Archive for the ‘Permits / Licenses / Customs / Tax’ Category

Without Admitting Or Denying The SEC’s Findings, Goodyear Resolves SEC Administrative Action

Wednesday, February 25th, 2015

GoodyearAs highlighted in this previous post, in February 2012 Goodyear Tire & Rubber Company disclosed as follows.

“In June 2011, an anonymous source reported, through our confidential ethics hotline, that our majority-owned joint venture in Kenya may have made certain improper payments. In July 2011, an employee of our subsidiary in Angola reported that similar improper payments may have been made in Angola. [...]  Following our internal investigation, we … voluntarily disclosed the results of our investigation to the DOJ and the SEC, and are cooperating with those agencies in their review of these matters.”

As highlighted in this previous post, in October 2014 Goodyear disclosed that it recorded a charge of $16 million in connection with the above FCPA inquiry.

Yesterday, an actual enforcement action dripped from the FCPA pipeline as the SEC announced an administrative action against Goodyear in which the company, without admitting or denying the SEC’s findings, agreed to pay approximately $16 million.

In summary fashion, the SEC Order states:

“This case involves violations of the books, records, and internal control provisions of the Foreign Corrupt Practices Act (“FCPA”) by Goodyear. Goodyear, headquartered in Akron, Ohio, is one of the world’s largest tire companies. From 2007 through 2011, Goodyear subsidiaries in Kenya (Treadsetters Tyres Ltd., or “Treadsetters”) and Angola (Trentyre Angola Lda., or “Trentyre”) routinely paid bribes to employees of government-owned entities and private companies to obtain tire sales. These same subsidiaries also paid bribes to police, tax, and other local authorities. In all, between 2007 and 2011, Goodyear subsidiaries in Kenya and Angola made over $3.2 million in illicit payments.

All of these bribery payments were falsely recorded as legitimate business expenses in the books and records of these subsidiaries which were consolidated into Goodyear’s books and records. Goodyear did not prevent or detect these improper payments because it failed to implement adequate FCPA compliance controls at its subsidiaries in sub-Saharan Africa.”

Under the heading “Improper Payments in Kenya,” the Order states:

“Treadsetters is a retail tire distributor in Kenya. In 2002, Goodyear acquired a minority ownership interest in Treadsetters. By 2006, Goodyear had acquired a majority ownership interest in the company, though the day-to-day operations of Treadsetters continued to be run by Treadsetters’ founders and the local general manager. During the relevant time period, Treadsetters had annual revenues of approximately $20 million.

From 2007 through 2011, Treadsetters’ management regularly authorized and paid bribes to employees of government-owned or affiliated entities, and private companies, to obtain business. The practice was routine and appears to have been in place prior to Goodyear’s acquisition of Treadsetters. The bribes generally were paid in cash and falsely recorded on Treadsetters’ books as expenses for promotional products.

Treadsetters’ general manager and finance director were at the center of the scheme. They approved payments for phony promotional products, and then directed the finance assistant to write-out the checks to cash. Treadsetters’ staff then cashed the checks and used the money to make improper payments to employees of customers, which included both government owned entities and private companies.

Between 2007 and 2011, Treadsetters paid over $1.5 million in bribes in connection with the sale of tires. This included improper payments to employees of government-owned or affiliated entities including the Kenya Ports Authority, the Armed Forces Canteen Organization, the Nzoia Sugar Company, the Kenyan Air Force, the Ministry of Roads, the Ministry of State for Defense, the East African Portland Cement Co., and Telkom Kenya Ltd. During that same time period, Treadsetters also made approximately $14,457 in improper payments to local government officials in Kenya, including city council employees, police, and building inspectors.

Goodyear did not detect or prevent these improper payments because it failed to conduct adequate due diligence when it acquired Treadsetters, and failed to implement adequate FCPA compliance training and controls after the acquisition.”

Under the heading “Improper Payments in Angola,” the Order states:

“Trentyre was incorporated in 2007, and is a wholly-owned subsidiary of Goodyear. Trentyre is primarily engaged in selling new tires for mining equipment. During the relevant time period, Trentyre had annual revenues between $6 million and $20 million.

From 2007 through 2011, Trentyre paid over $1.6 million in bribes to employees of government-owned or affiliated entities, and private companies, to obtain tire sales. Trentyre paid approximately $1.4 million of these bribes to employees of government-owned or affiliated entities in Angola, including the Catoca Diamond Mine, UNICARGAS, Engevia Construction and Public Works, the Electric Company of Luanda, National Service of Alfadega, and Sonangol. A majority of these improper payments were paid to employees of Trentyre’s largest customer at the time, the Catoca Diamond Mine, which is owned by a consortium of mining interests, including Endiama E.P., Angola’s national mining company, and ALROSA, a Russian mining company. During the same time period, Trentyre also made approximately $64,713 in improper payments to local government officials in Angola, including police and tax authorities.

