When commodity traders get caught

ADM and the Ukrainian VAT

Companies and/or individuals involved: Archer-Daniels-Midland Company (USA and Switzerland), Alfred C. Toepfer International Ukraine Ltd. (Ukraine), Alfred C. Toepfer International G.m.b.H. (Germany)

Charges:

Archer-Daniels-Midland Co.: Violation of the Foreign Corrupt Practices Act (USA); control failure
Alfred C. Toepfer International Ukraine Ltd.: Violation of the Foreign Corrupt Practices Act (USA)
Alfred C. Toepfer International G.m.b.H: Violation of the Foreign Corrupt Practices Act (USA) / Granting undue advantage

Swiss lawyers used: None

Countries affected: Ukraine, Germany, United States

Proceedings: United States (Department of Justice; Securities and Exchange Commission), Germany (Hamburg judicial authorities)

Outcome:

ADM:
- Department of Justice: Non-Prosecution Agreement (“NPA”)
- SEC: Settlement: Forfeiture of profits and interest: USD 36,467,366
ACTI Ukraine:
- Department of Justice: Guilty Plea: Fine of USD 17.8 million
ACTI Hamburg:
- German judicial authority: Fine of EUR 900,000

Asset recovery:

Germany: Tax arrears of EUR 6.1 million

The case

The end does not justify all means. This is demonstrated by the case of the U.S. commodity trader ADM, which has its European headquarters in Rolle (Vaud), Switzerland, and its group companies Alfred C. Toepfer International G.m.b.H. (ACTI Hamburg) and Alfred C. Toepfer International Ukraine Ltd. (ACTI Ukraine).

ACTI Ukraine bought agricultural commodities in Ukraine and organized their export. ACTI Hamburg sold the goods. As an export transaction was involved, ACTI Ukraine was entitled to a refund of Ukrainian VAT of 20%. But Ukraine was short on funds, so the process dragged on. To help things along, Ukrainian contacts demanded “charitable donations” from the companies.

Therefore, ACTI had a shipping company in Odessa or the London-based company Yurol issue inflated invoices to ACTI Hamburg. ACTI Hamburg retained part of the amount until the VAT had been refunded. The remaining amount went to the Ukrainian contacts.

Around July 2002, representatives of ACTI Hamburg informed the U.S. headquarters about the “donations”. An ADM employee investigated and learned that the procedure did not comply with tax laws. The ugly word “bribery” was mentioned. Employees were worried and did nothing. Even when this came up again in 2004, nothing happened.

Despite the “generous donations”, ACTI Ukraine’s VAT refund claim amounted to about USD 40 million at the end of 2006. According to the managing director of ACTI Hamburg, foreign companies were engaged in a “bidding orgy” to get their refund. ACTI Hamburg joined in and paid the shipping company in Odessa more than USD 8 million to be forwarded as usual.

ADM missed its next chance to clarify the situation when its internal European audit service stumbled, in early 2007, over the 20% reserve that ACTI Ukraine had set up to finance the undue advantages. ACTI Hamburg explained to ADM that ACTI Ukraine used this reserve to finance write-downs on the tax receivable. Again, nothing happened.

From 2007 to 2008, payments were made through a Ukrainian insurance company, which issued invoices for non-existent crop insurance, i.e., insurance mainly against the loss of crop due to natural disasters like floods or droughts.

ADM’s internal control team picked this up in mid-2008. On this occasion, the company launched an investigation, self-reported and cooperated with the authorities in the United States and Germany. Nevertheless, the Ukrainian subsidiary had to submit a guilty plea to the U.S. Department of Justice (DoJ) and pay a fine of almost USD 18 million. The U.S. Securities and Exchange Commission (SEC) received more than USD 36 million from ADM as forfeiture of profits.

In total, presumably USD 22 million had flowed into Ukrainian state officials’ pockets. The company had thus managed to get a refund of USD 100 million in VAT.

Documents related to this affair

Timeline

Date	Event	Source
Since 2002	Archer-Daniels-Midland Company (ADM) holds a majority stake in Alfred C. Toepfer International (ACTI), an agricultural and logistics group headquartered in Hamburg, Germany.	ADM
July-August 2002	Employees at ADM headquarters discuss the “donations” that ACTI Ukraine must make in order to have the VAT refunded. There are concerns about whether this could constitute illegal bribery.	SEC
2004	The topic comes up again during the preparation of a joint venture with a Swiss company.	SEC
December 2006	ACTI Hamburg enters into a “bidding orgy” to get over USD 40 million VAT refunded.	SEC
January 2007	ADM’s finance department notices the reserves at ACTI Hamburg.	SEC
February 2007 to August 2008	ACTI Ukraine organizes the scheme of granting undue advantages through a Ukrainian insurance company.	SEC
2009	ACTI Hamburg self-reports to the Hamburg authorities.	Hamburger Abendblatt
20th December 2013	Decision of the U.S. Department of Justice: ACTI Ukraine has to admit its guilt and pay a fine of USD 17.8 million.	DoJ
24th December 2013	Decision of the U.S. Securities and Exchange Commission: ADM must pay USD 36.5 million in forfeiture of profits.	SEC
February 2014	Decision of the Hamburg Judicial Authority.	Hamburger Abendblatt

Legislative loopholes

Concealment of responsibility by using intermediaries to pay bribes
Systematic bribery as an organizational problem
Failure of the group’s internal control system, in this case ADM’s internal financial control
Lack of monitoring of group-wide compliance with minimum legal standards
Tax implications of bribes
No specific supervisory authority in the commodities sector and no appropriate due diligence obligations for traders