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Two Firsts In The U.K. – First Use Of Sec. 7 Of The Bribery Act In A Foreign Bribery Action And First Use Of A DPA

By on December 2, 2015 in Financial Services Industry, Serious Fraud Office, Standard Bank, Tanzania, U.K. Bribery Act, United Kingdom
Across the Pond

Earlier this week, the U.K. Serious Fraud Office announced two firsts in connection with an enforcement action against Standard Bank Plc (currently known as ICBC Standard Bank Plc):

(i) the first use of Section 7 of the Bribery Act (the so-called failure to prevent bribery offense) in a foreign bribery action; and

(ii) the first use of a deferred prosecution agreement in the U.K..

The conduct at issue focused on allegations that a former affiliate company of Standard Bank made an improper payment to a partner in Tanzania intended to induce members of the Government of Tanzania to show favor to the affiliate’s and Standard Bank’s proposal for a US$600 million private placement offering to be carried out on behalf of the Government of Tanzania.

The underlying source documents are linked below and future posts will further explore the DPA, the Sec. 7 “failure to prevent” bribery offense, and the related U.S. enforcement action against Standard Bank.

(Speaking of Sec. 7 of the Bribery Act, the SFO announced today the following: “The Serious Fraud Office can confirm that Sweett Group plc has admitted an offence under Section 7 of the Bribery Act 2010 regarding conduct in the Middle East. […] Further details will be made available when the matter comes before court, at a date still to be determined.).

Deferred Prosecution Agreement

Statement of Facts

Preliminary Judgement

Full Judgement

In this release, the SFO stated:

“The Serious Fraud Office’s first application for a Deferred Prosecution Agreement was … approved by Lord Justice Leveson at Southwark Crown Court, sitting at the Royal Courts of Justice.

The counterparty to the DPA, Standard Bank Plc (now  known as ICBC Standard Bank Plc) (“Standard Bank”), was the subject of an indictment alleging failure to prevent bribery contrary to section 7 of the Bribery Act 2010. This indictment, pursuant to DPA proceedings, was immediately suspended. This was also the first use of section 7 of the Bribery Act 2010 by any prosecutor.

As a result of the DPA, Standard Bank will pay financial orders of US$25.2 million and will be required to pay the Government of Tanzania a further US$7 million in compensation. The bank has also agreed to pay the SFO’s reasonable costs of £330,000 in relation to the investigation and subsequent resolution of the DPA.

In addition to the financial penalty that has been imposed, Standard Bank has agreed to continue to cooperate fully with the SFO and to be subject to an independent review of its existing anti-bribery and corruption controls, policies and procedures regarding compliance with the Bribery Act 2010 and other applicable anti-corruption laws. It is required to implement recommendations of the independent reviewer (Price Waterhouse Coopers LLP).

Commenting on the DPA, Director of the SFO David Green CB QC said:

“This landmark DPA will serve as a template for future agreements. The judgment from Lord Justice Leveson provides very helpful guidance to those advising corporates. It also endorses the SFO’s contention that the DPA in this case was in the interests of justice and its terms fair, reasonable and proportionate. I applaud Standard Bank for their frankness with the SFO and their prompt and early engagement with us.”

The suspended charge related to a US$6 million payment by a former sister company of Standard Bank, Stanbic Bank Tanzania, in March 2013 to a local partner in Tanzania, Enterprise Growth Market Advisors (EGMA). The SFO alleges that the payment was intended to induce members of the Government of Tanzania, to show favour to Stanbic Tanzania and Standard Bank’s proposal for a US$600 million private placement to be carried out on behalf of the Government of Tanzania. The placement generated transaction fees of US$8.4 million, shared by Stanbic Tanzania and Standard Bank.

On 18 April 2013, Standard Bank’s solicitors Jones Day reported the matter to the Serious and Organised Crime Agency and on 24 April to the SFO. It also instructed Jones Day to begin an investigation and to disclose its findings to the SFO. The resulting report was sent to the SFO on 21 July 2014.

The SFO reviewed the material obtained and conducted its own interviews. Subsequently, the Director of the SFO considered that the public interest would likely be met by a DPA with Standard Bank and negotiations were commenced accordingly.