The bribery scheme was put in place by Trentyre’s former general manager. To hide the scheme and generate funds for the improper payments, Trentyre falsely marked-up the costs of its tires by adding to its invoice price phony freight and customs clearing costs. On a monthly basis, as tires were sold, the phony freight and clearing costs were reclassified to a balance sheet account. Trentyre made improper payments to employees of customers both in cash and through wire transfers. As bribes were paid, the amounts were debited from the balance sheet account, and falsely recorded as payments to vendors for freight and clearing costs.

Goodyear did not prevent or detect these improper payments because it failed to implement adequate FCPA compliance training and controls at this subsidiary.”

Under the heading “Legal Standards and Violations,” the Order states:

“Goodyear subsidiaries in Kenya and Angola made improper payments to employees of government-owned entities and private companies to obtain business. These improper payments were falsely recorded as legitimate business expenses in the books and records of these subsidiaries which were consolidated into Goodyear’s books and records. Accordingly, Goodyear violated [the FCPA's books and records provisions]. [...] Goodyear also violated [the internal controls provisions] by failing to devise and maintain sufficient accounting controls to prevent and detect these improper payments.”

Under the heading “Goodyear’s Cooperation and Remedial Efforts,” the Order states:

“In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff. After receiving information about the bribes, Goodyear promptly halted the improper payments and reported the matter to Commission staff. Goodyear also provided significant cooperation with the Commission’s investigation. This included voluntarily producing documents and reports and other information from the company’s internal investigation, and promptly responding to Commission staff’s requests for information and documents. These efforts assisted the Commission in efficiently collecting evidence including information that may not have been otherwise available to the staff.

Goodyear also has undertaken remedial efforts. In Kenya, Goodyear divested its ownership interest in Treadsetters, and ceased all business dealings with the company. In Angola, after Goodyear halted the improper payments its subsidiary lost its largest customer. Goodyear is now in the process of divesting this subsidiary.

Goodyear also undertook disciplinary action against certain employees, including executives of its Europe, Middle East and Africa region who had oversight responsibility, for failing to ensure adequate FCPA compliance training and controls were in place at the company’s subsidiaries in sub-Saharan Africa.

Goodyear also implemented improvements to its compliance program, both specific to its operations in sub-Saharan Africa, and globally. In Africa, the improvements include expanded on-line and in-person anti-corruption training for subsidiary management, sales, and finance personnel; regular audits, by internal audit, specifically focused on corruption risks; quarterly self-assessment questionnaires required of each subsidiary regarding business with government-affiliated customers; quarterly management certifications from every subsidiary that cover among other things controls over financial reporting; and annual testing of internal controls at each subsidiary. To increase oversight, Goodyear also put in place a new regional management structure, and added new compliance, accounting, and audit positions. Goodyear is also making technology improvements, where possible, to electronically link subsidiaries in sub-Saharan Africa to its global network. At the parent company, Goodyear created a new senior position of Vice President of Compliance and Ethics, which further elevated the compliance function within the company. Goodyear has also expanded on-line and in-person anti-corruption and ethics training at its other subsidiaries, and implemented a new Integrity Hotline Web Portal, which enhanced users’ ability to file anonymous online reports to its hotline system. With that system, Goodyear is also implementing a new case management system for legal, compliance and internal audit to document and track complaints, investigations and remediation. Goodyear also has updated its policies governing third-party agents and vendors, and is in the process of implementing a new third-party due diligence software tool.”

Without admitting or denying the SEC’s findings, Goodyear agreed to pay $16,228,065 (disgorgement of $14,122,525 and prejudgment interest of $2,105,540). In addition, Goodyear is required to report to the SEC staff “periodically, at no less than 12-month intervals during a three-year term, [on] the status of its remediation and implementation of compliance measures.”  The Order states that the SEC “is not imposing a civil penalty based upon its cooperation in a Commission investigation and related enforcement action.”

In this SEC release, Scott Friestad (Associate Director of the SEC’s Enforcement Division) stated:

“Public companies must keep accurate accounting records, and Goodyear’s lax compliance controls enabled a routine of corrupt payments by African subsidiaries that were hidden in their books. This settlement ensures that Goodyear must forfeit all of the illicit profits from business obtained through bribes to foreign officials as well as employees at commercial companies in Angola and Kenya.”

Joan McKown (Jones Day and a former SEC enforcement division attorney) represented Goodyear.

Yesterday, Goodyear’s stock closed down .09%.

Avon Resolves Long-Standing FCPA Scrutiny By Agreeing To $135 Million Settlement

Friday, December 19th, 2014

AvonEarlier this week, the DOJ and SEC announced resolution of Avon’s long-standing FCPA scrutiny in China.  The conduct at issue took place between 2004 and 2008 and Avon disclosed the conduct to the enforcement agencies in 2008.

In short, the DOJ and SEC alleged that Avon’s indirect subsidiary (Avon China) provided approximately $8 million in things of value, including gifts, cash, and non-business travel, meals and entertainment, which it gave to Chinese officials in order to obtain and retain business benefits for Avon China.  Avon resolved FCPA books and records and internal controls charges related to this conduct.

