2014 Enforcement Actions – Page 2

Items Of Interest From The Recent Dutch Enforcement Action Against SBM Offshore

Dutch-based SBM Offshore recently resolved an enforcement action in the Netherlands. With a settlement amount of $240 million, the SBM Offshore enforcement action is believed to be the third largest bribery enforcement action of 2014 with China’s $490 million enforcement action against GlaxoSmithKline and the U.S.’s $384 million enforcement action against Alcoa consisting of the top two.

The enforcement action was pursuant to Article 74 of the Dutch Penal Code, a provision of Dutch law that has been criticized by the OECD.

As stated by the OECD, Article 74 of the Dutch Penal Code “essentially involves the payment of a sum of money by the defendant to avoid criminal proceedings.” Regarding such out-of-court settlements, the OECD has further noted that “out-of-court settlements in the Netherlands do not require an admission of guilt.”

In its December 2012 Phase 3 review of the Netherlands, one of the follow-up items listed was: “the use of out-of-court transactions for foreign bribery offences, as governed by article 74 of the Dutch Penal Code, to ensure that they result in the imposition of effective, proportionate and dissuasive sanctions (Convention, Article 3.1).”

Regarding the SBM Offshore action, the Dutch Prosecutor’s Service announced:

“SBM Offshore has accepted an offer from the Dutch Public Prosecutor’s Service to enter into an out-of-court settlement. The settlement consists of a payment by SBM Offshore … of US$ 240,000,000 in total. This amount consists of a US$ 40,000,000 fine and US$ 200,000,000 disgorgement. This settlement relates to improper payments to sales agents and foreign government officials in Equatorial Guinea, Angola and Brazil in the period from 2007 through 2011 […]. According to the [Dutch prosecutors] those payments constitute the indictable offences of bribery in the public and the private sector as well as forgery.”

According to the release, the reasons for the out-of-court settlement include:

SBM Offshore itself brought the facts to the attention of the authorities …, SBM Offshore itself investigated the matter and agreed to fully cooperate with subsequent criminal investigations …;

there has been a new Management Board since 2012;

after it became aware of the facts, the newly established Management Board of SBM Offshore, at its own initiative, has taken significant measures to improve the company’s compliance; and

as noted in SBM Offshore’s press release, the current Management Board and Supervisory Board regret the failure of control mechanisms in place in the past.

According to the release, “from 2007 to 2011, SBM Offshore paid approximately US$ 200 million in commissions to foreign sales agents for services. The largest part of these commissions totaling US $180.6 million, relate to Equatorial Guinea, Angola and Brazil.”

As to Equatorial Guinea, the release states:

“In early 2012, it came to SBM Offshore’s attention that one of its former sales agents might have given certain items of value to government officials in Equatorial Guinea. This reportedly involved one or more cars and a building. In the opinion of the Openbaar Ministerie and the FIOD, SBM Offshore’s former sales agent paid a significant portion of the commissions paid to him by SBM Offshore on to third parties, who in turn would have forwarded parts of these payments to one or more government officials in Equatorial Guinea. There also are other payments, such as education and health insurance costs. In the opinion of the [Dutch authorities], such (forwarded) payments took place with the knowledge of people who at the time were SBM Offshore employees, including someone who at the time was a member of the Management Board. From 2007 through 2011, SBM Offshore paid that particular sales agent USD 18.8 million in total in relation to Equatorial Guinea.”

As to Angola, the release states:

“In the period from 2007 through 2011, SBM Offshore also used several sales agents in Angola. These sales agents received commissions for services regarding certain projects in Angola. In the opinion of the [Dutch authorities], Angolan government officials, or persons associated with Angolan government officials, who are associated with at least one of these sales agents, received funds. In addition, there are payments for travel and study costs to one or more Angolan government officials or their relatives. Also with respect to Angola, the [Dutch authorities] are of the opinion that such payments took place with the knowledge of people who at the time were SBM Offshore employees. In the period from 2007 through 2011, SBM Offshore paid USD 22.7 million in commissions to its sales agents in connection with Angola.”

As to Brazil, the release states:

“With regard to Brazil, certain “red flags” relating to the main sales agent used in Brazil were found during the internal investigation commissioned by SBM Offshore. These red flags included:

the high amounts (in absolute terms) of commission that were paid to the sales agent and its companies;

a split between commissions paid to the sales agent between its Brazilian and its offshore entities; and

documents indicating the sales agent had knowledge of confidential information about a Brazilian client.

The internal investigation conducted by SBM Offshore did not yield any concrete evidence that payments may have been made to one or more government officials in Brazil. In the period from 2007 through 2011, SBM Offshore paid USD 139.1 million in commissions to its sales agents in connection with Brazil.

A mutual legal assistance request in the context of the investigation conducted by the [Dutch authorities] established that payments were made from the Brazilian sales agent’s offshore entities to Brazilian government officials. These findings resulted from means of investigation inaccessible to SBM Offshore.”

The release states, under the heading “Further Investigation” as follows.

“It appears from the criminal investigation that certain natural persons have been involved in the criminal offences committed in the opinion of the [Dutch authorities]. In a case like the one at hand, the [Dutch authorities] has jurisdiction if criminal acts are committed in the Netherlands, or when criminal acts are committed abroad by persons with the Dutch nationality. From the current state of affairs of the investigation, this does not appear to be the case. The [Dutch authorities] will cooperate fully with the countries that have jurisdiction to prosecute the natural persons involved.”

In this release, SBM Offshore stated that “the United States Department of Justice has informed SBM Offshore that it is not prosecuting the Company and has closed its inquiry into the matter.”

The SBM Offshore release further states:

Self-Reporting

The settlement with the [Dutch authorities] is a result of the discussions between the [Dutch authorities] and SBM Offshore, which started after SBM Offshore voluntarily informed the [Dutch authorities] and the United States Department of Justice of its self-initiated internal investigation in the spring of 2012. The findings of the internal investigation were communicated in SBM Offshore’s press release of April 2, 2014. SBM Offshore fully cooperated with the [Dutch authorities] and the United States Department of Justice.

Remedial Measures

With its voluntary reporting of the internal investigation to the [Dutch authorities], the United States Department of Justice and the market in April 2012, SBM Offshore made it clear that it wants to conduct its business transparently. The Supervisory Board appointed a new Management Board that took office in the first half of 2012. The new Management Board has repeatedly stressed the importance of compliance inside and outside the organisation. The Company, with the assistance of its advisors, enhanced its anti-corruption compliance program and related internal controls. The Company shared these measures with the [Dutch authorities] and the United States Department of Justice. The measures include:

the appointment of [a] Chief Governance and Compliance Officer, a newly created Management Board position;

the appointment of a seasoned compliance professional as Compliance Director, another newly created position;

the enhancement of anti-corruption related policies and procedures designed to ensure compliance by Company employees as well as third parties;

at the inception of the internal investigation, a review of all sales agents who were active at that time;

a decision to no longer use sales agents in those countries where the Company itself has a substantial presence;

the enhancement of compliance procedures related to the retention of sales agents, other intermediaries and joint venture partners;

the launch of a significant training effort for employees in compliance-sensitive positions;

the enhancement of mechanisms to report potential wrongdoing;

the enhancement of the Company’s internal financial controls related to anti-corruption compliance and internal audit processes; and

disciplinary actions against employees who were involved in or had knowledge of possible improper payments, including termination of employment agreements.

Although the current Management Board and the Supervisory Board regret that in the past, SBM Offshore’s processes relating to the monitoring of its sales agents appeared to not have been of a standard that allowed SBM Offshore to ensure the integrity of the actions taken by its sales agents, SBM Offshore believes that with these measures it offers a transparent and open Company to its clients and other stakeholders.

In the release Bruno Chabas (CEO of SBM Offshore) stated:

“SBM welcomes the conclusion of all discussions with the Dutch and U.S. authorities. We have been open, transparent and accountable throughout this difficult process which has addressed issues from a past era. We can now focus on the future, secure in the knowledge that we have put in place an enhanced compliance culture which embeds our core values.”

To some, the lack of a DOJ enforcement action against SBM Offshore was a declination. However, such a conclusion implies that there was actually an FCPA enforcement action to bring against SBM Offshore.

Two points are relevant to this issue. First, as noted in this Global Investigations Review article, SBM Offshore’s outside counsel comments that the company disclosed to the Dutch authorities an the DOJ “before we had done much of the internal investigation.” Second, SBM Offshore could only be prosecuted for FCPA anti-bribery violations to the extent the conduct at issue had a U.S. nexus.

“World Tour” For Saudi Officials Results In Individual SEC FCPA Enforcement Action

Yesterday, for the first time since April 2012, the SEC brought a Foreign Corrupt Practices Act enforcement action against an individual. Like the previous five SEC corporate FCPA enforcement actions in 2014, the enforcement action was brought via the SEC’s administrative process.

