Top Menu

Navigation

And The Apples Go To …

By on November 26, 2014 in Apple Award, Layne Christensen, Obtain or Retain Business
applepic

Often times there seems to be an echo chamber when it comes to Foreign Corrupt Practices Act reporting, commentary, etc.

One such occasion has been the recent Layne Christensen enforcement action (see here for the prior post).  The theme, which appears to have first been floated by lawyers representing Layne Christensen, but repeated by many others (see here and here for instance), is that the enforcement action was SEC only because of the company’s voluntary disclosure, cooperation and remedial actions.

That’s one narrative.

But some have bucked this narrative and have thankfully injected some informed thought into the conversation surrounding the Layne Christensen enforcement action.  And for this, the various individuals identified below receive FCPA Professor apple awards.

This other narrative is that the conduct alleged in the SEC’s enforcement action does not even violate the FCPA’s anti-bribery provisions.

This Shearman & Sterling Client publication, with former DOJ FCPA enforcement Philip Urofsky listed as the lead author, states:

“While a relatively unremarkable case at first glance, the SEC’s charges against Layne Christensen reflect a troubling approach by enforcement agencies to disregard the “business nexus element” of the FCPA’s anti-bribery provisions. These recent practices appear to contradict the Fifth Circuit’s opinion in United States v. Kay and create greater uncertainty as to the scope of the statute.”

[…]

Although a seemingly unremarkable case in a field known for blockbuster settlements, Layne Christensen illustrates a troubling practice by the SEC and US Department of Justice to disregard the “business nexus element” of the FCPA. Specifically, the FCPA states that to violate the anti-bribery provisions of the law, the defendant must pay a bribe “to assist the issuer in obtaining or retaining business . . . .” While it is often the case that bribes are paid on a quid pro quo basis in exchange for the award of valuable contracts, there are additional scenarios, like that seen in Layne Christensen, where the bribes merely assisted the defendant to improve its profit margins. In United States v. Kay, the Fifth Circuit held that bribes made in exchange for a reduction in tax liability or customs duties did not per se violate the statute without proof that the increased profits were used to obtain or retain some form of business.”

“Layne Christensen is further evidence that the DOJ’s and SEC’s current approach to the “business nexus element” of the FCPA flies in the face of Kay. By charging companies (often under extreme pressure to settle the case against them) with facts that do not show how the bribes were used to assist in obtaining or retaining business, the DOJ and SEC have created significant uncertainty as to the scope of the FCPA.”

[…]

“The SEC’s case against Layne Christensen demonstrates that the government continues to follow the practice … [of] treating the “business nexus requirement” as a seemingly unnecessary feature of the FCPA.”

[…]

“Strikingly, short of simply parroting the language of the statute, the SEC made no effort to allege facts as to what specific business was obtained or retained as a result of the reduced tax liability and customs duties. Such a pleading is clearly at odds with the Fifth Circuit’s opinion in Kay which stated that while bribes in exchange for increased profitability could violate the FCPA, they would not, per se, constitute criminal conduct without an allegation that the increased profits were used to obtain or retain business.”

[…]

“Whether the DOJ’s and SEC’s approach to the business nexus element of the FCPA stems from a misinterpretation of Fifth Circuit’s opinion or an active attempt to challenge Kay remains to be seen. Nevertheless, the lack of clarity ultimately disadvantages defendants who may be pressured to settle charges over conduct which does not necessarily constitute a crime.”

This is not the first time Urofsky, et al have rightly noted the DOJ/SEC’s unhinged enforcement theories relevant to “obtain or retain business.”  (See here for a prior post).

Charles Leeper (DrinkerBiddle) is also deserving of an apple award for his writing on the Layne Christensen enforcement action. He writes:

“According to the Consent Order, between 2005 and 2010 Layne’s subsidiaries made approximately $800,000 in improper payments to foreign officials in various African countries in order to: (1) realize improper tax benefits; (2) secure custom clearance of equipment; (3) avoid assessed customs duties and penalties; and (4) secure work permits for, and avoid deportation of, their employees.  While the SEC alleged that Layne realized financial benefits of approximately $3.9 million by making these payments, the Consent Order does not allege that Layne obtained business from the African governments in question, or even that Layne improved its competitive position in those countries on account of these payments.  Other than a single rote reference to the alleged purpose of “obtain[ing] or retain[ing] business,” the Consent Order contains no indication that the SEC’s investigation produced evidence satisfying the business nexus element of the FCPA.

