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A Unique FCPA Enforcement Action Then And Still Unique Now

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

As highlighted in this prior post [1], the DOJ used to civilly enforce the Foreign Corrupt Practices Act. One of enforcement actions highlighted, indeed the last time the DOJ used this express statutory provision, was a 2001 enforcement action against KPMG Siddharta Siddharta & Harsono and Sonny Harsono.

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.

In this joint civil complaint [2] for permanent injunctive relief, the DOJ and SEC alleged in summary fashion:

“This action concerns illegal conduct by defendants KPMG Siddharta Siddharta & Harsono (KPMG-SSH) [a public accounting firm based in Jakarta, Indonesia and an affiliate firm of KPMG International] and Sonny Harsono, who have engaged, are engaged and are about to engage in acts and practices which constitute violations of the [FCPA anti-bribery, books and records and internal controls provisions]. In 1999, Harsono authorized KPMG-SSH personnel to bribe an Indonesian tax official on behalf of one of KPMG-SSH’s clients, PT Eastman Christensen (“PTEC”), an Indonesian company beneficially owned by Baker Hughes Incorporated [whose financial results appear in the consolidated financial statements of Baker Hughes]. KPMG agreed to make the illicit payment to influence the Indonesian tax official to issue a lower tax assessment for PTEC. Harsono also directed KPMG-SSH personnel to create a false invoice to PTEC to generate the money needed to pay the bribe and to conceal the purpose for which that money was to be used. Defendants KPMG-SSH and Harsono knew that the false invoice would be incorporated into the books and records of Baker Hughes, PTEC’s beneficial owner, in violation of [the FCPA’s books and records and internal controls provisions].

By authorizing and facilitating the improper payments to an Indonesian government official, Defendant Harsono violated the [FCPA’s anti-bribery provisions]. In addition, by authorizing and facilitating the payment, and by creating and sending a false invoice to Baker Hughes for the purpose of generating and concealing the payment, Defendants Harsono and KPMG-SSH aided and abetted Baker Hughes’ violations of [the FCPA’s anti-bribery, books and records, and internal controls provisions].”

In the complaint, both KPMG-SSH and Harsono are described as an “agent” of an issuer under the 78dd-1 prong of the FCPA as well as a “person other than an issuer or domestic concern” under the 78dd-3 of the FCPA. Even though these provisions have a U.S. nexus jurisdictional requirement for foreign companies and nationals, there is no allegation in the complaint regarding conduct by KPMG-SSH and/or Harsono in the U.S.

[3]

The complaint alleged as follows regarding the origins of the conduct.

“In November 1998, the Indonesian Ministry of Finance’s Directorate General of Taxation notified PTEC that it would soon begin a tax audit of PTEC’s 1997 tax returns. Those returns claimed a substantial refund. The next month, the Directorate General commenced a tax audit.

In February 1999, the Directorate General notified PTEC of its preliminary assessment that PTEC’s tax liability would be assessed at $3.2 million. On February 26, 1999, as instructed by PTEC’s Finance Manager, a PTEC employee contacted KPMG-SSH and instructed KPMG-SSH to represent PTEC before the Directorate General. Shortly after the initial contact, the PTEC Finance Manager told KPMG-SSH that the Indonesian tax official was seeking an improper payment.

KPMG-SSH immediately reviewed the preliminary determination by the Directorate General and concluded that the proposed $3.2 million assessment against PTEC was incorrect. […] KPMG-SSH suggested that it meet with the Directorate General in an attempt to reconcile the disparity between their respective findings.”

[…]

During [meetings between KPMG-SSH and the Directorate General], the Indonesian tax official told KPMG-SSH that he was aware of PTEC’s reputation of making ‘goodwill payments’ to tax officials, and demanded a payment of $200,000 in exchange for which he would reduce PTEC’s tax assessment. KPMG-SSH initially rejected the Indonesian tax official’s request for an illicit payment.

On March 5, 1999, KPMG-SSH informed the BH Regional Tax Manager of the Indonesian tax official’s demand for an illicit payment. During this conversation, the BH Regional Tax Manager instructed KPMG-SSH not to pay the Indonesian tax official but to challenge the assessment on its merits.”

