Top Menu

Nigeria … A Challenging Market

Nigeria.

It is one of Africa’s largest markets. It is also one of the largest oil and gas producing nations in the world.

No surprise then that many companies subject to the FCPA do business in Nigeria.

Problem is, Nigeria is also an incredibly challenging and complex market to do business in from an FCPA perspective.

The recent Bonny Island bribery enforcement actions (see here and here), and Panalpina’s pending FCPA enforcement action (see here), which is largely focused on Nigeria, all highlight this point.

Just how challenging and complex is the Nigerian market?

Based on a report (see here) released earlier this month, incredibly so.

The report, jointly commissioned by the European Union (EU), the UN Office on Drugs and Crime, Nigeria’s Economic and Financial Crimes Commission (EFCC), and the National Bureau of Statistics (NBS), was carried out in 2007 and funded by the EU at a cost of 25 million euro (US$31.2 million). It is the aggregation of results from a survey of 2,200 companies doing business across Nigeria.

Among the findings of the report, 71% of respondents answered that corruption presents a serious risk for doing business in Nigeria and the payment of bribes affects most companies operating in the country. According to the report, one in three companies reported paying a bribe to public officials in undertaking administrative tasks. According to the report, in dealing with police or clearing goods through customs, the payment of bribes is common.

Payment of bribes in connection with custom clearances is at the heart of the pending Panalpina enforcement action (as well as numerous other recent FCPA enforcement actions such as Helmerich & Payne, Inc. (see here) and Nature’s Sunshine Products, Inc. (see here).

The recent Nigeria report, specifically its finding that the payment of bribes is common in clearing goods through customs, begs the questions – is this exactly the reason why Congress included a facilitation payment exception to the FCPA? If the answer if yes, then what does it say about the pending Panalpina enforcement action, the recent Helmerich & Payne and Nature’s Sunshine Products enforcement actions, and the numerous other enforcement actions based in whole or in part on customs issues.

For a prior post on facilitating payments, see here.

Blackwater In Hot Water

The New York Times (here) reports that the DOJ “is investigating whether officials of Blackwater Worldwide tried to bribe Iraqi government officials in hopes of retaining the firm’s security work in Iraq.”

According to the Times, the DOJ’s fraud section open an investigation “late last year” to determine whether Blackwater employees violated the FCPA. The investigation follows a November 2009 times article (here) which first raised questions about Blackwater’s (now known as Xe Services) conduct in Iraq. That article suggested that the alleged payments at issue were made to Iraqi “foreign officials” to help secure an operating license the company needed to continue doing business in Iraq.

As noted in a prior post (here), this case is interesting on several levels.

First, the case (from an FCPA antibribery perspective) would seem to hinge on the FCPA’s “obtain or retain” business element, and is another example of the post-Kay explosion in enforcement actions in which alleged improper payments were made to help secure foreign government licenses, permits, etc. An interesting wrinkle to this analysis is that the Iraqi license was apparently needed so that Blackwater could retain its contract with the U.S. State Department – not with a foreign entity as is usually the case.

Second, rarely if perhaps ever, has an FCPA inquiry focused on the conduct of a company so intertwined with U.S. government agencies (State Department and CIA) operating in a war zone.

Ready, Set, Go …

The 2010 FCPA enforcement year has begun.

Yesterday, the SEC announced (here) resolution of an FCPA books and records and internal controls action against NATCO Group Inc. – a Houston based “worldwide leader in design, manufacture, and service” of oil and gas process equipment (see here).

The SEC complaint (here) alleges that TEST Automation & Controls, Inc., a wholly-owned subsidiary of NATCO Group, “created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan.” According to the complaint, “NATCO’s system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO’s consolidated books and records did not accurately reflect these payments.”

According to the complaint, TEST maintained a branch office in Kazakhstan and in June 2005 it won a contract which required it to hire both expatriates and local Kazakh workers. Pursuant to Kazakh law, TEST needed to obtain immigration documentation before an expatriate worker could enter the country. Thereafter, Kazakh immigration authorities claimed that TEST’s expatriate workers were working without proper documentation and the authorities threatened to fine, jail, or deport the workers if TEST did not pay cash fines.

According to the complaint, TEST employees believed the threats to be genuine and, after consulting with U.S. TEST management who authorized the payments, paid the officials approximately $45,0000 using their personal funds for which the employees were reimbursed by TEST.

