Attorneys
- Thomas R. L. Best
- Owen Bonheimer
- Andrew D. Irwin
- Negar Katirai
- Erik L. Kitchen
- Edward J. Krauland
- David Lorello
- Lucinda A. Low
Related Practices
International Law Advisory - Baker Hughes Agrees to Pay Record $44.1 Million To Resolve DoJ and SEC FCPA Enforcement Actions
May 3, 2007On April 26, 2007, to settle enforcement actions based upon findings of FCPA violations, Baker Hughes Incorporated (“Baker Hughes”) entered into (1) a Deferred Prosecution Agreement with U.S. Department of Justice ("DoJ") and (2) a civil settlement with the U.S. Securities and Exchange Commission ("SEC"). In addition, Baker Hughes Services International (“BHSI”), a subsidiary of Baker Hughes with operations in Kazakhstan, entered into a plea agreement with the DOJ.[1] The FCPA charges relate to Baker Hughes’ operations in six countries -- Kazakhstan, Russia, Uzbekistan, Indonesia, Nigeria, and Angola. Baker Hughes agreed to pay a record $44.1 million settlement amount. Baker Hughes also agreed to retain a compliance monitor for a period of three years. The DoJ recognized Baker Hughes' voluntary disclosure of the matter to enforcement authorities, its extensive and thorough internal investigation of business practices in Kazakhstan, and its significant remedial steps and controls enhancements.[2]
The case covers a wide range of substantive issues that have been addressed in other recent FCPA enforcement actions. Although the case does not break significant new substantive ground in terms of the practices at issue, the case is the first major recent FCPA enforcement action based upon violation of a cease-and-desist order or injunction. Both the DoJ and the SEC took into account the 2001 cease-and-desist order in determining the record settlement amount. The case also provides further data as to the penalty-mitigation benefits of FCPA voluntary disclosures.
The payments at issue
The core allegation in the case arises out of Baker Hughes’ business in Kazakhstan. In September 2000, Baker Hughes retained an agent in connection with its bid for a business opportunity in the Karachaganak oil project in Kazakhstan. Within weeks, the company won the Karachaganak tender, which led to approximately $220 million in gross revenues for the company. From May 2001 to November 2003, Baker Hughes made 27 commission payments totaling approximately $4.1 million to the agent. Baker Hughes and BHSI recorded these payments as "commissions", "fees" or "legal services", though no identifiable services were performed by the agent for the company. According to the documents relating to the SEC settlement, a Baker Hughes operating subsidiary also retained another agent in connection with the award of a chemical contract in Kazakhstan, making payments of over $1 million to the Swiss bank account of that agent. The subsidiary made some of these payments after a company employee learned that the representative of the agent was a high-ranking official of the parastatal KazTransOil, which awarded business to the subsidiary.
The SEC settlement documents also state that Baker Hughes or its subsidiaries made questionable payments in both the procurement and operations contexts without obtaining adequate assurances that the payments would not be passed through to government officials.
- Questionable payments in the procurement context included (1) $5.3 million in commission payments between 1998 and 2004 to an agent who worked with state oil companies in Kazakhstan, Russia and Uzbekistan from which the company sought to obtain or retain business; and (2) payments of more than $11.5 million in commissions to agents in Angola between 1998 and 2003 without adequate assurances against pass-through payments to employees of the state-owned oil company, Sonangol, with which the company conducted business. Most of the latter payments went to an agent Baker Hughes inherited from a 1998 acquisition from Western Atlas Corporation.
- Questionable payments in the operations context included the following: (1) $60,000 to secure an option to lease a property in Kazakhstan from a company owned by a company affiliated with the agent Baker Hughes had retained for the Karachaganak project; (2) payments of unspecified amounts to freight forwarders in Indonesia between 2000 and 2003 without adequate assurances against pass-through payments to Indonesian customs officials who permitted importation of goods that bypassed customs; (3) payments of more than $2.5 million to customs brokers in Nigeria between 2001 and 2005 without adequate assurances against pass-through payments to Nigerian customs officials; (4) payments of approximately $90,000 to an agent in Nigeria in 2001 without adequate assurances against pass-through payments to Nigerian tax officials who had reduced a tax assessment levied upon a Nigerian subsidiary by 90-percent; and (5) payment of $9,000 in cash to a Kazakh individual some employees believed to be a Kazakh official in order to obtain a license required by Kazakh law to import tools with radioactive components.
