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.
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.
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.