The SFO has worked with the US Department of Justice (DoJ) and Securities and Exchange Commission (SEC) throughout this process. A penalty of $4.2m has been agreed between Standard Bank and the SEC in respect of separate related conduct.

We are very grateful to the DoJ, the SEC, the Foreign and Commonwealth Office, the Financial Conduct Authority for their assistance in resolving this investigation and deferred prosecution.”

The SFO release also provided the following information.

  • The charge against Standard Bank has been suspended for three years, after which, subject to the bank’s compliance with the terms of the DPA, the SFO will discontinue the proceedings.
  • Standard Bank’s US$25.2 million total financial penalty, which is payable to HM Treasury, consists of a US$16.8 million financial penalty and a US$8.4 million disgorgement of profits. The compensation due to the Government of Tanzania consists of US$6 million, plus interest of US$1,046,196.58.

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%.

Oxford Publishing Resolves U.K. SFO / World Bank Actions

By on July 4, 2012 in Debarment, Kenya, Monitor, Oxford Publishing Limited, Publishing Industry, Serious Fraud Office, Tanzania, United Kingdom, Voluntary Disclosure, World Bank

Last July, the U.K. publisher resolving an enforcement action concerning textbook and other sales in East Africa was Macmillian Publishing (see here for the prior post).  This July, it is Oxford Publishing Limited (OPL), a wholly owned subsidiary of Oxford University Press (OUP).

Yesterday the U.K. Serious Fraud Office announced (here) an enforcement action against OPL regarding “unlawful conduct related to subsidiaries incorporated in Tanzania and Kenya.”  The conduct at issue included “participating in public tenders for contracts to supply governments with text books and other educational materials for the school curricula.”

Pursuant to a civil recovery order under the Proceeds of Crime Act, OPL agreed to pay £1,895,435.

Under the heading “self referral” the SFO release states as follows.

“In 2011, OUP became aware of the possibility of irregular tendering practices involving its education business in East Africa.  OUP acted immediately to investigate the matter, instructing independent lawyers and forensic accountants to undertake a detailed investigation. As a result of the investigation, in November 2011 OUP voluntarily reported certain concerns in relation to contracts arising from a number of tenders which its Kenyan and Tanzanian subsidiaries … entered into between the years 2007 and 2010. […] The investigation was thorough – involving numerous interviews and an extensive review of documents and electronic data – and completed to the satisfaction of the SFO. The substantial product of those investigations was presented to the SFO […]  The product of that work led the SFO … to believe that [OPL subsidiaries] had offered and made payments, directly and through agents, intended to induce the recipients to award competitive tenders and/or publishing contracts for schoolbooks.”

The SFO release states that “a number of relevant features … led to the decision to pursue a civil recovery order in place of a criminal prosecution.”  Those factors include the following:  “OUP has conducted itself in a manner which fully meets the criteria set out in the SFO guidance on self reporting matters of overseas corruption” and “there is no evidence of Board level (or the equivalent) knowledge or connivance within OUP in relation to the business practices which led to the case being referred to the SFO.”  The SFO release also states as follows.  “The products supplied were of a good standard and provided at ‘open market’ values.  This means that the jurisdictions involved have not been victims as a result of overpaying for the goods or as a result being supplied goods which were unsuitable or not required.”

The SFO release further states as follows.

“Since the occurrence of the conduct that is the subject matter of the civil recovery order, OUP has introduced enhanced compliance procedures intended to significantly reduce the risk of recurrence of such conduct within OUP.  These procedures will be subject to review by a monitor who will report to the Director of the SFO within twelve months …”.

As noted in the SEC release, OUP also “unilaterally offered to contribute £2,000,000 to not-for-profit organisations for teacher training and other educational purposes in sub-Saharan Africa.  This was a reflection of the seriousness with which OUP views the course of events that were subject to the investigation and a wish to acknowledge that the conduct of [its subsidiaries] fell short of that expected within its wider organisation.”  As to this contribution, the SFO releases states that it “decided that the offer should not be included in the terms of the court order as the SFO considers it is not its function to become involved in voluntary payments of this kind.”

In the release, SFO Director David Green states as follows.  “This settlement demonstrates that there are, in appropriate cases, clear and sensible solutions available to those who self report issues of this kind to the authorities.  The use of Civil Recovery powers has been exercised in accordance with the Attorney General’s guidelines.  The company will be adopting new business practices to prevent a recurrence of these issues and these new procedures will be subject to an extensive and detailed review.”

