Staying on Top of FCPA Compliance: Baker Hughes, Bribery and the Mandated Compliance
Yesterday the SEC brought another FCPA case, its third this year. Earlier the SEC filed In re The Dow Chemical Company, (Feb. 13, 2007) http://www.sec.gov/litigation/admin/2007/34-55281.pdf); and SEC v. Martin, 1:07CV0434 (D.D.C. Mar. 6, 2007) http://www.sec.gov/litigation/litreleases/2007/lr20029.htm). The increasing focus on the FCPA suggest that this is again becoming an enforcement priority. The SEC, ofcourse, has brought cases in this area since the 1970’s when it brought the so-called foreign payments cases that lead up to the passage of the FCPA. Those cases were clearly the headline grabbers of their day. While the FCPA is not about to push option backdating off the front page yet, it clearly is area in which more cases are being brought. This may be the result of increased globalization.
The latest FCPA case was filed against Baker Hughes Inc., a Texas-based global provider of oil field products and services, for violating a 2001 Commission cease-and-desist Order prohibiting violations of the books and records and internal controls provisions of the FCPA. SEC v. Baker Hughes Incorporated and Roy Fearnley, Civil Action No. H-07-1408, (S.D.TX, filed April 26, 2007), http://www.sec.gov/litigation/litreleases/2007/lr20094.htm. Without admitting or denying the allegations in the complaint, the company agreed to pay more than $23 million in disgorgement and prejudgment interest and to pay a civil penalty of $10 million. The SEC also charged Roy Fearnley, a former business development manager for Baker Hughes, with violating and aiding and abetting violations of the FCPA. Mr. Fearnley has not reached any settlement with the Commission regarding these charges.
The Complaint alleges that Baker Hughes paid approximately $5.2 million to two agents, knowing that some or all of the money was intended to bribe officials of State-owned companies in Kazakhstan. According to the complaint, Baker Hughes retained two separate agents in 1998 and 2000, respectively, to facilitate business in Kazakhstan. The first was retained in connection with the award of a large chemical contract with KazTransOil, the national oil transportation operator of Kazakhstan. As alleged, the second agent was hired after Mr. Fearnley told his bosses that an agent for Kazakhstan’s national oil company told him that unless the second agent was retained, Baker Hughes could “say goodbye to this and future business.” Additionally, the SEC alleges that between 1998 and 2005, Baker Hughes made payments in Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan that suggested a failure to implement sufficient internal controls to determine whether the payments were for legitimate services, whether the payments would be shared with government officials, or whether these payments would be accurately recorded in Baker Hughes’ books and records. The SEC’s complaint also alleges violations of the books and records and internal controls provisions of the FCPA in Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan. In the settlement, Baker Hughes will retain an independent consultant to review the company’s FCPA compliance and procedures.
In a related criminal proceeding, the DOJ filed criminal FCPA charges against the company and its wholly-owned subsidiary Baker Hughes Services International, Inc. BHSI pleaded guilty to one count of violating the anti-bribery provisions of the FCPA, one count of aiding and abetting the falsification of the books and records of Baker Hughes, and one count of conspiracy to violate the FCPA, and to pay a criminal fine of $11 million. The DOJ entered into a two-year deferred prosecution agreement with Baker Hughes concerning charges of violating the anti-bribery and books and records provisions of the FCPA. Under the agreement, the company must retain a monitor for three years to review and assess the company’s compliance program and monitor its implementation of and compliance with new internal policies and procedures.
Regardless of the reasons, its clear that the number of FCPA cases being brought by the SEC and the DOJ is on the rise. This suggest that prudent companies that do business abroad and their directors and officers carefully review their compliance systems in this area now to avoid difficulties than later at the insistence of the SEC or the DOJ.