The enforcement action was against Stephen Timms and Yasser Ramahi, individuals who worked in sales at FLIR Systems Inc., (an Oregon-based company that produces thermal imaging, night vision, and infrared cameras and sensor systems).

The enforcement action is similar to previous FCPA enforcement actions against Lucent Technologies and UTStarcom in that the action focused on certain bona fide business travel that morphed into excessive travel and entertainment of foreign officials.

In summary fashion, the SEC’s order states:

“During 2009, Stephen Timms and Yasser Ramahi arranged expensive travel, entertainment, and personal items for foreign government officials in the Kingdom of Saudi Arabia in order to influence the officials to obtain new business for their employer, FLIR Systems, Inc. and to retain existing business for FLIR with the Saudi Arabia Ministry of Interior (the “MOI”). Timms and Ramahi subsequently provided false explanations for the gifts to FLIR and attempted to conceal the gifts’ true value by submitting false documentation to the company.”

In the order Timms is described as follows.

“Stephen Timms … is a United States citizen who resides in Thailand. FLIR hired Timms in November 2001. He was promoted to Middle East Business Development Director for FLIR’S Government Systems division in September 2007. Timms was the head of FLIR’s Middle East office in Dubai during the relevant time period, and was one of the company executives responsible for obtaining business for FLIR’s Government Systems division from the MOI.”

Ramahi, a United States citizen who resides in the United Arab Emirates, is described as follows.

“Ramahi was hired by FLIR in late 2005 and worked in business development in Dubai. During the relevant period, Ramahi’s manager was Timms, the head of FLIR’s Middle East office.”

Under the heading “FLIR’s Business with the Saudi Ministry of Interior,” the order states:

“In November 2008, FLIR entered into a contract with the MOI to sell thermal binoculars for approximately $12.9 million. Ramahi and Timms were the primary sales employees responsible for the contract on behalf of FLIR. In the contract, FLIR agreed to conduct a “Factory Acceptance Test,” attended by MOI officials, prior to delivery of the binoculars to Saudi Arabia. The Factory Acceptance Test was a key condition to the fulfillment of the contract. FLIR anticipated that a successful delivery of the binoculars, along with the creation of a FLIR service center, would lead to an additional order in 2009 or 2010.

At the same time, Ramahi and Timms were also involved in FLIR’s negotiations to sell security cameras to the MOI. In May 2009, FLIR signed an agreement for the integration of its cameras into another company’s products for use by the MOI. The contract was valued at approximately $17.4 million and FLIR hoped to win additional future business with the MOI under this agreement.”

Under the heading “World Tour” for Saudi Officials” the order states:

“In February 2009, Ramahi and Timms began preparing for the Factory Acceptance Test, which was scheduled to occur in July 2009 in Billerica, Massachusetts. Timms requested the names of the MOI officials who would attend the test so that travel arrangements could be made for them by FLIR’s travel agent in Dubai, UAE. Timms subsequently contacted the United States Embassy in Riyadh, Saudi Arabia, for assistance to obtain visas for the MOI officials to attend the Factory Acceptance Test.

Ramahi and Timms then sent MOI officials on what Timms later referred to as a “world tour” before and after the Factory Acceptance Test. Among the MOI officials for whom Ramahi and Timms provided the “world tour” were the head of the MOI’s technical committee and a senior engineer on the committee, who played a key role in the decision to award FLIR the business.

In June 2009, Ramahi made arrangements for himself and MOI officials to travel from Riyadh to Casablanca, where they would stay for several nights at FLIR’s expense. The MOI officials then traveled to Paris with FLIR’s third-party agent, where they would also stay for several nights at a luxury hotel, also paid for by FLIR. Ramahi met the MOI officials and FLIR’s third-party agent in Boston for the equipment inspection at FLIR’s nearby facilities. On the way back from Boston, Ramahi traveled with most of the MOI officials to Dubai and arranged airfare and hotel accommodations for one MOI official to travel to Beirut before returning to Riyadh, all at FLIR’s expense. Timms received the travel itinerary ahead of the officials’ departure on the “world tour.”

The trip proceeded as planned. In total, the MOI officials traveled for 20 nights on their “world tour,” with airfare and hotel accommodations paid for by FLIR. In addition, while the MOI officials were in Boston, Ramahi and the third-party agent also took the MOI officials on a weekend trip to New York City at FLIR’s expense. There was no business purpose for the stops outside of Boston.

While in the Boston area, the MOI officials spent a single 5-hour day at FLIR’s Boston facility completing the equipment inspection. The agenda for their remaining 7 days in Boston included just three other 1-2 hour visits to FLIR’s Boston facility, some additional meetings with FLIR personnel at their hotel, and other leisure activities, all at FLIR’s expense.

Timms approved expenses incurred by Ramahi and the MOI officials in connection with the extended travel, and Timms’ manager approved the expenses for the air travel provided to the MOI officials in connection with their “world tour.” FLIR’s finance department processed and paid the approved air expenses the next day.”

Under the heading “Expensive Watches for Saudi Officials,” the order states:

“In March 2009, while Ramahi was present, Timms provided expensive gifts to five MOI officials. At Timms’ and Ramahi’s instruction, in February 2009, FLIR’s third-party agent purchased five watches in Riyadh, paying approximately 26,000 Saudi Riyal (about U.S. $7,000).

In mid-March 2009, Ramahi and Timms traveled to Saudi Arabia for a nine-day business trip to discuss several business opportunities with MOI officials. According to Timms’ expense report, the purpose of the trip was to meet with MOI officials regarding FLIR’s efforts to sell its security cameras. During the trip, Timms, with Ramahi’s knowledge, gave the five watches to MOI officials. Ramahi and Timmsbelieved the MOI officials to be important to sales of both the binoculars and the security cameras. The MOI officials who received the watches included two of the MOI officials who subsequently went on the “world tour” travel.

Within weeks of his visit to Saudi Arabia, Timms submitted an expense report to FLIR for reimbursement of the watches. At the time of his submittal, Timms confirmed that each watch cost $1,425 and was for “Executive Gifts.” Shortly thereafter, Timms identified the names of the MOI officials who received the watches. The reimbursement was approved by Timms’ manager and paid out to Timms.”

Under the heading “The Cover Up,” the order states:

“In July 2009, in connection with an unrelated review of expenses in the Dubai office, FLIR’s finance department flagged Timms’ reimbursement request for the watches. In response to their questions, Timms claimed that he had made a mistake and falsely stated that the expense report should have reflected a total of 7,000 Saudi Riyal(about $1,900) rather than $7,000 as submitted.

At his supervisors’ request, Ramahi secured a second, fabricated invoice reflecting that the watches cost 7,000 Saudi Riyal, which Timms submitted to FLIRfinance in August 2009. Ramahi also told FLIR investigators that the watches were each purchased for approximately 1,300-1,400 Saudi Riyal (approximately $377) by FLIR’s third-party agent.

In September 2009, the FLIR finance department attempted to contact FLIR’s third-party agent. In e-mail correspondence, the FLIR finance department asked the agent a series of questions about the watches. Unknown to the finance department, Timms drafted responses to the questions on behalf of the agent. At Timms’ direction, the agent maintained the false cover story: that the watches cost a total of 7,000 Saudi Riyal, not U.S. $7,000.

In July 2009, Ramahi and Timms claimed that the MOI’s luxury travel and “world tour” had been a mistake. They told the FLIR finance department that the MOI had used FLIR’s travel agent in Dubai to book their own travel and that it had been mistakenly charged to FLIR. They promised to send an invoice to the MOI to pay for the“world tour” travel. Instead, however, Ramahi and Timms used FLIR’s agent to give the appearance that that the MOI paid for their travel. Timms also oversaw the preparation of false and misleading documentation of the MOI travel expenses that was submitted to FLIR’s finance department. For example, Timms obtained an invoice from the Dubai travel agency showing direct flights from Boston to Riyadh—a route not taken by the MOI officials on their “world tour.” Timms submitted the false invoice to FLIR finance as the “corrected” travel documentation.”

Under the heading, “FLIR’s FCPA-Related Policies and Training,” the order states:

“At all relevant times, FLIR had in place a code of conduct which prohibited FLIR employees from violating the FCPA. The policy required employees to record information “accurately and honestly” in FLIR’s books and records, with “no materiality requirement or threshold for a violation.”

Both Ramahi and Timms received training on their obligations under the FCPA and FLIR’s policy prior to the provision of expensive gifts of travel, entertainment, and personal items to the MOI. On or around May 13, 2007 and on or around December 2, 2008, Timms completed FLIR’s two-part FCPA-specific online training courses, including courses focused on “Understanding the Law” and “Dealing with Third Parties.” Ramahi only completed part one of the two-part series in May 2007. The training course completed by both Ramahi and Timms, entitled “Understanding the Law,” gave examples of prohibited gifts under the FCPA and specifically identified gifts of luxury watches, vacations and side trips during official business travel.”