Consistent with Avon’s prior disclosure, the aggregate settlement amount was $135 million.  While not a top-ten Foreign Corrupt Practices Act enforcement action, the settlement is the third-largest ever against a U.S. company.

The enforcement action included:

  • a DOJ component (a criminal information against Avon China resolved via a plea agreement and a criminal information against Avon Products resolved via a deferred prosecution agreement with an aggregate fine amount of $67.6 million); and
  • an SEC component (a civil complaint against Avon Products which it agreed to resolve without admitting or denying the allegations through payment of $67.4 million).

This post summarizes the approximately 175 pages of resolution documents.  Because all of the resolution documents have substantial overlap, the core allegations are highlighted in connection with the Avon China criminal information, yet repeated in the other resolution documents as well.

DOJ

Avon China Information

Avon Products (China) Co. Ltd. (“Avon China”) is described as an indirect subsidiary of Avon incorporated in China.  According to the information, Avon China and its affiliates manufactured and sold beauty and healthcare products through direct sales, as well as through “beauty boutiques” that were independently owned and operated.  The information states that in addition to independent sales representatives, Avon China had between 1,000 and 2,000 employees.  According to the information, Avon China’s books, records and accounts were consolidated into Avon’s books and records and reported by Avon in its financial statements.

Under the heading “The Chinese Regulatory Regime for Direct Selling” the information states:

“In or around 1998, the Chinese government outlawed direct selling in China for all companies.  In or around 2001, as a condition of its entry into the World Trade Organization, China agreed to lift its ban on direct selling.  In or around 2005, in order to test its planned regulations for direct selling, the Chinese government decided to issue one company a temporary license to conduct direct sales (the ‘test license.’). In or around March 2005, the Chinese government awarded the test license to Avon China, the defendant.  In or around late 2005, China lifted its ban on direct selling and allowed companies to apply for licenses to conduct direct sales.  Under China’s newly promulgated direct selling regulations, to conduct direct sales, a company was required to obtain a national direct selling license and approvals from each province and municipality in which it sought to conduct direct sales.  In order to obtain a license, a company was required to satisfy a number of conditions, including, in pertinent part, having a ‘good business reputation’ and a record that demonstrated no material violations of Chinese law for the preceding five years.  In or around February 2006, Avon China, the defendant, obtained its national direct selling license.  Between in or around February 2006 and in or around July 2006, Avon China, the defendant, obtained all of its provincial and municipal approvals to conduct direct selling.”

According to the information, Avon China created and maintained a Corporate Affairs Group whose duties included maintaining “guanxi (good relationships) with government officials and lobbying those officials on behalf of Avon China.”

Under the heading, “Overview of the Scheme to Falsify Books and Records,” the information states that from 2004 to 2008, Avon China, and Avon, acting through certain executives and employees, together with others, conspired to falsify Avon China’s and, thereby ultimately, Avon’s books and records in order to disguise the things of value Avon China executives and employees provided to government officials in China.

Specifically, the information alleges that from 2004 to 2008 Avon China “acting through certain executives and employees, disguised on its books and records over $8 million in things of value, including gifts, cash, and non-business travel, meals and entertainment, which it gave to Chinese officials in order to obtain and retain business benefits for Avon China.

The information alleges that:

Avon China “falsely and misleadingly described the nature and purpose of certain transactions on Avon China’s books and records, in part, because they believed that Chinese government officials did not want a paper trail reflecting their acceptance of money, gifts, travel, entertainment and other things of value from Avon China executives and employees.  The executives and employees also knew that, contrary to how the expenses were being described in Avon China’s books and records, the expenses were not incurred for legitimate business purposes.”

According to the information:

“Avon executives and employees, including high-level executives, attorneys, and internal auditors, learned that executives and employees of Avon China, the defendant, had in the past routinely provided things of value to Chinese government officials and failed to properly document it.  Instead of ensuring the practice was halted, disciplining the culpable individuals, and implementing appropriate controls at Avon and Avon China to address the problem, the Avon executives and employees, in conjunction with Avon China executives and employees, took steps to conceal the significant concerns raised about the accuracy of Avon China’s books and records and its practice of giving things of value to government officials.  These Avon and Avon China executives and employees, knowing that Avon China’s books and records would continue to be inaccurate if steps were not taken to correct Avon China’s executives and employees’ conduct, failed to take steps to correct such actions, despite knowing that Avon China’s books and records were consolidated into Avon’s books and records.”

The information then alleges various categories of payments.

Under the heading “gifts for government officials,” the information details designer wallets, bags, or watches “to obtain benefits from government officials, such as obtaining and retaining the direct selling license and requisite provincial and local approvals, avoiding fines, avoiding negative media reports, obtaining favorable judicial treatment, and obtaining government approval to sell nutritional supplements and healthcare apparel products, via direct selling, that did not meet or had yet to meet government standards.  According to the information, Avon China executives and employees, at various times, falsely or misleadingly described the gifts, including describing them as employee travel and entertainment, samples or public relations business entertainment.” Specific gifts mentioned include a $890 gift or entertainment expense, a $960 gift purchased from Louis Vuitton, a $800 Gucci Bag, and a $460 gift from Louis Vuitton.