[…]

Layne’s voluntary disclosure and substantial cooperation likely contributed to the relatively modest penalty that it was assessed by the SEC.  But it is equally likely that the SEC showed uncommon leniency, and the DOJ declined prosecution altogether, because an essential element of the FCPA could not be readily proven.”

Apple awards as well for commentary in this Global Investigations Review article.

“[A] number of lawyers are saying the DoJ failed to file charges as Layne did not satisfy the business-nexus element of the FCPA, which requires violating companies to have paid bribes “to assist the issuer in obtaining or retaining business”. They say the SEC’s decision to bring an administrative proceeding despite the business-nexus element not being met, is part of larger trend in both the SEC and the DoJ to wrongly pursue such cases. Kelly Kramer at Mayer Brown in Washington, DC, agreed that the SEC and DoJ are ignoring the precedent set by Kay. “There is very little court guidance. As a consequence the SEC and DoJ have adopted their own interpretation of the FCPA. Essentially, they presume that bribes that increase corporate profits also help companies to obtain or retain business,” he said. “But that is not always true. The DoJ and SEC seem to be using this presumption to avoid the business-nexus element.” Kramer added that as there are so few appellate FCPA cases, due to the tendency for companies to settle, the SEC and DoJ have created their own “common law of settlement”, which has persuasive value for general counsels, but lacks any legal weight.”

The above commentary should not come as a surprise to frequent readers of FCPA Professor.  The issue of whether the SEC could have actually proved its allegations in the Layne Christensen enforcement action were first flagged in this prior post.

More broadly, I have been writing about the DOJ/SEC’s unhinged “obtain or retain business” theories for years.

See “The Facade of FCPA Enforcement” (an extensive discussion of the Kay case starts at pg. 918 and concludes: Despite the equivocal nature of the Kay holding, the decision clearly energized the enforcement agencies and post-Kay there has been an explosion in FCPA enforcement actions where the alleged improper payments involve customs duties and tax payments or are otherwise alleged to have assisted the payer in securing foreign government licenses, permits, and certifications which assisted the payer in generally doing business in a foreign country. These enforcement actions are profiled [elsewhere in the article.] Because none of these actions have been challenged, it remains an open question whether the payments at issue in these cases, if subjected to judicial scrutiny: (i) would satisfy the FCPA’s “obtain or retain business” element; or (ii) were too attenuated to obtaining or retaining business (such as merely increasing the profitability of an existing profitable business) and thus, per the Kay holding, not a violation of this key FCPA anti-bribery element.”).

See “FCPA Enforcement As Seen Through Wal-Mart’s Potential Exposure” (“[T]he enforcement theory that payments to a foreign official outside the context of foreign government procurement fall under the FCPA’s anti-bribery provisions has been subjected to judicial scrutiny four times. The enforcement agencies lost three of those cases and the fourth case—the Fifth Circuit’s decision in Kay—is equivocal. The decision merely holds that payments to a foreign official outside the context of foreign government procurement can, under appropriate circumstances, fall within the statute. Given the facts and circumstances the Kay court found relevant, it is a highly fact-dependent question whether a payment to a foreign official outside the context of foreign government procurement is subject to the FCPA. A key portion from the Kay ruling logically implicated by Wal-Mart’s alleged payments is the following: ‘‘there are bound to be circumstances in which payments outside the context of foreign government procurement merely increase the profitability of an existing profitable company and thus, presumably, does not assist the payer in obtaining or retaining business.’’).

See “Why You Should Be Alarmed by the ADM Enforcement Action” (The Kay court did conclude that payments outside the context of foreign government procurement ‘‘could’’ violate the FCPA, but only if the payments were intended to lower a company’s cost of doing business enough to assist the company in ‘‘obtaining or retaining’’ business. Specifically, the court stated: If the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in getting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining business would be unnecessary, and thus surplusage—a conclusion that we are forbidden to reach.”

[The FCPA Apple Award recognizes informed, candid, and fresh thought-leadership on the Foreign Corrupt Practices Act or related topics. There is no prize, medal or plaque awarded to the FCPA Professor Apple Award recipient. Just recognition by a leading FCPA website visited by a diverse group of readers around the world. There is no nomination procedure for the Apple Award. If you are writing something informed, candid and fresh about the FCPA or related topics, chances are high that I will find your work during my daily searches for FCPA content.]

Items Of Interest From The Bio-Rad Enforcement Action

By on November 6, 2014 in Bio-Rad, Declination Decisions, Layne Christensen, Related Civil Litigation, Voluntary Disclosure

This previous post dived deep into the Bio-Rad Laboratories FCPA enforcement action.

