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Canada-Based Kinross Gold Corp. Resolves Approximate $1 Million SEC Action Because Its Acquired Indirect African Subsidiaries Had Deficient Internal Controls

Silly you for believing certain commentator hype that the Trump SEC would stop enforcing the Foreign Corrupt Practices Act or for thinking that the general lull in SEC corporate enforcement during the fourth quarter of 2017 meant anything.

In the second SEC corporate FCPA enforcement action in the last 2.5 weeks (see here [1] for the prior Elbit Imaging action), the SEC announced yesterday [2] that Canada-based Kinross Gold Corporation (a company with shares traded on the New York Stock Exchange) resolved an enforcement action “arising from the company’s repeated failure to implement adequate accounting controls of two African subsidiaries.” Without admitting or denying the SEC’s finding in this administrative order [3], Kinross agreed to, among other things, pay a $950,000 civil penalty.

In summary fashion, the order finds:

“This matter concerns violations of the books and records and internal accounting controls provisions of the FCPA by Kinross Gold Corporation, a gold mining company. From September 2010 through at least 2014, Kinross operated gold mines in Mauritania and Ghana without devising and maintaining a system of internal accounting controls sufficient to provide reasonable assurances that transactions were executed in accordance with management’s specific or general authorization. As a result, Kinross paid vendors and consultants, often in connection with government interactions, without reasonable assurances that transactions were consistent with their stated purpose or the prohibition against making improper payments to government officials. For certain of these transactions, the company used petty cash to pay consultants which it then failed to accurately and fairly describe in its books and records.

In 2014, Kinross also failed to maintain its internal accounting controls around contracting and awarded a lucrative logistics contract to a company preferred by government officials without following its own bidding and tendering procedures. Internal documentation provided incomplete information concerning the contract award. Additionally, Kinross contracted with a politically-well-connected third-party consultant to facilitate contacts with high-level government officials without conducting the heightened due diligence required by the company’s policies and procedures.”

The conduct at issue involved Tasiast Mauritanie Limited S.A. (“Tasiast”) described as a wholly-owned indirect subsidiary of Kinross that owns and operates the Tasiast mine in the Islamic Republic of Mauritania whose financial  results were included in the consolidated financial statements that Kinross filed with the Commission and Chirano Gold Mines Ltd. (Chirano) described as a 90 percent-owned indirect subsidiary of Kinross that owns and operates the Chirano mine in Ghana whose financial results were also included in the consolidated financial statements that Kinross filed with the Commission.

[4]

Under the heading “Kinross Failed to Timely Implement Sufficient Internal Accounting Controls and Remediate Known Issues,” the order states:

“On September 17, 2010, Kinross acquired Tasiast and Chirano, and their assets and mining operations in Mauritania and Ghana from Red Back Mining, Inc. (“Red Back”), a Vancouver-based mining company, for approximately $7.1 billion. Kinross viewed the development of the Tasiast mine, which was much larger than Chirano, as key and critical to the realization of the value of the transaction. In the few months prior to the purchase of the mines from Red Back, Kinross conducted due diligence on Red Back. As part of the process, Red Back acknowledged that it lacked an anti-corruption compliance program and associated internal accounting controls.

As part of this initial due diligence, and following the acquisition, Kinross failed to timely address the adequacy of the internal accounting controls at Red Back pertaining to the procurement and payment of vendors for goods and services or consider the risks of corruption associated with the high percentage of vendors that were controlled by government officials or their relatives. As a result, Kinross failed to make necessary improvements to Red Back’s inadequate controls in a timely manner. Kinross continued the same practices from Red Back that allowed low-level employees to contract with vendors and make payments with petty cash without appropriate controls.

In April 2011 Kinross’ internal audit group concluded that the internal accounting controls surrounding vendor selection and disbursement for goods and services at Tasiast and Chirano were not adequate to meaningfully assess transactions for accuracy or compliance with the FCPA. The internal audit group faulted the Enterprise Resource Planning (“ERP”) accounting and disbursements system, which did not “include much detail on the nature of disbursements” thus making it “not possible” to identify suspect payments such as excessive rebates and discounts, advance payments, government commissions and unjustified business expenses. While internal audit conducted a manual review, this was still not adequate to meaningfully assess transactions for FCPA compliance. Internal audit also found that the lack of contract administration procedures prevented it from adequately reviewing the contracting and tendering processes.