Regarding avoiding negative media reports, the information alleges that a leading government-owned newspaper intended to run a story about Avon China improperly recruiting sales associates and that this article could cause Avon China to lose its direct selling license.  According to the information, “in order to convince the newspaper not to run the article … an Avon China employee caused Avon China to pay approximately $77,500 to become a “sponsor” of the paper at the request of a government official at the paper who was in charge of determining whether the potential article would run and who may have received a commission on monies received from sponsors.”

Under the heading “meals and entertainment,” the information alleges that Avon China “routinely entertained government officials in order to obtain the same business benefits highlighted above.  According to the information, executives and employees of Avon China, “intentionally concealed these improper meal and entertainment expenses in Avon China’s books and records by (1) intentionally omitting reference to the participation of government officials in order to conceal their participation, using descriptions like business entertainment, public relation entertainment, or no description at all; or (2) revealing the participation of government officials but intentionally describing the event inaccurately by omitting the identity or number of officials, the cost of the event, or the true purpose of the event.”

Under the heading “travel for government officials,” the information alleges that executives and employees of Avon China caused Avon China to “pay for travel expenses for government officials, and sometimes their families” in order to obtain the same improper business benefits highlighted above.  According to the information, “to conceal the true nature of these expenses, these executives and employees intentionally omitted from or concealed in Avon China’s records the name of the government officials, the fact that the travelers were government officials or relatives of government officials, and, at times, the number of travelers.”  The information also alleges that executives and employees of Avon China “intentionally falsified in Avon China’s books and records the purpose of the travel, which often was for personal, not legitimate business, purposes.  For example, the information alleges that certain personal trips for government officials (and occasionally their spouses and children) were described as “study trips” or “site visits” when the officials were instead sightseeing or taking a beach vacation.”  Specifically, the information alleges, among other trips, that Avon China paid for six officials from the Guandong Food and Drug Administration to travel to Avon’s headquarters in New York City and its research and development facility in upstate New York for a “site visit/study visit.” According to the information, the “officials never visited Avon’s headquarters, only spent one morning at Avon’s research and development facility, and spent the rest of the 18-day trip sightseeing and being entertained by an Avon China employee in New York, Vancouver, Montreal, Ottawa, Toronto, Philadelphia, Seattle, Las Vegas, Los Angeles, Hawaii, and Washington D.C.

Under the heading “cash for government officials,” the information alleges that “executives and employees of Avon China, gave cash to government officials in order to obtain benefits for Avon China and falsified Avon China’s records to conceal the true recipient of and purpose for the money.”  According to the information, “these employees accomplished this by submitting for reimbursement meal or entertainment receipts given to them by government officials and falsely claiming that the receipts reflected employee business expenses.  In truth, the employees had no such expenses, and the receipts were used to obtain cash to make payments to government officials.  The information also alleges other instances in which executives and employees of Avon China “gave cash to government officials in order to obtain business benefits for Avon China and falsely reported the payments as fine payments.”  In other instances, the information alleges that Avon China executives and employees “made payments to organizations designated by government officials.”

The information also contains a separate section regarding payments to Consulting Company A that was retained by Avon China “purportedly” to provide various services to Avon China.  The information alleges that these services “were memorialized in a scant two-page contract” and that Avon China “did not conduct any due diligence of Consulting Company A, nor did they require Consulting Company A to comply with Avon’s Code of Conduct (in particular, the provisions related to payments to government officials), even though Consulting Company A was retained specifically to interact with government officials on behalf of Avon China.”  The information alleges that executives and employees of Avon China caused Avon China to pay Consulting Company A additional monies for purportedly legitimate, though ambiguously described, services even though an Avon China executive knew Consulting Company A’s invoices were often false, and no Avon China executives or employees knew of any legitimate services being provided by Consulting Company A.

Based on the above conduct, Avon China was charged with one count of conspiracy to violate the FCPA’s books and records provisions.

The information also contains a separate section titled “Discovery of the Falsification and Cover-Up.”  In pertinent part, the information alleges:

