October 30th, 2014

A Q&A With CREATe.org

For today’s post, I send you over to the Center for Responsible Enterprise And Trade.

In a two-part Q&A, I respond to questions about a Foreign Corrupt Practices Act compliance defense and related issues, enforcement of FCPA-like laws in other countries, and the future of FCPA enforcement.

See here for Part I, here for Part II.

Posted by Mike Koehler at 12:01 am. Post Categories: ComplianceCompliance DefenseFCPA Reform




October 29th, 2014

Items Of Interest From The Layne Christensen Company Enforcement Action

Yesterday’s post dived deep into the Layne Christensen Company SEC FCPA enforcement action.

This post continues the analysis by highlighting various issues associated with the enforcement action.

4 for 4

In 2014, there have been four SEC corporate FCPA enforcement actions (Layne Christensen, Smith & Wesson, Alcoa, and HP).  All have been resolved via the SEC’s administrative process.

My recent article, “A Foreign Corrupt Practices Act Narrative,” (see pgs. 991-995) discusses this trend and how it is troubling as it places the SEC in the role of regulator, prosecutor, judge and jury all at the same time.  As Judge Rakoff recently observed, “from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?”

Another noticeable feature of the Layne Christensen action was that the company resolved the SEC’s action without admitting or denying the SEC’s findings.  Smith & Wesson likewise resolved its FCPA enforcement action in this way.

$4

It is reasonable to assume that the SEC included findings in its order for a specific reason (and not just to practice its typing skills).

It is therefore noteworthy that the SEC’s order includes this finding:

“Layne Christensen made more than $10,000 in small payments to foreign officials through various customs and clearing agents that it used in Tanzania, Burkina Faso, Mali, Mauritania, and the DRC. These payments ranged from $4 to $1,700 and were characterized in invoices submitted by the agents as, among other things, “intervention,” “honoraires,” “commissions,” and “service fees.”

Stay tuned for (I predict) coming law firm client alerts and memos on this $4 payment.

As highlighted in this prior post, if the DOJ and SEC are genuine in their message that they are only “focused on bribes of consequence,” on payments of “real and substantial value” and in companies spending compliance dollars in the “most sensible way,” there is something very easy and practical for the enforcement agencies to do.

Only allege conduct that actually determines the ultimate outcome of the enforcement action.

Same Process, Different Results

Does voluntary disclosure and cooperation result in:

An SEC administrative cease and desist order?  Yes, see Layne Christensen.

An SEC non-prosecution agreement?  Yes, see Ralph Lauren.

An SEC deferred prosecution agreement?  Yes, see Tenaris.

An SEC civil complaint?  Yes, see Archer Daniels Midland Company.

Granted, the facts of each FCPA enforcement action are unique, but what drives FCPA practitioners and their clients crazy about the FCPA enforcement process is a lack of transparency and predictability of outcomes.

What Would Have Happened Had The SEC Been Put To Its Burden Of Proof?

Pardon me for being “that guy,” but what would have happened had the SEC been put to its burden of proof on its finding that Layne Christensen violated the FCPA’s anti-bribery provisions?  The SEC’s allegations all concerned payments outside the context of government procurement but rather to allegedly secure favorable tax treatment, customs clearance, work permits, relief from regulatory inspections, etc.

It is a matter of fact, that the SEC has been put to its ultimate burden of proof only once concerning alleged payments outside the context of government procurement and it lost that case.  (See here for the discussion of SEC v. Mattson and Harris). For a broader discussion of this issue, including DOJ actions, see this article.

Moreover, many of the SEC’s findings would seem to potentially implicate the FCPA’s facilitating payments exception.  On that score, in SEC v. Jackson & Ruehlen, a court ruled that the SEC has the burden of negating this statutory exception, something the SEC was unable to do in that case (based on certain similar facts as alleged in the Layne Christensen action) which resulted in a defendant-friendly settlement on the eve of trial.  (See here).

Finally, no doubt Layne Christensen as part of its cooperation likely agreed to toll statute of limitations or waive statute of limitations defenses altogether.  Yet it is worth highlighting that the bulk of the SEC’s findings concern conduct that allegedly occurred between 2005 and July 2009; in other words, beyond the FCPA’s typical 5 year statute of limitations.

Timeline

As highlighted in this 2010 post, Layne Christensen initially disclosed its FCPA scrutiny in Fall 2010.  The company’s first disclosure stated, in pertinent part:

“In connection with the Company updating its Foreign Corrupt Practices Act (“FCPA”) policy, questions were raised internally in late September 2010 about, among other things, the legality of certain payments to customs clearing agents in connection with importing equipment into the Democratic Republic of Congo (“DRC”) and other countries in Africa.  [...] Although the Company has had a long-standing published policy requiring compliance with the FCPA and broadly prohibiting any improper payments by the Company to foreign or U.S. officials, the Company has adopted additional policies and procedures to enhance compliance with the FCPA and related books and records requirements. Further measures may be required once the investigation is concluded.”

In short, Layne Christensen’s FCPA scrutiny – from point of first public disclosure to resolution – lasted approximately 4 years.

The “Three Buckets” 

In my article, “Foreign Corrupt Practices Act Ripples,” I coin the term “three buckets” of FCPA financial exposure and demonstrate how settlement amounts in an actual FCPA enforcement action (“bucket #1) are often not the most expensive aspect of FCPA scrutiny and enforcement.

