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Customs Issues In Argentina Result In FCPA Enforcement Action Against BJ Services

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[This post is part of a periodic series regarding “old” FCPA enforcement actions]

In 2004, the SEC brought this administrative cease and desist order against BJ Services (a Houston-based oil field services, products, and equipment company). The conduct at issue focused on the company’s Argentina subsidiary and its relationships with customs officials. As stated in the SEC’s order, there was no indication that anyone employed by BJ Services approved many of the alleged improper payments and the SEC further acknowledged that the improper payments were made in violation of BJ Services’ existing policies prohibiting payments of the kind made to the customs official.

Other interesting aspects of the enforcement include the following: (i) certain of the improper payments were facilitated by the Argentina subsidiary issuing checks “in the name of a lower’level” employee who then “cashed the checks and provided the proceeds to the customs official”; (ii) the SEC seemed to acknowledge that certain of the payments were facilitation payments under the FCPA, but nevertheless improperly booked, and thus still actionable.

Under the heading “Overview” the Order states:

“During 2001, BJ Services, through its wholly owned Argentinean subsidiary B.J. Services, S.A. (“BJSA”), made illegal or questionable payments, totaling approximately 72,000 pesos to Argentinean customs officials. Further, from 1998 through April 2002 certain undocumented or improperly characterized payments were made totaling approximately 151,000 pesos. In certain instances, entries were made in BJSA’s books and records to conceal the payments. During the same period, BJ Services experienced certain breaches in the existing accounting policies, controls and procedures in certain areas of its Latin American Region.”

Under the heading “January 2011 Payment,” the Order states:

“In January 2001, the Controller for BJSA learned that equipment BJSA was attempting to import into Argentina, and which was being awaited by BJSA for use on a project for a customer, had not been properly imported under Argentina’s customs laws and was being held by a customs official.The Controller also learned that the customs official had offered to release the equipment and overlook the customs law violation, if he were paid 75,000 pesos.

[As stated in the order: the term “equipment”  refers to a component part that was coming from BJ Services’ Venezuelan subsidiary and was meant for use in a larger piece of equipment at an oil well in Argentina. BJSA was attempting to import it into the country on a permanent basis, and only new or rebuilt equipment may be permanently imported into Argentina. The component part was used and had not been rebuilt and therefore was not permitted to be imported on a permanent basis, but only on a temporary basis.]

The customs official stated that unless he received the payment, the equipment would be deported and BJSA would: (i) forfeit the import taxes it previously paid to import the equipment, 71,575 pesos; (ii) pay a penalty of 1 to 5 times the value of the equipment, valued at $122,420; and (iii) pay importation taxes again when it properly re-imported the equipment. In addition, if the payment was not made, BJSA would also have: incurred freight charges to export and then re-import the equipment; risked losing the business and accompanying revenue the equipment would have immediately begun generating; and possibly impaired the relationship with the customer awaiting the work to be performed with the equipment, resulting in an inability to retain that customer’s business.

Shortly after learning of the customs official’s offer, the Controller contacted the Country Manager for BJ Services’ Argentinean operations to obtain guidance on how to proceed. [As stated in the order: The Controller did not normally have responsibility for customs issues, but handled this matter for a vacationing colleague. He did not believe he had authority to approve the payment and contacted the Country Manager to get approval. The Country Manager was employed by BJ Services Co. (not by BJSA)]

The Country Manager told the Controller that he would check with BJ Services’ Regional Manager for Latin American operations in order to get approval. [As stated in the order: The Regional Manager was also employed by BJ Services Co. (not by BJSA).] The Country Manager later called the Controller back and told him that: he had checked with the Regional Manager; the payment had been approved; and they should attempt to negotiate with the customs official to obtain a lower payment amount.

Negotiations with the customs official ensued, through a third party agent previously hired to assist BJSA with Argentinean customs matters, and the customs official eventually agreed to reduce the amount to 65,000 pesos. Two BJSA checks totaling 65,000 pesos were issued in the name of a lower-level BJSA employee. She cashed the checks and provided the proceeds to the customs official. [As stated in the order: This payment was made in violation of BJ Services’ existing policies prohibiting payments of the kind made to the customs official.].The equipment was then released to BJSA.

The Controller recorded the payment on BJSA’s books as a debit to a “Vendor Payable Account” with a corresponding entry of 65,000 pesos due from BJ Services’ Panamanian subsidiary in an attempt to have the payment charged to BJ Venezuela. The Panamanian subsidiary then recorded a payable to BJSA, improperly attaching the previously paid import tax invoice for the equipment as support. The 65,000 pesos expense was then allocated to Argentina for internal management reporting purposes by BJ Services’ Panamanian subsidiary, which regularly accounts for and allocates expenses among BJ Services’ various Latin American subsidiaries. The amount was improperly characterized as “Amortization – Fixed Costs.”