  • In 2005, a senior audit manager in Avon’s internal audit group reported to Avon’s Compliance Committee, that executives and employees of Avon China were not maintaining proper records of entertainment for government officials and that an Avon China executive had explained that the practice was intentional because information regarding that entertainment was “quite sensitive.”
  • In 2005, Avon’s internal auditors audited the Corporate Affairs Group’s travel and entertainment and discretionary expenses and issued a draft report.
  • The Draft Audit Report, which was reviewed by various Avon executives and Avon attorneys, contained conclusions regarding the Corporate Affairs Group’s expenses including: (1) high value gifts and meals were offered to government officials on an ongoing basis; (2) the majority of the expenses related to gifts, meals, sponsorships, and travel of substantial monetary value for Chinese government officials to maintain relationships with the officials; (3) a third party consultant was paid a substantial sum of money to interact with the government but was not contractually required to follow the FCPA, was not actively monitored by Avon China, and was paid for vague and unknown services; and (4) the payments, and the lack of accurate, detailed records, may violate the FCPA and other anti-corruption laws.
  • The management team of Avon China “insisted that the internal audit team remove the discussion of providing things of value to government officials and potential FCPA violations from the Draft Audit Report.
  • Certain Avon executives agreed with executives of Avon China to delete the discussion of the Corporate Affairs Group’s conduct from the Draft Audit Report.  An Avon Executive then directed the internal audit team to either (1) retrieve every copy of the Draft Audit Report and destroy them or (2) instruct the individuals who possessed copies of the Draft Audit Report to destroy them.
  • Avon executives did not instruct any executives or employees of Avon China to stop the conduct identified in the Draft Audit Report, put in place controls to prevent the conduct or ensure the accuracy of Avon China’s books and records.
  • In 2006, Avon’s internal auditors again reviewed the Corporate Affairs Group’s travel and entertainment and discretionary expenses and found that Corporate Affairs Group executive and employees were continuing their practice of giving things of value to government officials.  Notwithstanding learning that the conduct was continuing and that the books and records of Avon China were still being falsified, no Avon or Avon China executives or employees took steps to stop or prevent the conduct from recurring, and Avon China executives and employees continued operating in the same improper manner.
  • In 2007, an Avon executive reported to the Avon Compliance Committee that the matter reported in 2005 regarding potential FCPA violations by executives and employees of Avon China had been closed as “unsubstantiated” even though the executive and others knew of Avon China’s previous – and continuing – practice of giving things of value to government officials and the ongoing failure of Avon China’s books and records to reflect accurately and fairly the nature and purpose of the transactions.
  • From 2004 to 2008, Avon China executives signed false management representation letters to Avon China’s external auditor stating that Avon China’s books and records were fair and accurate.

Avon China Plea Agreement

According to the plea agreement, the advisory Sentencing Guidelines fine range was $73.9 million to $147.9 million.  Pursuant to the plea agreement, Avon China agreed to pay a criminal fine in the amount of $67.6 million.

In the plea agreement, Avon China waived all defenses based on the statute of limitations.

Avon Products Information

The information is based on the same core conduct alleged in the Avon China information.

Under the heading “Avon’s Internal Controls,” the information alleges, in pertinent part, as follows.

“Although Avon … and certain of its subsidiaries had policies in place relating to the review and approval of employee expenses, it lacked adequate controls to ensure compliance with those policies and thus, in practice, employee expenses were not adequately vetted to ensure that they were reasonable, bona fide, or properly documented.

Avon … lacked sufficient controls to ensure the integrity of its internal audit process, particularly with regard to its review of allegations of and testing for improper payments made to foreign government officials.  Avon’s internal audit group also failed to devote adequate funding, staffing, and resources to Avon China.

Avon … did not have adequate internal accounting and financial controls designed to detect and prevent, among other things, corruption-related violations, including FCPA violations.  In particular, after senior Avon executives … learned of specific corruption issues in China related to the provision of cash, meals, gifts, travel, and entertainment to government officials, Avon failed to take the necessary steps to implement appropriate controls to address such issues and prevent such risks in the future.

Avon … had an inadequate compliance program.  In fact, Avon did not have a dedicated compliance officer or compliance personnel.  Avon’s compliance program was particularly weak with regard to risks associated with foreign bribery.  For example, even though Avon operated in over 100 countries, including many countries with high corruption risks, Avon did not have a specific anti-corruption policy, nor did it provide any stand alone FCPA-related training.  Moreover, although Avon had a code of conduct that covered all of its employees and its subsidiaries’ employees, which, among other things, prohibited paying bribes, many employees of Avon and its subsidiaries were unaware of its existence.

Avon .. did not conduct corruption-related due diligence on appropriate third parties or have effective controls for the meaningful approval of third parties.  Avon also did not require adequate documentation supporting the retention of payments to third parties.

Avon … did not undertake periodic risk assessments of its compliance program and lacked proper oversight of gifts, travel, and entertainment expenditures.  Avon’s failure to maintain an adequate compliance program significantly contributed to the company’s failure to prevent the misconduct in China.”

Based on the core conduct and the specific allegations detailed above, Avon was charged with one count of conspiracy to violate the FCPA’s books and records provisions as well as one count of violating the FCPA’s internal controls provisions for knowingly failing to implement a system of internal accounting controls sufficient to provide reasonable assurance of various aspects of its business as required by the provisions.

Avon Products DPA

Pursuant to the three year DPA, Avon admitted, accepted and acknowledged that it was responsible for the conduct alleged in the information.