In nearly every case in which a comparison can be made, “bucket #1″ (pre-enforcement action professional fees and expenses) is the most expensive aspect of FCPA scrutiny.

The numbers in Layne Christensen serve as another instructive reminder.

Bucket #1 = in excess of $10 million (based on the company’s disclosures)

Bucket #12 = $5.1 million

Bukcet #3 (post enforcement action professional fees and expenses) are to be determined.  A noticeable aspect of the Layne Christensen action (one based on a voluntary disclosure and cooperation) is that the company has a reporting obligation imposed upon it.  As stated in the SEC’s order, Layne Christensen shall “report to the Commission periodically, at no less than nine-month internals during a two-year term, the status of its FCPA and anti-corruption related remediation and implementation of compliance measures.”

Compliance Enhancements, Etc.

During its period of FCPA scrutiny, Layne Christensen previously disclosed the following compliance enhancements.

  • contracted with a third party forensics accounting team to conduct an in-depth review of the operations in Africa and to make recommendations for improvement to the internal control systems;
  • reviewing existing arrangements with third parties interacting with government officials in international locations in an effort to assure that contracts and agreements include anti-corruption terms and conditions;
  • performing due diligence on third parties interacting with government officials in international locations and implementing a process to assess potential new third parties;
  • terminated certain agency and business relationships;
  •  established a separate position of, and appointed, a chief compliance officer, effective March 30, 2011, under the supervision of our Senior Vice President, General Counsel and Secretary to facilitate implementation and maintenance of compliance policies, procedures, training, reporting and internal reviews, with indirect reporting responsibility to the audit committee;
  • developed new procedures to improve the controls over cash handling and record retention;
  • conducting a company-wide risk assessment, including an employee survey, to ascertain whether similar issues may exist elsewhere in the Company;
  • initiated an enhanced company-wide, comprehensive training of Company personnel in the requirements of the FCPA, including training with respect to those areas of the Company’s operations that are most likely to raise FCPA compliance concerns; and
  • continued to enhance our training of management, including our operations managers, to emphasize further the importance of setting the proper tone within their organization to instill an attitude of integrity and control awareness and the use of a thorough and proper analysis of proposed transactions.

 





October 28th, 2014

Layne Christensen Company Resolves SEC Enforcement Action

In August, Layne Christensen Company said that it hoped to resolve its long-standing FCPA scrutiny by resolving an SEC enforcement action in the near future.

Yesterday, the company did just that as the SEC announced in this release that Layne Christensen agreed to pay approximately $5.1 million via an SEC administrative cease and desist order.

In summary fashion, the order states:

“These proceedings arise out of violations of the anti-bribery, recordkeeping,  and internal controls provisions of the FCPA by Layne  Christensen. Between 2005 and 2010, Layne Christensen, through its wholly-owned subsidiaries in Africa and Australia, made a total of more than $1,000,000 in improper payments to foreign  government officials in the Republic of Mali, Guinea, Burkina Faso, Tanzania, and the Democratic Republic of the Congo. With the knowledge and  approval of one of its officers, Layne Christensen made these improper payments in order to obtain favorable tax treatment, customs clearance for drilling equipment, work permits for expatriates, and  relief from inspection by immigration and labor officials, as well as, to avoid penalties for the delinquent payment of taxes and customs duties and the failure to register immigrant workers. Layne Christensen funded some of these payments through cash transfers from its U.S. bank  accounts to its Australian and African subsidiaries.

Layne Christensen falsely recorded these improper payments as legitimate expenses and failed to maintain a system of internal accounting controls sufficient to provide  reasonable assurances over its operations.

As a result of making improper payments to foreign officials in Africa, Layne Christensen (1) realized improper tax benefits; (2) secured customs clearance of a drilling rig and other equipment; (3) avoided assessed customs duties and associated penalties; and (4) secured work permits for its employees and avoided the possible deportation of its undocumented workers  and penalties for the failure to register these workers. Overall, Layne Christensen realized benefits  of approximately $3.9 million by making improper payments to foreign officials in Africa between  2005 and 2010.”

Under the heading “knowledge of improper payments,” the order states:

“The Mineral Exploration Division (“MinEx”) is Layne Christensen’s  second-largest business division and is primarily responsible for the Company’s mineral exploration drilling operations worldwide. Between 2005 and 2010, the president of MinEx (the “MinEx President”) was a corporate officer of Layne Christensen and reported directly to Layne Christensen’s Chief Executive Officer. Based in Salt Lake City, UT, the MinEx President supervised all of Layne Christensen’s mineral exploration drilling operations, including  operations in Australia and Africa.

The MinEx President had knowledge of and, in some instances, authorized the direct and indirect payment of bribes to foreign officials in Africa to obtain or retain business. Specifically, he was aware of payments made to third-party agents retained by Layne  Christensen’s African subsidiaries in order to obtain favorable tax treatment and to customs  officials to obtain clearance for equipment and reduced customs duties.”

[This 2011 Wall Street Journal article references the name of the apparent MinEx President]

Under the heading, “payments to achieve favorable tax treatment,” the order states:

“Between 2005 and 2009, Layne Christensen paid approximately $768,000 in bribes to foreign officials in Mali, Guinea, and the Democratic Republic of the Congo, through its wholly-owned subsidiaries WADS and Layne Drilling, in order to reduce its tax liability and to avoid associated penalties for delinquent payment. By making these improper payments, Layne Christensen realized more than $3.2 million in improper tax savings.”

