Alcoa Inc. (AA:US), the largest U.S. aluminum producer, agreed to pay $384 million to resolve U.S. criminal and civil probes, after a unit admitted paying tens of millions of dollars in bribes to members of Bahrain’s royal family and officials at a state-owned company to win business.
Alcoa World Alumina LLC, a majority-owned unit that supplies the raw material used by smelters to make aluminum, pleaded guilty yesterday in federal court in Pittsburgh to violating the Foreign Corrupt Practices Act.
The settlement includes a criminal fine of $209 million, a forfeiture of $14 million and a disgorgement to the Securities and Exchange Commission of $161 million, according to the Justice Department. The total settlement is the fourth-largest in an FCPA case, according to the SEC.
“I don’t think people were expecting that high of a payout,” said Curtis Woodworth, a New York-based analyst at Nomura Holdings Inc. “The settlement is slightly worse than anticipated,” said Woodworth, who has a neutral rating on the shares.
The U.S. Foreign Corrupt Practices Act bars corporate employees or their agents from paying bribes to government officials to obtain or retain business or to secure an improper advantage.
The Alcoa unit hired a consultant in 1989 at the request of Bahraini government officials who controlled contracting at state-owned Aluminium Bahrain BSC, known as Alba, according to court filings.
“Consultant A imposed a mark-up of approximately $400 million on sales of Alcoa of Australia’s alumina to Alba and paid tens of millions of dollars in bribes to senior government officials of Bahrain,” the filing says.
Alcoa has been dealing with allegations over its conduct in Bahrain since 2008, when Alba sued it in U.S. court for overcharges stemming from bribery. U.S. prosecutors began investigating those allegations the same year. They traced the funds through accounts, some held under aliases, in Liechtenstein, Luxembourg, Switzerland and Guernsey, the Justice Department said yesterday. Alcoa agreed last year to pay $85 million in cash and enter into a long-term alumina contract with Alba to settle the 2008 suit. That settlement had a total value of $447 million, Alba said in 2012.
The settlement “closes the door on Alba overhang,” according to a note yesterday by Brian Yu, a San Francisco-based analyst with Citigroup Inc., who has a neutral rating on the stock.
Alcoa fell 1.3 percent to $10.69 in New York yesterday.
“We welcome that we have been able to reach a settlement on this legacy legal matter and put this thing behind us,” Alcoa Chief Executive Officer Klaus Kleinfeld told CNBC yesterday.
Kleinfeld inherited the investigations over the company’s conduct in Bahrain when he took over in 2008, after joining the company a year earlier. Kleinfeld had resigned as chief executive officer of German engineering company Siemens AG in 2007 following a bribery investigation at the company that resulted in the largest FCPA fine of $800 million in 2008.
“There is no allegation in the filings by the DOJ and there is no finding by the SEC that anyone at Alcoa Inc. knowingly engaged in the conduct at issue,” Alcoa said in a statement yesterday.
Alcoa’s U.S. agreement comes a month after the collapse of the U.K.’s effort to prosecute British and Canadian businessman Victor Dahdaleh for bribing Alba officials. The Serious Fraud Office had accused Dahdaleh of paying about 40 million pounds ($66 million) in bribes to Alba’s former chairman and CEO. The SFO dropped the case in December after one witness changed his testimony and two U.S. witnesses refused to attend the trial, the SFO said. Neil O’May, Dahdaleh’s lawyer in London, didn’t immediately respond to a voicemail message asking for comment.
“There is a lot in this enforcement action that causes you to scratch your head, including that the alleged middleman was charged by U.K. authorities and when they were put to their burden of proof, the case completely fell apart,” said Mike Koehler, a law professor at Southern Illinois University and author of the FCPA Professor website.
Alba was one of Alcoa’s biggest customers from 1989 through 2009 for alumina, the raw material that is supplied to smelters that produce aluminum, the SEC said. Alcoa’s Australian subsidiary used a consultant who paid bribes to Bahraini officials using money from markups he made between the purchase price of the product from the Alcoa unit and the sale price to Alba, according to the regulator.
“As the beneficiary of a long-running bribery scheme perpetrated by a closely controlled subsidiary, Alcoa is liable and must be held responsible,” George Canellos, co-director of the SEC Enforcement Division, said in the agency’s statement.
The company said it took a $243 million charge in the fourth quarter to recognize all costs related to the government investigations and the settlement of the Alba lawsuit. Alcoa will pay the fines over five years, according to the plea agreement.
Alcoa had already taken a $62 million charge in the second quarter of 2013 and said in its third-quarter earnings report that it expected further charges of as much as $200 million to settle the Justice Department probe. The SEC had rejected its offer of $60 million to settle the inquiry, Alcoa also said at the time.
Alcoa got a benefit of more than $400 million from the scheme, according to Justice Department calculations, the plea agreement shows. The department agreed to a $209 million fine after considering the effect of the size of the fine on Alcoa’s ability to fund capital expenditures, research and development and pension obligations, and the company’s ‘substantial cooperation’ and its anti-corruption efforts, the document shows.
Alcoa World Alumina is a unit of a joint venture that is 60 percent owned by Alcoa and 40 percent owned by Alumina Ltd. The venture was formed in 1994, according to Alumina.
When contacted by telephone, a person at the Bahrain embassy in Washington declined to comment on the accord and declined to provide his name or title.
The case is U.S. v. Alcoa World Alumina LLC, 14-cr-7, U.S. District Court for the Western District of Pennsylvania (Pittsburgh).
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