This post continues the analysis by highlighting various issues from the enforcement action.

Play On Words

The enforcement action was the result of Bio-Rad’s voluntary disclosure and both the DOJ and SEC were complimentary of the company’s cooperation.

In the words of the DOJ, “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. ”  Elsewhere the DOJ stated that Bio-Rad translated numerous documents and provided timely reports on witness interviews to the DOJ.

Likewise, the SEC noted that Bio-Rad’s investigation “included over 100 in-person interviews, the collection of millions of documents, the production of tens of thousands of documents, and forensic auditing.”

Against this backdrop, the DOJ’s press release contained a most interesting play of words.

“The department pursues corruption from all angles …” (emphasis added).

“The FBI remains committed to identifying and investigating violations of the FCPA.”  (emphasis added).

Bio-Rad’s press release also contained an interesting play on words as well.

As highlighted in several previous posts (see here for instance), the term “declination” is already one of the more amorphous term in the “FCPA vocabulary.”

In a further twist, the company’s press release stated:

“The DOJ declined to prosecute Bio-Rad, and the parties entered into a Non-Prosecution Agreement under which Bio-Rad has agreed to pay a penalty of $14.35 million.” (emphasis added).

A Government Required Transfer of Shareholder Wealth to FCPA Inc?

Bio-Rad was the second FCPA enforcement in the past two weeks – Layne Christensen being the other (see here and here for prior posts).

Both enforcement actions were the result of voluntary disclosures in which the DOJ and/or SEC were complimentary of the company’s internal investigation, remedial actions, and compliance enhancements.

For instance, the DOJ noted that Bio-Rad conducted “an extensive internal investigation in several countries” and noted, among other things, as follows.

“the Company has engaged in significant remedial actions, including enhancing it 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 … and conducting extensive anti-corruption training throughout the global organization.”

Likewise, the SEC stated, among other things, as follows.

“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.”

In the Layne Christensen action, the SEC likewise stated, as other things, as follows.

“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.”

Nevertheless, both Bio-Rad and Layne Christensen have two-year reporting obligations to the government after the enforcement action.

The following observation is the same as in this prior post.

In situations involving voluntary disclosures where the enforcement agencies are complimentary of the company’s remedial actions and compliance enhancements, such post-enforcement action reporting obligations seem to be little more than a government required transfer of shareholder wealth to FCPA Inc.

Sure, such post-enforcement action reporting obligations give enforcement agency officials something to do and provide even more work for FCPA Inc., but in the situations discussed above, are such post-enforcement action reporting obligations necessary?

Both Bio-Rad’s (see below) and Layne Christensen’s FCPA scrutiny lasted approximately four years from beginning to enforcement action.  Tack on two more years of reporting obligations and the result is that these two instances of FCPA scrutiny will have provided FCPA Inc. participants an engagement lasting over six years.

This recent Wall Street Journal article asks “what would get more companies to self-disclose bribery” (a more detailed answer to this question will be explored in a future post).

One answer is to ditch the post-enforcement action reporting obligations in cases where there is a voluntary disclosure and the enforcement agencies are complimentary of the company’s remedial actions and compliance enhancements.

Or perhaps the post-enforcement action reporting requirements do indeed lead to more voluntary disclosures when one considers the important gatekeeper role FCPA counsel often play in such corporate decisions.  (See here).

Timeline

As indicated in the resolution documents, Bio-Rad’s initial self-disclosure of potential FCPA violations occurred in May 2010. The length of the company’s FCPA scrutiny – from point of first public disclosure to resolution – thus lasted approximately 4.5 years. (See here for the prior post “The Gray Cloud of FCPA Scrutiny Simply Lasts Too Long”).

5 for 5

In 2014, there have been five SEC corporate FCPA enforcement actions (Bio-Rad, Layne Christensen, Smith & Wesson, Alcoa, and HP).  All have been resolved via the SEC’s administrative process.

My recent article, “A Foreign Corrupt Practices Act Narrative,” (see pgs. 991-995) discusses this trend and how it is troubling as it places the SEC in the role of regulator, prosecutor, judge and jury all at the same time.  As Judge Rakoff recently observed, “from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?”

Here Come the Plaintiffs’ Lawyers

It is as predictable as the sun rising in the east.

No less than 24 hours after release of the Bio-Rad enforcement action documents, plaintiffs’ lawyers began salivating and announcing investigations to determine whether officers and directors of the company breached fiduciary duties owed to shareholders.  (See here, here, here, here, here, and here for releases).