WADS (West African Drilling Services Sarl in Mauritania and Guinea) is described as a wholly-owned subsidiary of Stanley Mining Services (“SMS”) and Layne Christensen is described as holding a 100% interest in SMS through Layne Christiensen Australia Pty Limited, an Australian corporation and wholly-owned subsidiary of Layne Christensen.  Layne Drilling is described as a wholly-owned subsidiary of SMS.  According to the SEC’s order:

“Layne Australia provides management and financial accounting services to Layne Christensen’s companies operating in these African countries. Layne Christensen exercised direct operational control over these wholly-owned subsidiaries and consolidated their results in its financial statements.”

In terms of Mali, the order states:

“In connection with a 2005 tax audit, the WADS subsidiary made two improper payments totaling $93,000 to Malian tax officials through its local agent. The purpose of these payments was to reduce its liability for unpaid taxes and associated penalties. The payments were made on September 5, 2005 and October 19, 2005. WADS falsely recorded the payments, respectively, as an “Advance of Audit” in its prepaid taxes account and as the “take up cost” of the agent’s freight invoice (no freight services were provided).

The MinEx President was aware that WADS had engaged the agent in order to reduce its tax liability, and that as a result WADS had reduced its tax liability to less than half the original assessment. The MinEx President did not question how these tax savings were achieved.

In order to fund the payments, the chief financial officer of MinEx (the “MinEx CFO”) directed another Layne Christensen subsidiary to transfer funds to WADS and WADS’s financial controller to execute a cash call to Layne Christensen’s corporate office. Layne Christensen wired funds from one of its U.S. banks accounts to WADS on the same day.

In 2007, WADS again made two improper payments to Malian tax officials through the same agent that it used in 2005. As a result of the payments, Layne avoided taxes and penalties of more than $1.2 million.

The check requisition used to make a payment to the agent listed the purpose of this payment as “Fret fees for container” and it was accompanied by an invoice from an unrelated company. The payment of $168,000 was falsely recorded as freight fees in Layne’s books and records.

Following this payment, WADS received an official notice reflecting a substantial reduction in its tax assessment and indicating that WADS was entitled to a credit of approximately $280,000 that could be used to offset its tax liability. Internal emails show that the Malian tax inspectors had requested a payment of about $67,000 to ensure that WADS would receive this tax credit. WADS’s financial controller wrote, “We have already paid the equivalent of $US$168K to [tax agent]. I was under the impression that this took care of all of ‘their’ payments.” Nevertheless, one day later, WADS issued another check to the tax agent in the amount of approximately $68,000. The accompanying check requisition identified the payment as related to “Fiscal Audit 2005/2006” and WADS falsely recorded it as “Property Rates and Taxes” in its books and records.

The MinEx CFO provided the MinEx President with a memo summarizing the history of the tax assessments and the subsequent reductions. As in 2005, the MinEx President did not question how the tax savings were achieved.”

In terms of Guinea, the order states:

“In 2006, WADS reduced its tax liability by paying bribes through two lawyers retained at the suggestion of the tax authorities but who provided no services.

WADS received an official tax assessment for the tax years 2002-2004 on February 15, 2006. However, prior to this date, WADS’s Finance Manager and tax consultants from a local affiliate of a large multinational accounting firm (“International Tax Consultants”) had been negotiating the amount of the assessment with Guinean tax officials. The WADS Finance Manager told the MinEx CFO that the official assessment was substantially lower than the amount that the Guinean tax authority had initially proposed but acceptance of this lower amount was conditioned on WADS making the payment within two days of the assessment. Without providing any supporting documentation, the MinEx CFO sent an email to Layne Christensen’s corporate office seeking an urgent transfer of funds. Despite the lack of documentation or a justification for the transfer, Layne Christensen wired more than $200,000 from a U.S. bank account to WADS’s local bank account on the same day.

On February 17, 2006, WADS made a single payment of approximately $97,648 to the tax authority and payments of $24,000 and $101,000 to the two lawyers, respectively. In comparison, WADS paid the International Tax Consultants only $8,400 for their services.

WADS falsely recorded the payments made to the lawyers as legal expense although internal communications show that the lawyers provided no services. In a March 14, 2006 memorandum to the MinEx CFO, the MinEx Tax Manager acknowledged that “The [C]ompany has never engaged any lawyers or other accountants in Guinea and [is] never likely to.” However, he reasoned that although the payments to the lawyers could not be considered legal expense because although the lawyers did not perform any work and were “merely a conduit for the money,” WADS could record them as tax expense because WADS would have faced a larger tax assessment if it had not made these payments.

In 2008, WADS obtained over a 90% reduction in its assessed taxes and penalties by funneling an improper payment of $273,000 to Guinean tax officials through the same lawyers that it used in connection with the 2006 audit.

On June 26 and 27, 2008, the lawyers submitted invoices to WADS totaling approximately $273,000 purportedly for rendering assistance with the tax audit. Neither lawyer participated in negotiating the settlement of the tax audit. WADS paid the lawyers’ invoices on July 22, 2008.

Layne Christensen funded the payments to the lawyers through wire transfers from a U.S. bank account. On July 2, 2008, the MinEx CFO sought a cash call from Layne Christensen’s corporate office. The stated purpose of the request was to pay WADS’s outstanding taxes but the amount requested exceeded the assessed tax amount. Without supporting documentation or further justification, Layne Christensen wired the funds on July 2 and 21, 2008, and falsely recorded the payments as tax expense.