Enforcement actions
Enforcement authorities brought several charges against Baker Hughes and its subsidiary, BHSI. Focusing on the $4.1 million paid to the agent for the Karachaganak project in Kazakhstan, the DoJ charged BHSI with conspiracy to violate the anti-bribery provisions of the FCPA, violation of the anti-bribery provisions of the FCPA, and with aiding and abetting Baker Hughes' violation of the books and records provisions of the FCPA. The SEC found that Baker Hughes violated the anti-bribery, books and records, and internal controls provisions of the FCPA, including by knowingly failing to implement a system of internal controls. The SEC also found that Baker Hughes violated the terms of a 2001 administrative cease-and-desist order barring it from violating the accounting provisions of the FCPA.[3]
The SEC complaint also named Roy Fearnley, a British national residing in Kazakhstan who formerly worked as the Baker Hughes Business Development Manager in Kazakhstan and later in Russia. The SEC alleged that Mr. Fearnley aided and abetted Baker Hughes' violation of the anti-bribery, books and records, and internal controls provisions of the FCPA, and that he knowingly circumvented the internal controls of Baker Hughes and falsified its books and records in violation of the FCPA. The SEC seeks disgorgement, civil penalties and an injunction against Mr. Fearnley. A filing by the DoJ identifies an individual believed to be Mr. Fearnley by title as a co-conspirator.
To resolve the enforcement action brought by the DoJ, Baker Hughes entered into a deferred prosecution agreement under which it agreed to appoint a compliance monitor for a term of three years and to cause its subsidiary, BHSI, to pay an $11 million criminal fine. To resolve the enforcement action brought by the SEC, Baker Hughes agreed to pay a $10 million civil penalty for violation of the 2001 cease-and-desist order and a record $23 million in disgorgement of profits and prejudgment interest. Baker Hughes also consented to a permanent injunction against violation of the anti-bribery and accounting provisions of the FCPA. The $44.1 million total settlement amount is the largest amount paid by a company to settle an FCPA enforcement action.
Compliance lessons
The Baker Hughes case underscores several trends in recent FCPA enforcement actions:
- Higher settlements in follow-on enforcement actions. In agreeing to settle the criminal enforcement action against BHSI for $11 million, the DoJ took into account the fact that the charged offenses took place within five years of the SEC cease-and-desist order.[4] The SEC settlement documents also cite a violation of the 2001 cease-and-desist order as a basis for a civil penalty of $10 million.[5] The Director of the SEC Division of Enforcement explained that this enforcement action “demonstrates that companies must adhere to Commission Orders and that recidivists will be punished.”[6] This follow-on action against Baker Hughes comes on the heels of the February 2007 follow-on action against Vetco International Ltd. and its affiliates. The near-record $26 million total settlement amount in the Vetco case also was attributable to the fact that the violations occurred after the company had given significant compliance undertakings on behalf of the affiliates of Vetco International.[7]
- Uncertainty regarding penalty-mitigating benefits of a voluntary disclosure. According to the DoJ, it was not previously aware of the conduct that led to the present enforcement action, which Baker Hughes voluntarily disclosed in May 2003. The 2001 enforcement action settled by Baker Hughes also resulted from a voluntary disclosure by Baker Hughes. Although enforcement authorities recently have been emphasizing the benefits of voluntary disclosures, perhaps in response to questions raised by the FCPA bar[8], the true benefit gained from making the disclosures often is difficult to quantify. In this case, using the Sentencing Guidelines' formula, the DoJ determined the criminal fine range to be from $19 million to $38 million.[9] The actual fine imposed -- $11 million -- is $27 million lower than the upper end of the calculated range. Nonetheless, some if not all of that difference may be attributable to other factors, such as the total SEC settlement amount of $33 million and the cooperation of Baker Hughes beyond making the voluntary disclosure.
- Emphasis on FCPA due diligence in relationships with agents and other third parties including subcontractors.
- Agents. The case against Baker Hughes highlights the last-minute retention of an agent, at the request of the parastatal Kazakhoil, on a commission basis, in connection with its bid for a business opportunity in the Karachaganak oil project in Kazakhstan. Hiring agents at the instruction of government officials, especially late in a procurement process on a commission basis without due diligence and without clarity as to the nature of the legitimate services they may provide, raises FCPA red flags. The SEC action sets a high bar for companies that encounter such red flags. The SEC recognized that Baker Hughes provided FCPA compliance procedures and materials to the employee responsible for retaining this agent. The SEC also noted that the employee stated that he would follow these procedures, use these materials and alert the company if any compliance issues arose. Nonetheless, the SEC found that the employee "failed to follow any of the FCPA procedures issued to him" and that the company "otherwise failed to follow up with [the employee]" until approximately two years later.[10] In part on that basis, the SEC determined that the company lacked the internal controls required by the FCPA. Enforcement authorities thus expect companies to monitor FCPA compliance by employees responsible for the retention of third parties that deal with foreign governmental bodies.
