Last week, the DOJ and SEC announced (here and here) a Foreign Corrupt Practices Act enforcement action against Och-Ziff Capital Management Group (and a related entity) for improper business practices in various African countries. The aggregate settlement amount was $412 million (a $213 million DOJ criminal penalty and a $199 million SEC resolution consisting of disgorgement and prejudgment interest), the 4th largest FCPA settlement amount of all-time.
As highlighted in this previous post, the SEC also found Daniel Och (CEO) and Joel Frank (CFO) culpable for certain of the improper conduct. As indicated in the post, this represents what is believed to be the first time in FCPA history that the SEC also found the current CEO and CFO of the issuer company liable, to some extent, for company FCPA violations. Moreover, the $2.2 million Och agreed to pay, without admitting or denying the SEC’s findings, is the largest settlement amount in FCPA history by an individual in an SEC action.
Whether the Och-Ziff enforcement action is the “first time a hedge fund has been held to account for violating the FCPA” (as the DOJ stated in its release) is a debatable point. (See here for the 2007 FCPA enforcement action on the DOJ’s FCPA website against hedge fund Omega Advisors).
Regardless, the scope and magnitude of the conduct at issue in the Och-Ziff action is notable and this post dives into the approximate 175 pages of resolution document released.
Before doing so, it is interesting to note the following.
In Och-Ziff’s press release (a release that pursuant to the ODJ deferred prosecution agreement the company had to consult with the DOJ before releasing to make sure statements were true and accurate) the company states:
“[T]wo former employees knowingly participated in a bribery scheme and other violations of the law. These two former employees deliberately concealed their misconduct from other employees at the Firm.”
Indeed, the vast majority of the improper conduct involves two Och-Ziff employees and relationships with third party agents. “Och-Ziff Employee 3” (in the words of the DOJ) / “Och-Ziff Employee A (in the words of the SEC) is described as a U.S. citizen who was a senior executive of Och-Ziff and a member of Och-Ziff’s partner management committee who headed Och-Ziff’s London office. Various media have suggested that this individual is Michael Cohen.
“Och-Ziff Employee 5” (in the words of the DOJ) / Och-Ziff Employee B (in the words of the SEC) is described as a Australian citizen who was an employee of a London based subsidiary and who had responsibility for investment in Africa including those involving the mineral extraction, oil and other nature resources in Africa. Various media have suggested that this individual is Vanja Baros. According to this website, Baros is currently on the Board of Directors of Loon Energy Corp.
In the words of the SEC, the Och-Ziff enforcement action is based “primarily through the misconduct” of these two individuals including suggestions of self-dealing.
Moreover, this was not an FCPA enforcement action concerning a company with no FCPA internal controls or related policies and procedures. Indeed, both the DOJ and SEC enforcement actions mention various aspects of Och-Ziff’s control environment during the relevant time period. Rather, this was an enforcement action primarily about failing to act consistent with those controls in connection with certain transactions involving third parties. In the words of the SEC “Och-Ziff did not follow its recommended anti-corruption policies.”
While the settlement amount in the Och-Ziff action is large (on account of the bribe payments and the lucrative investments which resulted therefrom), and while the actions of the two high-ranking individuals are (based on the information in the enforcement action documents) incredibly egregious which should result in related criminal and/or civil enforcement actions (if the DOJ/SEC wants to be viewed as credible), another way to view the Och-Ziff enforcement action is that it involved a fairly typical scenario that often leads to an FCPA enforcement action.
In other words, a few employees of a company with an existing control environment were involved in certain transactions made possible by various third parties against the backdrop of the few employees not being candid and/or concealing certain aspects of the transactions / third party relationships with others at the company.
The DOJ enforcement action involved a plea agreement by OZ Africa Management GP LLC (OZ Africa – a wholly-owned subsidiary of OZ Management LP, which is a subsidiary of Och-Ziff) to a one-count criminal information charging conspiracy to violate the FCPA’s anti-bribery provisions. According to the resolution documents, OZ Africa held Och-Ziff’s interests for its joint venture in Africa.
The DOJ enforcement action also involved a deferred prosecution agreement with Och-Ziff to resolve two counts of conspiracy to violate the FCPA’s anti-bribery provisions, one count of falsifying books and records and one count of failing to implement adequate internal controls.
OZ Africa Plea Agreement
The plea agreement is largely based on the conduct of two employees and a relationship with a Israeli third-party in connection with certain transactions in the Democratic Republic of Congo (DRC) in which alleged bribes were paid by the third-party.
Och-Ziff Employee 3 is described as a U.S. citizen who was a senior executive of Och-Ziff and a member of Och-Ziff’s partner management committee who headed Och-Ziff’s London office. Various media have suggested that this individual is Michael Cohen.
Och-Ziff Employee 5 is described as a Australian citizen who was an employee of a London based subsidiary and who had responsibility for investment in Africa including those involving the mineral extraction, oil and other nature resources in Africa. Various media have suggested that this individual is Vanja Baros. According to this website, Baros is currently on the Board of Directors of Loon Energy Corp.
The foreign officials are described as:
DRC Official 1 “a senior official in the DRC who had the ability to take official action and exert official influence over mining matters in the DRC”
DRC Official 2 “a senior official in the DRC and close advisor to DRC Official 1” who since at least 2004 “was an Ambassador-at-Large for the DRC government and also a national parliamentarian. DRC Official 2 had the ability to take official action and exert official influence over mining matters in the DRC.”
The conduct at issue concerned Africa Management Limited (AML) a joint-venture company started by Och-Ziff, OZ Africa, and affiliated and subsidiary entities with various South African business partners in 2007. According to the statement of facts, AML established multiple investment funds under the “African Global Capital” (AGC) name which invested in companies with African mining and mineral assets and rights.
A key participant in the alleged bribery scheme was “DRC Partner,” an Israeli businessman who had significant interests in the diamond and mineral mining industries in the DRC. Various media reports have identified this individual as Dan Gertler.
