Compliance Lessons from the Chiquita Case

The payments in question were made by Chiquita to the United Self-Defense Forces of Columbia ('Autodefensas Unidas de Colombia' or 'AUC'). The AUC is a right-wing paramilitary group opposed to left-wing rebel forces in Columbia. The AUC has engaged in a series of assassinations and massacres targeting left-wing rebels, trade unionists, leftist intellectuals and leftist politicians, often with the covert assistance of Columbian army units. AUC financed itself through the production and trafficking of cocaine. The AUC also received payments from landowners and business interests in exchange for protection against the rebel forces. All or some of these activities led to the designation of AUC in 2001 as a Foreign Terrorist Organization ('FTO') by the State Department and as a Specially Designated Global Terrorist ('SDGT') by the Treasury Department's Office of Foreign Assets Control ('OFAC').

Chiquita's involvement with AUC began in 1997, when Carlos Casta'o, then the head of the AUC, met with officials of C.I. Bananos deExportaci'n, S.A. ('Banadex'), Chiquita's wholly owned Colombian subsidiary. During that meeting, Casta'o indicated to the General Manager of Banadex that it should make certain payments in order to avoid physical harm to Banadex employees.

As a result, Banadex began to make the requested payments to AUC. At that time, AUC had not yet been designated as an FTO or an SDGT, and, accordingly, the payments to the AUC did not violate U.S. law. The payments became illegal after the designation of AUC in 2001, but it was not, however, until February 2003 that management of Chiquita learned about that designation. At that point, Chiquita consulted with outside legal counsel who advised Chiquita (arguably incorrectly) that the payments by the Colombian subsidiary violated U.S. law. Shortly after consulting with counsel, the Board of Chiquita was first advised of the payments by Banadex to AUC. The Board instructed the company to disclose the matter immediately to the DOJ. A suggestion was also made at the Board meeting that the company should sell its operations in Columbia.

Pursuant to the Board's directive, officials of Chiquita met with the DOJ in April 2003. Although the information suggests that some agreement may have been reached with DOJ not to penalize past payments, the issue of ongoing payments was not resolved. Employees of Banadex continued to make payments to the AUC until February 2004. In May of that year, Chiquita acknowledged that it had been informed by the DOJ that it was under investigation for the payments to AUC. The following month, Chiquita sold Banadex to a third-party.

What Compliance Lessons Can Be Gained?

Although Chiquita did its best, it seems to me, to try to confront and resolve the situation in an honest and forthright matter, hindsight suggests several things that might have been done better and that might serve as lessons to corporate counsel subsequently confronted with similar situations. And similar situations are far from being just a theoretical possibility. American multinational companies doing business in the Middle East and other potentially unstable areas may find themselves subject to ransom demands by terrorist groups that have kidnapped company employees or subject to other demands for payment from terrorist groups. And management may well find out about these payments after they have already occurred.

Companies should consider making initial disclosure to an administrative agency such as OFAC, not to the DOJ. The Department of Treasury's Office of Foreign Assets Control ('OFAC') is the primary agency involved in enforcing the laws and regulations that prohibit U.S. persons from engaging in financial transactions with 'Specially Designated Global Terrorists' under 31 C.F.R. ' 594.101 et seq. and 'Foreign Terrorist Organizations' under 31 C.F.R.
' 597.101. OFAC's penalty guidelines encourage voluntary disclosures and provide for a mitigation of penalties for violations that have been voluntarily disclosed to the agency.

Although a voluntary disclosure does not preclude a referral by OFAC of the disclosed violation to the DOJ, it is, in fact, rare for OFAC to make such a referral after a voluntary disclosure. Nor is it common for DOJ to investigate a violation that has been voluntarily disclosed to OFAC without some referral from OFAC.