- Subcontractors. The DoJ deferred prosecution agreement calls for the company to adopt and monitor a detailed compliance program that extends not just to subsidiaries and affiliates, but also to joint venturers, contractors, and subcontractors.[11]
- Continued Emphasis on FCPA issues outside the procurement area. As discussed above, many of the types of questionable payments cited by the SEC fall outside the procurement context. The SEC also cited payments an agent in Angola for travel to Portugal by a senior-level employee of the state oil company Sonangol and his family without documentation of a legitimate business purpose.[12]
- FCPA accounting requirements triggered by payments made without adequate internal controls. Payments by public companies that result in a bribe charge almost invariably lead to a charge of violation of the accounting requirements. In this case, instances of bribery also led enforcement officials to scrutinize other payments to third parties ultimately found to have been made without adequate controls to ensure that no bribe was paid. Those findings and similar findings in other recent cases show that enforcement authorities find inadequate accounting treatment where the ultimate beneficiary of a payment is not recorded with certainty.[13]
- Enforcement authorities continue to impose compliance program obligations with broad scope and preserve authority to request waiver of privileges. Under the deferred prosecution agreement, Baker Hughes must establish and monitor an anti-bribery compliance program that covers not only the FCPA, but also U.S. commercial bribery laws and foreign anti-bribery laws. Although this broad scope is becoming a standard feature of enforcement actions, it remains noteworthy that the Baker Hughes case did not raise allegations of violation of commercial bribery or foreign anti-bribery laws. In addition, in the deferred prosecution agreement, the Government reserves the right to request that the company provide information that is subject to attorney-client privilege and work product protections and if that request is denied, to "consider this fact in determining whether [the company] has fully cooperated with the Department."[14]
- Cooperation with foreign law enforcement authorities. The DoJ and the SEC enforcement actions reflect the strengthening of cooperation between U.S. and foreign enforcement authorities. Government press releases announcing the case emphasized assistance received from authorities in the United Kingdom, the Isle of Man, Guernsey, and Switzerland -- a list notable for its inclusion of several countries associated with secrecy. The DoJ deferred prosecution agreement emphasizes assistance it might provide to foreign authorities in the future, and secures Baker Hughes' consent to DoJ disclosure of information from the company to other government agencies, including agencies of a "foreign government".[15] The trend of close cooperation between U.S. and foreign enforcement authorities under the existing network of mutual legal assistance treaties and agreements will only continue as countries around the world implement the U.N. Convention against Corruption, including its Chapter IV provisions on cooperation.
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[1] United States v. Baker Hughes (S.D. Tex. 2007) (Deferred Prosecution Agreement of Apr. 11, 2007); SEC v. Baker Hughes Incorporated and Fearnley, Case No. H-07-cv-1408 (S.D. Tex.) (Complaint filed April 26, 2007); SEC Lit. Rel. No. 20094 (Apr. 26, 2007); SEC Press Release (Apr. 26, 2007); United States v. Baker Hughes Servs. Int'l, Inc., Case No. H-cr-07-129 (Information and Plea Agreement unsealed Apr. 26, 2007).
[2] DoJ Press Release (Apr. 26, 2007).
[3] SEC Compl., paras. 90-120 (citing In the Matter of Baker Hughes Incorporated, Exchg. Act Rel. No. 34-44784 (Sept. 12, 2001)).
[4] See United States v. Baker Hughes Servs. Int'l, Inc. (sentencing motion filed Apr. 20, 2007, at p. 19).
[5] SEC Compl., para. 89.
[6] SEC Press Release No. 2007-77 (Apr. 26, 2007).
[7] See Steptoe, International Law Advisory, http://www.steptoe.com/publications-4247.html.
[8] See Lucinda Low, Owen Bonheimer, and David Lorello, The Uncertain Calculus of Voluntary Disclosures, Paper for the March 2007 American Conference Institute FCPA Conference.
[9] United States v. Baker Hughes Int'l, Inc. (sentencing motion at p. 20).
[10] SEC Compl., paras. 36-37.
[11] Deferred Prosecution Agreement, para. 6.
[12] SEC Compl., para. 60.
[13] See Steptoe International Advisory, at http://www.steptoe.com/publications-3949.html (discussing use of FCPA accounting requirement in Oil-for-Food enforcement action).
[14] Deferred Prosecution Agreement, para. 4.a.iii.
[15] Id., para. 4.d.
