The SEC has brought charges against Rio Tinto plc, the UK- Australia mining giant, for violating the Foreign Corrupt Practices Act (FCPA) due to a bribery scheme with a consultant in Guinea. As part of the settlement for the SEC’s charges, Rio Tinto will pay a $15 million civil penalty.
To give a bit of historical context before we delve into the details of this case, in November 2016, Rio Tinto alerted the SFO, US Department of Justice, and Australian Federal Police about a payment of $10.5 million made to François Polge de Combret, a former top French banker, for his work on the Simandou project in Guinea in 2011.
The reason for reporting the fee to the authorities was never disclosed by Rio Tinto, but emails from 2011 revealed that senior executives discussed the payment to Mr. de Combret and his close relationship with former Guinea’s President Alpha Condé.
In response to the incident, Rio Tinto terminated the executive responsible for the project at the time, and its head of legal affairs for failing to uphold the company’s standards as outlined in its global code of conduct.
Now that we have some context, let’s take a closer look at Rio Tinto’s not-so-savvy bribery scheme as described by the SEC, and extract some compliance lessons that might be of relevance.
In its announcement of yesterday, the SEC disclosed that the company had been charged with violations of the Foreign Corrupt Practices Act (FCPA) in connection with a bribery scheme involving a Consultant.
Rio Tinto hired this consultant to help the company retain its mining rights in the Simandou mountain region.
The consultant was essentially hired to “open doors” to the precious mining sesame.Simandou is one of the world’s largest undeveloped iron-ore deposits.
Interestingly, the agent is a French citizen, who was a senior advisor at a French investment bank, and the director of his own consulting company.
Anyhoo, as per the SEC, the Consultant (not named in the SEC order) happened to be a former classmate at the Paris Institute of Political Studies, of the former “Senior Government Official” (also not named in the SEC order).
Absolutely no conflict of interest red flags there, right?
The consultant, who was hired based on his “buddy aptitude”, was retained without the due diligence required by the Company’s Code of Conduct, and without a formal written agreement defining the scope of his services or deliverables. The Consultant likewise possessed no particular work experience relating to the mining business, nor to Guinea specifically.
Yet in a moment of infinite wisdom, Rio Tinto’s senior executives decided to conduct email discussions highlighting the Consultant’s history and ongoing friendship with the “Senior Government Official” as the main reasons for hiring him.
The Consultancy Fee
For his “informal services” the consultant was eventually paid a whopping $10.5 million. Of course one cannot justify paying such a hefty consultancy fee in any respectable company without a formal contract, so for the form, a written contract was executed one day before Rio Tinto paid the Consultant, well after he rendered his services.
Although Rio Tinto executives did not seem bothered by his close relationship with the Senior Official, they did seem to have a lively debate however over the Consultant’s payment. One executive even voiced concerns about the suspicious nature of a lump sum payment that the Consultant demanded (allegedly at the request of the Senior Government Official).
In an email, the executive warned that “one big lump looks like a bribe and people will wonder where the money went.” I cannot imagine several tiny payments to Guinea’s President would have looked any less suspicious, but anyhoo.
Despite these reservations, Rio Tinto executives eventually came up with a solution: give the Consultant two lump sum payments for his supposed services.
The payment amounts were debated at lenght in several emails where a Rio Tinto Executive reminded the most reluctant staff of the Consultant’s “very unique and unreplicable services and closeness to the [Senior Government Official].”
Rio Tinto’s CEO went further and reminded them to consider “the optics to the Government of Guinea when thinking about the fees”. Short-sighted optics.
So in 2011, Rio Tinto made an initial payment of $7.5 million to the Consultant’s Swiss bank account (so cliché) and put a further $3 million in escrow, which would only be released if Rio Tinto continued to retain its mining rights over specific blocks.
After receiving his first payment with no fuss, the Consultant then requested the release of the $3 million from escrow, which Rio Tinto authorized in February 2016. The subsequent payments were made through manual payment forms meant for smaller amounts, and they were made out of an Australian-based subsidiary instead of Rio Tinto plc.
Even lower-level employees expressed concerns about the payments being accounted for out of the Australian subsidiary. But apparently, there was no system in place to flag such irregularities.
The Bribe to the Guinean Official
Shortly after Rio Tinto made the first payment and placed the rest in the escrow account, the Consultant tried to transfer over $800,000 from his Swiss bank account to a Hong Kong company owned by a Guinean national, linked to Guinean officials.
Unlike Rio Tinto, the bank handling the payment appears to have had a superb compliance program, as it stopped the transaction, suspecting the Hong Kong company’s ties to Guinean officials.
Following due process, the bank questioned the consultant on the nature of this payment. The Consultant claimed he was making the payment on behalf of a second government official, but that answer seemed unsatisfactory as the transaction was still blocked.
The Consultant said to the bank he would then make the payment from one of his other accounts at another bank. It is unclear whether he was successful at transferring the money via another bank.
The SEC investigation revealed that the Hong Kong company did make a $200,000 payment to buy t-shirts from a Chinese t-shirt company. Why T-shirts might you ask?
Well, the t-shirts made in China somehow ended up being used for the “Senior Government Official’s” reelection campaign, matching the description on the invoice the Consultant submitted.
Based on the evidence, it appears that the attempted payment made using Rio Tinto’s funds was aimed at either concealing a political contribution to the Senior Government Official’s campaign or as a payment to a more Junior Government Official.
The SEC’s Chief of Enforcement’s FCPA Unit, brilliantly summarized this case by saying that “Even well-designed controls need committed managers to be effective.”
He added: “Here deficient controls were no match for managers determined to hire a consultant whose only ostensible qualification was a personal relationship with a senior government official.”
Rio Tinto was charged for accounting failures. The SEC found that none of the payments to the Consultant were reflected in Rio Tinto’s books and records, and it failed to have sufficient internal accounting controls in place to detect or prevent the misconduct.
As a result of the charges, Rio Tinto has agreed to pay a $15 million civil penalty to settle the SEC’s charges without admitting or denying the findings.
The company’s past failure to implement sufficient internal accounting controls serves as a reminder of the importance of effective tone at the top and internal controls in preventing bribery and corruption.
- Check Conflicts of interest: The consultant may have connections with government officials or business partners that could create conflicts of interest and lead to bribes being paid in order to secure business deals.
- Draft a clear contract: Without a clear contract that outlines the consultant’s services and deliverables, it can be difficult to track payments and ensure that they are legitimate.
- Conduct Due Diligence: Hiring a consultant based solely on personal connections or recommendations, without verifying their qualifications and experience, can increase the risk of bribery and corruption.
- Check the Reputation of the consultant: If the consultant has a history of involvement in bribery or other unethical behavior, hiring them could put the company at risk of being implicated in illegal activities.
- Establish an internal controls framework: Without proper oversight and internal controls, the consultant may be able to engage in bribery and other corrupt activities without being detected.