In March 2019, the US Commodity Futures Trading Commission (CFTC) Division of Enforcement Director James McDonald announced that the agency would more closely partner with law enforcement and, for the first time, bring its own actions related to foreign corrupt practices.1 That announcement sparked immense interest, and reports circulated about potential matters in the pipeline.
On December 3, 2020, the CFTC made good on that promise. In a historic enforcement action involving a coordinated resolution with the CFTC and the Department of Justice (DOJ), Vitol Inc. (Vitol)—the U.S. arm of the Vitol group of companies, together forming a global energy and commodities trading firm—has agreed to pay $163 million to settle charges of fraud, manipulation, and foreign corruption.
The CFTC’s and DOJ’s Allegations of Wrongdoing Spread Wide and Deep
During a lengthy period—2005 to 2020—Vitol allegedly paid millions of dollars in bribes to foreign officials for inside information that would give Vitol the edge in trading and securing physical oil products and related derivatives contracts. According to the CFTC, Vitol’s “manipulative and deceptive conduct undermined the legitimate forces of supply and demand and the integrity of the global physical and derivatives oil markets.”2
According to the CFTC and DOJ, Vitol paid more than $8 million of bribes and kickbacks to employees and officials of a Brazilian state-owned and state-controlled oil company (Brazilian SOE). These payments were allegedly made to obtain and retain business from the Brazilian SOE in connection with the purchase and sale of oil products. Vitol’s employees are said to have used alias email accounts and code names to communicate with the Brazilian officials. They allegedly effectuated the corrupt payments by entering into sham consulting agreements, establishing fictitious companies to divert the corrupt payments to offshore bank accounts and/or shell entities, and creating fake invoices for purported “market intelligence” or “sell support.” Some of the payments passed through correspondent bank accounts in the United States.
In exchange for these bribes, Vitol, according to the CFTC and DOJ, received “market intelligence” (e.g., internal import and export forecasts, including detailed information on production volume and quality, anticipated imports, shipping routes and cargo loading details) and “last look” information (confidential pricing and bid information that the Brazilian SOE received from Vitol’s competitors) from the Brazilian SOE. Armed with this information, Vitol was able to gain an improper competitive advantage on trading in the physical and derivative markets, and access to the “gold number”—the amount it would need to bid to win a supposedly competitive bidding or tender process. The parties subsequently engaged in sham negotiations to reach the secretly agreed-on prices. Finally, Vitol used confidential information from the Brazilian SOE to secure facially legitimate Exchange of Futures for Physical (EFP) transactions on the US derivative markets, whereby Vitol exchanged future positions for physical oil with the Brazilian SOE.
The CFTC and DOJ also alleged that Vitol similarly made $2 million in corrupt payments to Mexican and Ecuadorian officials to obtain preferential treatment and access to trades with state-owned entities.
Further, the CFTC found that Vitol, as part of the scheme, had attempted to manipulate two S&P Global Platts physical oil benchmarks in August 2014 and July 2015. On both occasions, Vitol engaged in trading activity at prices and in a manner intended to influence the benchmark upward or downward in order to benefit its related physicals and derivatives positions.
The CFTC issued a Consent Order3 filing and settling charges against Vitol for manipulative and deceptive conduct under Section 6(c)(1) of the Commodity Exchange Act (CEA) and Rule 180.1. According to the CFTC, Vitol violated these provisions by intentionally or recklessly:
1) Submitting manipulative bids and offers and engaging in manipulative trading activity relating to physical fuel oil price benchmarks in order to attempt to benefit its physical positions and related derivatives positions;
2) Using misappropriated and corruptly obtained non-public information material to Vitol’s transactions; and
3) Obtaining improper preferential treatment and access to trades from agents of its counterparties as a result of corrupt payments to benefit its trading of physical oil products and related derivatives contracts in the global oil markets.
Under the order, Vitol agreed to pay disgorgement in the amount of $12.7 million and a civil penalty of $16 million. Vitol neither admitted nor denied the CFTC’s findings. Notably, the CFTC recognized Vitol’s substantial cooperation and remedial action in the form of a reduced penalty. In particular, the order noted Vitol’s strengthening of due diligence and approval processes for the use of third parties, initiation of a global review of payment processes and enhancement of internal trading surveillance processes.