As stated in the order:

“Respondents violated [the FCPA’s anti-bribery provisions] by corruptly providing expensive gifts of travel, entertainment, and personal items to the MOI officials to retain and obtain business for FLIR. Respondents also violated Section 13(b)(5) of the Exchange Act, and Rule 13b2-1 thereunder, by knowingly circumventing FLIR’s existing policies and controls, placing a fabricated invoice for the watches into FLIR’s books and records and falsifying FLIR’s records regarding the MOI officials’ extended personal travel paid by FLIR. As a result of this same conduct, Respondents caused FLIR’s books and records to be not accurately maintained in violation of [the books and records provisions of the FCPA].”

As noted in the SEC’s order and release, “without admitting or denying the findings, Timms and Ramahi consented to the entry of the order and agreed to pay financial penalties of $50,000 and $20,000 respectively.”

In the SEC’s release, Andrew Ceresney (Director of the SEC’s Enforcement Division) states:

“This case shows we will pursue employees of public companies who think it is acceptable to buy foreign officials’ loyalty with lavish gifts and travel. By making illegal payments and causing them to be recorded improperly, employees expose not only their firms but also themselves to an enforcement action.”

According to media reports, Timms is represented by Solomon Wisenberg (Nelson Mullins) an Ramahi is represented by Lisa Prager (Schulte Roth & Zabel).

According to the SEC’s release, “the SEC’s investigation is continuing.” As relevant to any potential FCPA enforcement action against FLIR, the SEC’s order states under the heading “FLIR Profits from Sales to the Saudi Ministry of Interior” as follows.

“Following the equipment inspection in Boston, the MOI gave its permission for FLIR to ship the thermal binoculars. The MOI later placed an order for additional binoculars for an approximate price of $1.2 million. In total, FLIR received payments from the MOI for the binoculars that exceeded $10 million.

From September 2009 through August 2012, FLIR also shipped the security cameras and related accessories to the MOI. FLIR received payments for the cameras exceeding $18 million. FLIR subsequently submitted a bid to sell additional security cameras to the MOI. The bid expired before the contract was awarded by the MOI.”

Based on a review of FLIR’s SEC filings, it does not appear that the company has disclosed any FCPA scrutiny.

Bio-Rad Laboratories Agrees To Pay $55 Million To Resolve FCPA Enforcement Action

Yesterday the DOJ and SEC announced (here and here) a coordinated FCPA enforcement action against Bio-Rad Laboratories Inc. based on alleged conduct in Russia, Thailand and Vietnam.

The enforcement action involved a DOJ non-prosecution agreement and an SEC administrative order. Bio-Rad agreed to pay approximately $55 million to resolve the alleged FCPA scrutiny ($14.35 million in the DOJ action; and $40.7 million in the SEC action).

This post summarizes both the DOJ and SEC enforcement actions based on a review of the original source documents.

DOJ Enforcement Action

The enforcement action focused on the conduct of Bio-Rad Laboratorii OOO (“Bio-Rad Russia”) and Bio-Rad SNC as well as the alleged knowledge of certain Bio-Rad managers concerning various Russian business practices.

According to the NPA, Bio-Rad Russia is:

“[A] wholly owned subsidiary of BIO-RAD located in Moscow, Russia. Bio-Rad Russia primarily sold BIO-RAD clinical diagnostic products, such as HIV testing kits. Approximately 90% of its clientele were government customers, most notably the Russian Ministry of Health. In order to obtain certain Russian government contracts, Bio-Rad Russia was required to participate in public tender processes.”

According to the NPA, Bio-Rad SNC is:

“[A]n indirectly wholly-owned subsidiary of Bio-Rad headquartered in Marnes-la-Coquette, France. Bio-Rad SNC manufactured, sold, and distributed Bio-Rad products worldwide.”

According to the NPA, Agent 1 (described as an agent retained by Bio-Rad SNC with respect to sales in Russia) assisted Bio-Rad Russia in connection with certain governmental sales in Russia and established Intermediary Companies (described as Agent 1 affiliated companies in Panama, the United Kingdom, and Belize) which Bio-Rad SNC retained “purportedly to perform extensive services on its behalf in Russia.” However, according to the NPA, Intermediary Companies “were located offshore and had no employees aside from Agent 1.” Moreover, according to the NPA, “Intermediary Companies used a phony address on its invoices that belonged to a Russian government agency.”

According to the NPA, Manager 1 (described as a high-level manager of Bio-Rad’s Emerging Markets sales region, which included Rusia, from 2004 to 2010 and based in Bio-Rad’s corporate offices in California) “authorized Bio-Rad SNC’ agreements with the Intermediary Companies without conducting any due diligence on the Intermediary Companies.”

According to the NPA,

“Bio-Rad SNC paid the Intermediary Companies a commission of 15-30% purportedly in exchange for various services outlined in the agency contracts, including acquiring new business by creating and disseminating promotional materials to prospective customers, installing Bio-Rad products and related equipment, training customers on the installation and use of Bio-Rad products, and delivering Bio-Rad products.

The Intermediary Companies, however, lacked the capabilities to perform these contractually defined services. In some instances, the Intermediary Companies submitted invoices suggesting that they performed distribution services in connection with certain contracts. The Intermediary Companies did not perform these services, and would have been significantly overpaid even had they performed such services.”

According to the NPA:

“Manager 1, Manager 2 [described as a high-level accounting manager of Bio-Rad’s Emerging Markets sales region, which included Russia, from around 2004 to 2010 and based in Bio-Rad’s corporate offices in California] and Manager 3 [described as a high-level manager of Bio-Rad Russia from 2007 to 2011 and based in Moscow] reviewed and approved commission payments to Intermediary Companies, despite knowing that Intermediary Companies and Agent 1 were not performing the services from which they were being paid.”

The NPA further states that Manager 1, Manager 2, and Manager 3 used the code word “bad debt” when communicating with each other to refer to the Intermediary Companies’ commission payments. According to the NPA, Manager 2 “instructed lower-level Bio-Rad SNC finance employees to ‘talk with codes’ when communicating about the Intermediary Companies’ invoices and that Manager 3 requested that Intermediary Company invoices be paid in installments of less than $200,000 each so as to avoid additional approvals required by Bio-Rad policy for payment over $200,000.

According to the NPA,

“The payments to the Intermediary Companies were made by Bio-Rad SNC and falsely recorded as “commission payments” in its books. Moreover, Manager 1 and Manager 2, who falsely described the commission payments as “bad debt” in e-mails, knew that Bio-Rad SNC maintained the bogus contracts with the Intermediary Companies, as well as the numerous associated false invoices Bio-Rad SNC had paid, as part of its books and records. Bio-Rad SNC’s books, records, and financial accounts were consolidated into Bio-Rad’s books and records and reported by Bio-Rad in its financial statements. Thus, Manager 1 and Manager 2 knowingly caused BIO-RAD to falsify its books and records.”

The NPA further states:

“Bio-Rad maintained a set of corporate policies, but Bio-Rad’s international offices were given autonomy by the company to implement and maintain adequate controls. However, Manager 1 and Manager 2 failed to implement adequate controls for Bio-Rad’s Emerging Markets sales region, including controls related to its operations in Russia where those managers knew that the failure to implement these controls allowed Agent 1 and the Intermediary Companies to be paid significantly above-market commissions for little or no services that were supported by false contracts and invoices. For example, Manager 1 and Manager 2 did not put in place a system of controls to conduct due diligence on third party agents, such as the Intermediary Companies, to ensure documentation supporting payments to third parties, or to monitor such payments. Nor did the company implement adequate testing of the controls that should have been in place.

Manager 1 and Manager 2’s knowing failure to implement adequate internal accounting controls with respect to Russia was due, at least in part, to their desire to continue to obtain and retain contracts with the Russian government. Bio-Rad Russia won 100% of its government contracts when Agent 1 was involved and lost its first major Russian government contract after terminating Agent 1 in or around 2010.”

According to the NPA:

“In addition to the knowing failure to implement an adequate system of internal accounting controls, prior to the discovery of the misconduct in Bio-Rad did not maintain an adequate compliance program. The company did not provide any FCPA training to its employees and, although Bio-Rad had a business ethics policy and code of conduct that prohibited bribery and was posted on the company’s intranet site, many employees of Bio-Rad and its subsidiaries were unaware of its existence. Moreover, the code was only available in English despite the fact that a significant number of employees working for Bio-Rad’ss overseas subsidiaries did not speak or understand English well enough to understand the code.”