Under the heading “Mendoza Payment,” the Order states:

“In September 2001, BJSA’s former Treasury and Purchasing Manager, who was then in charge of customs matters for BJSA, authorized payments totaling 7,000 pesos to an Argentinean customs official in Mendoza, Argentina so that the official would overlook a previous customs violation by BJSA and not fine the company. [As stated in the order: These payments were also made in violation of BJ Services’ existing policies prohibiting payments of the kind made to the customs official. The former Treasury and Purchasing Manager was a mid-level employee of BJSA. There is no indication that anyone employed by BJ Services Co, or who was part of BJSA’s senior management, approved the payment.] In exchange for the payments, the customs official created false documentation so that the customs violation would not be uncovered. The payments were improperly characterized on BJSA’s books and records as import duties paid to the third party customs agent. BJSA’s books and records did not provide accurate support for those payments.”

Under the heading “Facilitation Payment,” the order states:

“In October 2000, BJSA’s former Treasury and Purchasing Manager approved a 10,994 peso payment to an official employed by Argentina’s Secretary of Industry and Commerce. [As stated in the order: “In this instance, as in the previous, there is no indication that anyone employed by BJ Services Co., or who was part of BJSA’s senior management, approved the payment.] The official was reviewing whether equipment being imported into Argentina by BJSA could be legally imported into the country. While BJSA personnel believed that the equipment could be imported under Argentina’s laws, the payment was made to expedite the approval process. The payment was recorded in BJSA’s books and records as an importation cost with an offsetting charge to the Panamanian subsidiary, and was improperly supported by an invoice from the third party customs agent for unspecified services.”

Under the heading “Internal Control Issues,” the Order states:

“From 1998 through April 2002, certain areas of BJ Services’ Latin American Region experienced certain breaches of its existing accounting policies, controls and procedures. An internal evaluation of Latin America’s Regional Manager in 2000 noted that “Management of the [Latin American Region’s] financial and accounting procedures has been extremely lackadaisical in the past several years …” [As stated in the order: As a consequence of the breaches, BJ Services later replaced a Country Manager for failure to follow procedures for capital expenditures approval. In addition, BJ Services took corrective action with respect to regional management in January 2002. In April 2002, BJ Services’ senior management uncovered all of the facts noted above and took further corrective action as noted subsequently herein.]

Based on the above findings, the SEC found that BJ Services violated the FCPA’s anti-bribery provisions and books and records and internal controls provisions. Without admitting or denying the SEC’s findings, BJ Services agreed to cease and desist from committing or causing any violations and any future violations of the FCPA.”

Under the heading “Internal Investigation and Discovery of Other Payments,” the Order states:

“In June 2002, while investigating seemingly unrelated financial issues in Argentina, BJ Services’ senior management learned that violations of the Foreign Corrupt Practices Act might have occurred in Argentina. At the direction of the board of directors, a full internal investigation ensued. The investigation provided details of the payments noted above. The internal investigation also uncovered an aggregate of 151,406 pesos in additional undocumented or improperly characterized payments made by BJSA during the period from January 1998 through April 2002, the largest of which was 10,994 pesos, with a few in the 3,000 to 7,400 pesos range, and the remainder under 3,000 pesos. Most of the payments were to the third party customs agent for unspecified customs charges and contained no supporting documentation.”

In addition, under the heading “Cooperation and Remedial Actions,” the Order states:

“Upon discovery of the aforementioned payments, BJ Services began an internal investigation of such payments and their accounting, engaged outside counsel in both the U.S. and Argentina and disclosed the matters to its outside auditors and its full board of directors. Upon completion of BJ Services’ internal investigation, BJ Services voluntarily and promptly approached the Commission’s staff, notified the staff of the results of the investigation, and cooperated with the staff’s investigation, including declining to assert its attorney-client privilege with respect to communications during the relevant time period.

Upon completion of BJ Services’ internal investigation, BJ Services also undertook certain remedial actions. In particular, the company: arranged for proper classification of the equipment associated with the January 2001 payment to Argentine customs; revised the accounting treatment of the subject payments and included the appropriate supporting documentation in the accounting records; replaced the management of the Latin American Region; approved the expansion of its existing corporate internal audit department and placed an additional audit manager in the Latin American Region reporting directly to BJ Services’ Director of Internal Audit; retained an additional independent auditor to conduct a forensic audit of its books and records in Argentina; and adopted an improved and expanded Foreign Corrupt Practices Act education and prevention program introduced in all of its regions worldwide.”

As highlighted in this previous post, in 2009 Baker Hughes (itself a company that resolved an FCPA enforcement action) acquired BJ Services. Recently, Baker Hughes sold its majority stake in BJ Services and it is now a standalone company again.

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