In 2009, Halliburton Company, KBR Inc. (a wholly-owned subsidiary of Halliburton during the relevant time period) and Kellogg, Brown & Root, LLC (a wholly-owned subsidiary of KBR) resolved parallel DOJ and SEC Foreign Corrupt Practices Act enforcement actions in connection with a bribery scheme involving a $6 billion liquefied natural gas plant on Bonny Island, Nigeria. (See here  and here ).
The combined $579 million settlement amount (DOJ – $402 million / SEC $177 million) remains the third largest FCPA settlement of all-time. The SEC’s resolution contained the perfunctory condition  of permanently enjoining Halliburton from violating the FCPA’s books and records and internal controls provisions.
However, yesterday Halliburton joined the ever-increasing (see here  and here  for recent posts) FCPA repeat offender club as the SEC announced  an FCPA enforcement action concerning alleged conduct in Angola. Without admitting or denying the SEC’s findings in this administrative order  that it violated the FCPA’s books and records and internal controls provisions, Halliburton agreed to pay $29.2 million. In the same order, the SEC also found that Jeannot Lorenz (Halliburton’s former vice president) causing the company’s violations, circumvented internal accounting controls, and falsified books and records. Without admitting or denying the SEC’s findings, Lorenz agreed to pay a $75,000 penalty.
In summary fashion, the SEC’s order states:
“This matter concerns violations of the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Halliburton, a global oilfield services company, headquartered in Houston, Texas, and its former Vice-President, Jeannot Lorenz, a citizen of France and permanent resident of the United States.
[Lorenz is described as follows: “He is a former Halliburton VicePresident who had been the country manager in charge of Halliburton’s operations in Angola from 1993 to 2002. He returned to Angola to serve as interim country manager from mid-2004 through early-2005. Beginning in April 2008, while officially working for Halliburton in Brazil, Lorenz was appointed to lead the company’s local content efforts in Angola. Lorenz left the company in late 2013.]
From April 2010 through April 2011, Halliburton paid $3,705,000 to a local Angolan company that Halliburton had proposed to a Sonangol Official to fulfill local content obligations. The local Angolan company was owned by a former Halliburton employee and a friend and neighbor of the Sonangol government official and some of the payments were made in advance of Halliburton obtaining lucrative oilfield services contracts. The Sonangol official, who had authority to veto or reduce subcontracts awarded to Halliburton by large international oil companies, approved Halliburton’s local content proposal.
The payments to the local Angolan company were made under two contracts arranged and negotiated by Lorenz and others: (i) a September 2009 Interim Consulting Agreement, and (ii) a May 2010 Real Estate Transaction Management Agreement. Halliburton entered into these contracts in violation of its own internal accounting controls and did not record the true nature of the transactions in its books and records. Specifically, the two contracts were entered into for the purpose of paying the local Angolan company to satisfy local content requirements, not for the stated scope of work set forth in each contract. In addition, Halliburton entered into the contracts without following all of the terms of its internal accounting controls governing such transactions.
Lorenz negotiated and entered into the agreements with the local Angolan company while knowingly circumventing certain Halliburton internal accounting controls. Also, Lorenz falsified books and records by knowingly providing inaccurate scopes of work and other information contained in the agreements. Lorenz, therefore, personally violated provisions that prohibit knowingly circumventing internal accounting controls and falsifying books and records, and also caused Halliburton’s violations of the books and records and internal accounting controls provisions of the FCPA.”
Under the heading “Facts,” the order states:
“In early 2008, Sonangol officials told Halliburton management that Sonangol was considering vetoing further subcontract work for Halliburton in Angola because Halliburton had insufficient local content and was not compliant with Angola’s local content regulations governing foreign companies operating in Angola. Sonangol officials made it clear that Halliburton needed to partner with more local Angolan-owned businesses in order to satisfy local content requirements. In response, starting in April 2008, Halliburton tasked Lorenz to spearhead efforts to find local content in Angola that would be acceptable to Sonangol. Lorenz previously worked for Halliburton in Angola where he had established relationships and networks with many Angolans, including Sonangol and other government officials. During 2008 and early 2009, Lorenz and Halliburton considered a variety of potential local content projects and kept Sonangol officials apprised of their progress. In 2008, Halliburton finalized and commenced one separate local content project not involving the local Angolan company. This separate project fulfilled Halliburton’s local content obligations for contracts that were up for bid in 2008.