Under the heading “Relevant Considerations,” the factors the DOJ considered in resolving the action were:

“(a) the Company’s cooperation, which included conducting an extensive internal investigation in China and other relevant countries; voluntarily making U.S. and foreign employees available for interviews; collecting, analyzing, translating, and organizing voluminous evidence and information for the Department; (b) the Company’s voluntary disclosure of its employees’ and its subsidiary’s employees’ misconduct to the Department, which came relatively soon after the Company received a whistleblower letter alleging misconduct but years after certain senior executives of the Company had learned of and sought to hide the misconduct in China; (c) the Company’s extensive remediation, including terminating the employment of individuals responsible for the misconduct, enhancing its compliance program and internal controls, and significantly increasing the resources available for compliance and internal audit; (d) the Company’s commitment to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements [set forth in the DPA]; and (e) the Company’s agreement to continue to cooperate with the Department …”

The DPA also states:

“The Department also considered that the Company, taking into account its own business interests, expended considerable resources on a company wide review of and enhancements to its compliance program and internal controls.  While the Company’s efforts in this regard were taken without Department request or guidance, and at times caused unintended delays in the progress of the Department’s narrower investigations, the Department recognizes that the Company’s efforts resulted in important compliance and internal controls improvements.”

Based on the conduct at issue, the DPA sets forth an advisory Sentencing Guidelines range of $84.6 million to $169.1 million.  The DPA sets forth a criminal fine amount of $67.6 million and the above-mentioned Avon China criminal fine was deducted from this amount.

Pursuant to the DPA, Avon agreed to retain an independent compliance monitor for an 18 month term and agreed to various periodic reporting obligations to the DOJ.

The DPA contains a standard “muzzle clause” in which it (or those associated with it) agreed not to make any public statements contradicting its acceptance of responsibility under the DPA.

In this release, Assistant Attorney General Leslie Caldwell stated:

“Companies that cook their books to hide improper payments will face criminal penalties, as Avon China’s guilty plea demonstrates. Public companies that discover bribes paid to foreign officials, fail to stop them, and cover them up do so at their own peril.”

U.S. Attorney Preet Bharara of the Southern District of New York stated:

“For years in China it was ‘Avon calling,’ as Avon bestowed millions of dollars in gifts and other things on Chinese government officials in return for business benefits. Avon China was in the door-to-door influence-peddling business, and for years its corporate parent, rather than putting an end to the practice, conspired to cover it up.  Avon has now agreed to adopt rigorous internal controls and to the appointment of a monitor to ensure that reforms are instituted and maintained.”

Assistant Director in Charge Andrew G. McCabe of the FBI’s Washington Field Office stated:

“When corporations knowingly engage in bribery in order to obtain and retain contracts, it disrupts the level playing field to which all businesses are entitled. Companies who attempt to advance their businesses through foreign bribery should be on notice.  The FBI, with our law enforcement partners, is continuing to push this unacceptable practice out of the business playbook by investigating companies who ignore the law.”

SEC

Based on the same core conduct alleged in the DOJ actions, in this civil complaint the SEC charged Avon with violating the FCPA’s books and records and internal controls provisions.  In summary, the SEC’s complaint states:

“This matter concerns violations by A von Products, Inc. (“A von”) of the corporate record keeping and internal controls provisions of the federal securities laws. [...] . From 2004 through the third quarter of 2008, Avon’s books and records failed to accurately and fairly reflect payments by Avon Products (China) Co., Ltd. (“Avon Products China”) to Chinese government officials. Avon Products China provided cash and things of value, including gifts, travel, and entertainment, to various Chinese government officials, including government officials responsible for awarding a test license, and subsequently a direct sales business license, that would allow a company to utilize direct door-to-door selling in China. Avon Products China  was, in fact, awarded a test license and, then, the first official direct selling business license in China. Avon Products China also adopted an internal “no penalty policy” and provided cash and things of value to Chinese government officials to avoid fines and other penalties in order to maintain an ostensibly pristine corporate image. Avon Products China also paid a third-party consultant for purportedly legitimate interactions with government officials, even though Avon Products China management knew the consultant’s invoices were often false and could not point to legitimate services provided by the consultant. At times , payments were made to suppress negative news in state-owned media and to obtain competitor information. In addition, Avon Products China provided cash to government officials on behalf of other Avon subsidiaries in China. Avon Products China falsified its books and records so as to conceal the cash and things of value provided to government officials.  Near the end of 2005, an Avon internal audit team reported potential issues concerning things of value provided to Chinese government officials. Nevertheless, remedial measures sufficient to address the issues were not implemented at Avon Products China. Similar issues related to Avon Products China were raised at the end of 2006. Again, responsive remedial measures were not implemented. The books and records at A von Products China were consolidated into the books and records of Avon. Avon thus violated [the books and records provisions] by failing to make and keep books, records , and accounts, which, in reasonable detail , accurately and fairly reflected the transactions and disposition of assets of the issuer. By failing to ensure that it maintained adequate internal controls sufficient to record the nature and purpose of payments, or to prevent improper payments, to government  officials, Avon failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that its transactions and the disposition of its assets were recorded correctly, accurately, and in accordance with authorization of management. Avon thereby violated [the internal controls provisions]. Finally, in May 2008, Avon began a review of its compliance with the Foreign Corrupt Practices Act (“FCPA”), the U.S . legislation that, among other things, prohibits payments to foreign government officials to obtain or retain business. As a result of its review, the company instituted extensive, related reforms.”

