A document leaked online in November raises concerns about whether multinational corporations did everything possible—and what they were legally obligated to do—to avoid potential corruption within Venezuela’s electricity sector.
This document comprises a series of e-mails exchanged between Pratt & Whitney Power Systems and ProEnergy Services. Together with the other documents in that same collection of apparent leaks, it seems to indicate that some turbines ultimately supplied to Venezuela originated from Pratt & Whitney Power Systems. At that time, this company was a division of publicly traded United Technology Corp. (UTX), but has since been acquired by Mitsubishi Heavy Industries Ltd. (7011.jp OTC:MHVYF) and rebranded as PW Power Systems.
I found this topic intriguing. Since 2011, when we first learned about Venezuelan state companies purchasing turbines at inflated prices, I’ve often wondered how large corporations like Pratt & Whitney, General Electric Corp. (GE), and Rolls Royce Holdings Plc (RR.L) became entangled in this situation, given that U.S. law mandates due diligence checks on local partners. As Carl H. Loewenson, Jr. from the major U.S. law firm Morrison Foerster noted:
The simple fact is that parties should know with whom they are doing business. Companies and individuals should take the necessary precautions to ensure they have formed a business relationship with reputable and qualified third parties.
The degree of diligence required for a specific third party varies based on numerous factors, including the industry, market, type of transaction, and previous relationships.
At the very least, companies need to be aware of the “qualifications and associations” of their third-party intermediaries. This means understanding the business rationale for hiring these third parties, as well as their reputation and government connections. As the DOJ and SEC indicate in the Resource Guide, “the level of scrutiny should increase as red flags appear.”
The U.S. Foreign Corrupt Practices Act (FCPA) is quite comprehensive. It is structured to hold companies accountable, even if they attempt to distance themselves from overseas corruption by employing third parties to do their dirty work. The guidebook issued by the U.S. Department of Justice is informative. I’ve summarized it with some sections highlighted for clarity. Essentially, the law expects companies to go beyond the minimum requirements.
How Are Payments to Third Parties Treated?
The FCPA explicitly prohibits corrupt payments made through intermediaries. Specifically, it addresses 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 facilitated by a third party does not eliminate the risk of criminal or civil liability under the FCPA…
Under the FCPA, a person’s mindset is considered “knowing” concerning 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
• holds a firm belief that such circumstance exists or that such result is likely to happen.
Hence, a person possesses the required knowledge when they are aware of a high probability of the existence of such circumstance, unless they sincerely believe that such circumstance does not exist. As Congress intended, liability extends not only to those with actual knowledge of wrongdoing but also to those who intentionally avoid such knowledge…
Common red flags linked with third parties include:
• excessive commissions to third-party agents or consultants;
• unreasonable discounts to third-party distributors;
• third-party “consulting agreements” that vaguely describe services;
• the third-party consultant operates in a different industry than what they were hired for;
• the third party is related to or closely tied with the foreign official;
• the third party became part of the transaction at the express request of the foreign official;
• the third party is essentially a shell company registered in an offshore jurisdiction; and
• the third-party requests payment to offshore bank accounts.
Companies can lower FCPA risks linked to third-party agents by executing an effective compliance program, which includes thorough due diligence of all potential foreign agents.
Now, let’s examine what the documents posted on Scribd appear to reveal. It’s worth mentioning that none of this has been tested in a court of law, and whoever published these documents clearly aimed to cast these transactions in a negative light. I do not have special insight that confirms these documents as definitive. However, I reached out to both Derwick Associates and ProEnergy for their comments on the documents, but received no reply.
Let’s go through that list of red flags, stopping at each point I highlighted:
Excessive commissions to third-party agents or consultants: The documents indicate that Derwick Associates marked up each turbine sale by more than 30 percent over what ProEnergy charged. What constitutes “excessive” is a matter of judgment. What do you think?
The third party became involved in the transaction at the explicit request of the foreign official. This was a major question in this post. Why did ProEnergy submit a proposal to PDVSA, only for Derwick to submit a nearly identical proposal six months later, with Derwick’s being accepted while ProEnergy’s was not? As I noted in November:
This raises many questions. If the Venezuelan state wanted this equipment, why didn’t it purchase directly from ProEnergy? Why go through an inexperienced local company instead?
One possibility is that a foreign official requested it. There are individuals who know the full details, but they are less than reliable. We may hear the truth from them once they want to redeem their tarnished reputations. For now, we are left with more questions.
The third party is merely a shell company registered in an offshore jurisdiction. When ProEnergy began working with Derwick Associates, was Derwick based in Florida? Or Panama? It registered a Venezuelan division on October 28, 2009. The Panamanian company was founded by individuals tied to numerous other companies and who lack a clear link to the current Derwick Associates—which does seem to fit the definition of a “shell.”
The third party requests payment to offshore bank accounts. As mentioned previously, Derwick’s proposals instructed Venezuelan state-owned enterprises to wire funds through Citibank NA in New York, to International Union Bank SA in Panama, for eventual credit to a Derwick account at Davos International Bank, located in Antigua & Barbuda. Sounds offshore.
There was, at the very least, reason to be wary of this third-party arrangement. “Common red flags,” as the Department of Justice puts it. And to remind you of what that same guidebook states:
A person has the requisite knowledge when they are aware of a high probability of such circumstances, unless they genuinely believe such circumstances do not exist.
Did PW Power Systems “actually believe that such circumstances do not exist”?
What I sent to the company’s press contact over the U.S. Thanksgiving weekend was:
– Can you please confirm or deny whether these e-mails are authentic?
– Was P&W aware that ProEnergy intended to sell the turbines to Derwick Associates, who in turn would sell them to the final customer?
– Why didn’t P&W sell directly to the Venezuelan state or a single middleman, rather than going through two?
– What procedures did P&W implement to ensure compliance with the Foreign Corrupt Practices Act?
– Did P&W follow those procedures?
– Did P&W take any actions to confirm that its middlemen, ProEnergy and Derwick Associates, adopted sufficient anti-corruption measures?
J. Cory Nielsen, general counsel of PW Power Systems Inc., kindly replied:
PW Power Systems, Inc. (PWPS) has a strong compliance program. We strive to enforce the requirements of this program among our suppliers, customers, and agents.
Please be aware that private business communications and related information are protected under applicable state and federal trade secret laws. Thus, PWPS has no additional comments on this issue.
Thank you.
Considering that both UTX and Mitsubishi Heavy are prominent suppliers of equipment to high-risk countries globally, I’m pleased to learn that PW Power Systems Inc. maintains a strong compliance program. We wouldn’t want a U.S. company to get involved in overseas corruption.