“Bio-Rad also decentralized its compliance program such that its international offices were responsible for ensuring adequate compliance with its business ethics policy and code of conduct. However, Manager 1 and Manager 2 did not take steps to ensure such compliance in Emerging Markets, and Bio-Rad did not take sufficient steps to monitor its international offices. As a result, Bio-Rad’s international offices did not undertake appropriate risk-based due diligence in connection with the retention of agents and business partners and, further, did not have distribution and agency agreements with appropriate anti-corruption terms. Bio-Rad also did not undertake periodic risk assessments of its compliance program. Bio-Rad’s failure to maintain an adequate compliance program significantly contributed to the company’s inability to prevent the misconduct in Russia, as well as improper payments to government officials in Vietnam and Thailand.”

The NPA states as follows.

“The [DOJ] enters into this Non-Prosecution Agreement based on the individual facts and circumstances presented by this case and the Company. Among the facts considered were the following: (a) following discovery of potential FCPA violations during the course of an internal audit, the Company’s audit committee retained independent counsel to conduct an internal investigation and voluntarily disclosed to the [DOJ] the misconduct described in the Statement of Facts; (b) the Company has fully cooperated with the [DOJ’s] investigation, including conducting an extensive internal investigation in several countries, voluntarily making U.S. and foreign employees available for interviews, voluntarily producing documents from overseas, summarizing its findings, translating numerous documents, and providing timely reports on witness interviews for the [DOJ]; (c) the Company has engaged in significant remedial actions, including enhancing its anti-corruption policies globally, improving its internal controls and compliance functions, developing and implementing additional FCPA compliance procedures, including due diligence and contracting procedures for intermediaries, instituting heightened review of proposals and other transactional documents for all Company contracts, closing its Vietnam office after learning of improper payments by its Vietnam subsidiary, and conducting extensive anti-corruption training throughout the global organization; (d) the Company has committed to continue to enhance its compliance program and internal controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment B to this Agreement; and (e) the Company has agreed to continue to cooperate with the [DOJ] in any ongoing investigation of the conduct of the Company and its officers, directors, employees, agents, and consultants relating to possible violations of the FCPA …”.

Pursuant to the NPA, which has a term of two years, Bio-Rad admitted, accepted and acknowledged that it was responsible for the acts of its employees and agents as set forth in the Statement of Facts. The NPA also contains a “muzzle clause” in which Bio-Rad expressly agree[d] that it shall not, through present or future attorneys, officers, directors, employees, agents or any other person authorized to speak for the Company make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by the Company …”.

In the NPA, Bio-Rad also agreed to undertake a host of compliance enhancements and report to the DOJ during the two-year term of the NPA “regarding mediation and implementation of the compliance program and internal controls, policies and procedures” described in the NPA.

In the DOJ release, Assistant Attorney General Leslie Caldwell stated:

“Public companies that cook their books and hide improper payments foster corruption. The department pursues corruption from all angles, including the falsification of records and failure to implement adequate internal controls. The department also gives credit to companies, like Bio-Rad, who self-disclose, cooperate and remediate their violations of the FCPA.”

Special Agent in Charge David Johnson of the FBI’s San Francisco Field Office stated:

“The FBI remains committed to identifying and investigating violations of the Foreign Corrupt Practices Act. This action demonstrates the benefits of self-disclosure, cooperation, and subsequent remediation by companies.”

The release further states:

“The department entered into a non-prosecution agreement with the company due, in large part, to Bio-Rad’s self-disclosure of the misconduct and full cooperation with the department’s investigation. That cooperation included voluntarily making U.S. and foreign employees available for interviews, voluntarily producing documents from overseas, and summarizing the findings of its internal investigation. In addition, Bio-Rad has engaged in significant remedial actions, including enhancing its anti-corruption policies globally, improving its internal controls and compliance functions, developing and implementing additional due diligence and contracting procedures for intermediaries, and conducting extensive anti-corruption training throughout the organization.”

SEC Enforcement Action

The SEC’s order is based on the same core conduct alleged in the DOJ action as relevant to Russia business and also contains allegations concerning conduct in Vietnam and Thailand.

In summary fashion, the SEC’s order states:

“From approximately 2005 to 2010, subsidiaries of Bio-Rad made unlawful payments in Vietnam and Thailand to obtain or retain business. During the same period, Bio-Rad’s subsidiary paid certain Russian third parties, disregarding the high probability that at least some of the money would be used to make unlawful payments to government officials in Russia. With respect to Russia, one of Bio-Rad’s foreign subsidiaries paid three off-shore agents (the“Russian Agents”) for alleged services in connection with sales of its medical diagnostic and life science equipment to government agencies. These agents were not legitimate businesses, and despite receiving large commissions, they did not provide the contracted-for services. In paying these agents, Bio-Rad’s foreign subsidiary demonstrated a conscious disregard for the high probability that the Russian Agents were using at least a portion of the commissions to pay foreign officials to obtain profitable government contracts. The General Manager (“GM”) of Bio-Rad’s Emerging Markets sub-division and the Emerging Markets Controller, both employees of the parent company (collectively, “the Emerging Markets managers”) ignored red flags, which permitted the scheme to continue for years. In Vietnam and Thailand, Bio-Rad’s foreign subsidiaries used agents and distributors to funnel money to government officials. In total, Bio-Rad made $35.1 million in illicit profits from these improper payments.

In violation of Bio-Rad’s policies, Bio-Rad’s foreign subsidiaries did not record the payments in their own books in a manner that would accurately or fairly reflect the transactions. Instead they booked them as commissions, advertising, and training fees. These subsidiaries’ books were consolidated into the parent company’s books and records. During the relevant period, Bio-Rad also failed to devise and maintain adequate internal accounting controls.”

As to the Vietnam and Thailand conduct, the SEC’s order focuses on Bio-Rad Laboratories (Singapore) Pte. Limited (“Bio-Rad Singapore”) described as a wholly-owned subsidiary located in Singapore and Diamed South East Asia Ltd. (“Diamed Thailand”) described as a 49%-owned subsidiary of Diamed AG (Switzerland) that was acquired by Bio-Rad in October 2007. According to the order, local majority owners ran Diamed Thailand’s operations until 2011, when Bio-Rad bought out their interest in the company.

Under the heading “Facts in Vietnam,” the order states:

“From at least 2005 to the end of 2009, Bio-Rad maintained a sales representative office in Vietnam. A country manager supervised the Vietnam Office’s sales activities, and was authorized to approve contracts up to $100,000 and sales commissions up to $20,000. Vietnam’s country manager reported to Bio-Rad Singapore’s Southeast Asia regional sales manager (“RSM”), who in turn reported to the Asia Pacific GM.

From 2005 through 2009, the country manager of the Vietnam office authorized the payment of bribes to government officials to obtain their business. At the direction of the country manager, the sales representatives made cash payments to officials at government-owned hospitals and laboratories in exchange for their agreement to buy Bio-Rad’s products.

In 2006, the RSM first learned of this practice from a finance employee. She raised concerns about it to the Vietnam Office’s country manager, who informed her that paying bribes was a customary practice in Vietnam. On or about May 18, 2006, the Vietnamese country manager wrote in an email to the RSM and the Bio-Rad Singapore finance employee that paying third party fees “[wa]s outlawed in the Bio-Rad Business Ethics Policy,” but that Bio-Rad would lose 80% of its Vietnam sales without continuing the practice. In that same email, the country manager proposed a solution that entailed employing a middleman to pay the bribes to Vietnamese government officials as a means of insulating Bio-Rad from liability. Under the proposed scheme, Bio-Rad Singapore would sell Bio-Rad products to a Vietnamese distributor at a deep discount, which the distributor would then resell to government customers at full price, and pass through a portion of it as bribes.

The RSM and the Asia Pacific GM were aware of and allowed the payments to continue. Between 2005 and the end of 2009, the Vietnam office made improper payments of $2.2 million to agents or distributors, which was funneled to Vietnamese government officials. These bribes, recorded as “commissions,” “advertising fees,” and “training fees,” generated gross sales revenues of $23.7 million to Bio-Rad Singapore. The payment scheme did not involve the use of interstate commerce, and no United States national was involved in the misconduct.”

Under the heading “Facts in Thailand,” the order states:

“Bio-Rad acquired a 49% interest in Diamed Thailand as part of its acquisition of Diamed AG (Switzerland) in October 2007. Bio-Rad performed very little due diligence on Diamed Thailand prior to the acquisition.

Diamed Thailand’s local majority owners managed the subsidiary. Bio-Rad’s Asia Pacific GM was responsible for working and communicating with Diamed Thailand’s majority owners and distributors.

Prior to the October 2007 acquisition, Diamed Thailand had an established bribery scheme, whereby Diamed Thailand used a Thai agent to sell diagnostic products to government customers. The agent received an inflated 13% commission, of which it retained 4%, and paid 9% to Thai government officials in exchange for profitable business contracts.

The scheme continued even after Bio-Rad acquired Diamed Thailand. Diamed Thailand renewed the contract with the distributor in June 2008, but unbeknownst to Bio-Rad, the distributor was partially owned by one of Diamed Thailand’s local Thai owners.

