revenue Service. The DOJ set forth various factors justifying a reduced criminal fine for AWA including “the significant remedy being imposed on the Defendant’s majority shareholder, Alcoa, by the U.S. Securities and Exchange Commission for Alcoa’s conduct in this matter.”
In the civil action, the SEC charged Alcoa Inc. with anti-bribery and accounting violations. The action was settled through an administrative cease-and-desist order, under which Alcoa agreed to pay $175 million in disgorgement of profits, with $14 million of that sum deemed satisfied by the forfeiture to the IRS.
The Government’s Expansive Agency Theory
The FCPA contains two main parts: (i) the anti-bribery provisions, and (ii) the books and records and internal control provisions. The latter applies only to issuers. An issuer’s responsibility to maintain accurate books and records encompasses the financial records of the subsidiaries of which the parent holds 50% or more of the voting power. Accordingly, a parent company may be held strictly liable for its subsidiary’s violations of the FCPA accounting provisions. Parent liability under the anti-bribery provisions, however, has been traditionally premised on the parent company’s authorization, direction or control of the alleged improper conduct. Recently, the government has advanced a more aggressive enforcement theory, seeking to hold a parent responsible for the actions of subsidiary without its knowledge of, or participation, in the alleged misconduct.
The DOJ and SEC formally announced this position in the November 2012 Resource Guide to the U.S. Foreign Corrupt Practices Act (“Resource Guide”), in which the agencies asserted that a parent company may be liable under the FCPA’s anti-bribery provisions not only when the parent “participated sufficiently” in a subsidiary’s misconduct, but also “under traditional agency principles.” To make such an agency showing, the DOJ and the SEC explained that they will “evaluate the parent’s control—including the parent’s knowledge and direction of the subsidiary’s actions, both generally and in the context of the specific transaction.”
A small number of enforcement actions appear to reflect, at least in part, such an agency theory. Neither the Resource Guide nor these relatively modest enforcement actions, however, shed much light on what level of knowledge and control the parent must have over the allegedly improper conduct, rather than over the subsidiary generally. The allegations related to agency tend to be either conclusory or brief.
By contrast, after explicitly noting that it contained no findings that an officer, director or employee of Alcoa knowingly engaged in the bribery scheme, the Alcoa cease-and-desist order describes in significant detail the factors on which the SEC relied in determining Alcoa’s subsidiaries were agents of the parent corporation. First, Alcoa appointed the majority of seats on a Strategic Council that provided “direction and counsel” to the subsidiaries. Second, Alcoa and a subsidiary transferred personnel between them. Third, Alcoa set the business and financial goals for the subsidiaries and coordinated their legal, audit, and compliance functions. Fourth, the subsidiaries’ employees managing the Alba alumina business reported functionally to Alcoa officials. Fifth, Alba was a significant Alcoa customer. Sixth, members of Alcoa senior management met with Alba officials and Dahdaleh to discuss matters related to the Alba relationship. Seventh, Alcoa officials were aware that Dahdaleh was the subsidiaries’ agent and the terms of related contracts were reviewed and approved by senior Alcoa managers.
Each of these allegations, with the limited exception of those related to Dahdaleh, relates solely to Alcoa’s control over the subsidiaries generally, rather than any allegedly improper conduct. The assertions related to Dahdaleh, moreover, describe what would appear to be innocuous activities. In short, if the various factors set forth in the Alcoa order are sufficient to establish parent liability, there will be few, if any, circumstances that fail to satisfy the purported “agency” inquiry.
Such an enforcement approach appears to abrogate basic tenets of corporate liability. A parent company is not liable for the acts of its subsidiary except when the companies disregard corporate formalities (alter ego theory) or when the subsidiary acts as the agent of the parent for a specific purpose. For the latter, the parent is required to control the particular activity in question. The government’s new agency theory of enforcement represents an aggressive expansion of corporate liability, with significant the implications for parent companies both in terms of the compliance and potentially liability.