Items Of Interest From The Layne Christensen Company Enforcement Action

By on October 29, 2014 in Anything of Value, Compliance, Facilitating Payments, Gray Cloud, Investigative Fees, Layne Christensen, Permits / Licenses / Customs / Tax, SEC Enforcement Action, Statute of Limitations, Voluntary Disclosure

Yesterday’s post dived deep into the Layne Christensen Company SEC FCPA enforcement action.

This post continues the analysis by highlighting various issues associated with the enforcement action.

4 for 4

In 2014, there have been four SEC corporate FCPA enforcement actions (Layne Christensen, Smith & Wesson, Alcoa, and HP).  All have been resolved via the SEC’s administrative process.

My recent article, “A Foreign Corrupt Practices Act Narrative,” (see pgs. 991-995) discusses this trend and how it is troubling as it places the SEC in the role of regulator, prosecutor, judge and jury all at the same time.  As Judge Rakoff recently observed, “from where does the constitutional warrant for such unchecked and unbalanced administrative power derive?”

Another noticeable feature of the Layne Christensen action was that the company resolved the SEC’s action without admitting or denying the SEC’s findings.  Smith & Wesson likewise resolved its FCPA enforcement action in this way.

$4

It is reasonable to assume that the SEC included findings in its order for a specific reason (and not just to practice its typing skills).

It is therefore noteworthy that the SEC’s order includes this finding:

“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.”

Stay tuned for (I predict) coming law firm client alerts and memos on this $4 payment.

As highlighted in this prior post, if the DOJ and SEC are genuine in their message that they are only “focused on bribes of consequence,” on payments of “real and substantial value” and in companies spending compliance dollars in the “most sensible way,” there is something very easy and practical for the enforcement agencies to do.

Only allege conduct that actually determines the ultimate outcome of the enforcement action.

Same Process, Different Results

Does voluntary disclosure and cooperation result in:

An SEC administrative cease and desist order?  Yes, see Layne Christensen.

An SEC non-prosecution agreement?  Yes, see Ralph Lauren.

An SEC deferred prosecution agreement?  Yes, see Tenaris.

An SEC civil complaint?  Yes, see Archer Daniels Midland Company.

Granted, the facts of each FCPA enforcement action are unique, but what drives FCPA practitioners and their clients crazy about the FCPA enforcement process is a lack of transparency and predictability of outcomes.

What Would Have Happened Had The SEC Been Put To Its Burden Of Proof?

Pardon me for being “that guy,” but what would have happened had the SEC been put to its burden of proof on its finding that Layne Christensen violated the FCPA’s anti-bribery provisions?  The SEC’s allegations all concerned payments outside the context of government procurement but rather to allegedly secure favorable tax treatment, customs clearance, work permits, relief from regulatory inspections, etc.

It is a matter of fact, that the SEC has been put to its ultimate burden of proof only once concerning alleged payments outside the context of government procurement and it lost that case.  (See here for the discussion of SEC v. Mattson and Harris). For a broader discussion of this issue, including DOJ actions, see this article.

Moreover, many of the SEC’s findings would seem to potentially implicate the FCPA’s facilitating payments exception.  On that score, in SEC v. Jackson & Ruehlen, a court ruled that the SEC has the burden of negating this statutory exception, something the SEC was unable to do in that case (based on certain similar facts as alleged in the Layne Christensen action) which resulted in a defendant-friendly settlement on the eve of trial.  (See here).

Finally, no doubt Layne Christensen as part of its cooperation likely agreed to toll statute of limitations or waive statute of limitations defenses altogether.  Yet it is worth highlighting that the bulk of the SEC’s findings concern conduct that allegedly occurred between 2005 and July 2009; in other words, beyond the FCPA’s typical 5 year statute of limitations.

Timeline

As highlighted in this 2010 post, Layne Christensen initially disclosed its FCPA scrutiny in Fall 2010.  The company’s first disclosure stated, in pertinent part:

“In connection with the Company updating its Foreign Corrupt Practices Act (“FCPA”) policy, questions were raised internally in late September 2010 about, among other things, the legality of certain payments to customs clearing agents in connection with importing equipment into the Democratic Republic of Congo (“DRC”) and other countries in Africa.  […] Although the Company has had a long-standing published policy requiring compliance with the FCPA and broadly prohibiting any improper payments by the Company to foreign or U.S. officials, the Company has adopted additional policies and procedures to enhance compliance with the FCPA and related books and records requirements. Further measures may be required once the investigation is concluded.”