The complaint alleges that when reimbursing the employees for these payments, TEST inaccurately described the money as: (i) being an advance on a bonus; and (ii) visa fines.

The complaint further alleges that TEST used consultants in Kazakhstan to assist in obtaining immigration documentation for its expatriate employees and that “one of these consultants did not have a license to perform visa services, but maintained close ties to an employee working at the Kazakh Ministry of Labor, the entity issuing the visas.” According to the complaint, the consultant twice requested cash from TEST to help him obtain the visas and the complaint alleges that the consultant provided TEST with bogus invoices to support the payments.

Based on the above allegations, the SEC charged NATCO with FCPA books and records and internal control violations even though the complaint is completely silent as to any involvement or knowledge by NATCO in the conduct at issue. This action is thus the latest example of an issuer being strictly liable for a subsidiary’s books and records violations (see here for a prior post).

Without admitting or denying the SEC’s allegations, NATCO agreed to pay a $65,000 civil penalty. According to the SEC’s findings in a related cease and desist order (here), during a routine internal audit review, NATCO discovered potential issues involving payments at TEST, conducted an internal investigation, and voluntarily disclosed the results to the SEC. The order also lists several other remedial measures NATCO implemented.

I’ve noted in prior posts that one of the effects of voluntary disclosure is that it sets into motion a whole series of events including, in many cases, a much broader review of the company’s operations so that the company can answer the enforcement agencies’ “where else may this have occurred” question.

On this issue, the SEC order states that NATCO “expanded its investigation to examine TEST’s other worldwide operations, including Nigeria, Angola, and China, geographic locations with historic FCPA concerns.” However, the SEC order notes that “NATCO’s expanded internal investigation of TEST uncovered no wrongdoing.”

According to the complaint, at all times relevant to the complaint, NATCO’s stock was listed on the NYSE, but in November 2009 NATCO became a subsidiary of Cameron International Corporation (here) (an NYSE listed company) and NATCO’s NYSE listing ended.

The NATCO enforcement action is “as garden variety” of an FCPA enforcement action as perhaps one will find. Not only does moving product into and out of a country expose a company to FCPA risk, but so too does moving employees into and out of a country.

The NATCO civil penalty also demonstrates that in certain cases, the smallest “cost” of an alleged FCPA violation are the fines or penalties, figures which are so dwarfed by investigative, remedial and resolution costs.

FCPA Aches and “Payne”s

Helmerich & Payne Inc. (“H&P”) is an international drilling contractor headquartered in Tulsa. It has land and offshore operations in South America. To operate in that region, H&P must import and export equipment and materials. According to the DOJ and SEC, therein lies the problem.

H&P recently settled a DOJ and SEC FCPA enforcement action based on the conduct of two wholly-owned second tier subsidiaries, Helmerich & Payne (Argentina) Drilling Company (“H&P Argentina”) and Helmerich & Payne de Venezuela, C.A. (“H&P Venezuela”).

Pursuant to a two-year DOJ non-prosecution agreement, H&P acknowledged responsibility for the conduct of H&P Argentina and H&P Venezuela in making various improper payments to officials of the Argentine and Venezuelan customs services. According to a DOJ release (see here), the payments “were made in order to import and export goods that were not within regulations, to import good that could not lawfully be imported, and to evade higher duties and taxes on the goods.” Pursuant to the agreement, H&P will pay a $1 million penalty.

In a parallel action, H&P agreed to an SEC settlement under which it agreed to pay approximately $375,000. The SEC cease-and-desist order (“Order”) (see here) finds that: (i) “H&P Argentina paid Argentine customs officials approximately $166,000 to permit the importation and exportation of equipment and materials without required certifications, to expedite the importation of equipment and materials, and to allow the importation of materials that could not imported under Argentine law; and (ii) “H&P Venezuela paid Venezuelan customs officials approximately 19,673 either to permit the importation and exportation of equipment and materials that were not in compliance with Venezuelan importation and exportation regulations or to secure a partial inspection, rather than a full inspection, of the goods being imported.”

According to the Order, the payments were “falsely, or at least misleadingly” described as “additional assessments,” “extra costs,” “extraordinary expenses,” “urgent processing,” “urgent dispatch,” or “customs processing.” The SEC found that as a result of the payments, H&P avoided approximately $320,000 in expenses it would have otherwise incurred had it properly imported and exported the equipment and materials. The subsidiaries’ financial results were included in H&P’s filings with the SEC and, based on the above conduct, the SEC found that H&P violated the FCPA books and records and internal control provisions.

