Saturday, April 28, 2007
Oil-field services company Baker Hughes Inc. settled charges that it paid bribes to obtain business from the state-owned oil company in Kazakhstan. A subsidiary of the company agreed to plead guilty to charges of conspiracy, violation of the FCPA, and aiding and abetting a violation of the books-and-records provisions of the federal securities laws; Baker Hughes also settled an SEC civil enforcement action. The company had agreed to a cease-and-desist order covering FCPA violations in 2001, so this is a second strike against the company because some of the conduct occurred after entry of that order. In settling the criminal and civil actions, Baker Hughes agreed to pay an $11 million criminal fine, disgorge profits and interest of $23 million, and pay a civil penalty of $10 million. The $44 million in payments is the largest in an FCPA case, according to a Department of Justice press release (here). The SEC Litigation Release (here) describes the payments to agents of Kazakhoil:
Baker Hughes paid approximately $5.2 million to two agents while knowing that some or all of the money was intended to bribe government officials, specifically officials of State-owned companies, in Kazakhstan. The complaint alleges that one agent was hired in September 2000 on the understanding that Kazakhoil, Kazakhstan's national oil company at that time, had demanded that the agent be hired to influence senior level employees of Kazakhoil to approve the award of business to the company. Baker Hughes retained the agent principally at the urging of Fearnley. According to the complaint, Fearnley told his bosses that the "agent for Kazakhoil" told him that unless the agent was retained, Baker Hughes could "say goodbye to this and future business." Baker Hughes engaged the agent and was awarded an oil services contract in the Karachaganak oil field in Kazakhstan that generated more than $219 million in gross revenues from 2001 through 2006. Baker Hughes, the complaint alleges, paid the agent $4.1 million to its bank account in London but received no identifiable services from the agent. The complaint also alleges that in 1998 Baker Hughes retained a second agent in connection with the award of a large chemical contract with KazTransOil, the national oil transportation operator of Kazakhstan. Between 1998 and 1999, Baker Hughes paid over $1 million to the agent's Swiss bank account, despite a company employee knowing by December 1998 that the agent's representative was a high-ranking executive of KazTransOil.
The SEC complaint (here) also alleges FCPA violations from bribe payments in "Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan in circumstances that reflected a failure to implement sufficient internal controls to determine whether the payments were for legitimate services, whether the payments would be shared with government officials, or whether these payments would be accurately recorded in Baker Hughes' books and records."
Baker Hughes also entered into a deferred prosecution agreement with the Department of Justice that requires the company to continue its cooperation with the Department of Justice, appoint a compliance monitor, and stay clear for two years. Unlike most cases involving such an agreement in which criminal charges are dropped after a certain period, the subsidiary entered a guilty plea and the deferred prosecution agreement only precludes additional charges against Baker Hughes for other conduct, most likely related to the payments in the other countries identified in the SEC complaint. This case involves more than just an isolated payment, but instead what appears to be part of a culture of foreign bribery, and it will be interesting to see whether Baker Hughes will be able to reform its overseas operations. The government did acknowledge Baker Hughes' cooperation, which likely saved it from even more severe penalties. The SEC action also named a former business development manager from the company as a defendant, and he did not settle the case. (ph)