In an internal memorandum dated July 23, 2008 that was provided to officers of Layne Christensen, the MinEx Tax Manager explained that on June 17, 2008,following the issuance of the original tax assessment in May, the tax authorities suggested WADS retain the same lawyers that it had used in 2006 to represent it in negotiating the tax assessment. Shortly thereafter, without engagement letters or the approval of Layne Christensen’s management, WADS retained both lawyers on a success-fee basis that tied their compensation to the amount by which the assessment was reduced.

The MinEx Tax Manager also noted that a portion of the fees paid to the lawyers could have been used to fund illegal payments to tax officials and that the lawyers and the International Tax Consultants pressured WADS to make the payments to the lawyers in order to obtain a settlement of the audit.

A few days later, the MinEx President learned that WADS had achieved a substantial reduction in its tax assessment. On July 25, 2008, the Vice President of Operations for Africa and Australia informed the MinEx President that the amount of the settled tax assessment was materially different from the MinEx Division’s forecasted amount, could have a material impact on Layne Christensen’s reported earnings, and could be scrutinized by Layne Christensen’s auditors. The MinEx President also learned that WADS had retained the lawyers without engagement letters. As with the Malian tax audits in 2005 and 2007, the MinEx President did not question how the tax savings were achieved.”

In terms of the Democratic Republic of Congo, the order states:

“In July 2009, Layne Drilling DRC made an improper payment of more than $50,000 to tax officials in the Democratic Republic of the Congo (“DRC”) through an agent in order to reduce its liability for unpaid taxes and penalties.

After receiving a multi-million dollar tax assessment in June 2009, Layne Drilling DRC’s local tax agent recommended that it engage a specialized lawyer to negotiate a reduction in the assessment. On June 19, 2009, the MinEx CFO sought the approval of the MinEx President to retain the lawyer as Layne Drilling DRC’s agent. Emphasizing that there was “a lot at stake, potentially $millions,” the MinEx CFO explained that he had spoken to the country manager and knew “more than can be written down.” However, he wrote that the transaction would entail paying $30,000 in taxes and $50,000 in legal commissions in an arrangement similar to the arrangement made with the lawyers in Guinea the previous year. The MinEx CFO also stated that all payments to the tax authorities would be made through the lawyer. Without questioning either the need to retain an agent or the suspicious proposed arrangement, the MinEx President approved Layne Drilling DRC’s retention of the lawyer.

On July 9, 2009, Layne Drilling DRC paid the lawyer $57,200 and falsely recorded the payment as legal expense.

The next day, the DRC tax authority issued a revised final tax assessment to Layne Drilling DRC. The amount of the revised tax assessment was substantially lower than the assessment issued to Layne Drilling DRC in June 2009.”

Under the heading “Payments to Reduce Customs Duties and Obtain Customs Clearance,” the order states:

“Layne Christensen made multiple improper payments to customs officials in Burkina Faso and the DRC between 2007 and 2010 in order to avoid paying customs duties and to obtain clearance for the import and export of its equipment in these countries. LayneChristensen made these improper payments through its customs clearing agents and falsely recorded the payments as legal fees and agent commissions in its books and records.”

Specifically as to Burkina Faso, the order states:

“Burkina Faso’s customs authority conducted an audit of WADS in June 2010. The auditors found that WADS had failed to comply with customs regulations relating to the importation of certain goods and to pay sufficient customs duties on these items. As a result, the customs authority assessed WADS nearly $2 million in unpaid duties and penalties.

Although WADS had retained a new customs clearing agent prior to receiving this assessment, it engaged its former customs agent purportedly to negotiate a reduction in the assessment. The former agent had cleared the disputed items but WADS terminated it in or about May 2009 due, in part, to poor performance. Nevertheless, WADS reengaged its former agent in June 2010 because the agent’s owner was well-connected with customs authorities in Burkina Faso. In an email to the MinEx CFO, the WADS Finance Manager described the agent as someone who is “well known in the game.” In addition, he informed the MinEx CFO that WADS retained the agent on a success fee basis and would pay the agent 10% of the difference between the original assessment and the final assessment.

On August 1, 2009, the MinEx CFO also told the MinEx President and another senior employee that WADS had retained a third-party agent to negotiate a settlement of the customs audit and the assessed customs duties were reduced from nearly $2 million to less than $300,000. The MinEx CFO recommended that WADS accept this settlement and he sought the approval of the MinEx President to send $300,000 to pay the customs fees and penalties as well as $100,000 for the agent’s commission. Without questioning the identity of the agent, the nature of the services provided, or the size of the commission, the MinEx President approved the payments.

The MinEx CFO initiated cash calls to fund the payments and Layne transferred funds from a U.S. bank account to WADS on August 4 and August 28, 2010. Between August 4 and 20, 2010, WADS paid the agent a total of approximately $138,000, including one cash payment. WADS falsely recorded the payments to the agent as legitimate consultant fees in its books and records.”

As to the Democratic Republic of Congo, the order concerns payments in connection with importation of drilling rigs and equipment, customs clearance for exports, and exportation of equipment.

In terms of importation of drilling rigs, the order states:

“In 2007, Layne Drilling DRC made improper payments to customs officials to obtain the initial importation of its drilling rigs and other equipment into the DRC.