In a parallel matter, the Fraud Section of the DOJ’s Criminal Division (Fraud Section) and the United States Attorney’s Office for the Eastern District of New York charged Vitol with two counts of conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA).4 Vitol agreed to enter into a three-year deferred prosecution agreement (DPA) and pay a penalty of $135 million, of which $45 million will be credited to Brazilian authorities to settle a parallel investigation.5 Vitol received full credit from the DOJ for its cooperation and committed to enhancing its compliance programs and internal controls, on which it will report annually to the DOJ for the duration of the DPA. The DOJ determined that an independent compliance monitor is unnecessary.
1. Anti-corruption adds a new regulator.
Traditionally, the US Securities and Exchange Commission (SEC) and the DOJ have been exclusively responsible for enforcing the FCPA. The CFTC has now entered the arena.
The Vitol settlement is a historic enforcement action by the CFTC, showing that the agency is prepared and willing to investigate foreign corrupt practices that involve or impact a commodity interest contract—e.g., a futures contract, commodity option or swap. It also demonstrates that the CFTC can get to a settlement on such a matter—no small task. As evidenced by the Vitol settlement, the CFTC continues to be ever-sensitive to market practices that impact the integrity of the futures and swaps markets. Such sensitivity marks an important trend and builds on the CFTC’s enforcement actions relating to spoofing, wash trades, misappropriation of information and other violations, all of which implicate market integrity.
The Vitol settlement is also not likely to be an outlier. Additional FCPA-related investigations appear to be on the way. In fact, two other global commodities trading companies have already announced that they are the subjects of similar CFTC probes relating to potential foreign corrupt practices.
Given the CFTC’s commitment to “actively pursue fraud tied to foreign corruption and manipulation that impacts the U.S. derivatives and related physical markets,”6 commodity market participants—and, particularly, global players—should take immediate note of the CFTC’s new enforcement focus and consider whether any potential foreign corrupt activity could impact their physical and derivatives commodity businesses. Such firms should think broadly in terms of the transactions that could be the focus of CFTC FCPA-related enforcement activity. In 2019, Director McDonald outlined several examples of activity that could fall within the remit of the CFTC:
Bribes might be employed, for example, to secure business in connection with regulated activities like trading, advising, or dealing in swaps or derivatives. Corrupt practices might be used to manipulate benchmarks that serve as the basis for related derivatives contracts. Prices that are the product of corruption might be falsely reported to benchmarks. Or corrupt practices in any number of forms might alter the prices in commodity markets that drive U.S. derivatives prices.7
2. Coordination between the DOJ and CFTC is likely to continue.
For several years, the CFTC and DOJ have demonstrated unparalleled cooperation. During the 2019 fiscal year, which ended September 30, the CFTC filed 16 parallel actions with criminal authorities—more than any prior year. Most of those involved Main Justice, which in October announced a restructuring that created within the Fraud Section a commodities fraud subsection known as the Market Integrity and Major Frauds (MIMF) Unit.8
It is likely that we will continue to see coordination between the CFTC and both the MIMF Unit and the Fraud Section’s FCPA Unit of the kind that resulted in the Vitol settlement. Critics of these types of parallel actions have noted that “pile-on” actions can result in penalties and sanctions that go beyond what is necessary or justifiable. Former Director McDonald has denied any intention to “pile onto other existing investigations,” stating that the CFTC “work[s] closely with [enforcement partners] to avoid duplicative investigative steps” and credits penalties “imposed by any other enforcement body.”9 In 2018, the DOJ announced a policy not to “pile on” companies when coordinating resolutions with other domestic or foreign authorities—a policy it has now codified in its Justice Manual.10
In any event, market participants should be prepared that enforcement matters in the commodities space risk duplicative punishment from the DOJ and CFTC for the same underlying conduct. While we have not seen it yet, it is also possible that the enforcement arms of the exchanges might find it too tempting not to find a way to join the game as well.