Bio-Rad’s Asia Pacific GM learned of Diamed Thailand’s bribery scheme while attending a distributor’s conference in Bangkok in March 2008. At the conference, Diamed Thailand’s local manager informed him that some of Diamed Thailand’s customers received payments, which the Asia Pacific GM understood to mean kickbacks. The Asia Pacific GM instructed Bio-Rad Singapore’s controller to investigate the matter. The controller confirmed to the Asia Pacific GM that Diamed Thailand was bribing government officials through the distributor. Despite these findings, the Asia Pacific GM did not instruct Diamed Thailand to stop making the improper payments to the distributor.

From 2007 to early 2010, Diamed Thailand improperly paid a total of $708,608 to the distributor, generating gross sales revenues of $5.5 million to Diamed Thailand. These payments were recorded as sales commissions. The payment scheme did not involve the use of interstate commerce, and no United States national was involved in the misconduct.”

The SEC’s order found that:

“Bio-Rad violated [the FCPA’s anti-bribery provisions] because Bio-Rad’s Emerging Markets managers demonstrated a conscious disregard for the high probability that the Russian Agents were using at least a portion of Bio-Rad Russia’s sales commission payments to bribe Russian government officials in exchange for awarding the company profitable government contracts. These managers knew the Russian Agents operated as mere shell entities. They also knew that, among other things, the commissions were large, and that the Russian Agents did not have the resources to perform any of the contracted-for services set forth in their agreements. Nevertheless, the managers approved all of their agreements, and authorized $4.6 million in payments to the Russian Agents’ off-shore accounts even though many of the payment requests and invoices raised substantial questions as to their legitimacy. Finally, the same Emerging Markets managers communicated about the Russian Agents under cover of secrecy, which further calls in question their legitimacy. These red flags surfaced repeatedly over a five year period.”

The SEC’s order also found violations of the books and records and internal controls provisions based on the Russia, Vietnam, and Thailand conduct. As to internal controls, the order states:

“[A]lthough [Bio-Rad] had an ethics policy prohibiting the payment of bribes and various policies and procedures requiring accurate books and records, its systems of internal controls proved insufficient to provide reasonable assurances that such payments would be detected and prevented.”

Under the heading, “Self-Disclosure, Cooperation and Remedial Efforts,” the order states:

“Bio-Rad made an initial voluntary self-disclosure of potential FCPA violations to the Commission staff and the Department of Justice in May 2010, and immediately thereafter Bio-Rad’s audit committee retained independent counsel to conduct an investigation of the alleged violations. The audit committee conducted a thorough internal investigation, and subsequently expanded it voluntarily to cover a large number of additional potentially high-risk countries. The investigation included over 100 in-person interviews, the collection of millions of documents, the production of tens of thousands of documents, and forensic auditing. Bio-Rad’s cooperation was extensive, including voluntarily producing documents from overseas, summarizing its findings, translating numerous key documents, producing witnesses from foreign jurisdictions, providing timely reports on witness interviews, and making employees available to the Commission staff to interview.

Bio-Rad also undertook significant and extensive remedial actions including: terminating problematic practices; terminating Bio-Rad employees who were involved in the misconduct; comprehensively re-evaluating and supplementing its anticorruption policies and procedures on a world-wide basis, including its relationship with intermediaries; enhancing its internal controls and compliance functions; developing and implementing FCPA compliance procedures, including the further development and implementation of policies and procedures such as the due diligence and contracting procedure for intermediaries and policies concerning hospitality, entertainment, travel, and other business courtesies; and conducting extensive anticorruption training throughout the organization world-wide.”

As noted in the SEC’s release:

“[Bio-Rad] agreed to pay $40.7 million in disgorgement and prejudgment interest to the SEC … The company also must report its FCPA compliance efforts to the SEC for a period of two years.”

In the SEC release, Andrew Ceresney, Director of the SEC’s Division of Enforcement, stated:

“Bio-Rad Laboratories failed to detect a bribery scheme and did not properly address red flags that such a scheme was underway. “This enforcement action, which reflects credit for Bio-Rad’s cooperation in our investigation, reiterates the importance of all companies ensuring they have the proper internal controls to prevent FCPA violations.”

Bio-Rad was represented by Douglas Greenburg (Latham & Watkins).

In this release, Norman Schwartz (Bio-Rad President and Chief Executive Officer) stated:

“The actions that we discovered were completely contrary to Bio-Rad’s culture and values and ethical standards for conducting business. We took strong, decisive action to end the problematic practices and prevent anything like this from happening in the future, including terminating involved employees and committing substantial resources to strengthening our compliance functions and financial controls. Bio-Rad prides itself on operating with the highest levels of integrity, and I am pleased that this settlement fully resolves the government’s FCPA investigation and puts this matter behind us.”

The release further states:

“Bio-Rad discovered the potential FCPA violations and self-reported them to the DOJ and SEC in May 2010. The Company subsequently conducted a thorough global investigation with the assistance of independent legal and forensic specialists, terminated involved employees and third party agents, and significantly enhanced its internal controls, procedures, training and compliance functions designed to prevent future violations. The settlement fully resolves all outstanding issues related to these investigations.”

On the day the FCPA enforcement action was announced Bio-Rad’s stock closed up .5%.

Layne Christensen Company Resolves SEC Enforcement Action

In August, Layne Christensen Company said that it hoped to resolve its long-standing FCPA scrutiny by resolving an SEC enforcement action in the near future.

Yesterday, the company did just that as the SEC announced in this release that Layne Christensen agreed to pay approximately $5.1 million via an SEC administrative cease and desist order.

In summary fashion, the order states:

“These proceedings arise out of violations of the anti-bribery, recordkeeping, and internal controls provisions of the FCPA by Layne Christensen. Between 2005 and 2010, Layne Christensen, through its wholly-owned subsidiaries in Africa and Australia, made a total of more than $1,000,000 in improper payments to foreign government officials in the Republic of Mali, Guinea, Burkina Faso, Tanzania, and the Democratic Republic of the Congo. With the knowledge and approval of one of its officers, Layne Christensen made these improper payments in order to obtain favorable tax treatment, customs clearance for drilling equipment, work permits for expatriates, and relief from inspection by immigration and labor officials, as well as, to avoid penalties for the delinquent payment of taxes and customs duties and the failure to register immigrant workers. Layne Christensen funded some of these payments through cash transfers from its U.S. bank accounts to its Australian and African subsidiaries.

Layne Christensen falsely recorded these improper payments as legitimate expenses and failed to maintain a system of internal accounting controls sufficient to provide reasonable assurances over its operations.

As a result of making improper payments to foreign officials in Africa, Layne Christensen (1) realized improper tax benefits; (2) secured customs clearance of a drilling rig and other equipment; (3) avoided assessed customs duties and associated penalties; and (4) secured work permits for its employees and avoided the possible deportation of its undocumented workers and penalties for the failure to register these workers. Overall, Layne Christensen realized benefits of approximately $3.9 million by making improper payments to foreign officials in Africa between 2005 and 2010.”

Under the heading “knowledge of improper payments,” the order states:

“The Mineral Exploration Division (“MinEx”) is Layne Christensen’s second-largest business division and is primarily responsible for the Company’s mineral exploration drilling operations worldwide. Between 2005 and 2010, the president of MinEx (the “MinEx President”) was a corporate officer of Layne Christensen and reported directly to Layne Christensen’s Chief Executive Officer. Based in Salt Lake City, UT, the MinEx President supervised all of Layne Christensen’s mineral exploration drilling operations, including operations in Australia and Africa.

The MinEx President had knowledge of and, in some instances, authorized the direct and indirect payment of bribes to foreign officials in Africa to obtain or retain business. Specifically, he was aware of payments made to third-party agents retained by Layne Christensen’s African subsidiaries in order to obtain favorable tax treatment and to customs officials to obtain clearance for equipment and reduced customs duties.”

[This 2011 Wall Street Journal article references the name of the apparent MinEx President]

Under the heading, “payments to achieve favorable tax treatment,” the order states:

“Between 2005 and 2009, Layne Christensen paid approximately $768,000 in bribes to foreign officials in Mali, Guinea, and the Democratic Republic of the Congo, through its wholly-owned subsidiaries WADS and Layne Drilling, in order to reduce its tax liability and to avoid associated penalties for delinquent payment. By making these improper payments, Layne Christensen realized more than $3.2 million in improper tax savings.”

WADS (West African Drilling Services Sarl in Mauritania and Guinea) is described as a wholly-owned subsidiary of Stanley Mining Services (“SMS”) and Layne Christensen is described as holding a 100% interest in SMS through Layne Christiensen Australia Pty Limited, an Australian corporation and wholly-owned subsidiary of Layne Christensen. Layne Drilling is described as a wholly-owned subsidiary of SMS. According to the SEC’s order:

“Layne Australia provides management and financial accounting services to Layne Christensen’s companies operating in these African countries. Layne Christensen exercised direct operational control over these wholly-owned subsidiaries and consolidated their results in its financial statements.”