Finally, the SFO release notes that it “has previously been subject to criticism in relation to the transparency of the processes and proceedings in civil recovery matters.”  Thus the SFO release links to a number of documents including this Claim Form which sets forth specific claim details.

Based on the same core conduct, the World Bank also announced yesterday (here) that “OUP has agreed to make a payment of US$500,000 to the World Bank.”  In addition, as part of a negotiated resolution, the World Bank “announced the debarment of two wholly-owned subsidiaries of OUP, namely: Oxford University Press East Africa Limited (OUPEA) and Oxford University Press Tanzania Limited (OUPT) – for a period of three years following OUP’s acknowledgment of misconduct by its two subsidiaries in relation to two Bank-financed education projects in East Africa.”

In a statement (here) OUP Chief Executive Nigel Portwood stated as follows.

“OUP is committed to maintaining the highest ethical standards, and we have been deeply concerned to discover evidence of wrongdoing in two of our African subsidiaries. We do not tolerate such behaviour. As soon as these matters came to light we acted immediately to investigate thoroughly and report to the relevant authorities. We have strengthened our management in the region and are taking appropriate disciplinary action in respect of those involved in this conduct.”

Where Should The Money Go?

By on March 26, 2012 in BAE, Disgorgement, FCPA Reform, Private Right of Action, SEC, Serious Fraud Office, Tanzania, United Kingdom, Victims

It is a thorny question with no easy answer.  Where should the money go when a company resolves an FCPA enforcement action?  It was addressed last year in connection with the Alcatel-Lucent enforcement action.  (See here, and here for prior posts).  Two recent events raise the issue again.

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Earlier this month, it was announced (here) that the U.K. “Serious Fraud Office, the Government of Tanzania, BAE Systems and the Department for International Development (DFID) … signed a Memorandum of Understanding enabling the payment of £29.5 million [$47 million USD] plus accrued interest to be paid by BAE Systems for educational projects in Tanzania.”  As noted in the release, “textbooks will be purchased for all 16,000 primary schools in the country and as a result 8.3 million children will benefit” in subjects such as Kiswahli, English, Maths and Science.  The release further notes that funds will also be used to “provide all 175,000 primary school teachers with teachers’ guides, syllabi and syllabi guides to help improve their teaching skills” as well as the purchase of desks.  In the release, SFO Director Richard Alderman stated as follows.  “This agreement is a first for the SFO which piloted it through the UK legal system. It provides a satisfactory outcome for all concerned but most of all for the Tanzanian people and I am personally delighted that SFO staff were able to achieve this.”

In this release, BAE stated as follows.  “We are glad to finally be able to make the payment to the Government of Tanzania and bring this matter to a close. We are grateful to DFID for their work in agreeing the Memorandum of Understanding with the Government of Tanzania.”  The BAE release states that the “payment follows the settlement agreed between BAE Systems and the SFO.”  For a prior post on the settlement, see here.

To be sure, BAE’s payment to Tanzania, and the role of the SFO in brokering the payment, feels good.  What is not to like about children receiving textbooks?

However, the feel good nature of this most recent BAE development should not mask the significant problems with the BAE enforcement action (on both sides of the Atlantic).  As noted in this prior post, even the U.K. judge who accepted the SFO-BAE plea agreement called it “loosely and hastily drafted” and said the fine he levied reflected that he couldn’t “sentence for an offense which the prosecution failed to charge.”