In 2006 and 2007, Layne Drilling DRC encountered significant delays in obtaining customs clearance for the importation of its equipment, which resulted in the WADS Finance Manager terminating Layne Drilling DRC’s then-customs clearing agent and hiring a new agent (“Customs Clearance Agent”) in March 2007. The new Customs Clearance Agent was managed by the brother of a national government official in the DRC (“DRC Official”). In an email to the MinEx President, the WADS Finance Manager said that he had found someone who is “more connected” and “can get things moving for us.” As an example, he noted that the Customs Clearance Agent had obtained clearance for two trucks in only two days whereas the former agent had been unable to clear three trucks through customs for more than five weeks.

Between March and September 2007, Layne Drilling DRC paid a total of approximately $124,000 to the Customs Clearance Agent for irregular expenses, described as things such as “per diem,” “intervention expenses,” and “honoraires,” that were not related to specific invoices. Layne Drilling DRC paid the Customs Clearance Agent upon request and in amounts dictated by the agent. In addition, on two occasions, Layne Drilling DRC made payments to an unrelated third party in the U.S. at the direction of the Customs Clearance Agent.

As a result of these payments, Layne Christensen was able to import equipment necessary to perform on its existing contracts and derived more than $300,000 in benefits in 2007.

Layne Drilling DRC inaccurately recorded these payments as legitimate expenses relating to customs and clearance in its books and records.”

In terms of customs clearance for exports, the order states:

“Soon after beginning operations in the DRC in 2007, Layne Drilling DRC hired the nephew of the DRC Official as an office manager. Internal documents describe the DRC Official as Layne Drilling DRC’s “protector” and show that Layne Drilling DRC hired the DRC Official’s nephew in order to facilitate a good relationship.

Between November 2007 and August 2008, the office manager approved and made $18,000 in cash payments from Layne Drilling DRC’s account. These payments were purportedly made based on invoices submitted by a local firm that had allegedly provided customs clearance services but with whom Layne Drilling DRC had no written contract. Many of the payments were made outside of Layne Drilling DRC’s vendor system. In addition, the firm’s invoices were undated and included undefined “per diem” and “honoraire” expenses, similar to the invoices submitted by the Customs Clearance Agent. Layne improperly recorded these payments as legitimate customs and clearance expenses.”

In terms of exportation of equipment, the order states:

“In 2009 and 2010, Layne Drilling DRC made payments through its agents to customs officials in order to secure the exportation of goods and equipment from the DRC to Zambia.

In June 2009, Layne Drilling DRC retained a customs clearing agent to facilitate the export of a drilling rig to Zambia on an expedited basis. However, when thecustoms clearing agent indicated that the exportation would be delayed due to the lack of  documentation relating to the original importation of the drilling rig Layne Drilling DRC replaced the agent.

Between July 10 and July 17, 2009, Layne Drilling DRC paid $7,186 to the second agent who, in turn, made payments to customs officials and on July 20, 2009, the drilling rig was successfully exported to Zambia and placed it into operations. Layne Drilling DRC inaccurately recorded payments made to the agent as “governor office release rig” and “release documents for rig44.”

By making improper payments to customs officials to secure the export of this drilling rig, Layne Drilling DRC realized benefits of approximately $145,000.

Similarly, between April and November 2010, Layne Drilling DRC made nearly $15,000 in improper payments, through its agent, to DRC officials in order to again obtain clearance of goods for export to Zambia that lacked the proper import documentation. As before, the agent provided invoices that included “honoraires” and “per diems” and the payments were falsely recorded as legitimate customs and clearance expenses in Layne’s books and records.”

Under the heading, “other payments,” the order states:

“Between 2007 and 2010, Layne Christensen made more than $10,000 in small payments to foreign officials through various customs and clearing agents that it used in Tanzania, Burkina Faso, Mali, Mauritania, and the DRC. These payments ranged from $4 to $1,700 and were characterized in invoices submitted by the agents as, among other things, “intervention,” “honoraires,” “commissions,” and “service fees.”

Between 2006 and 2010, Layne Christensen made more than $23,000 in cash payments, through its subsidiaries, to police, border patrol, immigration officials, and labor inspectors in Burkina Faso, Guinea, Tanzania, and the DRC to obtain border entry for its equipment and employees, to secure work permits for its expatriate employees, and to avoid penalties for noncompliance with local immigration and labor regulations.”

Based on the above conduct, the order finds that Layne Christensen violated the FCPA’s anti-bribery, books and records, and internal controls provisions.

Under the heading “remedial measures and cooperation,” the order states:

“Since 2010, Layne Christensen has implemented a number of remedial measures designed to identify and mitigate bribery risks and to prevent FCPA violations in the future. Upon learning of possible improper payments made to foreign officials by its staff in Africa, Layne Christensen’s senior management and Audit Committee responded quickly by initiating an investigation conducted by an outside law firm and forensic accounting experts, self-reporting its preliminary findings to the Commission, and publicly disclosing its potential FCPA violations. During the course of the investigation, Layne Christensen terminated four employees, including the MinEx President, the MinEx CFO, and the WADS Finance Manager for their roles in the misconduct, and reduced the compensation of the MinEx President for failing to establish a strong compliance tone at the top. In addition, the Company conducted a comprehensive risk assessment of its worldwide operations and implemented measures to address its most significant corruption risks.

Layne Christensen also took affirmative steps to strengthen its internal compliance policies, procedures, and controls. Layne Christensen issued a standalone anti-bribery policy and procedures, improved its accounting policies relating to cash disbursements, implemented an integrated accounting system worldwide, revamped its anti-corruption training, and conducted extensive due diligence of third parties with which it does business. In addition, Layne Christensen hired a dedicated chief compliance officer and three full-time compliance personnel and retained a consulting firm to conduct an assessment of its anti corruption program and make recommendations.