As noted here, a spokesman for Gertler’s Fleurette Group said that the firm “vigorously contests any and all accusations of wrongdoing in any of its dealings in the DRC including those with Och Ziff. The Fleurette Group and Dan Gertler strongly deny the allegations announced today, which are motivated by a hedge fund trying to put behind it problems sparked by people that have nothing to do with Fleurette.”
According to the statement of facts, Och-Ziff, OZ Africa, AGC, and various subsidiary companies were investment partners with DRC Partner for mining and mineral opportunities in the DRC.
In pertinent part, the DOJ alleges:
“[B]etween 2005 and 2015, DRC Partner, together with others, paid more than one-hundred million U.S. dollars in bribes to DRC officials to obtain special access to and preferential prices for opportunities in the government-controlled mining sector in the DRC. Beginning in December 2007, Och-Ziff, through [certain employees] had discussions with DRC Partner about forming a joint venture between Och-Ziff and DRC Partner, through DRC Partner’s companies, for the purpose of acquiring and consolidating valuable mining assets in the DRC into one large publicly traded mining company. The underlying premise of the proposed joint venture was that DRC Partner had special access to attractive investment opportunities in the DRC through his relationships with officials at the highest levels of the DRC government. In return for access to these attractive investment opportunities, Och-Ziff would finance DRC Partner’s operations in the DRC. Och-Ziff [employees] understood that Och-Ziff’s funds would be used, in part, to pay substantial sums of money to DRC officials to secure access to these opportunities in the DRC mining sector. Although the parties did not enter into a written partnership agreement, as a result of agreeing to the corrupt arrangement, [certain Och-Ziff employees] secured long-term deal flow for Och-Ziff and AGC in the DRC mining sector.”
According to the statement of facts, the relevant Och-Ziff employees did not share information about DRC Partner’s expectation that Och-Ziff would help fund corrupt payments “with anyone within Och-Ziff’s legal or compliance departments.”
Thereafter, the DOJ alleges that “consistent with Och-Ziff’s anti-corruption policy as it related to prospective business partners, [… an Och-Ziff employee] sent an e-mail to a due diligence firm requesting a background report on DRC Partner.” The initial findings of the due diligence firm raised certain red flags regarding DRC Partner yet stated “whether through good PR and legal advice or indeed innocence, no allegations against him have yet been proved.”
According to the DOJ, “based upon the report, and other publicly available information, various Och-Ziff senior employees had concerns about proceeding with any transaction with DRC Partner” and “several members of Och-Ziff’s senior management” recommended not undertaking any transactions with him. In addition, according to the statement of facts, an Och-Ziff employee:
“also forwarded the due diligence report on DRC Partner to an outside attorney representing Och-Ziff on anti-corruption issues. The outside attorney advised that providing a convertible loan to DRC Partner would be high-risk, but that there would be ‘no [anti-money laundering] or anti-corruption issue’ as long as DRC Partner ‘has no discretion with regard to how to spend the proceeds of the loan.'”
Elsewhere, the statement of facts allege that in 2008 AGC employees who reported to Och-Ziff Employee 5 conducted an audit to ensure that expenses pursuant to a loan agreement were properly spent. The draft audit report suggested that certain red flags needed “to be investigated at the highest level directly with [DRC’s Partner’s company]. This issue should be flagged as a concern considering AGC’s compliance requirements.” According to the DOJ, Och-Ziff Employee 5 spoke with one of the employees who drafted it and instructed that certain language be removed from the report which occurred in the revised report.
Yet, the DOJ alleges “the subsequent agreements provided DRC Partner with a significant amount of discretion over the use of the loan proceeds.” According to the DOJ, “in total, Och-Ziff received wire transfers of $342,091,110 from DRC Partner-controlled companies as satisfaction of the outstanding agreement, representing a profit of approximately $91,181,182.”
The plea agreement notes the following factors considered by the DOJ.
(a) Och-Ziff and OZ Africa did not voluntarily self-disclose to the Offices the misconduct that forms the basis for this Agreement;
(b) Och-Ziff’s cooperation with the Offices’ investigation, which included Och-Ziff’s Audit Committee’s very thorough and comprehensive internal investigation through counsel which included regular reports to the Offices, Och-Ziff’s counsel’s collection and production of voluminous evidence located in foreign countries, and efforts to make current and former employees available for interviews, and also issues that resulted in a delay to the early stages of the government’s investigation, including Och-Ziff’s failure to produce important, responsive documents on a timely basis, and in some instances producing documents only after the Offices flagged for Och-Ziff that the documents existed and should be produced, and providing documents to other defense counsel prior to their production to the government;
(c) Och-Ziff engaged in significant remediation to improve its compliance program and internal controls;
(d) the seriousness of the offense misconduct including the high dollar amount of bribes to foreign officials, conduct in multiple, high-risk jurisdictions, and the fact that bribery occurred at a high-level within Och-Ziff;
(e) neither Och-Ziff nor OZ Africa has a prior criminal history; and
(f) Och-Ziff and OZ Africa have agreed to cooperate with the Offices.”
The plea agreement sentencing guidelines calculation references a “value of benefit received” of $65 million and sets forth a sentencing range of $72.9 million to $145.9 million. The plea agreement states that “pursuant to the DPA, Och-Ziff, directly or through an affiliate, has agreed to pay a penalty of $213,055,689 relating to the same underlying conduct … and certain additional conduct.” Based on this, the plea agreement notes that the parties jointly agreed to recommend “that the Court not impose a criminal fine on the Defendant, conditioned upon a monetary penalty in the amount of $213,055,689 paid by Och-Ziff and its affiliates under the terms specified in the DPA.”
The DOJ’s press release notes that OZ Africa’s sentencing has been scheduled for March 29, 2017 and the plea agreement offers the reason. The plea agreement states:
“The [DOJ] will not object to and will consent to a request by the Defendant for an initial six-month adjournment of sentencing to allow time for Och-Ziff to pursue an application with the United States Department of Labor (DOJ) for a regulatory rule exemption to allow Och-Ziff to continue to act as a Qualified Professional Asset Manager under ERISA Prohibited Transaction Class Exemption 84-14. The [DOJ] further agrees that if the DOJ has not ruled on Och-Ziff’s application within the initial six-month adjournment, the [DOJ] will not oppose further six-month adjournment requests by the Defendant, if [the DOJ] in their sole discretion, determine that Och-Ziff has diligently pursued its application with the DOL.”