In short, Layne Christensen’s FCPA scrutiny – from point of first public disclosure to resolution – lasted approximately 4 years.

The “Three Buckets” 

In my article, “Foreign Corrupt Practices Act Ripples,” I coin the term “three buckets” of FCPA financial exposure and demonstrate how settlement amounts in an actual FCPA enforcement action (“bucket #1) are often not the most expensive aspect of FCPA scrutiny and enforcement.

In nearly every case in which a comparison can be made, “bucket #1” (pre-enforcement action professional fees and expenses) is the most expensive aspect of FCPA scrutiny.

The numbers in Layne Christensen serve as another instructive reminder.

Bucket #1 = in excess of $10 million (based on the company’s disclosures)

Bucket #12 = $5.1 million

Bukcet #3 (post enforcement action professional fees and expenses) are to be determined.  A noticeable aspect of the Layne Christensen action (one based on a voluntary disclosure and cooperation) is that the company has a reporting obligation imposed upon it.  As stated in the SEC’s order, Layne Christensen shall “report to the Commission periodically, at no less than nine-month internals during a two-year term, the status of its FCPA and anti-corruption related remediation and implementation of compliance measures.”

Compliance Enhancements, Etc.

During its period of FCPA scrutiny, Layne Christensen previously disclosed the following compliance enhancements.

  • contracted with a third party forensics accounting team to conduct an in-depth review of the operations in Africa and to make recommendations for improvement to the internal control systems;
  • reviewing existing arrangements with third parties interacting with government officials in international locations in an effort to assure that contracts and agreements include anti-corruption terms and conditions;
  • performing due diligence on third parties interacting with government officials in international locations and implementing a process to assess potential new third parties;
  • terminated certain agency and business relationships;
  •  established a separate position of, and appointed, a chief compliance officer, effective March 30, 2011, under the supervision of our Senior Vice President, General Counsel and Secretary to facilitate implementation and maintenance of compliance policies, procedures, training, reporting and internal reviews, with indirect reporting responsibility to the audit committee;
  • developed new procedures to improve the controls over cash handling and record retention;
  • conducting a company-wide risk assessment, including an employee survey, to ascertain whether similar issues may exist elsewhere in the Company;
  • initiated an enhanced company-wide, comprehensive training of Company personnel in the requirements of the FCPA, including training with respect to those areas of the Company’s operations that are most likely to raise FCPA compliance concerns; and
  • continued to enhance our training of management, including our operations managers, to emphasize further the importance of setting the proper tone within their organization to instill an attitude of integrity and control awareness and the use of a thorough and proper analysis of proposed transactions.

 

Layne Christensen Company Resolves SEC Enforcement Action

By on October 28, 2014 in 2014 Enforcement Actions, Burkina Faso, Congo, Guinea, Layne Christensen, Mali, Mauritania, Permits / Licenses / Customs / Tax, SEC Enforcement Action, Tanzania

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%.

Self-Serving Statements Do Not Establish The Truth Of The Matter Asserted

By on October 21, 2014 in Declination Decisions, Layne Christensen, Morgan Stanley

FCPA Professor is the best website devoted to the Foreign Corrupt Practices Act.

Does this self-serving statement establish the truth of the matter asserted?

Of course not.

Yet, in the FCPA context it seems that many self-serving statements by political actors, advocates, and counsel are reported as establishing the truth of the matter asserted.

For instance, recently there was much reporting in the FCPA space regarding the DOJ’s so-called declination of Layne Christensen Company.

As highlighted in this prior post, the company has been under FCPA scrutiny since 2010 concerning conduct in Africa and as noted in this November 2013 post, the company disclosed that it was “engaged in discussions with the DOJ and the SEC regarding a potential negotiated resolution” of the matter.

However, in August Layne Christensen issued this release which stated in pertinent part:

“The DOJ has decided to not file any charges against the Company in connection with the previously disclosed investigation into potential violations of the FCPA.  The DOJ has notified Layne that it considers the matter closed. […] Based on conversations with the DOJ, we understand that our voluntary disclosure, cooperation and remediation efforts have been recognized and appreciated by the staff of the DOJ and that the resolution of the investigation reflects these matters.”

The implicit suggestion from the company’s disclosure would seem to be that the reasons for the so-called declination was the company’s voluntary disclosure, cooperation and remediation.  Yet, the disclosure of course is little more than a self-serving statement that does not establish the truth of the matter asserted (indeed there have been many FCPA enforcement actions originating from voluntary disclosures during which the company cooperated and engaged in extensive remedial measures).