And let’s not forgot how this story began.  In 2004, the SFO began investigating whether BAE made bribe payments to secure Saudi fighter jet contracts. However, in late 2006, the SFO was forced to halt its investigation under pressure from the U.K. government, which cited national security concerns should the investigation go forward.  However, because BAE also allegedly made bribe payments in numerous other countries to secure business, the SFO, under a new Director, revived its  investigation of BAE, at least as to non-Saudi issues, including whether the  company paid bribes to secure contracts in various European and African countries. After settlement talks stalled – the conventional wisdom is that BAE was unwilling to plead guilty to bribery related offenses given the collateral effect of the mandatory European Union debarment provisions – the SFO pressed ahead with the case.  In late January 2010, the SFO issued a release (here) stating that Count Mensdorff, a former BAE agent, was criminally charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.” Then, in early February 2010, the SFO announced (here) its long-awaited resolution of the BAE matter. Despite allegations of wide-spread bribery on a global scale, and despite BAE’s agent being criminally indicted a few days earlier in connection with bribe payments in “certain Eastern and Central European countries” (presumably on evidence that such payments did indeed occur), the SFO resolution related solely to the company’s failure “to keep reasonable and accurate accounting records in relation to its activities in Tanzania.”  Most dramatic, and in a strange turn of events, the SFO announced that it had withdrawn the criminal charges filed days earlier against Count Mensdorff. The same release also noted that “[t]his decision brings to an end the SFO’s investigations into BAE’s defense contracts.”  For more on “BAE – Inside the SFO”, see this prior post.

In any event, at least some children in Tanzania received some textbooks from BAE as a result.

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As previously highlighted on the FCPA Blog (here), Socio-Economic Rights and Accountability Project (“SERAP”) (a non-governmental civil society organization in Nigeria) recently wrote a letter (here) to SEC Enforcement Division Director Robert Khuzami (with a copy to Assistant Attorney General Lanny Breuer and Deputy Chief, Fraud Section Charles Duross)  regarding “FCPA civil penalty and disgorgement proceeds that companies agree to pay to resolve US Foreign Corrupt Practices Act investigations.”  As the letter notes, “currently such proceeds, once paid, are retained by the U.S. government.”

In summary, the SERAP letter requests “that the Enforcement Division establish a case-by-case policy or process that would enable foreign governmental entities that have been victims of corruptly-procured contracts to apply for, subject to appropriate anti-corruption safeguards, some or all of the civil penalty and disgorgement proceeds that would eventually be paid by companies alleged to have violated the U.S. Foreign Corrupt Practices Act.”  SERAP also suggests that “civil society groups in the home country, or U.S. non-profit organizations serving that country, be eligible within a short time-period to apply for such proceeds as well, or instead, for use for ‘public benefits projects’ in the affected foreign country, again subject to anti-corruption safeguards.”

The SERAP letter notes, among other things, as follows.  “… Many citizens in a country where such bribery has occurred might consider FCPA civil penalties and disgorgement payments imposed by the US, and then kept by the US, as in fact representing funds that rightfully ‘belong’ to the victim.”

Stating that “corruptly procured contracts ‘cost’ the victim at least 10 percent extra” the SERAP letter says that “this figure ought to be a presumed measure of possible funds available for third-party application in the context of a civil FCPA settlement, particularly since the Enforcement Division typically settles an investigation before extensive evidence of damages, as opposed to liability, is placed in the public realm.”

The specific SERAP proposal is as follows.  “…[A]fter, and ony after, public notice of an FCPA settlement agreement, the victim foreign government entity and any applicant NGO would have 60 days to file a request that the Enforcement Division pay some or all of the agreed payment proceeds to or for the benefit of the victim government entity or to a home country-based or US based NGO that would present a proposal [to] spend the proceeds for public purposes (e.g. on public health programs) in the country of the victim entity.  Thereafter, the Enforcement Division would have 60 days to act upon the request, favorably or not in its discretion; in this context the Enforcement Division should provide a brief statement of its reasons for its decisions.  In reaching its decisions the Enforcement Division would have the inherent authority to consult with Executive Branch agencies of the US government.

The SERAP letter raises some interesting issues regarding alleged victims of FCPA enforcement actions.  The SERAP letter also raises some interesting questions, including the following.

If the SEC would be required to relinquish a certain portion of money recovered in an FCPA enforcement action, what impact would this have on FCPA enforcement?  Would the SEC be less aggressive in bringing enforcement actions or perhaps more aggressive because more enforcement actions would be needed to sustain the current FCPA “revenue stream”?  For instance, 10% of SEC FCPA “revenue” in 2011 was approximately $15 million, in 2010 approximately $53 million.

The SERAP proposal appears to assume that all FCPA enforcement actions involve foreign government procurement.  This is not the case.  Approximately 50% of recent  FCPA enforcement actions (i.e. in the past five years) do not involve foreign government procurement, but rather issues relating to foreign taxes, customs duties, or foreign licenses, permits, certifications and the like.  Is the victim analysis the same in these FCPA enforcement actions compared to foreign government procurement enforcement actions?