Despite these findings by the internal audit group, company management failed to take immediate action. Employees in the finance department became increasingly concerned about the poor internal accounting controls associated with disbursements in Africa and the continued risk of corrupt activities. These employees suggested internal audits of Chirano and Tasiast be repeated so that the internal accounting control issues would be found and then, hopefully, prioritized for solution by regional and international management. In April 2012, Kinross’ internal audit group issued a nearly-identical memorandum reaching the same conclusions.

Internal audit conducted reviews at Chirano in January 2012 and Tasiast in February 2012. The audits found issues requiring significant improvements at both mines.

A. The mines variously lacked formal site Delegations of Authority by which disbursements were approved; lacked formalized procedures for contract approval and tendering; and lacked a fully functioning ERP system. As a result, Kinross relied on manual controls to mitigate against any potential control issues, but they did not consistently adhere to the manual controls.

B. At Chirano, specific internal accounting controls in key purchasing and disbursement areas were adhered to only sporadically. For instance, for 41% of the disbursement sample, the purchase order was dated and created after the invoice was received and, for 75% of the sample, there was no contract at all. At Tasiast, there was a widespread lack of adherence to basic internal accounting controls. For each and every of the sampled transactions, there was either no purchase order or the purchase order was created after the invoice was received.

C. At both mines, most disbursements were made without approval by the required level of signatories, or based on signatures that did not provide adequate detail, such as names and positions, to verify whether appropriate approval had been provided. Kinross failed to maintain supporting documentation required for disbursements, including invoices, purchase orders, and/or good receipts. Internal audit found minimal evidence of a functioning bidding or tendering process.

The internal audit reports for the Chirano and Tasiast mines contained recommendations for extensive remediation steps. While management agreed to swiftly implement the needed remediation, it failed to follow through on its commitments in a timely manner. As a result, follow-up internal audits indicated that the issues largely remained. For example,

A. At Tasiast, an October 2012 internal audit found no evidence of required bidding or tendering for any of the sampled transactions for goods or services and no purchase orders or contracts for the vast majority of them. Fourteen months later, in December 2013, internal audit reported that of the transactions it reviewed; only 53% possessed a contact and 57% had any evidence of bidding and tendering.

B. At Chirano, a July 2013 internal audit found that only 56% of the sampled transactions possessed a contract and only 44% showed evidence of being the result of required bidding or tendering. As noted by the internal auditor, “100% of the contracts reviewed were awarded directly by the functional area or department,” rather than by the procurement department, an indication that the Red Back practice of low-level employees awarding contracts without independent accounting control or oversight continued nearly three years after Kinross assumed control of the mine.

As a result of the known control weaknesses, payments were made for a period of years without reasonable assurances that the payments were for their stated purpose or with management’s approval. For example,

A. Kinross paid a fixed amount to a Ghanaian government customs officer for his expenses in traveling to the mine weekly in order to sign papers necessary for the transfer of the gold’s title and attendant shipping risk from Kinross to the buyer. While the agreement did not provide for it, during 2012 through 2014, personnel at Chirano regularly paid the customs officer for weeks in which he did not travel to the mine and bore no travel expenses.

B. In 2012, the Ghana Environmental Protection Agency (“Ghana EPA”) delayed granting Kinross a mining production permit for a planned mine expansion due to unresolved questions about an Environmental Impact Study that Kinross had previously submitted with the assistance of a third-party consultant. The consultant organized a public hearing for the community to discuss the planned expansion’s impact on infrastructure and employment opportunities. During the delay of several months, Kinross received a $12,000 invoice from the third-party consultant with no documentation for services the consultant purportedly provided to Kinross one year earlier. The consultant represented that the amount was based on an oral contract between the consultant and the company. Kinross personnel used petty cash to pay the third-party consultant the $12,000 without obtaining any documentation to evidence the services were actually provided. Kinross’ books and records did not fairly and accurately reflect in reasonable detail the nature or intended recipients of the payment. About a month after the payment, the Ghana EPA approved the mining production permit.