Moreover, there could be other reasons why the DOJ declined to prosecute Layne Christensen including the nature and quality of the evidence that the company actually violated the FCPA.  There is no way to test or measure the accuracy of Layne Christensen’s disclosure, yet the public is  invited to accept the self-serving statements as establishing the truth of the matter asserted.

Perhaps sensing a marketable moment, Layne Christensen’s counsel took the unusual step of issuing this press release. The release noted the “recently closed DOJ investigation” of its client and then cited to the substance of its own client’s press release.  In other words, the firm used its client’s self-serving statements to support its own self-serving statements with the implicit suggestion being that the nature and quality of the firm’s lawyering was a reason for the so-called declination of its client by the DOJ.

No big deal, everyone is entitled to engage in a bit of puffery aren’t they?

Yet, the problem arises when self-serving statements are then reported by others to establish the truth of the matter asserted.

And that is precisely what this recent article appeared to do.  The article began as follows.

“Often the best guidance on how to avoid Foreign Corrupt Practices Act charges comes from the details of cases that government authorities chose not to pursue. Companies looking to improve their FCPA compliance programs got two such cases recently. Together, the cases speak volumes about how to get a declination from the Department of Justice. In an unusual move, the Department of Justice opted not to bring enforcement actions against Image Sensing Systems and Layne Christensen in two separate cases pertaining to alleged violations of the FCPA. Statements issued by the companies themselves cite numerous reasons why the Justice Department declined to prosecute.” (emphasis added).

The article then quoted a number of self-serving statements from Layne Christensen’s counsel that appear to convince the reader of the truth of the matter asserted by the statements.

The above linked article even closed with the biggest self-serving statement of them all in the context of so-called DOJ declinations. The article stated:

“Learning from Morgan Stanley

In 2012, the Justice Department similarly exonerated Morgan Stanley of FCPA charges for its extensive cooperation, robust internal compliance program, and voluntary disclosure of the misconduct. “Often overlooked is one of the critical factors that led to that declination: Morgan Stanley assisted the government in identifying the individual executive responsible for the criminal conduct, Garth Peterson, and in securing evidence to hold Peterson criminally responsible,” [stated an industry participant]. For other companies facing an FCPA investigation, engaging the help of outside experts who have been through the process many times before and can help the company “not have to reinvent the wheel,” [stated an industry participant], really helps in the end to see the successful conclusion of an FCPA investigation and remediation.”

The above article cited, as so many articles have before, the self-serving statements in this April 2012 DOJ press release concerning its so-called Morgan Stanley declination.  However, the DOJ’s statements in that press release were not simply that of an umpire calling the balls and strikes.  Rather, the press release statements concerning Morgan Stanley are more properly viewed as statements by a political actor and advocate seeking to quell the then-existing growing tide of FCPA reform, including as to a compliance defense.  (See prior posts here and here for the context, timing, and background of the DOJ’s so-called Morgan Stanley declination).

In short, the DOJ was looking for an opportunity to make a policy statement – and a political move – yet to most this self-serving statement seemed to establish the truth of the matter asserted.  That this was the primary motivation of the DOJ’s so-called Morgan Stanley declination seems to become more apparent with time as it is a prominent talking point in nearly every DOJ FCPA policy speech since.  (See here – Sept. 2012); (here – October 2012); (here – Nov. 2012); (here – Nov. 2013); (here – Nov. 2013); (here – May 2014); (here – Sept. 2014); (here – Oct. 2014).

To anyone who has attended an FCPA conference in recent years, you know that self-serving statements dominate the conference circuit.

For instance, a DOJ or SEC enforcement official will state x, y, or z.  It is of course impossible to test the accuracy or veracity of x, y, or z, but the audience is of course invited to accept the self-serving statement as establishing the truth of the matter asserted.

Likewise, it is common on the conference circuit for FCPA Inc. participants to tell “war stories” about how they successfully negotiated with the DOJ or SEC as to issue x, y or z.  Again, it is of course impossible to test the accuracy or veracity of x, y or z, but once again the audience is invited to accept the self-serving statement as establishing the truth of the matter asserted.

To conclude, the point is this.

Self-serving statements are fine and political actors, advocates, and counsel are entitled to make them.  Yet, greater restraint should be exhibited in reporting self-serving statements as establishing the truth of the matter asserted.

Powered by WordPress. Designed by WooThemes