Pursuant to the plea agreement, the company shall cooperate fully with the DOJ’s ongoing investigations.
The Statement of Facts in the DPA concern the same alleged DRC conduct as described above in connection with the OZ Africa plea agreement.
In addition, the DPA alleges that between 2007 and 2010, Och-Ziff engaged Libyan Intermediary as a third-party agent to assist in securing investments from the Libyan Investment Authority (LIA) into the Och-Ziff Hedge Funds. The DPA describes the Libya Intermediary as “a London-based middleman with connections to foreign officials in Libya” who was retained “by Och-Ziff to act as an agent on behalf of Och-Ziff to obtain a $300 million investment from the LIA.
For prior media coverage on the Libyan Intermediary, see here.
According to the DPA:
“Libyan Intermediary paid bribes to Libyan officials to corruptly influence those officials and thereby obtain investments from the LIA. Och-Ziff entered into a consulting agreement to pay Libyan Intermediary a ‘finder’s fee’ of $3.75 million, which Och-Ziff Employee 3 knew that all or a portion of the fee would be paid to foreign officials in return for influencing the LIA to make a $300 million investment into the Och-Ziff Hedge Funds. As a result of the corrupt payments, Och-Ziff, through Och-Ziff Employee 3 secured the investment of LIA funds and approximately $100 in pecuniary gain.”
The Libyan officials are described as follows:
Libyan Official 1 “was a close relative of a high-ranking official in the Libyan government. Libyan Official 1 did not hold a formal position within the Libyan government, but possessed and used a Libyan diplomatic passport and conducted high profile foreign and domestic affairs on behalf of the Libyan government. Libyan Official 1 made administrative and investment decisions for the LIA, including through proxies like Libyan Official 3.” [The SEC’s order describes this individual as “one of the sons of Colonel Muammar Gaddafi, Libya’s ruler at the time.”]
Libyan Official 2 “was a high-ranking official in the Libyan government who could influence commercial matters in Libya. Libyan Official 2 could also influence the granting of visas and landing permits for foreign visitors to Libya.
Libyan Official 3 “was a high-ranking official at the LIA who could influence investment decisions.”
According to the DPA, “prior to engaging Libya Intermediary to work on Och-Ziff’s behalf, Och-Ziff did not conduct any due diligence on Libya Intermediary, and there was no formal approval of Libya Intermediary to work on behalf of Och-Ziff.” Moreover, the DPA states that an entity Libya Intermediary used to receive the LIA-related fee from Och-Ziff “had no employees, had no expertise and had never acted as a consultant in Libya or elsewhere to any company.”
According to the DPA, Och-Ziff Employee 3 received legal advice from others at Och-Ziff that Och-Ziff might be required to disclose Libya Intermediary’s role as an Och-Ziff agent to the LIA. According to the DPA:
“Libya Intermediary and Och-Ziff Employee 3 discussed ways to satisfy Och-Ziff’s requirements without actually providing such disclosure to the LIA. To this end, Och-Ziff Employee 3 and Libya Intermediary discussed the possibility of Och-Ziff delivering the disclosure to the LIA through Libya Intermediary, which Libya Intermediary would fail to deliver. Och-Ziff Employee 3 and Libya Intermediary also discussed the possibility of Libya Intermediary providing a false representation to Och-Ziff that Libya Intermediary had provided the LIA with disclosure of Libya Intermediary’s role.”
According to the DPA, Libya Intermediary transferred portions of the payments received from Och-Ziff to various Libyan officials. In addition, the DPA states:
“In addition, Libyan Intermediary regularly provided Libyan Official 3 with in-kind payments to gain and maintain influence with Libyan Official 3. These in-kind payments included, but were not limited to, payments for luxury travel, hotel accommodations and jewelry. Libya Intermediary also paid the living expenses of Libyan Official 3’s brother while he resided in London.”
In addition, the DPA states that Och-Ziff Employee 3 caused “Och-Ziff funds to invest $40 million in a Libyan real estate development project which was founded and overseen by Libya Intermediary” to “compensate Libya Intermediary for bribes that Libya Intermediary had to pay to Libyan officials in connection” with the real estate development project.
According to the DPA, “Och-Ziff accrued fees and incentive income from the LIA fund investment totaling approximately $100,181,881.”
The DPA also states in summary fashion:
“In addition, Och-Ziff and AGC made investments in companies doing business in the mining and mineral sectors of various developing countries, including countries with a documented high risk for corruption such as the DRC, Libya, Chad, and Niger. These investments by Och-Ziff, AGC and their business partners were facilitated through the use of illegal bribery. Och-Ziff knowingly failed to implement and maintain an adequate system of internal accounting controls designed to detect and prevent the misappropriate of assets by its employees, agents, and business partners. It further did not appropriately respond to due diligence that was performed on proposed business transactions, agents, counterparties, and business partners or controls for payments to third parties.”
Under the heading “Och-Ziff’s Policies, Procedures and Controls,” the DPA states:
“Och-Ziff knowingly failed to implement an adequate system of internal accounting controls and failed to enforce the internal accounting controls it did have in place, which failed to prevent bribe payments from being made in DRC, Libya, Chad and Niger. Further, in instances where the potential improper use of proceeds was identified, Och-Ziff did not take corrective measures, obtain verification of payments or seek to exercise contractually available audit or cancellation rights.
Och-Ziff also knowingly failed to implement and maintain adequate controls for the approval of business transactions and consultancy agreements.
Och-Ziff did not implement controls to ensure the effective enforcement of policies governing interactions by third-parties with prospective clients, including requirements (a) that such arrangements were to be pre-cleared by legal or compliance and (b) that Och-Ziff provide prospective clients with a written disclosure of any agreements for a third-party to secure money from the prospective client on behalf of Och-Ziff.
Och-Ziff also knowingly failed to implement and maintain controls to address known risks for corruption or misuse of company funds in connection with contractual agreements or investments. Och-Ziff proceeded to conduct multiple business transactions with DRC Partner and entities associated with him despite objections from senior compliance and control personnel.”