In terms of Mali, the order states:

“In connection with a 2005 tax audit, the WADS subsidiary made two improper payments totaling $93,000 to Malian tax officials through its local agent. The purpose of these payments was to reduce its liability for unpaid taxes and associated penalties. The payments were made on September 5, 2005 and October 19, 2005. WADS falsely recorded the payments, respectively, as an “Advance of Audit” in its prepaid taxes account and as the “take up cost” of the agent’s freight invoice (no freight services were provided).

The MinEx President was aware that WADS had engaged the agent in order to reduce its tax liability, and that as a result WADS had reduced its tax liability to less than half the original assessment. The MinEx President did not question how these tax savings were achieved.

In order to fund the payments, the chief financial officer of MinEx (the “MinEx CFO”) directed another Layne Christensen subsidiary to transfer funds to WADS and WADS’s financial controller to execute a cash call to Layne Christensen’s corporate office. Layne Christensen wired funds from one of its U.S. banks accounts to WADS on the same day.

In 2007, WADS again made two improper payments to Malian tax officials through the same agent that it used in 2005. As a result of the payments, Layne avoided taxes and penalties of more than $1.2 million.

The check requisition used to make a payment to the agent listed the purpose of this payment as “Fret fees for container” and it was accompanied by an invoice from an unrelated company. The payment of $168,000 was falsely recorded as freight fees in Layne’s books and records.

Following this payment, WADS received an official notice reflecting a substantial reduction in its tax assessment and indicating that WADS was entitled to a credit of approximately $280,000 that could be used to offset its tax liability. Internal emails show that the Malian tax inspectors had requested a payment of about $67,000 to ensure that WADS would receive this tax credit. WADS’s financial controller wrote, “We have already paid the equivalent of $US$168K to [tax agent]. I was under the impression that this took care of all of ‘their’ payments.” Nevertheless, one day later, WADS issued another check to the tax agent in the amount of approximately $68,000. The accompanying check requisition identified the payment as related to “Fiscal Audit 2005/2006” and WADS falsely recorded it as “Property Rates and Taxes” in its books and records.

The MinEx CFO provided the MinEx President with a memo summarizing the history of the tax assessments and the subsequent reductions. As in 2005, the MinEx President did not question how the tax savings were achieved.”

In terms of Guinea, the order states:

“In 2006, WADS reduced its tax liability by paying bribes through two lawyers retained at the suggestion of the tax authorities but who provided no services.

WADS received an official tax assessment for the tax years 2002-2004 on February 15, 2006. However, prior to this date, WADS’s Finance Manager and tax consultants from a local affiliate of a large multinational accounting firm (“International Tax Consultants”) had been negotiating the amount of the assessment with Guinean tax officials. The WADS Finance Manager told the MinEx CFO that the official assessment was substantially lower than the amount that the Guinean tax authority had initially proposed but acceptance of this lower amount was conditioned on WADS making the payment within two days of the assessment. Without providing any supporting documentation, the MinEx CFO sent an email to Layne Christensen’s corporate office seeking an urgent transfer of funds. Despite the lack of documentation or a justification for the transfer, Layne Christensen wired more than $200,000 from a U.S. bank account to WADS’s local bank account on the same day.

On February 17, 2006, WADS made a single payment of approximately $97,648 to the tax authority and payments of $24,000 and $101,000 to the two lawyers, respectively. In comparison, WADS paid the International Tax Consultants only $8,400 for their services.

WADS falsely recorded the payments made to the lawyers as legal expense although internal communications show that the lawyers provided no services. In a March 14, 2006 memorandum to the MinEx CFO, the MinEx Tax Manager acknowledged that “The [C]ompany has never engaged any lawyers or other accountants in Guinea and [is] never likely to.” However, he reasoned that although the payments to the lawyers could not be considered legal expense because although the lawyers did not perform any work and were “merely a conduit for the money,” WADS could record them as tax expense because WADS would have faced a larger tax assessment if it had not made these payments.

In 2008, WADS obtained over a 90% reduction in its assessed taxes and penalties by funneling an improper payment of $273,000 to Guinean tax officials through the same lawyers that it used in connection with the 2006 audit.

On June 26 and 27, 2008, the lawyers submitted invoices to WADS totaling approximately $273,000 purportedly for rendering assistance with the tax audit. Neither lawyer participated in negotiating the settlement of the tax audit. WADS paid the lawyers’ invoices on July 22, 2008.

Layne Christensen funded the payments to the lawyers through wire transfers from a U.S. bank account. On July 2, 2008, the MinEx CFO sought a cash call from Layne Christensen’s corporate office. The stated purpose of the request was to pay WADS’s outstanding taxes but the amount requested exceeded the assessed tax amount. Without supporting documentation or further justification, Layne Christensen wired the funds on July 2 and 21, 2008, and falsely recorded the payments as tax expense.

In an internal memorandum dated July 23, 2008 that was provided to officers of Layne Christensen, the MinEx Tax Manager explained that on June 17, 2008,following the issuance of the original tax assessment in May, the tax authorities suggested WADS retain the same lawyers that it had used in 2006 to represent it in negotiating the tax assessment. Shortly thereafter, without engagement letters or the approval of Layne Christensen’s management, WADS retained both lawyers on a success-fee basis that tied their compensation to the amount by which the assessment was reduced.

The MinEx Tax Manager also noted that a portion of the fees paid to the lawyers could have been used to fund illegal payments to tax officials and that the lawyers and the International Tax Consultants pressured WADS to make the payments to the lawyers in order to obtain a settlement of the audit.

A few days later, the MinEx President learned that WADS had achieved a substantial reduction in its tax assessment. On July 25, 2008, the Vice President of Operations for Africa and Australia informed the MinEx President that the amount of the settled tax assessment was materially different from the MinEx Division’s forecasted amount, could have a material impact on Layne Christensen’s reported earnings, and could be scrutinized by Layne Christensen’s auditors. The MinEx President also learned that WADS had retained the lawyers without engagement letters. As with the Malian tax audits in 2005 and 2007, the MinEx President did not question how the tax savings were achieved.”

In terms of the Democratic Republic of Congo, the order states:

“In July 2009, Layne Drilling DRC made an improper payment of more than $50,000 to tax officials in the Democratic Republic of the Congo (“DRC”) through an agent in order to reduce its liability for unpaid taxes and penalties.

After receiving a multi-million dollar tax assessment in June 2009, Layne Drilling DRC’s local tax agent recommended that it engage a specialized lawyer to negotiate a reduction in the assessment. On June 19, 2009, the MinEx CFO sought the approval of the MinEx President to retain the lawyer as Layne Drilling DRC’s agent. Emphasizing that there was “a lot at stake, potentially $millions,” the MinEx CFO explained that he had spoken to the country manager and knew “more than can be written down.” However, he wrote that the transaction would entail paying $30,000 in taxes and $50,000 in legal commissions in an arrangement similar to the arrangement made with the lawyers in Guinea the previous year. The MinEx CFO also stated that all payments to the tax authorities would be made through the lawyer. Without questioning either the need to retain an agent or the suspicious proposed arrangement, the MinEx President approved Layne Drilling DRC’s retention of the lawyer.

On July 9, 2009, Layne Drilling DRC paid the lawyer $57,200 and falsely recorded the payment as legal expense.

The next day, the DRC tax authority issued a revised final tax assessment to Layne Drilling DRC. The amount of the revised tax assessment was substantially lower than the assessment issued to Layne Drilling DRC in June 2009.”

Under the heading “Payments to Reduce Customs Duties and Obtain Customs Clearance,” the order states:

“Layne Christensen made multiple improper payments to customs officials in Burkina Faso and the DRC between 2007 and 2010 in order to avoid paying customs duties and to obtain clearance for the import and export of its equipment in these countries. LayneChristensen made these improper payments through its customs clearing agents and falsely recorded the payments as legal fees and agent commissions in its books and records.”

Specifically as to Burkina Faso, the order states:

“Burkina Faso’s customs authority conducted an audit of WADS in June 2010. The auditors found that WADS had failed to comply with customs regulations relating to the importation of certain goods and to pay sufficient customs duties on these items. As a result, the customs authority assessed WADS nearly $2 million in unpaid duties and penalties.

Although WADS had retained a new customs clearing agent prior to receiving this assessment, it engaged its former customs agent purportedly to negotiate a reduction in the assessment. The former agent had cleared the disputed items but WADS terminated it in or about May 2009 due, in part, to poor performance. Nevertheless, WADS reengaged its former agent in June 2010 because the agent’s owner was well-connected with customs authorities in Burkina Faso. In an email to the MinEx CFO, the WADS Finance Manager described the agent as someone who is “well known in the game.” In addition, he informed the MinEx CFO that WADS retained the agent on a success fee basis and would pay the agent 10% of the difference between the original assessment and the final assessment.