Layne Christensen exhibited a high level of cooperation throughout the Commission’s investigation. In addition to self-reporting to the Commission shortly after it discovered potential FCPA violations, Layne Christensen voluntarily provided the Commission with real-time reports of its investigative findings, produced English language translations of documents, made foreign witnesses available for interviews in the United States, shared summaries of witness interviews and reports prepared by forensic consultants retained in connection with the Company’s internal investigation, and responded to the Commission’s requests for documents and information in a timely manner. These actions assisted the Commission in efficiently collecting valuable evidence, including information that may not have been otherwise available to the staff.”

As stated in the SEC release:

“The SEC’s order finds that Layne violated the anti-bribery, books and records, and internal controls provisions of the [FCPA].  Layne agreed to pay $3,893,472.42 in disgorgement plus $858,720 in prejudgment interest as well as a $375,000 penalty amount that reflects Layne’s self-reporting, remediation, and significant cooperation with the SEC’s investigation.  For a period of two years, the settlement requires the company to report to the SEC on the status of its remediation and implementation of measures to comply with the FCPA.  Layne consented to the order without admitting or denying the SEC’s findings.”

As relevant to the $375,000 penalty amount, the order states:  [Layne Christensen] acknowledges that the Commission is not imposing a civil penalty in excess of $375,000 based upon its cooperation in a Commission investigation and related enforcement action.”

In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:

“Layne’s lack of internal controls allowed improper payments to government officials in multiple countries to continue unabated for five years. However, Layne self-reported its violations, cooperated fully with our investigation, and revamped its FCPA compliance program.  Those measures were credited in determining the appropriate remedy.”

On the day the SEC’s enforcement action was announced, Layne Christensen’s stock price closed up 14.7%.

Posted by Mike Koehler at 12:02 am. Post Categories: 2014 Enforcement ActionsBurkina FasoCongoGuineaLayne ChristensenMaliMauritaniaPermits / Licenses / Customs / TaxSEC Enforcement ActionTanzania




October 27th, 2014

The Use Of Overblown And Inherently Inconsitent Rhetoric In Connection With FCPA Enforcement Continues

This post is not about whether the Foreign Corrupt Practices Act is a fundamentally sound statute.  It is, even though the FCPA and FCPA enforcement policies and procedures could be improved.

This post is not about whether FCPA enforcement by the DOJ and SEC – when facts legitimately satisfy FCPA elements – is in the public interest.  It is, for a variety of reasons.

Rather this post is about overblown and inherently inconsistent government rhetoric in connection with FCPA enforcement.

As highlighted in this post, there is seemingly little connection between the bulk of FCPA enforcement actions and U.S. national security.  Indeed, as further highlighted in this post, U.S. national security is, as a matter of law and seemingly as a matter of practice, a reason not to enforce the FCPA.

Last week, Assistant Attorney General Leslie Caldwell delivered this speech.

The general topic was “about the enforcement of our nation’s federal criminal laws in the 21st Century, and how the Justice Department constantly is adapting its approach to new challenges presented by the global economy and expansion of crime beyond national borders.”

As to the FCPA, Caldwell stated:

“The Foreign Corrupt Practices Act, or FCPA, is a law that prohibits the paying of bribes to foreign government officials to assist in obtaining or retaining business.

You may be asking yourself why the U.S. Justice Department is involved in the fight against corruption abroad.  In fact, there are people who claim that taking aim at foreign bribery puts U.S. companies at a competitive disadvantage in countries where bribery is just business as usual.

The threats posed to the United States by international corruption, however, cannot be overlooked.  Foremost, corrupt countries are less safe.  Corruption thwarts economic development, traps entire populations in poverty, and leaves countries without a credible justice system.  Corrupt officials who put their personal enrichment before the benefit of their citizenry create unstable countries.  And as we have seen time and again, unstable countries become the breeding grounds and safe havens for terrorist groups and other criminals who threaten the security of the United States.

International corruption also inhibits the ability of American companies to compete overseas on a level playing field.  Once bribery and corruption take hold, fair and competitive business practices are eliminated.  Nobody but the corrupt official benefits from bribery.

For all of these reasons, fighting foreign corruption is not a service we provide to the global community, but rather a necessary enforcement action to protect our own national security interests and the ability of our U.S. companies to compete on a global scale.

And, it is not just the United States that is recognizing the importance of foreign bribery laws.  There is an ever growing chorus of countries voicing support for the fight against this type of corruption.  More and more countries are joining international bodies that provide uniform standards for the criminalization of bribery of foreign public officials in international business transactions.  This type of collaboration is critical if we are going to have a meaningful impact on international corruption.”

The notion that FCPA enforcement is “necessary” to “protect our own national security” causes me to once again ask the question: do high-ranking DOJ officials actually read the allegations in most FCPA enforcement actions?  (See here for the prior post).

Recent DOJ FCPA enforcement actions have included the following.

  • Against HP related entities concerning conduct that occurred 7-14 years in which alleged improper payments were made in selling telecommunications, computer equipment, and other technology products in Russia, Poland and Mexico.
  • Against an Alcoa entity concerning conduct that occurred  15-20 years in which alleged improper payments were made in connection with an aluminium smelter project in Bahrain.
  • Against ADM concerning alleged improper payments made in Ukraine in connection with value added tax (VAT) refunds, notwithstanding the fact that the company was legitimately owed the VAT refunds.

