US stock market daily report (January 10, 2014, Friday)
January 13, 2014, Monday, 05:10 GMT | 00:10 EST | 09:40 IST | 12:10 SGT
Alcoa Inc. (AA) has been charged by the Securities and Exchange Commission with violating the Foreign Corrupt Practices Act (FCPA) when its subsidiaries repeatedly paid bribes to government officials in Bahrain to maintain a key source of business. George Canellos, co-director of the SEC Enforcement Division said, “As the beneficiary of a long-running bribery scheme perpetrated by a closely controlled subsidiary, Alcoa is liable and must be held responsible. It is critical that companies assess their supply chains and determine that their business relationships have legitimate purposes.”
Over $110 million in corrupt payments were made to Bahraini officials, per the SEC investigation, which influenced contract negotiations between global aluminum producer Alcoa and a major government-operated aluminum plant. A London-based consultant, with connections to Bahrain’s royal family, was used by subsidiaries of Alcoa, as an intermediary to negotiate with government officials and funnel the illicit payments to retain Alcoa’s business as a supplier to the plant. Deficient internal controls by Alcoa, resulted in the inability to prevent or detect bribes which were improperly recorded in Alcoa’s records as legitimate commissions or sales to a distributor.
Kara N. Brockmeyer, chief of the SEC Enforcement Division’s FCPA Unit said, “The extractive industries have historically been exposed to a high risk of corruption, and those risks are as real today as when the FCPA was first enacted.”
Alcoa is a global provider of not only primary or fabricated aluminum, but also smelter grade alumina which is the raw material that is supplied to plants or smelters that produce aluminum. In its global mining operations, Alcoa refines alumina from bauxite during the extraction process.
Aluminium Bahrain B.S.C. (Alba) - controlled by Bahraini government - is known as one of the largest aluminum smelters in the world as well as, one of the largest customers of Alcoa’s global bauxite and alumina refining business during years from 1989 to 2009. Alcoa’s mining operations in Australia were the source of the alumina that Alcoa supplied to Alba.
Alcoa’s Australian subsidiary retained a consultant to assist in negotiations for long-term alumina supply agreements with Alba and Bahraini government officials, per SEC's order. The consultant was described by a manager at the Alcoa subsidiary as “well versed in the normal ways of Middle East business” and one who “will keep the various stakeholders in the Alba smelter happy…” Alcoa’s subsidiary inserted the intermediary into the Alba sales supply chain, with the consultant generating funds needed to pay bribes to Bahraini officials, despite the red flags inherent in the arrangement. Commissions that Alcoa’s subsidiary paid to the consultant as well as, price markups the consultant made between the purchase price of the product from Alcoa and the sale price to Alba, were used to fund the bribes to Bahraini officials. Corrupt payments were paid to senior Bahraini government officials, members of Alba’s board of directors and Alba senior management.
Alcoa was found to have not conducted due diligence nor did they determine whether there was a legitimate business purpose for the use of a middleman, per the SEC order. After Alcoa’s subsidiary retained the consultant to lobby a Bahraini government official, in August 2003 the consultant’s shell companies made two payments totaling $7 million for the benefit of the official - which was left unquestioned by Alcoa. Alcoa and Alba signed an agreement in principle to have Alcoa participate in Alba’s plant expansion, just two weeks thereafter. The consultant’s shell company paid $1 million to an account for the benefit of that same Bahraini government official in October 2004 with Alba reaching yet another supply agreement in principle with Alcoa. The consultant’s companies made three payments totaling $41 million to benefit another Bahraini government official as well, after that agreement was executed.
The SEC’s cease-and-desist order finds that Alcoa violated Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934. Alcoa will pay $175 million in disgorgement of ill-gotten gains, of which $14 million will be satisfied by the company’s payment of forfeiture in the parallel criminal matter. Alcoa also will pay a criminal fine of $209 million. Alcoa will pay a total of $384 million to settle the SEC’s charges as well as a parallel criminal case announced January 9, 2014 by the U.S. Department of Justice.