By April 2009, another round of contracts for other joint Sonangol/international oil company projects was coming up for bid. Halliburton understood that the 2008 local content efforts would not count for this new round of contract bids. Halliburton also learned from a variety of sources, including the head of an international oil company’s operations in Angola, that Sonangol remained extremely dissatisfied with Halliburton’s local content efforts and that Sonangol might veto the international oil company’s recommendations that Halliburton be awarded certain contracts in Angola. In response, Lorenz proposed that Halliburton offer to outsource approximately $15 million of unspecified services to a local Angolan company that was owned by a former Halliburton employee who was a friend and neighbor of the government official who would on Sonangol’s behalf approve the award of the contracts in question to Halliburton. Lorenz knew of the relationship between the owner of the local Angolan company and the Sonangol government official. On April 29, 2009, Halliburton senior executives met with the Sonangol government official at Sonangol’s headquarters in Luanda and discussed Lorenz’s proposal for local content. Thereafter, Lorenz began a lengthy effort to retain this local Angolan company in order to fulfill Halliburton’s proposal, making three attempts to do so.
Lorenz first proposed retaining the local Angolan company as a commercial agent and paying a fee equal to 2% of Halliburton’s existing revenue earned in Angola. Lorenz projected that Halliburton would pay a fee of approximately $4 million for the remaining 6 months in 2009 which would rise to $15 million by 2013. However, Lorenz’s proposal to pay a fee on existing revenues (as opposed to newly obtained business) was rejected by Lorenz’s direct management because (i) Halliburton declined to add any agents in Africa during that time period, and (ii) Halliburton generally retained commercial agents to obtain new business for Halliburton and paid the agent a percentage of the new business as a commission or fee. As outlined by Halliburton’s legal department, to retain the local Angolan company as a commercial agent, it would be required to undergo a lengthy due diligence and review process that included retaining outside U.S. legal counsel experienced in FCPA compliance to conduct interviews. Halliburton’s in-house counsel noted that “[t]his is undoubtedly a tortuous, painful administrative process, but given our company’s recent US Department of Justice/SEC settlement, the board of directors has mandated this high level of review.” As a result of the internal disapproval, Lorenz abandoned the idea of retaining the local Angolan company as a commercial agent.
Lorenz then proposed to directly outsource some of Halliburton’s in-house functions to the local Angolan company without competitive bidding. However, in order to comply with the company’s internal accounting controls, Halliburton’s procurement personnel required a competitive bidding process to outsource real estate maintenance, travel and ground transportation services in which the preferred local Angolan company would compete. Halliburton personnel in Angola and procurement specialists from Houston conducted the competitive bidding. As the bidding process would take several months to complete, Lorenz considered it imperative to show “good faith” by beginning to engage and pay the local Angolan company some money. Accordingly, in July 2009 – before the initial request for quotes in the bidding process was issued in October 2009 – Lorenz began negotiating a “bridge agreement.” The initial draft was a six-month “consulting agreement” beginning in September 2009 for $30,000 per month. By late October 2009, after further negotiations, the amount was increased to $45,000 per month. The effective date of the agreement remained September 2009, despite that November was about to begin and the contract had not been signed.
The real reason for the interim consulting agreement – to provide bridge payments as a show of good faith to the Sonangol government official and the local Angolan company until the latter successfully emerged from the bidding process – did not appear in the agreement. Rather, the scope of work falsely stated that the local Angolan company would be “developing reports with respect to findings and recommendations” addressing local content requirements and how Halliburton could meet those requirements with respect to areas of travel, local logistics, and real estate. In order to secure approval for the draft agreement in the fall of 2009, Lorenz made false statements that led other Halliburton employees to believe that the local Angolan company had already provided and would continue to provide actual services under the consulting agreement. However, the agreement was not executed and payments under the agreement were not made until beginning in February 2010.
Halliburton’s internal accounting controls required that the supplier qualification process begin with an assessment of the criticality or risk of a material or service, not with a particular supplier. Instead, Lorenz started with a particular supplier (the local Angolan company) and then backed into a list of services it could provide. Lorenz also violated Halliburton internal accounting controls by entering into the interim consulting agreement without either seeking competitive bids or providing an adequate single source justification. Lorenz failed to comply with an internal accounting control that required contracts over $10,000 in countries with a high risk of corruption, such as Angola, to be reviewed and approved by a Tender Review Committee.