Moreover, in the past several years approximately 15 corporate FCPA enforcement actions have concerned business relationships with foreign physicians, lab personnel and yes even a mid-wife.

Moreover, during this new era of enforcement, a substantial percentage of FCPA enforcement actions concern alleged conduct in connection with obtaining foreign licenses, permits, certifications and the like.

Moreover, most of the large FCPA enforcement actions in the past several years have concerned alleged improper relationships between foreign companies and foreign officials in which the alleged conduct seemingly has little actual connection to the U.S.

Moreover, many FCPA enforcement actions have involved, to name just a few, allegations about a bottle of wine (see here), a Cartier watch (see here), a camera (see here), kitchen appliances and business suits (see here), television sets, laptops and appliances (see here), and tea sets and office furniture (see here).

I invite anyone to submit a guest post articulating a credible and direct link between the above enforcement activity and U.S. national security.

The implicit suggestion of course from Caldwell’s speech is that if one is critical of certain FCPA enforcement efforts, one is somehow against U.S. national security.

I reject that.

Indeed, U.S. national security is, as a matter of law and seemingly as a matter of practice, a reason not to enforce the FCPA.

The FCPA itself states:

“(3)(A) With respect to matters concerning the national security of the United States, no duty or liability under [the FCPA] shall be imposed upon any person acting in cooperation with the head of any Federal department or agency responsible for such  matters if such act in cooperation with such head of a department or agency was done upon the specific, written directive of the head of such department or agency pursuant to Presidential authority to issue such directives. Each directive issued under this paragraph  shall set forth the specific facts and circumstances with respect to which the provisions of  this paragraph are to be invoked. Each such directive shall, unless renewed in writing,  expire one year after the date of issuance.

(B) Each head of a Federal department or agency of the United States who issues such a directive pursuant to this paragraph shall maintain a complete file of all such directives and shall, on October 1 of each year, transmit a summary of matters covered by such directives in force at any time during the previous year to the Permanent Select Committee on Intelligence of the House of Representatives and the Select Committee on Intelligence of the Senate.”

That the above provision specifically invoke the FCPA’s books and records and internal controls provisions, but not the FCPA’s anti-bribery provisions, would seem to be a scrivener’s error.

Moreover, U.S. national security also seems to be a reason not to enforce the FCPA as a matter of practice.

Consider the BAE enforcement action.  Despite the DOJ alleging conduct that clearly implicated the FCPA’s anti-bribery provisions, BAE (a large U.S. defense contractor) was not charged with violating the FCPA.  (To learn more about the BAE enforcement action, see “The Facade of FCPA Enforcement” pgs. 993-996).

Consider also the mysterious conclusion to the James Giffen enforcement action.  In 2003, James Giffen was criminally charged with “making more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions, in which the American oil companies Mobil Oil, Amoco, Texaco and Phillips Petroleum acquired valuable oil and gas rights in Kazakhstan.” However, Giffen’s defense was that his actions were made with the knowledge and support of the CIA, the National Security Council, the Department of State and the White House. The DOJ did not dispute that Giffen had frequent contacts with senior U.S. intelligence officials or that he used his ties within the Kazakh government to assist the United States. With the court’s approval, Giffen sought discovery from the government to support his public authority defense and much of the delay in the case was due to the government’s resistance to such discovery and who was entitled to see such discovery.  In 2010, the enforcement action took a sudden and mysterious turn when Giffen agreed to plead guilty to a one-paragraph superseding indictment charging a misdemeanor tax violation.  The enforcement action ended with the presiding judge imposing no jail time on Giffen and stating that he was a Cold War hero and that the enforcement action should have never been brought in the first place. Giffen presumably prevailed over the DOJ not because of the facts or the law, but because he possessed significant leverage over the government in that he asserted his actions were taken with the knowledge and support of the highest levels of our  government. 

Consider also the fact that there has been no FCPA enforcement actions concerning contracts at the Manas airbase in Kyrgyzstan (which the U.S. used to route personnel and equipment headed for Afghanistan).  (To learn about the Manas contracts see here for a U.S. House hearing devoted to the subject and here, here and here for additional information).

In short, the DOJ’s recent “national security” rhetoric concerning FCPA enforcement was overblown and inherently inconsistent.

*****

Ms. Caldwell of course did not invent overblown or inherently inconsistent rhetoric to describe FCPA enforcement.  Rather such rhetoric is a carry-over from former DOJ officials.   To learn more, read this article.

Posted by Mike Koehler at 12:03 am. Post Categories: Enforcement Agency PolicyEnforcement Agency SpeechesNational Security




October 24th, 2014

Friday Roundup

SEC administrative proceedings, a sorry state of affairs, voluntary disclosure calculus, nice payday but what was really accomplished, and for the reading stack.  It’s all here in the Friday roundup.

SEC Administrative Proceedings

A focus on SEC administrative proceedings here at the Wall Street Journal.

“The Securities and Exchange Commission is increasingly steering cases to hearings in front of the agency’s appointed administrative judges …”

For discussion of this dynamic in the FCPA context, see my article “A Foreign Corrupt Practices Act Narrative” (pgs. 991-995).

“SEC administrative settlements, as well as SEC  DPAs and NPAs, place the SEC in the role of regulator,  prosecutor, judge and jury all at the same time and a notable  feature from 2013 SEC FCPA corporate enforcement is that 4 (1  NPA and 3 administrative orders) of the 8 corporate enforcement  actions (50%) were not subjected to one ounce of judicial  scrutiny.”