Under the same heading, the DPA also contains three paragraphs concerning the Gabonese national (Gabonese Consultant) engaged by a joint venture portfolio company and how “Och-Ziff became aware that the salary payments to Gabonese Consultant in connection with operations in Chad and Niger were a ‘deal introduction related consulting fee.'” (See this prior post for the DOJ’s FCPA enforcement action against Samuel Mebiame, a Gabonese national connected to Och-Ziff, for conspiracy to violate the FCPA’s anti-bribery provisions.).
According to the DPA “when Gabonese Consultant … refused to sign anti-corruption warranties, Och-Ziff continued to do business with him as an intermediary” and that Gabonese Consultant “provided at least $2 million in bribe payments to officials in Niger and Chad in connection with obtaining uranium concessions for the joint venture.” According to the DPA, “during the relevant period, Och-Ziff accrued approximately $30 million in fees in connection with investments for which it failed to implement or enforce effective controls.”
The criminal charges against Och-Ziff were resolved through a deferred prosecution agreement with a three year term.
Under the heading “relevant considerations,” the DPA states:
The company did not voluntarily self-disclose the offense conduct to the Offices, and as a result the Company was not eligible for a more significant discount on the fine amount or the form of resolution;
The company received credit, in addition to the two-point downward adjustment to the Sentencing Guidelines, of 20 percent off the bottom of the Sentencing Guidelines range for its cooperation with the Offices’ investigation including its Audit Committee’s very thorough and comprehensive internal investigation through counsel which included regular reports to the Offices, Company counsel’s collection and production of voluminous evidence located in foreign countries, and efforts to make current and former employees available for interviews. The Company did not receive additional credit because of issues that resulted in a delay to the early stages of the investigation, including failures to produce important, responsive documents on a timely basis, and in some instances producing documents only after the Offices flagged for the Company that the documents existed and should be produced, and providing documents to other defense counsel prior to the their production to the government;
By the conclusion of the investigation, the Company had provided to the Offices all relevant facts known to it, including information about individuals involved in the offense conduct;
The Company engaged in significant remediation to improve its compliance program and internal controls, and the Company has committed to continue to enhance its compliance program and internal controls, including ensuring that they satisfy the minimum elements of the corporate compliance program set forth [in the DPA attachment]
In addition to the Company’s remedial efforts, the Company has agreed to the imposition of an independent compliance monitor to prevent the reoccurrence of the misconduct;
The seriousness of the offense conduct including the high-dollar amount of bribes paid to foreign officials, conduct in multiple, high-risk jurisdictions, and the fact that the bribery occurred at a high level within the company;
The Company has no prior criminal history; and
The Company has committed to continuing to cooperate with the Offices.”
The DPA’s sentencing guidelines calculation refers to a “value of benefit received more than $150 million” and sets forth a fine range of $266 million to $532 million. The DPA states that the company and the DOJ agree that the $213 million monetary penalty “is appropriate given the facts and circumstances of this case, including the factors” discussed above.
Pursuant to the DPA, Och-Ziff is required to retain a Monitor for a three-year term. Similar to other DPAs used to resolve FCPA enforcement actions, the DPA contains a so-called muzzle clause in which Och-Ziff agrees not, through present or future attorneys, officers, directors, employees, agents, or any other person, to make any public statement contradicting the acceptance of responsibility by the company or the conduct described in the DPA.
In the DOJ’s release, Principal Deputy Assistant Attorney General David Bitkower stated:
“This case marks the first time a hedge fund has been held to account for violating the Foreign Corrupt Practices Act. In its pursuit of profits, Och-Ziff and its agents paid millions in bribes to high-level officials across Africa. By exposing corruption in this industry, the Criminal Division’s Fraud Section continues to root out wrongdoing of all types in the financial sector.”
U.S. Attorney Robert Capers of the Eastern District of New York stated:
“Och-Ziff, one of the largest hedge funds, positioned itself to profit from the corruption that is sadly endemic in certain parts of Africa, including in Libya, the Democratic Republic of the Congo, Chad and Niger. Despite knowing that bribes were being paid to senior government officials, Och-Ziff repeatedly funded corrupt transactions. One Och-Ziff employee was so bold as to order the removal of language from their African joint venture’s internal audit report that called for an investigation of suspected bribery payments by a business partner. Today’s corporate resolutions, which include a more than $213 million criminal penalty and an independent compliance monitor, hold Och-Ziff accountable for placing profits above the law and will help ensure that the conduct brought to light here never happens again at this company.”
William Sweeney, Assistant Director in Charge of the FBI’s New York Field Office stated:
“Gaining the upper hand in a business venture by engaging in corrupt practices is bribery in its purest form. Doing so with the intention of influencing a foreign official in his or her capacity is nothing short of corruption. In this scheme, payments of millions of dollars were paid out to senior officials within certain parts of Africa in exchange for access to profitable investment opportunities. This type of behavior can’t and won’t be tolerated. I commend the investigators and prosecutors who continue to work together at home and abroad to vigorously enforce the law within the confines of the Foreign Corrupt Practices Act.”
Richard Weber, Chief of the Internal Revenue Service-Criminal Investigation New York Field Office stated:
“Today’s plea and deferred prosecution agreement result from the unraveling of complex financial transactions orchestrated by Och-Ziff Capital Management Group LLC and its subsidiary to facilitate illegal payments to foreign government officials. IRS-CI will continue to investigate pervasive bribery schemes used by corporations in the pursuit of attractive international investment opportunities.”
In the release the DOJ acknowledged the assistance and cooperation of: the Swiss Federal Office of Justice, the British Virgin Islands Central Authority, the Maltese judicial authorities and authorities in Jersey and Guernsey.
The SEC’s order contains the same core conduct alleged in the DOJ action concerning DRC and Libya. In addition, the SEC’s order also contains findings regarding Chad, Niger, and Guinea.