Are individuals or organizations located in the country giving rise to the FCPA enforcement action really the most direct victims of the conduct at issue?  In the procurement context, what about a competitor who may have lost out on the foreign business because it was unwilling to make an improper payment?  With victim issues attracting new attention, should an FCPA private right of action receive new attention?

Last, but certainly not least, companies settling SEC FCPA enforcement actions are allowed to settle without admitting or denying the SEC’s allegations.  Even the SEC itself has stated that this settlement device often leads to settlements that “do not necessarily reflect the triumph of one party’s position over the other.”  Given this dynamic, would SERAP’s proposal lead to undeserved “windfalls” for civil society organizations?  [In this prior post, I asked the same question as to Dodd-Frank Act whistleblowers.]

U.K. Judge Reluctantly Accepts The “Loosely and Hastily Drafted” SFO – BAE Plea Agreement

By on December 22, 2010 in BAE, Serious Fraud Office, Tanzania, United Kingdom

In February 2010, the U.K. Serious Fraud Office (“SFO”) and the U.S. DOJ announced resolution of a joint enforcement action against BAE Systems. (See here for the prior post).

Despite years of widespread bribery allegations and despite the DOJ’s bribery, yet no bribery allegations (see here), BAE escaped bribery and corruption charges. The U.S. enforcement action came to a formal conclusion in March (see here). As noted in the DOJ release (here) BAE pleaded guilty to “conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its FCPA compliance program, and to violate the Arms Export Control Act and International Traffic in Arms Regulations” and was sentenced to “pay a $400 million criminal fine, one of the largest criminal fines in the history of DOJ’s ongoing effort to combat overseas corruption in international business and enforce U.S. export control laws.”

The SFO’s plea agreement with BAE was even more limited. As noted in this SFO release, the SFO “reached an agreement with BAE Systems that the company will plead guilty” to the offense of “failing to keep reasonably accurate accounting records in relation to its activities in Tanzania.” As noted in the SFO release BAE agreed to pay a £30 million penalty “comprising a fine to be determined by the Court with the balance paid as a charitable payment for the benefit of Tanzania.”

Days before the SFO-BAE plea agreement, the SFO charged BAE’s former agent with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.” However, these charges were quickly withdrawn and the SFO release states that “[t]his decision brings to an end the SFO’s investigations into BAE’s defence contracts.” As discussed in this prior post, the SFO agreed to drop the criminal charges against BAE’s former agent because BAE would not agree to the proposed SFO plea (as watered down as it was) without the SFO agreeing to drop the charges against the former agent.

Under no circumstances, it appeared, could BAE (or anyone associated with it) be accused of bribery or corruption. This would have complicated things too greatly for BAE, the world’s second largest defense contractor. (See page 15 of the DOJ’s sentencing memo – here).

With BAE’s U.S. legal exposure in the rear-view mirror, the final act in this circus was approval of the SFO – BAE plea agreement by a U.K. court.

Fast forward to December 20th, the day BAE was supposed to be fined and sentenced.

Enter Mr. Justice David Michael Bean.

As widely reported, Justice Bean, notwithstanding the accounting only charges, wanted to know “whether some of the payments had been channelled corruptly to decision makers in Tanzania.” (See here). Justice Bean said “he couldn’t approve the settlement until he knew the intended use of $12.4 million in payments to a local businessman, because Bean said it looked to him as though the money was so he could pay “whatever was necessary to whomever it was necessary” to win the $40 million contract.” (See here). Justice Bean suggested the “obvious inference” was that part of the secret payments was used as a “bribe” to win a lucrative contract. (See here).

Prosecutor Victor Temple QC for the SFO said it was not part of his case that any part of the payments at issue was improperly used. David Perry, QC, representing BAE, said the SFO was not alleging bribery or offering evidence of it. He said this was “fundamental to the plea agreement” between the company and the prosecutor to end the corruption probe.

Remember, under no circumstance could BAE be accused of bribery or corruption.

Justice Bean wanted to hear more arguments and postponed BAE’s fine and sentence.

The delay was termed (see here) a blow to the SFO and its use of U.S. style plea agreements.

