Federal authorities served up a $98 million FCPA enforcement action at the end of last week against a commodities trading firm in Connecticut. Today let’s take a look at the details of that case to see what the firm did and what lessons the rest of the compliance world can learn.
The company in question is Freepoint Commodities, a firm based in Stamford, Conn., with roughly 500 employees worldwide. Freepoint trades in all sorts of commodities across the globe, including oil — which brought Freepoint into contact with Petrobras, the notoriously corrupt state-owned oil company in Brazil.
So what happened? According to a settlement announced last week by the Justice Department and the Commodity Futures Trading Commission, a senior oil trader at Freepoint conspired with his brother (who ran a separate commodity trading firm) and an overseas intermediary to funnel $3.9 million in bribes to a Petrobras employee in the 2010s. In exchange, they gained confidential intel about Petrobras’ plans, so that Freepoint could make more attractive bids to buy, sell, and transport Petrobras oil products.
The cast of characters is important here, so let’s list them:
- Glenn Oztemel, previously a senior oil trader at Freepoint;
- Gary Oztemel, the brother of Glenn Oztemel and head of the Oil Trade & Transport (OTT) shipping company;
- Eduardo Innecco, a Brazilian national and oil trader who worked at various times for both Freepoint and OTT;
- Rodrigo Berkowitz, a Brazilian national who worked as a trader for Petrobras-owned subsidiaries.
The Justice Department already indicted the Oztemel brothers and Innecco earlier this year for their alleged FCPA violations; those cases are still pending.
As described in the criminal information filed with the case, the bribery scheme itself is nothing compliance officers haven’t heard before. Most of the time, Freepoint would pay “consulting fees” to Innecco, who would then send a portion of that money to a shell company in Uruguay that was controlled by Berkowitiz; that was the bribe.
Alternatively, Freepoint would sometimes arrange to buy oil from OTT at inflated prices, and OTT would then offer “profit-sharing” to Innecco-controlled intermediaries; the shared profits ended up with that Uruguay shell company. For example, in July 2012 Freepoint paid OTT $12 million for a shipment of oil. Three days later, OTT paid Petrobras only $11.7 million for that same oil cargo, and sent a $123,000 profit-sharing payment to an Innecco-owned intermediary. Four days after that, the intermediary wired $26,500 to the Uruguay shell company controlled by Berkowitz.
Lesson 1: The Price of a Poor Start
We should take a close look at the damages Freepoint ended up paying, because they give us a glimpse into current Justice Department thinking about the worth of voluntary self-disclosure, cooperation, and remediation.
The full amount Freepoint must pay is more than $98 million: $30.5 million in disgorgement of ill-gotten profits, plus a $68 million penalty. (Technically Freepoint must also pay a $7.6 million civil penalty to the CFTC, although that amount is being credited against the Justice Department criminal penalty.)
First, Freepoint did not receive any voluntary self-disclosure credit, because the company didn’t self-disclose its misconduct. (We don’t know how regulators got wind of the misconduct; none of the settlement documents say.) Freepoint also received some credit for cooperating with the Justice Department, but the department did note that “in the initial phases, [Freepoint’s] cooperation was limited in degree and impact, and largely reactive.”
OK, not great; but Freepoint soon changed its attitude and cooperated more fully. That included prompt responses to document requests, making employees available for interviews, and providing an in-depth analysis of more than 4,000 transactions.
The company also received credit for overhauling its compliance program, and especially its third-party compliance program. Those measures included:
- An independent review of its third-party risk management program by an outside advisory firm;
- Implementation of enhanced risk-based due diligence, screening, ongoing monitoring and oversight procedures, and rolling out FCPA training for third-party agents;
- Implementing a global agent onboarding and tracking procedure;
- Reducing the use of third-party intermediaries;
- Regular testing of the third-party compliance program.
Freepoint implemented all the other remediation measures we typically see too, such as more autonomy for the compliance and hiring more experienced compliance staff, as well as a new global anti-bribery policy that incorporated FCPA red flags. But as we saw from the sketchy relationships with Innecco and the Oztemel brothers, third-party risk was the major issue here that needed the most attention.
For all that effort, Freepoint received a $12 million discount from the FCPA penalties it was facing. That is, the U.S. Sentencing Guidelines would typically lead to a fine of at least $80 million. Freepoint’s cooperation and remediation earned the company a 15 percent discount against that minimum penalty. Fifteen percent of $80 million is $12 million. Deduct that amount, and you arrive at the $68 million criminal penalty Freepoint actually received.
The Justice Department also imposed a three-year deferred-prosecution agreement, but it did not require an independent compliance monitor — another potentially significant cost that Freepoint will avoid paying, thanks to its cooperation and remediation.
So if some crankypants in the First Line business units ever asks, “Why are we doing all this compliance stuff, anyway?” you can point to this example. There are tangible savings to be had by giving the Justice Department what it wants, and many millions in unnecessary cost if you don’t.
Lesson 2: Know Your People
We should also note an interesting detail seldom seen in FCPA enforcement actions lately: the three alleged culprits knew each other, worked together, and supposedly ran other FCPA bribery schemes together — before they arrived at Freepoint in 2012.
The Justice Department settlement documents only identify that previous company as “Trading Company No. 1,” based in Connecticut like Freepoint. Glenn Oztemel worked there, as did Innecco. Another unindicted co-conspirator (read: cooperating witness, most likely) worked at both Trading Company 1 and Freepoint as well. Gary Oztemel didn’t work there, although one might reasonably assume his OTT company did work with Trading Company 1 too.
So we have an alleged FCPA scheme that started at one company and then moved to another, Freepoint. The company itself was even quick to stress that detail in a statement, saying that the misconduct, “though serious and unfortunate, stems from activity by individuals that commenced prior to their joining Freepoint, and was inconsistent with Freepoint’s values and a breach of our zero-tolerance for corruption.”
That’s nice to say, but it raises questions about how Freepoint brought these men into the corporate fold in the first place. What were the background checks for new hires? What were the due diligence procedures for screening out intermediaries such as Innecco? How did nobody object to the conflict of interest of Glenn Oztemel at Freepoint doing business with Gary Oztemel at OTT?
So for all our attention on third parties, don’t forget that FCPA compliance begins at home. You need to be able to root out misconduct happening in your own house too.