In summary fashion, the Order states:
“Beginning in 2007 and continuing through 2011, Och-Ziff, primarily through the misconduct of two senior employees, entered into a series of transactions and investments in which Och-Ziff paid bribes through intermediaries, agents and business partners to high ranking government officials in multiple African countries including Libya, Chad, Niger, and the Democratic Republic of the Congo (“DRC”). These bribes were paid with the specific knowledge of a senior Och-Ziff employee who was the head of Och-Ziff Europe (“Och-Ziff Employee A”) and in certain cases, of an Och-Ziff investment professional working in Och-Ziff’s European office (“Och-Ziff Employee B”), but other executives at Och-Ziff ignored red flags and corruption risks and permitted these transactions to proceed. Bribes were paid to corruptly influence foreign government officials in order to obtain or retain business for Och-Ziff and its business partners. Och-Ziff invested in countries and industries known for corrupt business dealings, and purposefully transacted with agents and business partners with high level connections to foreign government officials who funneled corrupt payments to those officials.
During this period, Och-Ziff entered into the following transactions in which corrupt payments were made:
a. An investment by the Libyan Investment Authority (“LIA”) of $300 million into Och-Ziff funds in 2007. To secure the LIA investment, Och-Ziff used an agent to pay bribes to high ranking Libyan government officials. With the knowledge of the Och-Ziff Employee A, bribes of more than $3 million were paid to Libyan government officials.
b. An investment of $40 million by Och-Ziff funds into a Libyan property development project in 2007. Och-Ziff used investor funds to pay a $400,000 “deal fee” to its agent in Libya as part of its investment. Och-Ziff Employee A knew or was willfully blind to the high probability that Och-Ziff’s agent would then use those funds to pay bribes to benefit the property development project.
c. A loan of more than $86 million and funding of more than $10 million from OchZiff investor funds to one of Och-Ziff’s South African partners in African Global Capital I (“AGC I”), an Africa mining-focused fund, in 2007 and 2008. Of the funds provided to its business partner in AGC I, with the knowledge or willful blindness of Och-Ziff Employee A and Och-Ziff Employee B, millions went towards bribes to foreign government officials, illicit payments to middlemen, the personal benefit of its business partners, and expenditures unrelated to the investment. Och-Ziff failed to conduct sufficient due diligence on the use of investor funds or impose sufficient internal accounting controls to prevent the misuse of funds by its South African partner.
d. A convertible loan of approximately $124 million from Och-Ziff investor funds through AGC I to an entity affiliated with an Israeli businessman, to purchase mining assets in the Democratic Republic of the Congo (“DRC”) in 2008. This businessman became Och-Ziff’s partner in the DRC. With the knowledge of OchZiff Employee A and Och-Ziff Employee B, a significant portion of the money was used by Och-Ziff’s partner in the DRC to pay bribes to high-ranking DRC officials to secure mining assets for Och-Ziff and its partner.
e. A margin loan for $130 million from Och-Ziff investor funds to another entity controlled by the same DRC partner in 2010 and 2011. Of the total, $84.1 million was provided to Och-Ziff’s partner in the DRC with no restrictions or oversight by Och-Ziff. Och-Ziff Employee A and Och-Ziff Employee B knew that Och-Ziff’s partner would pay bribes to high-ranking DRC government officials, and others within Och-Ziff knew of allegations of corruption against him and his close political ties within the DRC. Och-Ziff’s partner then used the funds to pay bribes.
f. A purchase of shares by African Global Capital II (“AGC II”), the second Africa focused fund created by Och-Ziff, in a London-based oil exploration company in 2011. Och-Ziff caused AGC II to purchase the shares from its South African partner in order to provide him with capital to use for other purposes. From there, the partner paid more than $1 million to a consultant who then used those funds to pay bribes to government officials in Guinea. Och-Ziff failed to conduct sufficient due diligence on the use of investor funds to prevent the payment of bribes. Och-Ziff Employee B knew or was willfully blind to the high probability that AGC II funds would be used by this consultant to pay bribes.
In most cases, the above transactions involved the use of managed investor funds rather than Och-Ziff’s own capital. OZ Management, a registered investment adviser which managed the various investor funds entrusted to Och-Ziff, authorized the use of funds in transactions in which bribes were paid to foreign government officials to obtain or retain business for Och-Ziff and its business partners. Och-Ziff categorized these transactions as investments or convertible loans despite the fact that two Och-Ziff employees, Och-Ziff Employee A and Och-Ziff Employee B, knew that investor funds would be used to pay bribes. Investor funds were also used in self-dealing transactions to benefit Och-Ziff Employee A, Och-Ziff’s business partners, and Och-Ziff itself.
Och-Ziff Employee A and Och-Ziff Employee B purposefully caused OZ Management to omit material facts to ensure that corrupt transactions would proceed and to engage in self-dealing. OZ Management failed to disclose all material facts and conflicts of interest in its communications with investors in certain AGC II transactions or to adequately control the use of investor funds. OZ Management made material misrepresentations or omissions and engaged in self-dealing in the following transactions:
a. A purchase of $20 million in shares in a privately held London-based mining company by AGC II in 2010. Och-Ziff Employee A knew that $4 million would be routed by an intermediary to Och-Ziff Employee A’s personal account to offset an outstanding personal loan from Och-Ziff Employee A to that intermediary. OchZiff Employee A further directed that an additional $4 million be paid in secret through the intermediary to an AGC business partner without disclosure to AGC II investors.
b. An investment by AGC II in oil rights in the Republic of the Congo (“CongoBrazzaville”) through an oil exploration and development company which was majority controlled by Och-Ziff and South African Business Partner(“Company A”), in 2010. Och-Ziff failed to disclose material facts regarding the origins of this transaction, the true purpose of payments to its AGC business partner in the transaction, and the justification for payments to intermediaries.
c. An AGC II purchase of shares in a London-based oil and gas company for $77 million in 2011. Och-Ziff, through Och-Ziff Employee A and Och-Ziff Employee B, structured the transaction to provide $50 million cash to its AGC business partner to further his and potentially Och-Ziff’s interests in The Republic of Guinea (“Guinea”), a country in which this business partner had a high-placed agent in the entourage of a senior government official. Och-Ziff Employee A and Och-Ziff Employee B also included within the purchase price an additional $2 million for the 5 partner to repay an outstanding debt to Och-Ziff. Och-Ziff failed to disclose accurate terms of the transaction or its own self-dealing to AGC II investors.
