A document leaked to the web in November raises questions about whether multinational companies did all they could — and all they were legally required to do — to avoid participating in potential corruption in Venezuela’s electricity industry.
The document in question is a chain of e-mails between Pratt & Whitney Power Systems and ProEnergy Services. It, along with the others in that same collection of ostensible leaks, appears to show that some of the turbines eventually sold to Venezuela came from Pratt & Whitney Power Systems. At the time, that company was a unit of publicly traded United Technology Corp. (UTX), but has since been sold to Mitsubishi Heavy Industries Ltd. (7011.jp OTC:MHVYF ) and renamed PW Power Systems.
I found this interesting. Ever since 2011, when we first heard tales of Venezuelan state companies buying turbines at inflated prices, I always wondered how big companies like Pratt & Whitney, General Electric Corp. (GE), and Rolls Royce Holdings Plc (RR.L) could have gotten mixed up in this, since US law gives them a responsibility to run due-diligence checks on their local partners. In the words of Carl H. Loewenson, Jr. of big US law firm Morrison Foerster:
The simple fact is that parties should know with whom they are doing business. Companies and individuals should take necessary precautions to ensure that they have formed a business relationship with reputable and qualified third parties.
The extent of diligence that should be conducted on a particular third party is a fact-based inquiry that will vary depending on a number of factors, including the industry, the market, the type of transaction, and the historical relationship with the third party.
At a minimum, companies should understand the “qualifications and associations” of its third- party intermediaries. That is, companies should understand the business rationale for hiring the third party as well as the intermediaries’ business reputation and government affiliations. As the DOJ and SEC make clear in the Resource Guide, “the degree of scrutiny should increase as red flags surface.”
The US Foreign Corrupt Practices Act is very broad. It is written to ensure that companies are responsible even if they try to keep their hands clean by letting third-parties do the dirty work of overseas corruption. The guidebook published by the US Department of Justice is instructive. I’ve trimmed a little bit and bolded some parts for emphasis. The short of it is that the law requires companies to go above and beyond.
How Are Payments to Third Parties Treated?
The FCPA expressly prohibits corrupt payments made through third parties or intermediaries. Specifically, it covers payments made to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly,” to a foreign official… The fact that a bribe is paid by a third party does not eliminate the potential for criminal or civil FCPA liability…
Under the FCPA, a person’s state of mind is “knowing” with respect to conduct, a circumstance, or a result if the person:
• is aware that [he] is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or
• has a firm belief that such circumstance exists or that such result is substantially certain to occur.
Thus, a person has the requisite knowledge when he is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist. As Congress made clear, it meant to impose liability not only on those with actual knowledge of wrongdoing, but also on those who purposefully avoid actual knowledge…
Common red flags associated with third parties include:
• excessive commissions to third-party agents or consultants;
• unreasonably large discounts to third-party distributors;
• third-party “consulting agreements” that include only vaguely described services;
• the third-party consultant is in a different line of business than that for which it has been engaged;
• the third party is related to or closely associated with the foreign official;
• the third party became part of the transaction at the express request or insistence of the foreign official;
• the third party is merely a shell company incorporated in an offshore jurisdiction; and
• the third party requests payment to offshore bank accounts.
Businesses may reduce the FCPA risks associated with third-party agents by implementing an effective compliance program, which includes due diligence of any prospective foreign agents.
Let’s take a look at what the documents posted on Scribd appear to show. Please note that none of this has been tested in court, and whoever posted these documents clearly had an agenda of making these transactions look bad. I have no special knowledge that allows me to say that these documents are definitive. However, I did write to both Derwick Associates and ProEnergy for comment on the documents and neither responded.
Let’s go down that list of red flags, stopping at each bit I bolded:
Excessive commissions to third-party agents or consultants: The documents show that Derwick Associates was able to mark up each turbine sale by more than 30 percent beyond what ProEnergy was charging. “Excessive” is a judgment call. What do you think?
The third party became part of the transaction at the express request or insistence of the foreign official. This was the big question in this post. Why was it that ProEnergy sent a proposal to PDVSA, six months later Derwick sent an almost identical proposal, and Derwick’s was accepted while ProEnergy’s wasn’t? As I wrote in November:
This all raises questions. If the Venezuelan state was interested in this equipment, why didn’t it buy directly from ProEnergy? Why buy from an inexperienced local company instead?
One possibility is that a foreign official requested it. There are readers of this site who know how it all went down, but they are skank whores. We’ll get the truth from them once it no longer matters and they want to cleanse their own permanently tarnished reputations. For now, all we have is questions.
The third party is merely a shell company incorporated in an offshore jurisdiction. When ProEnergy started to work with Derwick Associates, Derwick was maybe in Florida? Or in Panama? It incorporated a Venezuelan unit October 28, 2009. The Panamanian company was founded by people who were on the boards of dozens of other Panamanian companies, and who have no obvious connection to the current Derwick Associates — I think it’s fair to call that a “shell.”
The third party requests payment to offshore bank accounts. As I noted in November, the Derwick proposals told Venezuelan state-owned enterprises to wire them money through Citibank NA in New York, to International Union Bank SA in Panama, for final credit to a Derwick account at Davos International Bank, which is in Antigua & Barbuda. Sounds offshore.
There was, at least, reason for concern about this third-party dealing. “Common red flags,” as the Department of Justice says. And to remind you of what that same guidebook says:
A person has the requisite knowledge when he is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.
Did PW Power Systems “actually believes that such circumstance does not exist”?
Here is what I wrote to the company’s press contact over the US Thanksgiving weekend:
– Can you please confirm or deny the authenticity of these e-mails?
– Was P&W aware that ProEnergy would sell the turbines on to Derwick Associates, who would sell them to the final customer?
– Why didn’t P&W sell directly to the Venezuelan state, or to a single middleman, rather than going through two middlemen?
– What procedures did P&W have in place to ensure that this sale complied with the Foreign Corrupt Practices Act?
– Did P&W fulfill those procedures?
– Did P&W do anything to ensure that its middlemen, ProEnergy and Derwick Associates, had adequate anticorruption measures in place?
J. Cory Nielsen, general counsel of PW Power Systems Inc., was kind enough to respond:
PW Power Systems, Inc. (PWPS) maintains a robust compliance program. To the extent possible, we impose the requirements of this program on our suppliers, customers, and agents.
Please note that private business correspondence and related information are protected by applicable state and federal trade secret law. PWPS has no further comment on this matter.
Since both UTX and Mitsubishi Heavy are major providers of equipment to vulnerable countries around the world, I am glad to hear that PW Power Systems Inc maintains a robust compliance program. Wouldn’t want a US company to take part in overseas corruption.