Vantage Drilling International: The Rig Supplier Sat on the Board

In the Vantage Drilling International FCPA case, the company agreed to pay $5 million to settle the Securities and Exchange Commission’s allegations of failed controls around a rig supplier and a Brazilian marketing agent. In its November 19, 2018 order, the SEC traced the problems through shipyard payments, consulting agreements and warnings that reached the chief executive. According to the order, the supplier sat on the board, held the largest shareholding and owned the drillship the company needed for a Petrobras contract. An insider who knew the purchase arrangements or the payment approvals could see parts of the business that a drilling contract alone would never explain.

The SEC brought its Foreign Corrupt Practices Act action against Vantage Drilling International, an offshore drilling company organized in the Cayman Islands and headquartered in Houston. The order describes conduct at its predecessor, Vantage Drilling Company, whose tangible assets and operations passed to Vantage Drilling International through a restructuring.

A Drilling Business Built Around One Supplier

The SEC said Vantage Drilling Company wanted to market itself as a high-end offshore driller after its public offering, but it owned no drilling assets. It turned to a Taiwanese shipping businessman who had ordered rigs from a Korean shipyard. Agreements gave the company rights to buy his drilling assets, including the ultra-deepwater Titanium Explorer, and gave him a board seat and 40% of the company’s common stock.

The SEC found that the company conducted no due diligence on the businessman or his companies before making him its sole equipment supplier and a director. That put the person selling the rigs inside the company buying them. We see a remarkable amount of trust for someone whose ability to deliver had never been checked.

Then came a warning involving another drillship, the Platinum Explorer. The SEC said the director misrepresented his payment arrangements with the shipyard and claimed he could not make an installment. The company advanced him $32 million, then learned that the shipyard had already granted an extension and the installment was not yet due. Even after learning of those misrepresentations, the company failed to strengthen its controls over transactions with him.

According to the order, the Titanium Explorer arrangement changed when the company could not finance an outright purchase. The director would keep ownership, while the company would oversee construction, market the vessel and operate it. Under their later agreement, the company would forward Petrobras revenues to the director after deducting its management fee, and the director would make the shipyard installments. Ownership, construction funding and the customer relationship sat in different hands, with company money moving between them.

Consulting Agreements for a Customer’s Decision

The Petrobras drilling contract gave both the rig owner and the operator a reason to want the same award. The SEC’s order describes an eight-year contract signed in February 2009 with an approximate value of $1.8 billion. The customer, Petrobras, was Brazil’s state-owned oil and gas company.

According to the SEC, the predecessor’s chief executive had recruited a Brazilian agent to help market the business to Petrobras. Company policy required checks on such agents and safeguards against improper payments before engagement. The SEC found that neither was put in place for this agent, who helped the company answer Petrobras’s inquiry for a new ultra-deepwater drillship.

The SEC found that intermediaries approached the agent with a demand for money on behalf of a senior Petrobras official who could award the contract. Part of the requested bribe was earmarked for the politicians who had appointed the official. The agent then used a meeting arranged by the chief executive and another director to ask the rig owner privately whether he would make the payments. The order says those company officers did not know that was the agent’s purpose for the meeting.

The SEC found that the rig owner agreed to pay. At a later meeting in Rio de Janeiro, he formalized the arrangement through consulting agreements with the agent and an intermediary. He agreed to pay a total of $31 million from his personal funds, tied to contract signing, a later installment and the drillship starting work. In the SEC’s account, the agreements put commercial paperwork around money intended for Petrobras officials. The SEC described transfers from the rig owner to the agent and intermediary after the contract was signed.

The SEC also described a separate promise by the agent to pay Petrobras’s chief negotiator, who supported the company over its competitors in the bidding. After receiving money from the rig owner, the agent transferred funds to that former manager. The SEC’s account shows the damage to an honest bidder: a promised payment bought support from the customer’s own negotiator.