Accordingly, Chiquita, by going to DOJ rather than OFAC when it learned that AUC had been listed as a Specially Designated Global Terrorist and a Foreign Terrorist Organization, virtually guaranteed that the case would be treated as a criminal rather than a civil matter. It also made Chiquita ineligible for the potential mitigation of penalties that may be available under OFAC rules for voluntary disclosures to OFAC. If OFAC learned of the violation from the DOJ, even though a voluntary disclosure was made to the DOJ, it will not be deemed as a voluntary disclosure to OFAC.

A voluntary disclosure to OFAC can cover past violations but would not have dealt with the problem of future payments that Chiquita needed to pay to the AUC in order to protect its employees from on-going threats. This is a more intractable problem, but one that might have been addressed in some measure if Chiquita had applied for a license to make the protection payments to the AUC. Although it is not likely that OFAC would have granted such a license, it is not outside the realm of possibility in certain circumstances. Certainly it puts OFAC, rather than the company, in the position of taking moral responsibility for the death or violence that results from failure to make the payment.

Outside counsel should be extremely careful about what it puts in writing. The centerpiece of the information and DOJ's case against Chiquita was the advice that Chiquita's lawyers had provided to Chiquita with respect to the payments to AUC. For example, the information cites this capital-letter-laden language from a memo from outside counsel to Chiquita:

Bottom Line: CANNOT MAKE THE PAYMENT.

Advised: NOT TO MAKE THE ALTERNATIVE PAYMENT through CONVIVIR.

General Rule: Cannot do indirectly what you cannot do directly.

Concluded With: CANNOT MAKE THE PAYMENT.

Numerous other examples of similar advice by Chiquita's lawyers were also cited in the criminal information. The problem here is that, as in many cases, it was not so obvious that the payments were illegal. The basis of the government's claim that Chiquita violated 50 U.S.C. ' 1705(b) are the OFAC regulations, which forbid payments to SDGTs such as AUC by U.S. persons. (The information only charges Chiquita with engaging in a prohibited transaction with an SDGT; it did not charge Chiquita under other provisions relating to Foreign Terrorist Organizations.) The regulations make clear, in 31 C.F.R. ' 594.315, that a U.S. 'person' is a U.S. citizen or a company organized under the laws of the United States. Banadex, which made the payments, was not a U.S. person under that definition, and its payments were not a violation of U.S. law. Chiquita and its U.S. employees would only have violated the OFAC regulations only if they could be found, under 31 C.F.R. ' 594.205(b), to have engaged in a conspiracy with the Colombian employees to make the payments or to have provided services to the AUC in violation of 31 C.F.R. ” 594.204 and 594.206.

All of the above leaves plenty of room for counsel to have provided a much more nuanced assessment of the situation. If the memo had said that the payments may be illegal depending upon the extent of participation of U.S. employees in the payments by the Columbian subsidiary, the DOJ would not have been able to hammer Chiquita with alarmed and alarming legal memos which shouted in capital letters that Chiquita was breaking the law. Although the McNulty Memorandum recites the traditional pieties about the 'sacrosanct' attorney-client privilege and purportedly limits the situations in which the DOJ will request privileged documents, counsel should be aware that the DOJ will exert considerable pressure to obtain attorney-client communications on the subject of the disclosed violations. That should be taken into account before concluding such a memo by saying, 'MUST STOP OR YOU WILL GO TO JAIL!'

Selling the foreign subsidiary may not be a complete solution. According to the criminal information, it appears that the initial impulse of several of the Board members was to sell the Columbian subsidiary. Although this seems at first glance to be a sensible solution, it was one with several serious limitations.

First, OFAC applies a principal of succesor liability. That means that the potential pool of buyers for the foreign subsidiary was limited to companies without operations in the United States. Second, the settlement agreement entered into between El Paso Corporation and the DOJ last February suggests that selling a subsidiary may not eliminate on-going liability after the sale if the selling company continues to buy products from the divested subsidiary. The El Paso case involved payments made to the Iraq government to permit Iraqi oil purchases under the U.N. Oil-for-Food program. Such payments were prohibited by the Iraq sanctions regulations in place at the time.