As a result of the foregoing, Och-Ziff did not accurately and fairly reflect the disposition of assets involved in these transactions in its books and records, and did not devise and maintain an adequate system of internal accounting controls to prevent these violations. It inaccurately reflected in its books and records that the expenditures of investor funds were for legitimate investments and not, in whole or in part, corrupt payments to foreign government officials. Och-Ziff also failed to devise and maintain an adequate system of internal accounting controls to prevent these payments. It failed to follow certain of its own internal accounting controls, failed to conduct adequate due diligence, and failed to implement other appropriate financial controls to detect or prevent the payment of bribes.”
Relevant to the Libya conduct, the Order states:
“In its books and records, Och-Ziff recorded the fee paid to Libyan Agent as “Professional Services – Other.” This designation was inaccurate; the payment was for an introduction and to pay bribes, and not for professional services.”
Based on the above, the SEC found that Och-Ziff violated the FCPA’s anti-bribery provisions and books and records and internal controls provisions. Specifically, based on the Libya findings the SEC found violations of the anti-bribery provisions and books and records and internal controls provisions.
Compared to the DOJ enforcement action, the SEC order also contains additional findings regarding AGC including how “Och-Ziff chose a prominent figure in South Africa as a potential partner for AGC.”
According to the SEC’s order:
“This individual was a former government official as well as a successful businessman through his South African-based conglomerate. Although Och-Ziff envisioned his conglomerate as a part of AGC, it never became part of the joint venture. However, the co-founder of his South African conglomerate became the Chief Executive Officer of AML despite the conglomerate not contributing assets to the joint venture. An individual with a close connection to the co-founders of the South African conglomerate (“South African Business Partner”) became Och-Ziff’s partner in AGC despite having a limited history of mining operations in Africa. South African Business Partner controlled a private operating entity domiciled outside of South Africa, and he was designated to source and acquire assets for AGC.
The first step towards the creation of AGC I took place in May 2007 when Och-Ziff entered into a series of loan agreements with South African Business Partner’s entity. These loans, totaling more than $86 million, were ostensibly made to acquire mining rights in Africa which would then be contributed into AGC I upon its formation, to buy out minority shareholders in those assets, and to then fund mining operations. South African Business Partner used part of the funds loaned by Och-Ziff to acquire mining rights in Chad and Niger and to invest in an Africa-focused oil company, Company A. He also used a portion of the funds to pay bribes to facilitate the acquisitions. In 2008, the assets acquired by South African Business Partner were contributed to AGC I, and Och-Ziff converted its existing loan into an equity stake in AGC I. Prior to the inclusion of these assets into AGC I, Och-Ziff conducted due diligence into South African Business Partner’s ownership of the assets through various SPVs and subsidiaries. However, OchZiff failed to conduct any due diligence or investigation into how South African Business Partner spent the loan from Och-Ziff funds, how he had acquired the assets contributed to the joint venture, what minority investors had been bought out, or whether the assets were acquired through bribery using Och-Ziff investor funds.
Although Och-Ziff imposed representations and warranties on its business partner and required then to take Foreign Corrupt Practices Act (“FCPA”) training, as noted below, Och-Ziff did not impose sufficient controls on, and did not investigate what those partners were actually doing with Och-Ziff investor funds despite suspicion that its business partners were engaged in corrupt transactions and self-dealing. In particular, Och-Ziff Employee A knew or was willfully blind to the high probability that South African Business Partner would use the loan proceeds to pay bribes to government officials in order to win mining deals. In 2007 prior to Och-Ziff’s loan, Och-Ziff Employee A learned that South African Business Partner had access to certain deals through bribes or corrupt schemes. One deal presented to Och-Ziff Employee A in March 2007 by South African Business Partner would have cost “$20-$25 million (includes $5 million for the ongoing Presidential campaign…).” Och-Ziff did not participate in this particular deal, but did enter into multiple agreements with the individuals proposing the bribery scheme through its ongoing investments with South African Business Partner and Company A over the next four years. Following the formation of AGC, others at Och-Ziff, including the legal and compliance groups, learned that South African Business Partner had engaged in potential unlawful activities in the past. In one regulatory filing in early 2008, Och-Ziff informed a foreign government regulator that South African Business Partner had engaged in potentially criminal activity in Angola relating to an asset he sought to sell to AGC I. Also in early 2008, Och-Ziff’s legal and compliance group stopped a potential AGC I transaction in which the local Zimbabwean partner in a coal transaction identified by South African Business Partner was reportedly a front for a high-ranking Zimbabwean government official. Despite this information, Och-Ziff continued to provide funds to and do business with South African Business Partner through 2011 without sufficient oversight over his use of investor funds.
Och-Ziff knew that South African Business Partner was using Och-Ziff funds to purchase mining rights either from foreign governments or unknown third-parties, buy out minority shareholders in various entities, and pay substantial amounts to “consultants” with no explanation for the work done to justify these payments. Och-Ziff Employee A acknowledged in 2007 to his AGC partners that “you buy assets and sign contracts without our approval, but thats [sic] what you guys do best and we let you do it.” Och-Ziff Employee A was willing to allow South African Business Partner to operate without oversight because he knew or was willfully blind to the high probability that bribes would be paid to acquire assets. Others at Och-Ziff recognized the potential FCPA risks in dealing with South African Business Partner and investing in mining transactions Africa. For example, in 2007, during a meeting to discuss private investments by Och-Ziff Europe, a presentation regarding AGC noted that “imposing [Och-Ziff’s] standards of care on [AGC] going forward…has proved a particularly contentious issue with respect to FCPA rules as an example but is a must.” This presentation further stated that “[o]ne of the most difficult areas has been finding the right disincentive to our partners for any breach [of FCPA and Och-Ziff’s standards]. This is key as we are not the ones controlling what happens on the ground.” Despite understanding the risks, Och-Ziff did not conduct adequate due diligence to investigate whether AGC I assets were being acquired through bribery.