In certain respects, the SEC’s complaint contains additional details regarding certain of the alleged conduct such as:

  • Certain of the Chinese “foreign officials” are alleged to be individuals associated with the Ministry of Commerce (“MOFCOM”) and the State Administration for Industry and Commerce (“AIC”).
  • Regarding the Draft Audit Report, “Avon’s Legal Department took the position that conclusions about potential FCPA violations fell within the purview of Legal, and not Internal Audit.”
  • Regarding Avon’s initial investigation of the matter, Avon engaged a “major law firm” but “in mid-December 2005, sent the law firm a short e-mail stating that the company had ”moved on” from the issues and asking for an estimate of the fees incurred.”
  • “In May 2008 , the Avon Products China Corporate Affairs executive who had been terminated wrote to Avon’ s Chief Executive Officer alleging improper payments to Chinese government officials over several years in the form of meals, entertainment, travel, sponsorship of cultural events, gifts of art, and cash. The letter was forwarded to A von’s Legal Department and, in tum, to the audit committee of Avon’s board of directors. The audit committee commenced an internal investigation into the allegations and, in October 2008, Avon informed the Commission and the Department of Justice.”
  • As to various things of value: (i) “The majority of these payments were for meals and entertainment expenses under $200 per occurrence, without indication as to who attended the meal/entertainment or the business purpose of the expense.” (ii) a “Pearl River cruise for 200 State and Regional AIC officials during a conference of officials with responsibility for the oversight of Avon Products China’s direct selling business license.”; (iii) “corporate boxes at the China Open tennis tournament, given to AIC and other government officials in 2004 and 2005 “to thank them for their support.” During these years, Avon Products China was a corporate sponsor of the tournament and received the tickets as part of that sponsorship . Avon Products China also provided government officials with gifts that included Louis Vuitton merchandise, Gucci bags, and Tiffany pens.” (iv) “$23,000 for travel and expenses for government journalists to attend the ceremony at which Avon Products China launched its direct selling test;” (v) “Avon Products China’s employees also made payments to government officials for conferences, and related meals, gifts, and entertainment, in 150 instances aggregating $143,000. Records for these expenses do not indicate who attended the conferences, or the business purpose of the expenses. Approximately $15,000 of this amount was for expenses related to government journalists’ attendance at an Avon Products China media event.”

As noted in this SEC release:

“Avon, which neither admitted nor denied the allegations, agreed to pay disgorgement of $52,850,000 in benefits resulting from the alleged misconduct plus prejudgment interest of $14,515,013.13 for a total of more than $67.36 million.  In the parallel criminal matter, Avon entities agreed to pay $67,648,000 in penalties.  Avon also is required to retain an independent compliance monitor to review its FCPA compliance program for a period of 18 months, followed by an 18-month period of self-reporting on its compliance efforts.  Avon would be permanently enjoined from violating the books and records and internal controls provisions of the federal securities laws.  In reaching the proposed settlement, which is subject to court approval, the SEC considered Avon’s cooperation and significant remedial measures.”

In the release, Scott Friestad (Associate Director in the SEC’s Enforcement Division) stated:

“Avon’s subsidiary in China paid millions of dollars to government officials to obtain a direct selling license and gain an edge over their competitors, and the company reaped substantial financial benefits as a result. Avon missed an opportunity to correct potential FCPA problems at its subsidiary, resulting in years of additional misconduct that could have been avoided.”

In this release, Sheri McCoy (CEO of Avon Products, Inc.) stated: ”We are pleased to have reached agreements with the DOJ and the SEC.”

Avon was represented by Evan Chesler and Benjamin Gruenstein of Cravath, Swaine & Moore.

“I Have Such Trouble Understanding The Facilitating Payment Exception”

Tuesday, December 9th, 2014

Southern District of Texas Judge Keith P. Ellison.  HANDOUT.

In the minds of some, the Foreign Corrupt Practices Act is a clear statute with no ambiguity whatsoever (see here for a prior post on the same subject).  To such commentators, it’s easy –  just don’t bribe.  (The irony of course is that if it was so easy, then why do many of these same commentators devote their practice to FCPA compliance?).

To suggest that the FCPA is an ambiguous statute has been met by claims that such statements are nothing more than pandering to a particular audience.

Well, federal court judges are apparently pandering to a particular audience because if there is one common thread in many FCPA judicial decisions, it is judges finding various FCPA provisions vague or ambiguous.  (See the above prior post for numerous examples).

The latest example occurred in SEC v. Jackson & Ruehlen (the individual enforcement action the SEC settled on the eve of trial this past summer in what could only credibly be called an SEC defeat – see here and here for prior posts).

As to relevant background, in a pre-trial ruling (see here for the prior post), Judge Keith Ellisson (S.D.Tex.) ruled that the SEC had the burden of negating application of the FCPA’s facilitating payment exception.  As noted in this prior post, the enforcement action focused on alleged payments in connection with temporary importation permits in Nigeria for oil rigs.

Deep within the pre-trial transcript (see here), one will find Judge Ellison engage in the following exchange with SEC counsel.