Significantly, the DOJ didn't allege that El Paso made the improper payments to the Iraq government. Rather, the settlement agreement alleged that El Paso:

[P]urchased Iraqi oil for which third-party intermediaries and/or allocation holders paid approximately $5.48 million in illegal surcharges to the former Government of Iraq.

OFAC regulations prohibit transactions that have 'the purpose or effect of evading' the regulations, which could be read to include, although with a bit of a stretch, purchases from third parties of products that involved payments to a sanctioned country, group or individual. Under that analysis, Chiquita would not have solved anything by selling the Colombian subsidiary to a third party if it continued to buy bananas from that divested subsidiary while knowing that the divested subsidiary continued to make the improper payments

Conclusion

Of course, from a compliance point of view, Chiquita could have avoided the problem entirely by forbidding its subsidiary from making the payments in question. But that of course is entirely too simplistic an answer given the credible threat to its employees in Columbia. Some companies may well make a conscious decision in such a circumstance to violate the law to protect their employees and then to throw themselves on the mercy of the U.S. government. When that decision is made, the company should consider disclosing the problem to the relevant administrative agency rather than to the DOJ. Additionally, its lawyers should be careful that legal memoranda are not written in a way that might provide unnecessary ammunition to prosecutors.

Robert Clifton Burns is a partner at Powell Goldstein LLP in Washington, DC. He can be reached at 202-624-3949 or [email protected].

In March of this year, Chiquita Brands agreed to pay a $25 million criminal fine for payments it made to a paramilitary group in Colombia. The payments were made by the Colombian subsidiary of Chiquita in order to protect the company's employees from threatened violence. Unfavorable press coverage emphasized payments by Chiquita to a 'terrorist group' and downplayed the threats made to Chiquita, which prompted it to make the payments in the first place.

The criminal information filed by the government with the District of Columbia federal district court, and which served as the basis for Chiquita's plea in the case, shows a company caught between a rock and a hard place ' the rock being the consequences of not paying the terrorist group, and the hard place being U.S. criminal penalties that could be imposed for paying the group in question. Although there is never an ideal or win-win solution to the dilemma with which Chiquita was faced, the experience of Chiquita, as detailed in the criminal information, can provide some guidance as to ways that the situation might have been improved if the company and its lawyers had behaved somewhat differently.

How It Happened

The payments in question were made by Chiquita to the United Self-Defense Forces of Columbia ('Autodefensas Unidas de Colombia' or 'AUC'). The AUC is a right-wing paramilitary group opposed to left-wing rebel forces in Columbia. The AUC has engaged in a series of assassinations and massacres targeting left-wing rebels, trade unionists, leftist intellectuals and leftist politicians, often with the covert assistance of Columbian army units. AUC financed itself through the production and trafficking of cocaine. The AUC also received payments from landowners and business interests in exchange for protection against the rebel forces. All or some of these activities led to the designation of AUC in 2001 as a Foreign Terrorist Organization ('FTO') by the State Department and as a Specially Designated Global Terrorist ('SDGT') by the Treasury Department's Office of Foreign Assets Control ('OFAC').

Chiquita's involvement with AUC began in 1997, when Carlos Casta'o, then the head of the AUC, met with officials of C.I. Bananos deExportaci'n, S.A. ('Banadex'), Chiquita's wholly owned Colombian subsidiary. During that meeting, Casta'o indicated to the General Manager of Banadex that it should make certain payments in order to avoid physical harm to Banadex employees.