On August 1, 2009, the MinEx CFO also told the MinEx President and another senior employee that WADS had retained a third-party agent to negotiate a settlement of the customs audit and the assessed customs duties were reduced from nearly $2 million to less than $300,000. The MinEx CFO recommended that WADS accept this settlement and he sought the approval of the MinEx President to send $300,000 to pay the customs fees and penalties as well as $100,000 for the agent’s commission. Without questioning the identity of the agent, the nature of the services provided, or the size of the commission, the MinEx President approved the payments.

The MinEx CFO initiated cash calls to fund the payments and Layne transferred funds from a U.S. bank account to WADS on August 4 and August 28, 2010. Between August 4 and 20, 2010, WADS paid the agent a total of approximately $138,000, including one cash payment. WADS falsely recorded the payments to the agent as legitimate consultant fees in its books and records.”

As to the Democratic Republic of Congo, the order concerns payments in connection with importation of drilling rigs and equipment, customs clearance for exports, and exportation of equipment.

In terms of importation of drilling rigs, the order states:

“In 2007, Layne Drilling DRC made improper payments to customs officials to obtain the initial importation of its drilling rigs and other equipment into the DRC.

In 2006 and 2007, Layne Drilling DRC encountered significant delays in obtaining customs clearance for the importation of its equipment, which resulted in the WADS Finance Manager terminating Layne Drilling DRC’s then-customs clearing agent and hiring a new agent (“Customs Clearance Agent”) in March 2007. The new Customs Clearance Agent was managed by the brother of a national government official in the DRC (“DRC Official”). In an email to the MinEx President, the WADS Finance Manager said that he had found someone who is “more connected” and “can get things moving for us.” As an example, he noted that the Customs Clearance Agent had obtained clearance for two trucks in only two days whereas the former agent had been unable to clear three trucks through customs for more than five weeks.

Between March and September 2007, Layne Drilling DRC paid a total of approximately $124,000 to the Customs Clearance Agent for irregular expenses, described as things such as “per diem,” “intervention expenses,” and “honoraires,” that were not related to specific invoices. Layne Drilling DRC paid the Customs Clearance Agent upon request and in amounts dictated by the agent. In addition, on two occasions, Layne Drilling DRC made payments to an unrelated third party in the U.S. at the direction of the Customs Clearance Agent.

As a result of these payments, Layne Christensen was able to import equipment necessary to perform on its existing contracts and derived more than $300,000 in benefits in 2007.

Layne Drilling DRC inaccurately recorded these payments as legitimate expenses relating to customs and clearance in its books and records.”

In terms of customs clearance for exports, the order states:

“Soon after beginning operations in the DRC in 2007, Layne Drilling DRC hired the nephew of the DRC Official as an office manager. Internal documents describe the DRC Official as Layne Drilling DRC’s “protector” and show that Layne Drilling DRC hired the DRC Official’s nephew in order to facilitate a good relationship.

Between November 2007 and August 2008, the office manager approved and made $18,000 in cash payments from Layne Drilling DRC’s account. These payments were purportedly made based on invoices submitted by a local firm that had allegedly provided customs clearance services but with whom Layne Drilling DRC had no written contract. Many of the payments were made outside of Layne Drilling DRC’s vendor system. In addition, the firm’s invoices were undated and included undefined “per diem” and “honoraire” expenses, similar to the invoices submitted by the Customs Clearance Agent. Layne improperly recorded these payments as legitimate customs and clearance expenses.”

In terms of exportation of equipment, the order states:

“In 2009 and 2010, Layne Drilling DRC made payments through its agents to customs officials in order to secure the exportation of goods and equipment from the DRC to Zambia.

In June 2009, Layne Drilling DRC retained a customs clearing agent to facilitate the export of a drilling rig to Zambia on an expedited basis. However, when thecustoms clearing agent indicated that the exportation would be delayed due to the lack of documentation relating to the original importation of the drilling rig Layne Drilling DRC replaced the agent.

Between July 10 and July 17, 2009, Layne Drilling DRC paid $7,186 to the second agent who, in turn, made payments to customs officials and on July 20, 2009, the drilling rig was successfully exported to Zambia and placed it into operations. Layne Drilling DRC inaccurately recorded payments made to the agent as “governor office release rig” and “release documents for rig44.”

By making improper payments to customs officials to secure the export of this drilling rig, Layne Drilling DRC realized benefits of approximately $145,000.

Similarly, between April and November 2010, Layne Drilling DRC made nearly $15,000 in improper payments, through its agent, to DRC officials in order to again obtain clearance of goods for export to Zambia that lacked the proper import documentation. As before, the agent provided invoices that included “honoraires” and “per diems” and the payments were falsely recorded as legitimate customs and clearance expenses in Layne’s books and records.”

Under the heading, “other payments,” the order states:

“Between 2007 and 2010, Layne Christensen made more than $10,000 in small payments to foreign officials through various customs and clearing agents that it used in Tanzania, Burkina Faso, Mali, Mauritania, and the DRC. These payments ranged from $4 to $1,700 and were characterized in invoices submitted by the agents as, among other things, “intervention,” “honoraires,” “commissions,” and “service fees.”

Between 2006 and 2010, Layne Christensen made more than $23,000 in cash payments, through its subsidiaries, to police, border patrol, immigration officials, and labor inspectors in Burkina Faso, Guinea, Tanzania, and the DRC to obtain border entry for its equipment and employees, to secure work permits for its expatriate employees, and to avoid penalties for noncompliance with local immigration and labor regulations.”

Based on the above conduct, the order finds that Layne Christensen violated the FCPA’s anti-bribery, books and records, and internal controls provisions.

Under the heading “remedial measures and cooperation,” the order states:

“Since 2010, Layne Christensen has implemented a number of remedial measures designed to identify and mitigate bribery risks and to prevent FCPA violations in the future. Upon learning of possible improper payments made to foreign officials by its staff in Africa, Layne Christensen’s senior management and Audit Committee responded quickly by initiating an investigation conducted by an outside law firm and forensic accounting experts, self-reporting its preliminary findings to the Commission, and publicly disclosing its potential FCPA violations. During the course of the investigation, Layne Christensen terminated four employees, including the MinEx President, the MinEx CFO, and the WADS Finance Manager for their roles in the misconduct, and reduced the compensation of the MinEx President for failing to establish a strong compliance tone at the top. In addition, the Company conducted a comprehensive risk assessment of its worldwide operations and implemented measures to address its most significant corruption risks.

Layne Christensen also took affirmative steps to strengthen its internal compliance policies, procedures, and controls. Layne Christensen issued a standalone anti-bribery policy and procedures, improved its accounting policies relating to cash disbursements, implemented an integrated accounting system worldwide, revamped its anti-corruption training, and conducted extensive due diligence of third parties with which it does business. In addition, Layne Christensen hired a dedicated chief compliance officer and three full-time compliance personnel and retained a consulting firm to conduct an assessment of its anti corruption program and make recommendations.

Layne Christensen exhibited a high level of cooperation throughout the Commission’s investigation. In addition to self-reporting to the Commission shortly after it discovered potential FCPA violations, Layne Christensen voluntarily provided the Commission with real-time reports of its investigative findings, produced English language translations of documents, made foreign witnesses available for interviews in the United States, shared summaries of witness interviews and reports prepared by forensic consultants retained in connection with the Company’s internal investigation, and responded to the Commission’s requests for documents and information in a timely manner. These actions assisted the Commission in efficiently collecting valuable evidence, including information that may not have been otherwise available to the staff.”

As stated in the SEC release:

“The SEC’s order finds that Layne violated the anti-bribery, books and records, and internal controls provisions of the [FCPA]. Layne agreed to pay $3,893,472.42 in disgorgement plus $858,720 in prejudgment interest as well as a $375,000 penalty amount that reflects Layne’s self-reporting, remediation, and significant cooperation with the SEC’s investigation. For a period of two years, the settlement requires the company to report to the SEC on the status of its remediation and implementation of measures to comply with the FCPA. Layne consented to the order without admitting or denying the SEC’s findings.”

As relevant to the $375,000 penalty amount, the order states: [Layne Christensen] acknowledges that the Commission is not imposing a civil penalty in excess of $375,000 based upon its cooperation in a Commission investigation and related enforcement action.”

In the release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:

“Layne’s lack of internal controls allowed improper payments to government officials in multiple countries to continue unabated for five years. However, Layne self-reported its violations, cooperated fully with our investigation, and revamped its FCPA compliance program. Those measures were credited in determining the appropriate remedy.”

On the day the SEC’s enforcement action was announced, Layne Christensen’s stock price closed up 14.7%.

