Introduction
A flurry of federal enforcement action targeting payoffs by subsidiaries of two U.S. tobacco companies may signal a broader regulatory assault against the industry’s business practices abroad, according to experts on the Foreign Corrupt Practices Act.
The U.S. Securities and Exchange Commission and the Department of Justice on Friday announced resolution of civil and criminal actions against two international tobacco producers said to have paid out a combined $6.2 million to officials of seven foreign governments, in attempts to win favorable business deals and legislation.
Subsidiaries of Universal Corporation and Alliance One International, companies that buy, process, and ship tobacco to cigarette manufacturers, were accused of violating FCPA bribery rules, enacted in 1977 to combat U.S. bribery of foreign officials.
The companies have already settled with the two agencies, paying a combined $30 million. Universal, based in Richmond, Va., paid about $10 million in restitution and penalties. Morrisville, N.C.-based Alliance One paid almost $20 million, also in restitution and penalties. As part of the settlements, the two companies must retain independent corruption monitors, from both federal agencies, for three years.
Some of the money will come from subsidiaries of the two companies. Two of Alliance One’s units pleaded guilty in the Justice Department’s FCPA cases. Alliance One and Universal Corp. did not admit to wrongdoing in the SEC actions. One former Alliance One executive pleaded guilty to criminal charges in a separate case brought by state prosecutors in North Carolina.
“The tobacco industry is going to have to take a look at itself and the way it’s been doing business,” said Dick Cassin, a lawyer with 30 years worth of FCPA experience, and author of The FCPA Blog. “A lot of the law-on-the-ground practices are just going to have to stop.”
This is the first time the federal government has taken action against tobacco companies for payoffs overseas, according to the FCPA Digest, which tracks actions under the act.
FCPA experts say these actions could be a broad warning to the tobacco industry that the enforcement agencies are paying close attention. It is not uncommon for the SEC and DOJ to conduct “industry sweeps,” in which they use actions and fines as a show of force to industries, according to Mike Koehler, another veteran FCPA lawyer who teaches business law at Butler University in Indianapolis. The pharmaceutical industry, for example, is currently under this kind of FCPA scrutiny, according to an announcement by acting deputy Attorney General Gary G. Grindler.
The recent action on tobacco “starts to put the FCPA on the radar screen of tobacco companies and others in that industry,” Koehler said.
In the days leading up to last Friday’s announcement of settlements with the two companies, SEC and DOJ prosecutors did not respond to requests for interviews from the Center for Public Integrity.
Details of the corruption allegations tied to Alliance One and Universal Corp. offer a window into how some tobacco companies may be conducting business abroad, especially in countries considered high risk for corruption, and where gift-giving and side deals with government officials are commonplace, experts said.
If the SEC’s allegations are true, “the actions of both of these companies were pretty egregious,” said lawyer and FCPA expert Tom Fox. He cited the government’s charges that the companies set up special bank accounts or sponsored trips for government officials.
From 1996 to 2004, Dimon, a predecessor of Alliance, allegedly delivered $3.5 million in bribes to Kyrgyzstan and Thai government officials, looking to secure sales deals in the two countries, according to the SEC complaint against the company.
Kyrgyz government and tax officials received more than $3 million, most of it delivered in bags of $100 bills to a high-ranking government official, in exchange for favorable access to portions of the country’s tobacco market, the complaint alleges.
Dimon also paid tax officials in Greece and Indonesia $1.4 million to hide irregularities from audit findings and to administer a tax refund, the SEC said in its complaint.
In Thailand, officials of the Thailand Tobacco Monopoly, the government-owned cigarette producer, allegedly received more than $1 million from both Alliance and Universal in exchange for almost $20 million in sales contracts as part of a “coordinated bribery scheme,” the SEC said in a press statement.
The Thai Department of Special Investigation told reporters in Bangkok that it likely will launch its own investigation of the bribery schemes.
In an attempt to secure legislation that would tax competitors, yet spare Universal, the American producer paid $10,000 to the wife of an official with the Mozambique Ministry of Agriculture and Fisheries through a Belgian subsidiary, according to the SEC complaint against the company. The legislation, which called for a 20-percent tax on unprocessed tobacco leaf, was not adopted, but could have benefited Universal because the company was building a processing plant in the country.
“The $10,000 payment was recorded in the subsidiary’s books and records as a ‘consultancy fee,’” according to the SEC complaint. Another $50,000 was said to be paid to the brother of a Ministry of Agriculture and Fisheries official to avoid export taxes.
“The history of tobacco influence — both legitimate and illegal — on legislation both in the United States and around the world is as old as tobacco itself,” said Stephen Swedlow, a Chicago-based lawyer who specializes in U.S. and Nigerian lawsuits against the tobacco industry. “It is not surprising that bribery is one of the tools used by this industry and used repeatedly.”
Universal has been under investigation since June 2006 after the company voluntarily disclosed to regulators that possible FCPA violations had been found by its own investigators — an internal probe sparked by a call to the company’s ethics hotline.
Both Alliance One and Universal disclosed the imminent federal actions to shareholders in recent SEC filings. “We have absolutely no tolerance for this type of activity,” said Universal CEO George C. Freeman, III in a statement. “We have since taken steps to strengthen our culture of ethical and legal compliance, and our efforts are supported by our operations around the world.”
Officials at both companies did not respond to requests for interviews.
A former executive at Alliance One predecessor Dimon, Inc. pleaded guilty last week in a related criminal case filed by federal prosecutors in April. It is not uncommon for the Justice Department to take action against individuals as well as companies, FCPA experts said. Bobby J. Elkin, who was once the company’s manager in Kyrgyzstan, could receive up to five years in prison and a $250,000 fine.
“The DOJ has made perfectly clear that they want to go after individuals because individuals can be sent to jail.” said Koehler, the Butler University professor. “In order to achieve maximum deterrence they have to go after individuals.”
Traver Riggins and Ricardo Sandoval Palos report for the International Consortium of Investigative Journalists.
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