As a result, Banadex began to make the requested payments to AUC. At that time, AUC had not yet been designated as an FTO or an SDGT, and, accordingly, the payments to the AUC did not violate U.S. law. The payments became illegal after the designation of AUC in 2001, but it was not, however, until February 2003 that management of Chiquita learned about that designation. At that point, Chiquita consulted with outside legal counsel who advised Chiquita (arguably incorrectly) that the payments by the Colombian subsidiary violated U.S. law. Shortly after consulting with counsel, the Board of Chiquita was first advised of the payments by Banadex to AUC. The Board instructed the company to disclose the matter immediately to the DOJ. A suggestion was also made at the Board meeting that the company should sell its operations in Columbia.

Pursuant to the Board's directive, officials of Chiquita met with the DOJ in April 2003. Although the information suggests that some agreement may have been reached with DOJ not to penalize past payments, the issue of ongoing payments was not resolved. Employees of Banadex continued to make payments to the AUC until February 2004. In May of that year, Chiquita acknowledged that it had been informed by the DOJ that it was under investigation for the payments to AUC. The following month, Chiquita sold Banadex to a third-party.

What Compliance Lessons Can Be Gained?

Although Chiquita did its best, it seems to me, to try to confront and resolve the situation in an honest and forthright matter, hindsight suggests several things that might have been done better and that might serve as lessons to corporate counsel subsequently confronted with similar situations. And similar situations are far from being just a theoretical possibility. American multinational companies doing business in the Middle East and other potentially unstable areas may find themselves subject to ransom demands by terrorist groups that have kidnapped company employees or subject to other demands for payment from terrorist groups. And management may well find out about these payments after they have already occurred.

Companies should consider making initial disclosure to an administrative agency such as OFAC, not to the DOJ. The Department of Treasury's Office of Foreign Assets Control ('OFAC') is the primary agency involved in enforcing the laws and regulations that prohibit U.S. persons from engaging in financial transactions with 'Specially Designated Global Terrorists' under 31 C.F.R. ' 594.101 et seq. and 'Foreign Terrorist Organizations' under 31 C.F.R.
' 597.101. OFAC's penalty guidelines encourage voluntary disclosures and provide for a mitigation of penalties for violations that have been voluntarily disclosed to the agency.

Although a voluntary disclosure does not preclude a referral by OFAC of the disclosed violation to the DOJ, it is, in fact, rare for OFAC to make such a referral after a voluntary disclosure. Nor is it common for DOJ to investigate a violation that has been voluntarily disclosed to OFAC without some referral from OFAC.

Accordingly, Chiquita, by going to DOJ rather than OFAC when it learned that AUC had been listed as a Specially Designated Global Terrorist and a Foreign Terrorist Organization, virtually guaranteed that the case would be treated as a criminal rather than a civil matter. It also made Chiquita ineligible for the potential mitigation of penalties that may be available under OFAC rules for voluntary disclosures to OFAC. If OFAC learned of the violation from the DOJ, even though a voluntary disclosure was made to the DOJ, it will not be deemed as a voluntary disclosure to OFAC.

A voluntary disclosure to OFAC can cover past violations but would not have dealt with the problem of future payments that Chiquita needed to pay to the AUC in order to protect its employees from on-going threats. This is a more intractable problem, but one that might have been addressed in some measure if Chiquita had applied for a license to make the protection payments to the AUC. Although it is not likely that OFAC would have granted such a license, it is not outside the realm of possibility in certain circumstances. Certainly it puts OFAC, rather than the company, in the position of taking moral responsibility for the death or violence that results from failure to make the payment.

Outside counsel should be extremely careful about what it puts in writing. The centerpiece of the information and DOJ's case against Chiquita was the advice that Chiquita's lawyers had provided to Chiquita with respect to the payments to AUC. For example, the information cites this capital-letter-laden language from a memo from outside counsel to Chiquita:

Bottom Line: CANNOT MAKE THE PAYMENT.

Advised: NOT TO MAKE THE ALTERNATIVE PAYMENT through CONVIVIR.

General Rule: Cannot do indirectly what you cannot do directly.

Concluded With: CANNOT MAKE THE PAYMENT.