Stung By The Sting – Smith & Wesson Resolves FCPA Scrutiny That Originated With The Africa Sting

In January 2010 when highlighting the manufactured Africa Sting enforcement action, I predicted that the public company employing one of the defendants was likely going to be the subject of Foreign Corrupt Practices Act scrutiny not only based on the alleged conduct in the Africa Sting case, but also other conduct as well because the indicted individual was the “Vice President−Sales, International & U.S. Law Enforcement” for the company. That company, it soon was learned, was Smith & Wesson and indeed in July 2010 Smith & Wesson disclosed its FCPA scrutiny (see here).

In an instructive example of a dynamic I highlight in my recent article “Foreign Corrupt Practices Act Ripples” (that is every instance of FCPA scrutiny has a point of entry – in other words, a set of facts that give rise to the scrutiny in the first place – and this point of entry is often the beginning of a long and expensive journey for the company under scrutiny as the company – to answer the frequently asked “where else” question and to demonstrate its cooperation – will conduct a world-wide review of its operations), yesterday the SEC announced this administrative FCPA enforcement action against Smith & Wesson.

The conduct has nothing to do with the manufactured (and failed) Africa Sting case, but does involve Smith & Wesson’s former Vice President of International Sales and another individual referred to as the Regional Director of International Sales. The SEC states in summary fashion as follows.

“This matter concerns violations of the anti-bribery,books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Smith & Wesson. The violations took place from 2007 through early 2010, when a senior employee and other employees and representatives of Smith & Wesson made, authorized, and offered to make improper payments and/or to provide gifts to foreign officials in an attempt to win contracts to sell firearm products to foreign military and law enforcement departments. During this period, Smith & Wesson’s international business was in its developing stages and accounted for approximately 10% of the company’s revenues. Smith & Wesson’s employees and representatives engaged in a systemic pattern of making, authorizing and offering bribes while seeking to expand the company’s overseas business.

The bribe payments were inaccurately recorded in Smith & Wesson’s books and records as legitimate sales commissions or other business expenses. Despite its push to make sales in new and high risk markets overseas, Smith & Wesson failed to establish an appropriate compliance program or devise and maintain an adequate system of internal accounting controls, which allowed the repeated improper offers and payments to continue undetected for years.”

According to the SEC:

“Smith & Wesson does not have any international subsidiaries and conducts its international business directly and through brokering agents. Much of Smith & Wesson’s international business involves the sale of firearms to foreign law enforcement and military departments. […] From 2007 through early 2010, as Smith & Wesson sought to break into international markets and increase sales, certain of the company’s employees and representatives engaged in a pervasive practice of making, authorizing and offering improper payments to foreign government officials as a means of obtaining or retaining international business. Although only one of the contracts was fulfilled before the unlawful activity was identified, company employees made or authorized the making of improper payments in connection with multiple ongoing or contemplated international sales.”

The SEC’s order contains factual allegations regarding the following countries: Pakistan, Indonesia, Turkey, Nepal and Bangladesh.

As to Pakistan, the SEC order states:

“In 2008, for example, Smith & Wesson retained a third-party agent in Pakistan to assist the company in obtaining a deal to sell firearms to a Pakistani police department. Even after the agent notified the company that he would be providing guns valued in excess of $11,000 to Pakistani police officials in order to obtain the deal, and that he would be making additional cash payments to the officials, the company authorized the agent to proceed with the deal. Smith & Wesson’s Vice President of International Sales and its Regional Director of International Sales authorized the sale of the guns to the agent to be used as improper gifts and authorized payment of the commissions to the agent, while knowing or consciously disregarding the fact that the agent would be providing the guns and part of his commissions to Pakistani officials as an inducement for them to award the tender to the company. Smith & Wesson ultimately sold 548 pistols to the Pakistani police for $210,980 and profited from the corrupt deal in the amount of $107,852.”

As to Indonesia, the SEC order states:

“In 2009, Smith & Wesson attempted to win a contract to sell firearms to a Indonesian police department by making improper payments to its third party agent in Indonesia, who indicated that part of the payment would be provided to the Indonesian police officials under the guise of legitimate firearm lab testing costs. On several occasions, Smith & Wesson’s third-party agent indicated that the Indonesian police expected Smith & Wesson to pay them additional amounts above the actual cost of testing the guns as an inducement to enter the contract. The agent later notified Smith & Wesson’s Regional Director of International Sales that the price of “testing” the guns had risen further. Smith & Wesson’s Vice President of International Sales and its Regional Director of International Sales authorized and made the inflated payment, but a deal was never consummated.”

As to Turkey, Nepal and Bangladesh, the SEC order states:

Similarly, Smith &Wesson made improper payments in 2009 to its third party agent in Turkey, who indicated that part of the payments would be provided to Turkish officials in an attempt to secure two deals in Turkey for sale of handcuffs to Turkish police and firearms to the Turkish military. Neither of these interactions resulted in the shipment of products, as Smith & Wesson was unsuccessful bidding for the first deal, while the latter deal was ultimately canceled. Similarly, Smith & Wesson authorized improper payments to third party agents who indicated that parts of these payments would be provided to foreign officials in Nepal and Bangladesh in unsuccessful attempts to secure sales contracts in those countries. Although these contemplated deals in Nepal and Bangladesh were never consummated in each case, the company had obtained or attempted to obtain the contract by using third party agents as a conduit for improper payments to government officials.”

The SEC’s order then states:

“Despite making it a high priority to grow sales in new and high risk markets overseas, the company failed to design and implement a system of internal controls or an appropriate FCPA compliance program reasonably designed to address the increased risks of its new business model. The company did not perform any anti-corruption risk assessment and conducted virtually no due diligence of its third-party agents regardless of the perceived level of corruption in the country in which Smith & Wesson was seeking to do business. Smith & Wesson failed to devise adequate policies and procedures for commission payments, the use of samples for test and evaluation, gifts, and commission advances. The Vice President of International Sales had almost complete authority to conduct the company’s international business, including the sole ability to approve most commissions. Smith & Wesson’s FCPA policies and procedures, and its FCPA-related training and supervision also were inadequate. As a result of these compliance and internal controls failures, Smith & Wesson’s Vice President of International Sales and the Regional Director of International Sales were able to cause the company to pay and/or authorize improper payments in numerous countries around the globe for a period of several years.”

Under the headline “Remedial Measures,” the SEC order states:

“Smith & Wesson took prompt action to remediate its immediate FCPA issues, including: conducting an internal investigation, terminating its entire international sales staff; terminating pending international sales transactions; and re-evaluating the markets in which it sought international sales. In addition, Smith & Wesson implemented a series of significant measures to improve its internal controls and compliance processes, including: implementing new internal audit procedures to identify FCPA issues; creating more robust controls on payments, gifts, and other transactions in connection with international business activity; enhancing its FCPA compliance policies and procedures; and creating a Business Ethics and Compliance Committee.”

Based on the above findings, the SEC found that Smith & Wesson violated the FCPA’s anti-bribery provisions, books and records provisions and internal controls provisions. As to the later, the SEC order states:

“Smith & Wesson failed to devise and maintain sufficient internal controls with respect to its international sales operations. While the company had a basic corporate policy prohibiting the payment of bribes, it failed to implement a reasonable system of controls to effectuate that policy. For example, Smith & Wesson failed to devise adequate policies and procedures with regard to commission payments, the use of samples for test and evaluation, gifts, and commission advances. Further, Smith & Wesson’s FCPA policies and procedures, and its FCPA-related training and supervision were inadequate.”

As highlighted in the SEC’s order, Smith & Wesson agreed to “report to the Commission staff on the status of [its] remediation and implementation of compliance measures at six-month to twelve-month intervals during a two-year term.” In addition, Smith & Wesson agreed to conduct an initial review – and two follow-up reviews – “setting forth a complete description of its remediation efforts to date, its proposals reasonably designed to improve the policies and procedures of Respondent for ensuring compliance with the FCPA and other applicable anticorruption laws, and the parameters of the subsequent reviews.”

In the SEC order, Smith & Wesson was ordered to cease and desist from future FCPA violations and agreed to pay $2,034,892 … including $107,852 in disgorgement, $21,040 in prejudgment interest, and a civil monetary penalty of $1,906,000.” In resolving its FCPA scrutiny, Smith & Wesson did not admit nor deny the SEC’s findings.

In this SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:

“This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales. When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

In this release, Smith & Wesson President and CEO James Debney stated:

“We are pleased to have concluded this matter with the SECand believe that the settlement we have agreed upon is in the best interests of Smith & Wesson and its shareholders. Today’s announcement brings to conclusion a legacy issue for our company that commenced more than four years ago, and we are pleased to now finally put this matter behind us.”

John Pappalardo (Greenberg Traurig) represented Smith & Wesson.

Smith & Wesson’s stock price was down approximately .7% on the day of the SEC’s announcement of the enforcement action.

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Stung By The Sting – Smith & Wesson Resolves FCPA Scrutiny That Originated With The Africa Sting