By January 2010, nine months had passed since Halliburton had proposed to Sonangol that it would use the local Angolan company to satisfy local content requirements. Both Sonangol and the proposed local Angolan company believed that Halliburton was failing to comply with local content requirements, thus risking the award of significant contracts scheduled for mid-2010. At this moment of crisis, Lorenz asked a Halliburton senior executive to meet with the Sonangol government official as soon as possible to renew Halliburton’s local content commitment and the April 2009 proposal. On January 13, 2010, in the middle of an unrelated trip through the Middle East, the Halliburton senior executive flew to Portugal to meet the Sonangol government official at the vacation home of the Sonangol government official’s friend, the owner of the local Angolan company. Both Lorenz and the friend were present. The Halliburton senior executive explained to the Sonangol government official the delays associated with a large company’s procurement processes and affirmed that Halliburton was negotiating a deal with the local Angolan company to satisfy local content requirements. The Halliburton senior executive also asked the Sonangol government official for his support for the international oil company’s award of an upcoming contract to Halliburton, in light of progress Halliburton was making to satisfy Halliburton’s local content requirements.
In February 2010, Halliburton’s procurement personnel reviewed the bids for real estate maintenance, travel and ground transportation services, and the preferred local Angolan company was the least successful of the bidders. The local Angolan company did not submit a bid for the travel portion but submitted bids for real estate maintenance and ground transportation. The local Angolan company’s bid was 90% to 447% higher than the next highest bid for the property maintenance and was 42% to 126% higher in ground transportation. As noted by a Halliburton employee in a February 9, 2010 email evaluating the bids, the local Angolan company “is a very expensive solution (non-competitive and not justified based on their proposal) . . . .” Nonetheless – and notwithstanding the apparent availability of other Angolan bidders to satisfy local content requirements — Halliburton officials believed that they needed to use the preferred local Angolan company as their local content because they had committed they would do so. According to the February 9, 2010 email, Lorenz was “scrambling to find [a] justification” to award the business to the local Angolan company.
Lorenz and others unsuccessfully attempted to negotiate with the local Angolan company for an acceptable price for the services based on the bids received from others. The owner of the local Angolan company, however, insisted on an unexplained, non-negotiable monthly “fixed cost” of no less than $250,000 above his costs. On February 22, 2010, the local Angolan company refused to negotiate further. Desperate for a solution, and feeling intense pressure to get the deal with the local Angolan company done, Lorenz and others pivoted from the outsourced services contemplated under the bidding process to a new proposal where the local Angolan company would lease commercial and residential real estate and then sublease the properties to Halliburton at a substantial markup, and also provide real estate transaction management consulting services. The preferred local Angolan company had minimal experience in these areas and the services could have been provided more cheaply if done internally by Halliburton personnel. Nonetheless, on February 23, 2010, Halliburton issued a letter of intent to enter into contracts with the local Angolan company for real estate transaction management consulting services and subleases for office and residential space. The local Angolan company owner accepted the letter of intent and contacted the Sonangol official to inform him of the agreement in principle.
By again selecting a particular supplier – rather than determining the critical services and then selecting the appropriate supplier – and doing so without competitive bidding or substantiating the need for a single source, Lorenz violated Halliburton’s internal accounting controls. Also, another Halliburton internal accounting control required its Real Estate Services department to manage the process of subleasing real property and initiating contracts for professional services related to the acquisition or disposition of property. Initially, no one from Real Estate Services was consulted about the need for these services, let alone managed the process. Ultimately, although employees from Halliburton’s Real Estate Services Department assisted in drafting the contract, Lorenz and others outside of Real Estate Services managed and executed the agreement.
Near contemporaneously with the signing of the letter of intent, Lorenz and the local Angolan company finally executed the Interim Consulting Agreement in February 2010. That agreement remained backdated to September 2009 and Halliburton paid the local Angolan company $405,000 for the period of September 2009 through May 2010 even though the local Angolan company never provided the services enumerated in the agreement.
In late March 2010, as part of review processes required by Halliburton’s internal accounting controls in approving contracts over a certain value threshold high risk countries like Angola, personnel from the Finance & Accounting department, both at the region and headquarters, raised concerns about the proposed Real Estate Transaction Management Agreement. Specifically, they questioned the use of single source procurement, the upfront payment terms, the high costs, and the rationale for entering into subleases for properties that would cost less if leased directly from the landlord. One Finance & Accounting reviewer at headquarters noted that he could not think of any legitimate reason to pay the local Angolan company over $13 million under the Real Estate Transaction Management Agreement and that it would not have cost that much to run Halliburton’s entire real estate department in Angola. These concerns were raised with and vetted within the Finance & Accounting supervisory chain, and with Halliburton senior corporate executives. The senior executives understood that the commercial terms were onerous but allowed the contract reviews to proceed because they believed that by this time only this agreement with the local Angolan company would satisfy Sonangol as to Halliburton’s local content commitments.