JUDGE:  I have such trouble understanding the facilitating payment exception.  [...] I mean, it almost swallows the rest of the statute.  And I know it’s in the legislative history that these, I think reference is made to grease payments, somehow to grease the skids.  How do I separate those payments, which do seem to be contemplated, from the payments that [the SEC] alleges were made in this case, which you think are squarely within the FCPA’s prohibition?  [...] And I don’t understand it.  Whether we make the distinction based on size of payments, regularity of payments, purpose of payments, nature of the — of the favorable conduct elicited.  I just really struggle with it.”

SEC:  [...] For the — for the exception to apply, the SEC’s position is that two elements must be met.  There must be a purpose to expedite an act and the act must be a routine government action within the meaning of the statute.

JUDGE:  Both those could apply to the temporary — to the temporary import, though, couldn’t it?

SEC:  Well, in what way, Your Honor?

JUDGE: Well, because it purpose was to expedite an act and it was a routine government action.  These import permits were granted all the time.

Elsewhere in the transcript, one will find Judge Ellison expressing concern about the SEC’s position that the defendants violated the FCPA’s books and records provisions because Noble Corp. booked the alleged bribe payments in a special facilitating payments account based on the good faith belief that they were indeed facilitating payments.  The following exchange occurred.

JUDGE:  You also argue that recording the payments as facilitating payments in the company’s book is essentially duplicative or duplicitous.  Would payments to government officials, just say to that, like so, would that be accessible?

SEC:  Your honor, these payments were recorded as a particular kind of payment, a lawful payment.  A payment that meets a legal exception to liability under the FCPA.  As this Court recognized in the motion to dismiss opinion, calling a payment something that it is not is false.

JUDGE: What would they have needed to call it?  That’s what I am asking?

SEC:  Payments to government official — I can’t speculate all the things that it possibly could have been called, but payments to government officials may have been – may have been adequate.  However, they weren’t designated payments to government officials in this case …

Elsewhere in the transcript, the SEC acknowledged that the facilitating payments exception is “a difficult area to understand, largely because of the wording of the exception and the statute overall.”  The following exchange occurred.

SEC: This is how we conceptualize it.  And I think it’s — and it’s clearly evidenced and its manifest in the words of the statute and the exception.  Now, the facilitating payment exception is exactly that. It’s an exception for government actions that are routinely or ordinarily carried out. And you’ll see in the — in the exception itself, a number of examples that Congress set out as — as possible facilitating payment – facilitating payments and government — routine government actions. [...]

JUDGE: In your mind, does “routine” mean frequent or does “routine” mean automatic or does “routine” mean both?

SEC: I think that’s a fact issue, Your Honor. I think there could be situations where a routine governmental action can be something automatic. I think there can be situations where a — a routine governmental action is something that is issued or granted by a government entity or official routinely, so frequently, or without exception.

JUDGE: Well, I’m trying to identify which of the those things.  I mean, what if it were routine but not consistent; or automatic but not routine, it only happened once every five years?

SEC:  [...] Now, what’s important here is that the SEC posits whether a particular action is a routine governmental action is an objective inquiry.  You just take a look at the Nigerian law that governs this particular action.  If the Nigerian law says that it’s nondiscretionary, that’s the end of the inquiry.

JUDGE: Well, that’s what I trying to identify.  The fact that it’s nondiscretionary.  Do you think — do you agree with that?

SEC: No, Your Honor.

JUDGE:  Tell me what the lynchpin is?

SEC: The lynchpin is, again, it’s a fact-intensive inquiry.  What did the defendants – all right – what did the defendants believe was the action here?  And the action here was in — again, tying to the specific — specific facts of this case, the action was applying for temporary import authorizations that had, prior to the relevant period in this case, had been routinely granted.

JUDGE: Meaning — meaning consistently?

SEC: Consistently, to our — to our knowledge, without exception.

JUDGE:  Consistently and frequently?

SEC:  Yes

JUDGE:  Okay.

SEC:  Every — every time an application was put in, they received the authorization.

JUDGE: And those — to the best of your knowledge were those applications put in without — without any further monetary inducement or were they accompanied by monetary inducement?

SEC:  Accompanied by monetary inducement; hence, the payment itself, the facilitating payment, for a government action that was routinely rendered.

JUDGE: So the government would grant these routinely if it was paid?

SEC:  Well, Your Honor, we don’t know whether — we don’t necessarily know whether they were — whether they would have been granted if — if a payment had — payment had not been made, but what — what matters here is the payments were made –

JUDGE:  Isn’t that a big difference, though?  If it would have been granted anyway, without a payment being made, isn’t that signficant?

SEC:  I don’t think so, Your Honor.

In short, while many FCPA commentators continue to believe that the FCPA is a simple, straight-forward statute (and that claims of vagueness and ambiguity are the stuff of sugar plums and tinkerbells), the above example is just the latest of many (and please do visit this prior post for the numerous other examples) where federal court judges remain confused about various aspects of the FCPA.

Items Of Interest From The Layne Christensen Company Enforcement Action

Wednesday, October 29th, 2014

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.

 

Layne Christensen Company Resolves SEC Enforcement Action

Tuesday, October 28th, 2014

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%.