The DOJ’s Telefónica Enforcement: Looking for Roaming Charges?
Last week, the U.S. Department of Justice announced that a subsidiary of Spanish company Telefónica S.A. agreed to pay $85.2 million to resolve an investigation into a scheme to bribe government officials in Venezuela.
The enforcement is unusual not just because there is no parallel resolution with Securities Exchange Commission, but because the amount of the fine is lower than the improper advantage that the subsidiary received. This may signal that the DOJ had other interests in mind as it pursued the case – perhaps against Chinese equipment makers.
Under Venezuela’s strict currency controls, most companies cannot exchange domestic bolivars for foreign notes; instead, they have to use a government platform that takes bolivars from local companies and pays out U.S. dollars to their foreign vendors, using a fixed official exchange rate. Because the official rate artificially values the bolivar much higher than the free-market does (and because free market exchanges are illegal), allocations under the platform are highly oversubscribed. The subsidiary, Telefónica Venezolana, improperly paid nearly $29 million to access this platform in 2014.
To do so, it needed help from two of its vendors – described by the DOJ as “multinational telecommunications equipment and systems” companies. They agreed to pad their invoices and, when paid their U.S. dollars, pass those extra funds along to a shell company that would then pay out the bribes.
The settlement documents reveal that, all in all, Telefónica Venezolana was able to exchange about 1.27 billion bolivars for $115 million. What they do not say is that, at market rates, that same sum would have cost 5.77 billion bolivars or more. Instead, they simply describe the exchange rate as “favorable.”
That favorable difference was worth at least $90 million, meaning the penalty amount does not even amount to disgorgement.
So what does the DOJ gain from this settlement, and why did it gloss over the scope of the Telefónica subsidiary’s gains?
While there may have been some sympathy for Telefónica Venezolana, which faced price controls and runaway inflation and had to take massive losses as a result, it may also have been that the DOJ was ultimately more interested in the case as a way to collect evidence about the company’s vendors.
The vendors are not identified by name, but some of the main players in Venezuela’s telecommunications sector work with Chinese suppliers. Similarly, Spanish media have reported in May that Telefónica was facing a fine from U.S. regulators with respect to Chinese vendors in Venezuela.
And the settlement documents include an interesting, seemingly extraneous detail – that employees from one of the vendors used U.S.-based email accounts in furtherance of the bribe. It is completely meaningless with respect to the Telefónica case, where jurisdiction is already clearly established; but given that many US email services are not available from Mainland China, it’s possible that these accounts were accessed while in the US – thus hinting at the jurisdictional hook needed to bring FCPA charges against that vendor.
At least one of the potential vendors has been reported to be the subject of FCPA scrutiny, and both are the targets of U.S. political ire.
To be sure, the DOJ would be brushing up against the statute of limitations, and we may yet see an announcement from the SEC. But given that these companies have been frequent targets of U.S. regulators and politicians, this enforcement might foreshadow more actions against Chinese telecom suppliers.
FCPA Compliance Consultant