On May 1, 2010, Lorenz signed the Real Estate Transaction Management Agreement with the local Angolan company. Halliburton agreed to pay the local Angolan company $275,000 per month for four years to purportedly (i) manage real estate transactions in and around Luanda, Angola, (ii) develop a strategy for Halliburton’s staff housing, (iii) develop a strategy for “off base” leasing of commercial space, (iv) streamline the leasing process, and (v) produce quarterly reports relating to planning, costs and market conditions. Halliburton did not receive any meaningful services under this agreement and the local Angolan company failed to produce the required reports except for one unfinished report that was found in Lorenz’s house in Angola in 2011 that appeared to be plagiarized wholly from internet sources. Halliburton terminated payments to the local Angolan company in April 2011 after receiving an anonymous email in December 2010 alleging possible misconduct surrounding the transactions with the local Angolan company.
According to Halliburton’s internal accounting controls, using a single source is justified when “there is a significant advantage to the Company in soliciting a bid from only one supplier, although more than one supplier may be capable of supplying the product or service.” Halliburton’s internal accounting controls indicated that using a single source “typically occurs when a supplier is clearly preferred for quality, technical, execution or other reasons.” In this case, the supplier was not preferred for quality or technical reasons or its ability to execute. Instead it was chosen to fulfill Halliburton’s local content commitment to Sonangol. Halliburton internal accounting controls also mandated that when using a single source vendor without competitive bidding, the underlying reasons “should be clearly identified and justified by referencing an existing approved Single Source justification.” The purpose of this control is to provide needed information to company auditors in their effort to test whether transactions were undertaken for legitimate reasons and not due to improper considerations.
Although possible justifications for selecting the local Angolan company may have been discussed in some company emails, the documentation entered into Halliburton’s accounting system in May 2010 provided no justification for choosing the local Angolan company as a single source provider. The purported justifications merely described in summary form the terms of the agreements. As a consequence, internal audit was kept in the dark about the transactions and its late 2010 yearly review did not examine them. While internal audit did not examine the agreements with the local Angolan company in its late 2010 yearly review in Angola, it did note, from the transactions it did examine, that most of the filed single source justifications contained “inadequate information on the SSJ [Single Source Justification] to support why sole sourcing was necessary.”
From April 2010 through April 2011, when Halliburton terminated payments to the local Angolan company because of the allegations of misconduct, Halliburton paid the local Angolan company $3,705,000 under the interim consulting agreement and the Real Estate Transaction Management Agreement. Between May and December 2010, Sonangol approved the award of seven lucrative subcontracts to Halliburton and Halliburton profited by approximately $14 million.”
Based on the above, the SEC found that Halliburton violated the FCPA’s books and records and internal controls provisions. As to the later, the order states in pertinent part:
“As a result of the prior [2009 FCPA] settlement, Halliburton had clearly defined internal accounting controls governing, among other things, the selection and approval of vendors in high risk countries, commercial agents and single source suppliers. However, Halliburton failed to maintain these controls. Indeed, as there was a business need, the company failed to comply with controls that were supposed to prevent further violations of the FCPA.”
The SEC’s order states:
“In determining to accept the Offer, the Commission considered remedial acts undertaken by Respondent and cooperation afforded the Commission staff, including making foreign witnesses available, compiling financial data and analysis relating to the transactions at issue, and making substantive presentations on key topics at the staff’s request.”
As noted in the SEC’s release:
“Without admitting or denying the findings, Halliburton and Lorenz consented to the order requiring them to cease and desist from committing or causing any violations or any future violations of the books and records and internal accounting controls provisions of the FCPA. Halliburton agreed to pay $14 million in disgorgement plus $1.2 million in prejudgment interest and a $14 million penalty. Halliburton must retain an independent compliance consultant for 18 months to review and evaluate its anti-corruption policies and procedures, particularly in regard to local content obligations for business operations in Africa.”
In the SEC’s release Antonia Chion, Associate Director of the SEC’s enforcement division, stated:
“Halliburton committed to using a particular supplier that posed significant FCPA risks and a company vice president circumvented important internal accounting controls to get the deal done quickly. Companies and their executives must comply with these internal accounting controls that help ensure the integrity of corporate transactions.”
On the day of the enforcement action, Halliburton’s stock price fell .5%.
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