The Warnings Reached the Chief Executive

The SEC found that warnings about the contract payments reached the chief executive and went unanswered. By then, the rig owner had suffered financial losses elsewhere and could no longer fund the Titanium Explorer’s construction. To avoid defaulting on its Petrobras contract, the company bought the vessel in a transaction that combined cash, future shipyard payments and forgiveness of debt the director owed it.

In the SEC’s account, a consultant who had worked for the director during the sale negotiations hinted to the chief executive that the director expected reimbursement for his “payment to P.” Around the time the final improper payment was due, the agent told the chief executive that he had made a “final payment” concerning the Titanium Explorer contract.

The SEC said a Brazilian reporter put the issue directly to the chief executive and the marketing department in August 2013. Her email described promised payments to obtain the contract, a missed final payment and a question about whether the company knew of the arrangement. The chief executive took no action to understand the payments described in that inquiry.

The SEC found that the company did not investigate whether its own payments to the director funded or reimbursed improper payments. That is the connection a finance or audit insider may recognize: a supplier’s request for cash, the company’s purchase of an asset and a separate reference to reimbursement. The business explanation for paying the supplier deserves to be read alongside what the people negotiating the transaction were saying.

Why the SEC Focused on Accounting Controls

The SEC’s finding concerned internal accounting controls over transactions with the director and the use of the marketing agent. It found that weak controls increased the risk that company payments supplied or reimbursed money used for corruption. It also found that the company failed to follow its own requirements for checking the agent and responding to warning signs.

A 2022 review in the Journal of Forensic and Investigative Accounting, How to Avoid Inadvertently Violating the Foreign Corrupt Business Practices Act Abroad, explains why accounting controls carry their own enforcement consequences. The paper distinguishes accurate transaction records from controls over management’s authority and responsibility for company assets:

In Vantage’s case, the SEC described a particular failure to control payments to someone who combined ownership, supply and board roles. For the employee handling those transactions, the unanswered questions were ordinary business questions: what was due to the shipyard, what the supplier had paid, why the company was advancing money and whether anyone followed up when the explanations failed.

The Customer’s Books Showed Another Part of the Problem

The SEC’s separate September 2018 order against Petrobras described how inflated contractor payments became inflated assets on the customer’s balance sheet. In that proceeding, the SEC found that executives helped a contractor cartel obtain inside information, manipulate bidding and win contracts. Its account of how the kickbacks were recorded was blunt:

Vantage’s order raises the question of what a supplier payment funded, while Petrobras’s order shows how a customer’s books can hide a bribe in an asset’s cost. The company paying the invoice and the company receiving it can each hold a different part of the explanation.

The Settlement Followed a Profitable Contract

The SEC said Brazil’s Operation Car Wash criminal investigation exposed the Titanium Explorer payment scheme. Petrobras canceled the contract in August 2015, by which time the predecessor had earned approximately $106 million in net profits from it. We see a settlement that surrendered only a small fraction of that profit. A cost of doing business.

The SEC also explained why it set the payment as it did. It considered Vantage Drilling International’s financial condition and need to retain cash for operations and liabilities, as well as cooperation and remedial work. It ordered the company to give up part of the gains and imposed no additional civil penalty.

What Records Should I Preserve?

The useful records in a case like this connect the rig purchase, shipyard obligations, agent agreements, payment approvals and warnings received inside the company. We work with you on how your knowledge of those records connects the business decision to the money. A person in finance may understand an advance that made no sense, while someone in sales may know what the agent promised and who controlled the customer’s decision.

Vantage’s resolution was an SEC action, and eligible SEC whistleblowers can receive 10% to 30% of collected monetary sanctions. A whistleblower case under the separate False Claims Act can pay 15% to 30% of what the government recovers. We build from your knowledge of the transaction and bring in whistleblower lawyers with the experience your case needs.

You Know Why the Payment Was Approved

If you know why a rig supplier received an advance or how an agent secured a customer’s decision, speak with our whistleblower experts about the transaction. We build the case around your knowledge, bring in FCPA whistleblower lawyers who understand offshore contracts and cross-border payments, and stay beside you through the case.