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The First Time Baker Hughes Resolved An FCPA Enforcement Action

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

As highlighted in this prior post [1], in 2001 KPMG Siddharta Siddharta & Harsono (KPMG-SSH) and Sonny Harsono resolved a joint DOJ/SEC civil FCPA enforcement regarding alleged improper payments in connection with an Indonesia tax assessment.

As detailed in the prior post, it was a unique FCPA enforcement action at the time (believed to be the first time the DOJ/SEC had ever brought an FCPA action against a professional services firm – i.e. a law firm or accounting firm) and still remains unique in that the DOJ/SEC are believed to have never again brought an FCPA enforcement action against a professional services firm. As further detailed in the prior post, KPMG-SSH was an agent of Baker Hughes and thus it was not surprising that a related FCPA enforcement action against Baker Hughes soon followed.

This post summarizes the 2001 enforcement action – based in part on the same Indonesia conduct alleged in the related action – as well as additional conduct concerning business practices in India and Brazil. This enforcement action was the first time Baker Hughes resolved an FCPA enforcement action. (See here [2] and here [3] for a separate 2007 FCPA enforcement action against the company).

In the 2001 FCPA enforcement action, the SEC found, in summary fashion, in this administrative cease and desist order [4] as follows.

“In March 1999, Baker Hughes’ CFO and its Controller authorized an illegal payment, through KPMG, its agent in Indonesia, to a local government official in Indonesia. Baker Hughes, through its CFO and Controller, directed that this improper payment be made while knowing or aware that KPMG would pass all or part of the payment along to a foreign government official for the purpose of influencing the official’s decision affecting the business of Baker Hughes. This improper payment was made in violation of the Foreign Corrupt Practices Act (“FCPA”). In addition, in 1998 and 1995, senior managers at Baker Hughes authorized payments to Baker Hughes’ agents in India and Brazil, respectively, without making an adequate inquiry as to whether the agents might give all or part of the payments to foreign government officials in violation of the FCPA. Baker Hughes improperly recorded all three transactions in its books and records as routine business expenditures. In addition to its false books and records, Baker Hughes also failed to devise and maintain an adequate system of internal accounting controls to detect and prevent improper payments to foreign government officials and to provide reasonable assurance that transactions were recorded as necessary to permit the preparation of financial statements in conformity with Generally Accepted Accounting Principles.”

As mentioned above, the Indonesia conduct was the same conduct at issue in the KPMG-SSH enforcement action.

[5]

Regarding India and Brazil, the SEC’s order found:

The 1998 Transaction in India

In August 1998, Baker Hughes acquired the Western Atlas Corporation (“Western Atlas”). At that time, Western Geophysical Corporation (“Western Geophysical”) was a subsidiary of Western Atlas providing, among other things, seismic services throughout the world for offshore geophysical exploration. With the acquisition of Western Atlas, Western Geophysical became a subsidiary of Baker Hughes.

In September 1998, under the terms of a contract signed in September 1996, with the Indian Oil and Natural Gas Commission, Western Geophysical began preparations to perform various 3D seismic surveys in the Bay of Canby, India. In order for its foreign-flagged vessels to enter the Indian coastal waters and perform the seismic surveys, Western Geophysical was required to obtain shipping permits from the Director General of Shipping in Bombay, India. Before the Director General of Shipping could issue the permits, Western Geophysical had to obtain a “no objection certificate” from the Indian Coastal Commission (“ICC”), an organization of private Indian-flagged vessels, stating that there were no suitable Indian-flagged vessels available to carry out the seismic operations.

On October 14, 1998, while Western Geophysical’s foreign-flagged vessels were en route to India, an agent for Western Geophysical was working on securing the permits from the Director General of Shipping. The agent contacted the General Manager for Western Geophysical’s Far East, Australia and China Operations (“General Manager”) who, at the time, was traveling in Hong Kong. The Western Geophysical agent told the General Manager that the company needed to obtain permits before its foreign-flagged vessels could enter Indian coastal waters. The Western Geophysical agent advised the General Manager that if the General Manager provided $15,000, he might be able to get the permits issued. The General Manager authorized the agent to “take care of it.” Shortly after the General Manager’s authorization, the Western Geophysical agent obtained the necessary shipping permits, without obtaining the “no objection certificate.”

Thereafter, the Western Geophysical agent requested a reimbursement of the $15,000 payment. A Western Geophysical employee in the accounting department sent an e-mail to the General Manager in the United States seeking authorization to pay the agent. Without making an adequate inquiry to ensure that all or part of the $15,000 would not be paid to a foreign government official in violation of the FCPA, the General Manager authorized the payment of $15,000 to the Western Geophysical agent. Subsequently, Western Geophysical’s accounting staff improperly recorded the $15,000 payment: (a) without determining to whom the money ultimately would be paid or the specific purpose of the payment; and (b) by inaccurately describing the payment on its books and records as payment for a “Shipping Permit.”

The 1995 Transaction in Brazil

In 1995, Baker Hughes planned and implemented a two part restructuring of its operations in Brazil. The first part of the restructuring involved merging several of Baker Hughes’ Brazilian subsidiaries into Centrilift, another Baker Hughes subsidiary. Upon completion of the merger, Baker Hughes reincorporated and renamed Centrilift “Baker Hughes do Brasil Ltda.” (“BHB”). The second part of the restructuring involved transferring the assets and liabilities of Baker Hughes Equipamentos Ltda. (“BHEL”), another Baker Hughes subsidiary, to BHB and leaving BHEL dormant. BHEL’s Finance Director (“Finance Director”) and Baker Hughes’ International Tax Manager (“International Tax Manager”), who was also the team leader for the reorganization, believed that the restructuring, as planned, had to be completed by Baker Hughes’ September 30, 1995 fiscal year end, in order for Baker Hughes to take a $40 million U.S. tax deduction in that year. Before the restructuring became effective, Brazilian law required that BHB file various documents with, and receive the approval of, the Commercial Registry in Rio de Janeiro (“Commercial Registry”).

In August 1995, a Brazilian agent representing BHEL informed the Finance Director that he needed $10,000 in order to obtain the approval from the Commercial Registry that was necessary to complete the restructuring within a week. The Finance Director sought approval for this payment from the International Tax Manager. The International Tax Manager informed his supervisor of the agent’s request for $10,000 to obtain the approval from the Commercial Registry. Without making an adequate inquiry to ensure that all or part of the $10,000 would not be paid to a foreign government official in violation of the FCPA, Baker Hughes authorized the Finance Director to pay the $10,000. Based on this authorization, the Finance Director paid the agent $10,000 on August 30, 1995. Subsequently, Baker Hughes improperly recorded the $10,000 payment: (a) without determining to whom the money ultimately would be paid or the specific purpose of the payment; and (b) by inaccurately describing the payment as an “advance payment for expenses related to the commercial registry board of Rio de Janeiro.”

Based on the above, the SEC found that Baker Hughes violated the FCPA’s books and records and internal controls provisions. Without admitting or denying the SEC’s findings, Baker Hughes agreed to cease and desist from committing or causing any future FCPA violations.

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