C. From 2012 through 2015, Kinross paid the Ghanaian government fees in connection with the issuance of visas and work permits for expatriate personnel. During this same period, Kinross paid a consultant, a former government employee, to expedite the process. With no evidence of actual services being provided, and with no reasonably detailed description in the books and records, the consultant was paid approximately $1,000 per visa or permit from petty cash. As a result, the processing time for visas and work permits decreased from ten weeks to three weeks.”

Under the heading “After Implementing New Internal Accounting Controls, Kinross Failed to Maintain Them,” the order states:

“In 2013, Kinross took steps to enhance internal accounting controls concerning the procurement and payment of goods and services designed, in part, to provide reasonable assurances that transactions did not violate the FCPA and Kinross’ code of conduct, which prohibits providing improper inducements to government officials. However, on at least two occasions in 2014, Kinross failed to maintain these internal accounting controls.

The first instance arose in April 2014 as Kinross prepared to award an approximately $50 million, three-year logistical support contract to an international shipping company. Consistent with Kinross’ new supply chain policy, Kinross was prepared to award the contract to the bidder that offered the lowest price and possessed the best ability to fulfill the technical requirements of the contract. Kinross personnel soon learned, however, that a very high-level Mauritanian government official was unhappy with Kinross’ choice because the shipper’s local affiliate was controlled by persons allegedly active with the political opposition. Kinross also learned that the official preferred another international shipping company whose local affiliate recently was acquired by a prominent and influential Mauritanian businessman with ties to the official.

In July 2014, Kinross regional management in West Africa made a presentation to Kinross senior management, that showed that Kinross’ original preferred shipper remained by far the best based on cost, technical capabilities, and ability to provide logistical support in both Mauritania and Ghana, but its “political affiliations may pose business risk.” The presentation further noted that the shipper associated with the prominent Mauritanian businessman was unable to provide support in Ghana, its costs were high and technical capabilities were poor but excelled in “political risk” as it was the “preferred option of Gov[ernment] stakeholders.” After the presentation, Kinross management decided to award the approximately $50 million three-year logistics contract to the shipping company preferred by the high-level government official.

In making this decision, Kinross senior management failed to maintain the internal accounting controls, which directed that company personnel primarily focus on the commercial and technical qualifications of bidders when making awards. The internal accounting controls also required that when multiple bidders met the basic commercial and technical qualifications company personnel were to make an “in-depth evaluation” from a list of elements, which included compliance with health/safety/environmental standards and liability for cost, performance and delay. The preference of government officials was not among those elements.

In September 2014 Kinross internal contract award recommendation documents did not, in reasonable detail, accurately and fairly reflect the transaction. As drafted, the award documents did not reveal that the primary reason for awarding the contract was to satisfy the preference of a high-level government official.

The concerns about awarding this contract to a vendor with low technical capabilities and high costs were borne out. After one year, due to its poor performance, Kinross refused to grant the shipper associated with the prominent Mauritanian businessman an option to renew. After a subsequent tendering process, Kinross awarded the business to another company in accordance with company policy.

The second instance also arose in 2014 when an individual Kinross understood was well-connected with high-level government officials in Mauritania approached Kinross government-relations department personnel and proposed to work for Kinross in a government-relations capacity. Specifically, the individual offered to establish a continuing, semi-formal liaison relationship between a senior executive at Kinross and a particular government official influential with the same high-level government official who had influenced the award of the logistical support contract. Initially, Kinross considered hiring the individual as Government Relations Director for Mauritania and conducted the minimal due diligence required for prospective employees – checking for an arrest and criminal record. But because the amount of money the individual demanded for his services was excessive for a salaried employee, senior executives in Kinross’ government-relations department retained him as an independent consultant.