Yesterday, Justice Bean announced his decision.

Justice Bean fined BAE £500,000 for failing to keep proper records of payments it made to an adviser in Tanzania. He also ordered BAE to pay £225,000 in costs.

Because the SFO-BAE plea agreement allowed BAE to deduct the court-ordered fine from the £30m it had offered to the people of Tanzania to settle the case, Justice Bean said he felt pressure to keep the court fine to a minimum. As noted here, Justice Bean stated “the structure of this settlement agreement places moral pressure on the court to keep the fine to a minimum so that the reparation is kept at a maximum.”

Justice Bean called the SFO-BAE plea agreement “loosely and hastily drafted” and said the fine he levied reflected that he couldn’t “sentence for an offense which the prosecution failed to charge,” such as conspiracy to corrupt or false accounting. (See here).

See here for Justice Bean’s sentencing remarks.

See here for the SFO release.

As noted here, the only money BAE is legally obliged to pay is a £500,000 fine and costs of £250,000 as ordered by Mr Justice Bean. After the sentencing, Richard Alderman, the SFO Director said: “I expect BAE to honour the agreement. I expect the company to pay it [the reparation payment to Tanzania] as quickly as possible.” As noted in the article, such a payment could be problematic.

In a statement (here) BAE stated:

“Today’s judgment concludes and draws a line under this historical matter. The company accepts the decision of the Court and will abide by it. In the decade since the conduct referred to in this settlement occurred, the Company has systematically enhanced its compliance policies and processes with a view to ensuring that it is as widely recognised for responsible conduct as it is for high quality services and advanced technologies.”

In a statement (see here) Transparency International UK noted that despite Justice Bean’s “damning comments, [BAE] has not admitted bribery and no individuals have been punished.” Chandrashekhar Krishnan, Executive Director of Transparency International UK stated as follows: “This hearing also highlights the need for a thorough review of sentencing law and procedures, to ensure that judges presented with agreed settlements are able to sentence on a fully informed and transparent basis. It is clear that BAE Systems has got off lightly. The best that can now happen is that the company demonstrates it has turned a new leaf and is irrevocably committed to clean business.”

In an editorial, the Financial Times stated as follows.

“The plea-bargain deal BAE Systems struck earlier this year with the UK’s anti-corruption authority was designed to draw a line under the company’s murky past. This may indeed be the judicial outcome of the deal, which was sanctioned by a court on December 21. But the manner of its achievement leaves a sour taste. Justice has probably not been done; it has certainly not been seen to be done. The Serious Fraud Office has long been accused, with justice, of being toothless. So this newspaper welcomed its decision last year to prosecute BAE for allegedly paying bribes to foreign governments to win contracts in several African and eastern European countries. Although the SFO later switched to pursuing a more limited plea bargain, it was still hoped that this might raise the agency’s profile as a crusader against corporate corruption. This week’s court proceedings, which saw a judge reluctantly accept the SFO’s deal, have undermined that hope. British courts bridle at plea bargains because of the way they fetter judicial discretion. But even allowing for this aversion, the BAE deal rightly stuck in the judge’s craw. The company did not admit to any corruption, pleading guilty only to a trivial charge of keeping inadequate accounting records. In return, BAE and its officers were extraordinarily given blanket immunity from any offences before 2004 – whether admitted to or not. A cap was placed on the total amount BAE would pay to settle the litigation – whether as a fine or in compensation. There is nothing wrong with using plea bargains to settle complex cases, but these must satisfy the requirements of justice. This means that defendants in such cases must own up to what they have done wrong. Immunity should be offered sparingly, with prosecutors reserving the right to single out officers for prosecution even if a settlement is reached with the company. The best way to change corporate conduct is to put individuals in the firing line. Fines must fit the crime and not be arbitrarily capped. The UK is trying to get its act together. But it is still some way from – to quote a minister in the last government – “giving the Americans a run for their money”. There are grounds for hope. Britain has passed a bribery bill that would make it easier to prosecute cases such as the BAE one. The government is planning to replace the SFO with a new economic crime agency – hopefully with real teeth. On the evidence of the BAE case, these initiatives are needed.”

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Hope is a fitting word to end the BAE circus.

Hope that a case of this magnitude is never again resolved the way it was resolved both in the U.S. and the U.K.

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