3. Voluntary disclosure and cooperation may lead to reduced sanctions.
In announcing the Vitol settlement, the CFTC emphasized that companies and individuals should refer to its March 6, 2019, advisory on self-reporting and cooperation for CEA violations.11 The advisory provides that companies and individuals that timely and voluntarily disclose violations of the CEA involving foreign corrupt practices, and then fully cooperate and appropriately remediate, may benefit from a CFTC resolution with no civil monetary penalty, absent aggravating factors. In the Vitol resolution, the CFTC Order and DPA expressly highlighted Vitol’s full cooperation (after failing to voluntarily self-report) and the significant remedial measures undertaken in describing the relevant considerations for the respective resolutions. Although the CFTC could still require payment of disgorgement, forfeiture and/or restitution, there may be significant benefits to voluntarily self-disclosing misconduct and fully cooperating that companies should consider if they are aware of potential wrongdoing. In foreign corruption matters, the DOJ has a similar policy detailing the benefits of voluntary self-disclosure, full cooperation and remediation.12
4. Robust compliance programs serve as the first line of defense against FCPA violations.
Both the CFTC and DOJ credited and emphasized significant remedial measures and personnel changes that Vitol has implemented and committed to continuing to implement, including:
- Developing a corporate policy against violations of the FCPA and other applicable foreign law counterparts;
- Improving due diligence and approval processes related to the retention and management of third-party agents and payments to third parties, as well as related to eWindow trading;
- Enhancing policies relating to gifts, travel, and entertainment;
- Updating relevant model agreements;
- Initiating global review of payment processes;
- Dedicating additional resources to the compliance function;
- Establishing an internal confidential reporting system for anti-corruption violations; and
- Enhancing internal trading surveillance processes, including with respect to trading activity in oil liquid Market on Closes (MOCs).
Commodity firms should take a hard look at their internal controls and consider how they can be enhanced to identify potential manipulative and deceptive conduct. At the same time, these firms must examine the marriage between foreign practices and commodity interest activities. Policies and procedures specifically addressing such an interplay should be considered. The Fraud Section has issued multiple guidance documents regarding the features of an effective compliance program.13
1 See Matt F. Kluchenek, Daniel L. Stein, Laurence Urgenson, Steven Wolowitz, No Stone Unturned? The CFTC Targets Foreign Corrupt Practices Involving Commodity Interests, (March 21, 2019).
2 In the Matter of: Vitol Inc., CFTC Docket No. 21-01, Order Instituting Proceedings Pursuant to Section 6(c) and (d) of the Commodity Exchange Act, Making Findings, and Imposing Remedial Sanctions, (Dec. 3, 2020).
3 Order, supra note 2.
4 USA v. Vitol Inc., Cr. No. 20-539 (ENV), Information, (Dec. 3, 2020).
5 USA v. Vitol Inc., Cr. No. 20-539 (ENV), Deferred Prosecution Agreement, (Dec. 3, 2020).
7 James McDonald, CFTC, Remarks at the American Bar Association’s National Institute on White Collar Crime, (March 6, 2019).
8 See No Stone Unturned?, supra note 1.
9 See Remarks, supra note 7.
10 See U.S. Dep’t of Justice, Justice Manual § 1-12.100 (2018).
11 CFTC, Release Number 7884-19: CFTC Division of Enforcement Issues Advisory on Violations of the Commodity Exchange Act Involving Foreign Corrupt Practices, (March 6, 2019). See also Matthew F. Kluchenek, Daniel L. Stein, Michael P. Heffernan, CFTC Issues New Enforcement Guidance Stressing the Importance of Proactive Cooperation, (Nov. 10, 2020).
12 See U.S. Dep’t of Justice, Justice Manual § 9-47.120 (2018).
13 See U.S. Dep’t of Justice and Securities & Exchange Commission A Resources Guide to the U.S. Foreign Corrupt Practices Act (2d. ed. July 2020) at 56-68; DOJ’s Evaluation of Corporate Compliance Programs (updated June 2020).