In 2014, there have been three SEC corporate FCPA enforcement actions (Smith & Wesson, Alcoa, and HP).  All have been resolved via the SEC’s administrative process.

Sorry State of Affairs

It really is a sorry state of affairs when former government enforcement attorneys go into private practice and then criticize the current enforcement climate that they helped create.  For more on this dynamic in the FCPA context, see this prior post “A Former Enforcement Official Is Likely To Say (Or Has Already Said) The Same Thing.”

Albeit outside the FCPA Context, this ProPublica article, “In Turnabout, Former Regulators Assail Wall St. Watchdogs,” touches on the same general issue.

“Last week, I visited an alternate universe. The real world sees a pandemic of bank misconduct, but to the white-collar defense lawyers of Washington, the banks are the victims as they bow beneath the weight of regulators’ remarkably harsh punishments.

I was attending the Securities Enforcement Forum, a gathering of top regulators and white-collar defense worthies. The marquee section was a panel that included Andrew Ceresney, the current enforcement director of the SEC, and five of his predecessors. Four of those former S.E.C. officials represent corporations at prominent white-collar law firms. [...] The conference turned into a free-for-all of high-powered and influential white-collar defense lawyers hammering regulators on how unfair they have been to their clients, some of America’s largest financial companies.

[...]

This is how power and influence work in Washington. Former top officials, whose portraits mount the walls, weigh in on matters of enforcement. Now working for the private sector, they assail the regulatory “overreach.” Sincerely held or self-serving, these views carry weight in Washington’s clubby legal milieu.

[...]

Former regulators are the mouthpieces. And given what they say in public, one can only imagine what is happening behind closed doors.”

Voluntary Disclosure Calculus

At the Corporate Crime Reporter, Laurence Urgenson (Mayer Brown) talks about, among other topics, voluntary disclosure.

“Voluntary disclosure is still an important option in dealing with FCPA risk,” Urgenson said. “It used to be the default position — people had a predisposition toward it. It’s moved from the default position to one taken only after a clear-eyed case by case analysis of the benefits and the costs.” “That’s because the benefits and costs of voluntary disclosure have shifted. Part of that is the result of globalization. Part of it has to do with the increased penalties.” “It used to be that the Department of Justice and the SEC could provide companies with one stop shopping. If you volunteered to the Department and SEC, and you settled the matter, you had finality.” “That was a big benefit of the voluntary disclosure process. Now, because in part of the high penalties and globalization, the Department and SEC resolution can be the first stop in a long journey, which includes dealing with law enforcement authorities around the world, dealing with NGOs such as the World Bank which has an enforcement process, and navigating the risks of civil litigation.” “Once the Department of Justice resorted to the alternative fine provisions, which greatly increases the potential fines and once the SEC began to use the disgorgement remedy, FCPA settlements became much more costly, so much so that they could affect the stock price and provoke civil actions.” “You really have to sit down with the client and look at the list of pluses and minuses to voluntary disclosure. You have to go through with the client the long list of things that follow from voluntary disclosure.”

Nice Payday But What Was Really Accomplished?

As highlighted in this Law360 article:

“Alcoa Inc. shareholders on Monday asked a Pennsylvania federal judge to approve a settlement between shareholders and the board over allegations that the company paid hundreds of millions of dollars in illegal bribes to government officials in Bahrain. The proposed agreement states that aluminum producer Alcoa “has adopted or will adopt” compliance reforms that include the creation of a chief ethics and compliance officer, an officer-level position that oversees the ethics and compliance program, enhancements to the program that include the development of an anti-corruption policy, and implementation of Alcoa’s due diligence and contracting procedure for intermediaries.

[...]

The proposed settlement also provides that there be a reorganization of Alcoa’s regional and local counsel reporting structure, enhanced mandatory annual Foreign Corrupt Practices Act and employee anti-corruption training, improvements to its business expense policies, and enhancements to its compliance policies for evaluating the effectiveness of preventing corruption.

In addition, the company has agreed to pay $3.75 million to the plaintiffs’ counsel.

Alcoa admits no wrongdoing or liability under the terms of the proposed agreement.”

The issue is the same as highlighted in this prior post – nice payday, plaintiffs’ lawyer,s but what was really accomplished?

In connection with the January 2014 FCPA enforcement action against Alcoa World Alumina, Alcoa basically agreed to the same thing it agreed to do in the above settlement.  (See here at Exhibit 4).

Reading Stack

A review of my book, “The Foreign Corrupt Practices Act in a New Era” published at International Policy Digest by John Giraudo (of the Aspen Institute and formerly a chief compliance officer).  It begins:

“If you care about the rule of law, The Foreign Corrupt Practices Act in the New Era by Mike Koehler, is one of the most important books you can read—to learn how it is being eroded. Professor Koehler’s book … is a must read for people who care about law reform. It is a story of how a good law, the US Foreign Corrupt Practices Act, a criminal law that prevents companies from bribing foreign government officials has been misapplied in recent enforcement actions by the US Department of Justice (DOJ) and the US Securities and Exchange Commission (SEC).”

Miller & Chevalier’s FCPA Autumn Review 2014 is here.

*****

A good weekend to all.

Posted by Mike Koehler at 12:03 am. Post Categories: AlcoaEnforcement Agency PolicyRelated Civil LitigationSECVoluntary Disclosure