Of the total amount contributed by Och-Ziff towards the Chad and Niger mining assets, only a portion went towards mining-related costs. South African Business Partner used a significant portion of the funds he was provided to pay bribes to proxies for high ranking government officials in Chad and Niger in order to secure assets for AGC. These bribes were falsely classified on an AGC I portfolio company’s books as consultant payments, law firm payments, house rentals, and charitable contributions, among other designations. “Bribe accounts” were created and maintained by employees of a subsidiary of South African Business Partner’s company in Chad, whereby funds loaned by Och-Ziff supposedly to fund mining operations actually went towards bribes to ministers and governors, including “house repairs” and medical assistance for these officials. Och-Ziff failed to audit or review the expenditure of its funds by South African Business Partner to ensure compliance with Och-Ziff’s internal anti-corruption policies and financial controls.
Millions of dollars in Och-Ziff investor funds also went to personally enrich South African Business Partner, the CEO of AML, and the South African businessman who Och-Ziff touted as an AGC partner. Och-Ziff’s business partners also used funds provided by Och-Ziff to provide travel to African government officials, including officials from Zimbabwe and South Africa. Och-Ziff did not take sufficient steps to review South African Business Partner’s expenditures or prevent this self-dealing by its partners.
The misuse of Och-Ziff investor funds continued after the formation of AGC I. In 2008, Och-Ziff agreed to pay over $10 million based on claims that an African-based aircraft pilot had purchased uranium rights in Niger and then sold those rights in part to South African Business Partner. South African Business Partner represented to Och-Ziff that he had paid the pilot for those rights, though Och-Ziff saw no proof of payments by either the pilot or South African Business Partner. Nonetheless, Och-Ziff agreed to reimburse South African Business Partner for his alleged payments. In doing so, Och-Ziff did not conduct a review of the claimed expenses, did not confirm that the funds had actually been expended by the pilot to acquire the assets or by South African Business Partner to reimburse him, and did not to investigate whether bribes were paid to acquire these assets. After approval by Och-Ziff, AGC I transmitted the funds to South African Business Partner’s entity, not the pilot. South African Business Partner then used these funds to pay bribes to government officials in Chad and Niger and to enrich himself and his business partners.”
Based on the above findings, the SEC found books and records and internal controls violations and also found that OZ Management violated the anti-fraud provisions of the Investment Advisers Act of 1940 “by failing to prevent the use of managed investor funds by its business partner in corrupt and self-dealing transactions.”
Regarding the DRC Partner, the SEC order discusses the initial findings of due diligence which “detailed DRC Partner’s history of suspicious transactions, allegations of illegal conduct, and close connections at the highest levels in the DRC government.” After detailing certain red flags, the order states:
“Based upon the report and other publicly available information, the Och-Ziff attorney expressed to his supervisors, including a senior Och-Ziff attorney and Frank, strong concerns about doing business with the DRC Partner and his view that the company should not do business with him. Both Och and Frank received due diligence on DRC Partner. The corruption risks identified during due diligence were so significant that Frank and a senior Och-Ziff attorney went to Och to argue that Och-Ziff should not do business with DRC Partner in any transaction. Frank’s concerns included the reputational and legal risks inherent in dealing with DRC Partner, including the risk of a government investigation into Och-Ziff’s dealings with DRC Partner should they come to light. In a meeting in or about February 2008, Och, Frank, and the senior attorney discussed the risk of corruption that would exist in any relationship with DRC Partner. Och was told that although it was not illegal to transact with DRC Partner, nonetheless both Frank and the senior Och-Ziff attorney expressed the view that Och-Ziff should not enter into any transaction with him because of the significant corruption risk. Och instructed Frank and others to move forward on potential transactions with DRC Partner unless new information was uncovered.”
Based on the DRC findings, the SEC found violations of the anti-bribery provisions and books and records and internal controls provisions.
The SEC’s order contains a section titled “Och-Ziff Did Not Follow Its Recommended Anti-Corruption Policies” and states:
“In 2007, with the assistance of outside counsel, Och-Ziff began work on an anticorruption policy and procedures which was finalized in April 2008. This policy and procedures, which applied to OZ, OZM, OZ Europe, AML, AGC, and all of OZ’s affiliates, required rigorous due diligence and anti-corruption measures designed to provide reasonable assurances that transactions: (i) were executed in accordance with management’s general or specific authorization; and (ii) were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets.
For high risk transactions like those described above, Och-Ziff’s policy recommended due diligence steps including:
a. Obtaining copies of the most recent financial statements for its business partners;
b. Identifying all shareholders owning or controlling each business partner, and the nature of that control;
c. Requesting references from financial institutions that have existing business relationships with business partners and clients;
d. Making all payments in the country in which an agent resides;
e. Accessing business partner books and records and utilizing a right-to-audit on a periodic basis;
f. Re-checking and confirming due diligence for business partners on an ongoing basis;
g. Reviewing of all monies paid out by business partners as part of ongoing due diligence;
h. Conducting heightened due diligence in business transactions involving government officials or state-owned businesses, where the business partner’s only contribution is influence, or where the partner refuses to put agreements or proof of expenditures in writing; and
i. Obtaining annual certifications by the chief financial officer and chief legal officer that all foreign business partners have complied with the firm’s anti-corruption policies and procedures.
Och-Ziff failed to follow its own recommended due diligence steps in connection with the transactions set forth above.
Despite the presence of corruption risks in the above transactions, Och-Ziff did not impose sufficient procedures or measures to prevent corruption or provide reasonable assurance that the transaction documents accurately reflected the third party’s use of funds. Och-Ziff did not conduct sufficiently heightened due diligence in transactions involving state-owned entities, and failed to limit the interactions of its business partners with government officials. Och-Ziff knew of the close connections between its business partners, counterparties, agents and government officials. In fact, it chose them in part for their ability to influence to high-ranking government officials. Rather than limit such connections, Och-Ziff’s insufficient controls allowed its business partners and agents to exploit those relationships through bribery to benefit Och-Ziff. Och-Ziff Employee A knew that Och-Ziff’s business partners in Africa bought assets and made payments without oversight or control from Och-Ziff, and allowed such practices to continue despite the high risk of corruption.