According to the complaint, “during several subsequent meetings between the Indonesian tax official and KPMG-SSH, the Indonesian tax official reiterated his demand for an improper payment.” The complaint then alleged:

“Notwithstanding his recognition of the potential FCPA issues, Harsono advised the KPMG-SSH Tax Manager that if Baker Hughes represented directly to KPMG-SSH, not through PTEC, that it wanted KPMG-SSH to make the illicit payment, KPMG-SSH would be willing to pay the Indonesian tax official. To conceal the improper payment, Harsono agreed with the KPMG-SSH Tax Manager that KPMG-SSH should generate an invoice that would include money for the payment to the Indonesian tax official and for KPGM-SSH’s fees for services rendered. As a result of his discussions with Harsono, the KPMG-SSH Tax Manager understood that PTEC would have to provide the funds to pay the Indonesian tax official.”

Elsewhere, the complaint alleged:

“Disregarding the FCPA’s advisor’s instructions, and acting contrary to the advice of General Counsel, the CFO and the Controller [of Baker Hughes] authorized the BH Regional Tax Manager to proceed with the ‘success fee” transaction without obtaining the specific letter that the FCPA advisor had instructed they obtain. After the conference call, the BH Regional Tax Maanger called the KPMG-SSH Tax Manager to authorize him to proceed with the ‘success fee’ transaction. The BH Regional Tax Manager also told the KPMG-SSH Tax Manager that the authorization came from the highest level in Houston, specifically the CFO.

On March 11, 1999, KPMG-SSH created and sent a false invoice to PTEC for $143,000. Although the invoice purported to be for professional services rendered, in reality, it represented the $75,000 to be paid to the Indonesian tax official, and the remainder for KPMG-SSH’s actual fees and applicable taxes. After receiving the invoice, PTEC paid KPMG-SSH $143,000 and improperly entered the transaction on its books and records as payment for professional services rendered. On March 23, 1999, PTEC received a tax assessment of approximately $270,000 from the Directorate General.”

The complaint next contains a section titled “Baker Hughes Attempts to Unwind the Transaction and Takes Corrective Action” which alleged in pertinent part:

“After Baker Hughes’ General Counsel and FCPA advisor discovered that the CFO and Controlled had authorized KPMG-SSH to make the improper payment to the Indonesian tax official to reduce PTEC’s tax assessment, Baker Hughes embarked on a corrective course of conduct. In particular, the company: attempted to stop the payment to KPMG-SSH; voluntarily and promptly disclosed the misconduct to the SEC and DOJ; instructed KPMG-SSH not to make the payment to the Indonesian tax official and to return the entire amount paid to KPMG-SSH; disclosed the matter to its outside auditors and corrected its books and records; fired KPMG-SSH; asked for and obtained the resignation of those senior management officials responsible for the violative conduct; filed a formal objection to the $270,000 assessment with the Directorate General and took steps to determine the correct tax deficiency; and paid $2.1 million to the Indonesian government, which it believed to be the correct tax assessment.”

As stated in this SEC release [4]:

“Without admitting or denying the allegations of the complaint, the defendants have consented to the entry of a Final Judgment that permanently enjoins both defendants from violating and aiding and abetting the violation of the antibribery provisions of the FCPA and the internal controls and books and records provisions …”.

As further noted in the SEC release:

“This is the first time that the Commission and the Department of Justice, both of which have jurisdiction over the antibribery provisions of the Foreign Corrupt Practices Act (“FCPA”), have combined to file a joint civil action.”

For other original source documents relevant to the enforcement action, see here [5].

According to media reports:

Harsono’s attorney, Robert Tarun, said his client is still a partner at the accounting firm and settled the matter to put it behind him. “My client neither admits nor denies any of the allegations in the SEC’s complaint. We settled in order to put the matter behind us and to avoid the additional time and cost of disputing the SEC’s charges in court,” said William Linklater, the attorney representing KPMG-SSH.”

See here [6] for current information about Sonny Harsono.

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