The Order is silent as to H&P’s knowledge of or involvement in the above described payments.

No doubt H&P received an SEC cease and desist order (the least harsh SEC sanction) and a DOJ non-prosecution agreement because of its conduct upon learning of the payments. As described in the Order, during an FCPA training session, an employee voluntarily disclosed some potentially problematic payments, through a customs broker, in Argentina to customs officials. Thereafter, H&P hired FCPA counsel, conducted an internal investigation, and voluntarily reported the conduct at issue to the government.

According to H&P’s Form 8-K filed on July 30, 2009 (see here), “[t]here are no criminal charges involved in the settlements and disciplinary action has been taken by the company with respect to certain employees involved in the matter, including in some cases, termination of employment.” The 8-K also notes that both settlements “recognize the company’s voluntary disclosure, cooperation with both agencies, and its proactive remedial efforts.”

Gray Sky Over Nature’s Sunshine As It Settles FCPA Enforcement Action

Companies have varying degrees of FCPA risks. Generally, at the high-end of the spectrum is a resource extraction company operating in a third-world country with an unstable government. At the low-end of the spectrum, it would seem, is a Utah-based company which got its start as a small family business selling encapsulated cayenne and other herbs to health food stores.

Yet, as evidenced by the SEC’s recent FCPA enforcement action against Nature’s Sunshine Products, Inc. (“NSP”), even a company with a relatively low FCPA risk profile can run afoul of the FCPA.

As described in the SEC’s Litigation Release (see here) NSP, without admitting or denying the allegations in an SEC civil complaint, agreed to pay a $600,000 civil penalty to resolve allegations that it violated (among other securities laws – see below) the FCPA’s anti-bribery, books and records, and internal control provisions.

According to the SEC complaint (see here), Brazil was NSP’s largest foreign market, but in approximately 2000, the Brazilian governmental agency responsible for regulating nutritional products reclassified certain of NSP’s products as medicines, thus requiring a registration process prior to import and sale of the products in Brazil. As alleged in the SEC complaint, NSP’s wholly-owned subsidiary in Brazil (“NSP Brazil”) circumvented the registration process by making approximately $1 million in cash payments to customs brokers, some of which was later used to pay Brazilian customs officials so that they would allow NSP Brazil to import unregistered product into Brazil. According to the SEC, these payments were booked by NSP Brazil as “importation advances,” but without supporting documentation. Thereafter, as alleged by the SEC, NSP Brazil purchased fictitious supporting documentation for the payments.

As suggested above, in addition to the FCPA charges, the SEC complaint also charges other securities laws violations not typically found in an FCPA enforcement action such as fraud in connection with the purchase and sale of securities and false filings with the SEC. These other charges appear to be based on the allegation that NSP, in a prior Form 10-K filing with the SEC, stated that NSP Brazil experienced a significant decline in sales “due to import regulations imposed by the Brazilian government” but which failed to disclose any material information related to the above-mentioned cash payments.

Also charged in the SEC complaint were Douglas Faggioli, the current President and Chief Executive Officer of NSP and a member of its board of directors who during the relevant time period was NSP’s Chief Operating Officer, and Craig Huff, NSP’s former CFO. The complaint alleges that Faggioli and Huff, as “control persons” of NSP, violated the FCPA’s books and records and internal control provisions. In language that is sure to induce a cold sweat for any executive, the SEC generally alleged that both Faggioli and Huff had “supervisory responsibilities” over NSP’s senior management and policies, yet as “control persons,” “failed to make and keep books, records, and accounts, which in reasonable detail, accurately and fairly reflected the transactions of NSP” and failed to devise and maintain an adequate system of internal accounting controls. Without admitting or denying the SEC’s allegations, Faggioli and Huff each agreed to pay a $25,000 civil penalty.

According to an NSP press release (see here) no “current NSP officers, directors, or employees are alleged to have participated in or had knowledge of any of the improper conduct” alleged in the SEC complaint. The press release also notes that NSP voluntarily disclosed the conduct at issue to both the SEC and the DOJ and fully cooperated in the government’s investigation. The press release also states that NSP “anticipates no action by the DOJ” as to the disclosed conduct.

The NSP FCPA enforcement action, and other such enforcement actions against traditionally low FCPA risk companies, should serve notice to all that no industry is immune from FCPA scrutiny.

Powered by WordPress. Designed by WooThemes