Och-Ziff failed to conduct sufficient due diligence on asset purchases by its business partners. When due diligence on agents and business partners disclosed significant red flags, the company proceeded with the relationship without imposing sufficient limitations on the way the agents and business partners conducted business or used funds provided by Och-Ziff. Och-Ziff allowed its agents to use shell companies located in other jurisdictions to receive payment, failed to place restrictions on the agents themselves rather than their shell companies, transmitted payments through third-parties after which Och-Ziff had no oversight on the funds, and failed to monitor or audit how its agents used the Och-Ziff investor funds they were provided.
Och-Ziff entered into agreements with consultants and agents without conducting sufficient due diligence on the recipient of the funds or the role played by those agents and consultants. In some cases, Och-Ziff knew that AGC or its business partners in AGC were using consultants paid with Och-Ziff funds, yet took no steps to either conduct due diligence on those consultants or ascertain the basis for payments to those consultants. This led to bribes to government officials in Libya, Chad, and Niger.
Och-Ziff failed to implement sufficient safeguards to prevent corruption in ongoing joint ventures and investments. Och-Ziff was aware of significant corruption risks in its AGC joint venture, including a high risk of corruption with its partners in AGC. Och-Ziff failed to adequately address those risks and continued to give investor funds to AGC without appropriate oversight. Och-Ziff also continued to rely on its business partners in AGC despite knowledge of alleged criminal activity by those partners in other transactions. At no time did Och-Ziff audit the bank records, expenditures, or financial statements of its business partners or of AGC to ensure compliance with Och-Ziff’s internal controls and anti-corruption policies.
Och-Ziff failed to use its leverage to terminate transactions, foreclose on collateral, or bring legal action against its business partners. At no time did Och-Ziff exert its legal rights against its business partners. Instead, Och-Ziff allowed these corrupt relationships to continue in an effort to secure a return on investment rather than sever ties with illegal activity.”
Under the heading “Och-Ziff Violated the Books and Records and Internal Controls Provisions of the FCPA,” the order states:
“Och-Ziff was required to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. Och-Ziff’s policies and procedures required it to accurately document the purpose and authorization for expenditures of assets by the underlying managed funds. Och-Ziff inaccurately recorded the authorizations for the funds disbursed for these improper transactions as investments, loans, “deal fees,” “subscription amounts,” payments to business partners, payments to agents, or “professional services fees,” including portions of the funds that were used to pay bribes and other improper payments. The manner in which these authorizations were recorded on Och-Ziff’s books and records did not accurately describe the disposition of these assets.
Och-Ziff likewise failed to establish or maintain a system of internal accounting controls sufficient to ensure that certain of these transactions were properly recorded. Och-Ziff failed to devise or maintain a system of internal accounting controls sufficient to provide reasonable assurances that certain of these transactions were properly recorded. Och-Ziff failed to implement and maintain sufficient internal accounting controls to provide reasonable assurances that investor funds were not used to pay bribes, or to prevent self-dealing and misuse of investor funds by its business partners. Och-Ziff also failed to take corrective measures, obtain verification of payments, or seek to exercise contractually available audit or cancellation rights with its business partners, despite knowledge of improper payments and the high risk of corruption. OchZiff’s internal accounting controls failed to stop ongoing payments and transactions even after improprieties and potential corruption were discovered by Och-Ziff.”
Och-Ziff and OZ Management agreed to pay approximately $199 million to resolve the actions ($173,186,178 in disgorgement plus $25,858,989 in interest for a total of $199,045,167). The order states:
“Och-Ziff acknowledges that the Commission is foregoing a one-time $173,186,178 civil penalty for these charges based upon the imposition of a $213,055,689 criminal penalty as part of Och-Ziff’s settlement with the DOJ.”
Like the DOJ resolution documents, the SEC order requires Och-Ziff to engage a compliance monitor and sets forth various terms, conditions, and responsibilities of the monitor.
In the SEC’s release, Andrew Ceresney (Director of the SEC’s Enforcement Division) stated:
“Och-Ziff engaged in complicated, far-reaching schemes to get special access and secure significant deals and profits through corruption. Senior executives cannot turn a blind eye to the acts of their employees or agents when they became aware of suspicious transactions with high-risk partners in foreign countries.”
Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:
“Och-Ziff falsely recorded the bribe payments and failed to devise and maintain proper internal controls. Firms will be held accountable for their misconduct no matter how they might structure complex transactions or attempt to insulate themselves from the conduct of their employees or agents.”
The SEC’s release acknowledges the assistance of the following foreign law enforcement agencies: the U.K. Financial Conduct Authority, the Guernsey Financial Services Commission, the Jersey Financial Services Commission, the Malta Financial Services Authority, the Cyprus Securities and Exchange Commission, the Gibraltar Financial Services Commission, and the Swiss Ministry of Justice.
In this release, Och-Ziff stated:
“[T]wo former employees knowingly participated in a bribery scheme and other violations of the law. These two former employees deliberately concealed their misconduct from other employees at the Firm.
Och-Ziff has significantly strengthened its anti-corruption program and controls. The Firm has made a substantial investment to enhance its compliance personnel and infrastructure. The Firm has also bolstered its system of checks and balances by forming a Business Risk Committee. Recently, former U.S. Attorney General William Barr was appointed to the Och-Ziff Board of Directors and chairs the new Committee on Corporate Responsibility and Compliance.”
In the release, Och (Chairman and CEO) stated:
“This has been a deeply disappointing episode. This conduct is inconsistent with our core values and not representative of our hundreds of employees worldwide, who are dedicated to serving our clients with the utmost integrity. We have learned from this experience and taken significant steps to strengthen Och-Ziff. We are pleased to bring this matter to a conclusion and remain focused on generating returns in our funds.”
Gibson Dunn & Crutcher represented Och-Ziff.
The post In Depth Into The Och-Ziff FCPA Enforcement Action appeared first on FCPA Professor.