The consulting agreement was treated as a contract for “Corporate, General, and Non-Routine Expenditures,” which required “authorization in accordance with [the] procure-to-pay process set out in Kinross’ Supply Chain Policy . . . .” The Supply Chain Policy required that prospective vendors undergo a due diligence procedure to determine the FCPA risks in using the vendor. Greater due diligence was required where there were higher potential risk indicators. As Kinross’ agent in dealing directly with government officials where known risks of corruption existed, Kinross’ internal accounting controls required that the consultant be subjected to the company’s highest level of due diligence, necessitating, among other things, a credit report, a search of government sanctions and watch lists, a reference check of business partners and associates, confidential in-field inquiries about his reputation and an enhanced asset search. However, Kinross did not perform the required due diligence on the consultant, and between September 2014 and August 2015, paid the consultant approximately $715,000.

Relatedly, Kinross also failed to provide adequate training to its senior decision-makers, especially in the government relations department, to recognize the corruption risks in hiring a consultant to work as a liaison with government officials.”

Under the heading “Kinross’ Remediation Efforts,” the order states:

“Kinross has taken steps to remediate the above-described internal control and recordkeeping issues, including conducting audits, generating management remediation plans and tracking their progress, implementing a new ERP system to enable finance personnel to more effectively track and manage expenditures, and replacing personnel at Tasiast and Chirano. Kinross also increased compliance personnel, updated relevant policies and procedures, and conducted compliance training. Kinross terminated the use of the third-party consultant described above to obtain visas and work permits and has instituted more formalized controls over the use, documentation and approval of petty cash. Kinross continues to improve its internal accounting controls around third-party consultants and vendors, and enhanced FCPA training. Kinross also recently hired a consulting firm to assist it in evaluating its current controls for additional enhancements. Also, Kinross has taken steps to improve training of its senior decision-makers, especially in the government-relations department, to recognize the corruption risks in hiring a consultant to work as a liaison.”

Based on the above, the order finds that Kinross violated the FCPA’s books and records and internal controls provisions.

In this release [2], Tracy Price (Deputy Chief of the SEC’s FCPA Unit) stated:

“Companies should take particular care to remediate known accounting controls issues when making acquisitions to mitigate the risk that company funds will be misused for unauthorized purposes.”

The release further notes that “without admitting or denying the findings, Kinross agreed to a cease-and-desist order, a penalty of $950,000 and undertakings to report on its remedial steps for a period of one year.” In pertinent part, the order states that “with respect to its operations in Africa,” Kinross shall:

“Report to the Commission staff periodically during a one-year term, the status of its remediation and implementation of compliance measures, particularly as to the areas of due diligence on prospective and existing third-party consultants and vendors, FCPA training and the testing of relevant controls including the collection and analysis of compliance data.”

This Kinross release [5] states:

“Kinross is pleased to resolve this matter through an agreed-upon cease and desist order and that the SEC’s investigation has been concluded, as expected, without any material adverse effect on the Company’s financial position or business operations. The cease and desist order with the SEC makes no findings of bribery by the Company but is instead premised on allegations of various deficiencies in Kinross’ internal accounting controls and practices. Kinross cooperated fully with the SEC throughout the investigation and has taken steps to improve and strengthen its compliance program and internal accounting controls and practices.

On November 7, 2017, the U.S. Department of Justice (DOJ) also notified Kinross that it closed its investigation, declining to pursue further the matter against the Company and noting the Company’s full cooperation during the inquiry.

Both investigations related to allegations of improper payments made to government officials and certain internal control deficiencies at the Company’s West African mining operations, which Kinross first became aware of in August 2013. The Company immediately commenced an internal investigation into the allegations in accordance with its Whistleblower Policy. In March 2014, the SEC commenced an investigation seeking information and documents relating to these allegations, and in December 2014, the DOJ commenced a similar investigation. On October 2, 2015, the Company publicly disclosed the SEC and DOJ investigations.

The Company entered into the cease and desist order with the SEC without admitting or denying the findings of the order to resolve the investigation. As part of the settlement, the Company has agreed to pay US$950,000 to the SEC as a civil penalty and report to the SEC semi-annually for a one-year term on the status of its West African compliance measures. The order is final and not conditional on court approval.

Kinross is fully committed to operating in accordance with the highest ethical standards, conducting business in an honest and transparent manner that is compliant with the law, and building on its long-standing culture of ethical conduct and accountability consistent with its Code of Business Conduct.”

Yesterday’s the shares of Kinross closed up 3.9%.

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