Numerous other examples of similar advice by Chiquita's lawyers were also cited in the criminal information. The problem here is that, as in many cases, it was not so obvious that the payments were illegal. The basis of the government's claim that Chiquita violated 50 U.S.C. ' 1705(b) are the OFAC regulations, which forbid payments to SDGTs such as AUC by U.S. persons. (The information only charges Chiquita with engaging in a prohibited transaction with an SDGT; it did not charge Chiquita under other provisions relating to Foreign Terrorist Organizations.) The regulations make clear, in 31 C.F.R. ' 594.315, that a U.S. 'person' is a U.S. citizen or a company organized under the laws of the United States. Banadex, which made the payments, was not a U.S. person under that definition, and its payments were not a violation of U.S. law. Chiquita and its U.S. employees would only have violated the OFAC regulations only if they could be found, under 31 C.F.R. ' 594.205(b), to have engaged in a conspiracy with the Colombian employees to make the payments or to have provided services to the AUC in violation of 31 C.F.R. ” 594.204 and 594.206.

All of the above leaves plenty of room for counsel to have provided a much more nuanced assessment of the situation. If the memo had said that the payments may be illegal depending upon the extent of participation of U.S. employees in the payments by the Columbian subsidiary, the DOJ would not have been able to hammer Chiquita with alarmed and alarming legal memos which shouted in capital letters that Chiquita was breaking the law. Although the McNulty Memorandum recites the traditional pieties about the 'sacrosanct' attorney-client privilege and purportedly limits the situations in which the DOJ will request privileged documents, counsel should be aware that the DOJ will exert considerable pressure to obtain attorney-client communications on the subject of the disclosed violations. That should be taken into account before concluding such a memo by saying, 'MUST STOP OR YOU WILL GO TO JAIL!'

Selling the foreign subsidiary may not be a complete solution. According to the criminal information, it appears that the initial impulse of several of the Board members was to sell the Columbian subsidiary. Although this seems at first glance to be a sensible solution, it was one with several serious limitations.

First, OFAC applies a principal of succesor liability. That means that the potential pool of buyers for the foreign subsidiary was limited to companies without operations in the United States. Second, the settlement agreement entered into between El Paso Corporation and the DOJ last February suggests that selling a subsidiary may not eliminate on-going liability after the sale if the selling company continues to buy products from the divested subsidiary. The El Paso case involved payments made to the Iraq government to permit Iraqi oil purchases under the U.N. Oil-for-Food program. Such payments were prohibited by the Iraq sanctions regulations in place at the time.

Significantly, the DOJ didn't allege that El Paso made the improper payments to the Iraq government. Rather, the settlement agreement alleged that El Paso:

[P]urchased Iraqi oil for which third-party intermediaries and/or allocation holders paid approximately $5.48 million in illegal surcharges to the former Government of Iraq.

OFAC regulations prohibit transactions that have 'the purpose or effect of evading' the regulations, which could be read to include, although with a bit of a stretch, purchases from third parties of products that involved payments to a sanctioned country, group or individual. Under that analysis, Chiquita would not have solved anything by selling the Colombian subsidiary to a third party if it continued to buy bananas from that divested subsidiary while knowing that the divested subsidiary continued to make the improper payments

Conclusion

Of course, from a compliance point of view, Chiquita could have avoided the problem entirely by forbidding its subsidiary from making the payments in question. But that of course is entirely too simplistic an answer given the credible threat to its employees in Columbia. Some companies may well make a conscious decision in such a circumstance to violate the law to protect their employees and then to throw themselves on the mercy of the U.S. government. When that decision is made, the company should consider disclosing the problem to the relevant administrative agency rather than to the DOJ. Additionally, its lawyers should be careful that legal memoranda are not written in a way that might provide unnecessary ammunition to prosecutors.

Robert Clifton Burns is a partner at Powell Goldstein LLP in Washington, DC. He can be reached at 202-624-3949 or [email protected].