[This post is part of a periodic series regarding “old” FCPA enforcement actions]
Issuer strict liability for subsidiary conduct is a dubious prong of Foreign Corrupt Practices Act enforcement. However, as highlighted in this post concerning a 2006 enforcement action against Oil States International, it has long been an aspect of FCPA enforcement.
In 2006, the SEC brought this administrative action against Oil States International (a specialty provider to oil and gas drilling companies). The conduct at issue was based entirely on the actions of employees of a branch office in Eastern Venezuela of Hydraulic Well Control LLC, a subsidiary of Oil States. According to the SEC, HWC Venezuela contributed approximately 1% of Oil States’ consolidated revenues during the relevant time period.
In summary fashion, the order finds:
“This matter involves Oil States’ violations of the books and records and internal controls provisions of the FCPA, arising from certain payments made through its Hydraulic Well Control, LLC (“HWC”) subsidiary. Oil States, through certain employees of HWC, provided approximately $348,350 in improper payments to employees of Petróleos de Venezuela, S.A. (“PDVSA”), an energy company owned by the government of Venezuela. The employees were asked to participate in the scheme by a consultant for HWC, after he was requested to do so by the PDVSA employees. HWC improperly recorded the payments in its accounting books and records as ordinary business expenses, which were consolidated into those of its parent, Oil States. Oil States’ internal controls failed to ensure that HWC’s books and records accurately reflected the nature and purpose of these payments.”
As further stated in the order:
“In 2000, HWC hired a Venezuelan consultant (the “Consultant”) to interface with employees of PDVSA on behalf of HWC in the field and at the office level. Specifically, the Consultant acted on behalf of HWC to follow up on daily operations, translate information into Spanish, write up tickets in accordance with PDVSA requirements and submit HWC invoices to PDVSA for payment. HWC did not investigate the background of the Consultant. The Consultant was not involved in the solicitation to obtain business on behalf of HWC, and only worked on the operational matters referenced above. The Consultant submitted invoices for his services to HWC. HWC had certain FCPA policies in place; however, HWC provided no formal training or education to the Consultant regarding the requirements of the FCPA. Further, a written contract between HWC and the Consultant failed to address compliance with the requirements of U.S. law, including the provisions of the FCPA.
In December 2003, the Consultant was approached by three PDVSA employees about a proposed “kickback” scheme. The PDVSA employees proposed that the Consultant submit inflated bills to HWC for his services and kickback the excess to the PDVSA employees. At the same time, HWC would improperly bill PDVSA for “lost rig time” on jobs.2 If HWC did not comply with the proposed scheme, the PDVSA employees were capable of stopping or delaying HWC’s work. After learning of the proposed scheme from the Consultant, three HWC Venezuela employees acceded to and facilitated the improper activity. The Consultant provided inflated invoices for his services and other documents inaccurately reflecting the amount of rig time billable to PDVSA. HWC employees incorporated these documents into HWC’s books and records and HWC passed on an undetermined amount of the improper payments in inflated invoices to PDVSA.”
As to discovery of the alleged improper conduct and whether any HWC or Oil States employees in the U.S. were aware of or sanctioned improper payments, the order states:
“In December 2004, during a routine review of HWC’s results while preparing the budget for the following fiscal year, HWC senior management in the U.S. discovered departures from HWC Venezuela’s operating plan. Specifically, HWC management noted an unexplained narrowing of profit margins in the Venezuelan operations, which caused management to make immediate inquiry. As a result of that inquiry, the U.S. management of HWC learned of the kickback scheme. HWC reported the matter to Oil States’ management, which, in turn, reported the scheme to the company’s audit committee. An internal investigation conducted by Oil States uncovered no evidence that HWC or Oil States employees in the United States were aware of or sanctioned the improper payments. Upon completion of the internal investigation, Oil States terminated its relationship with the Consultant and disciplined the employees responsible for the misconduct (including dismissing two HWC Venezuela employees). Oil States also corrected its books and records, strengthened its regulatory compliance program, and reimbursed PDVSA for the improper charges. Oil States also voluntarily provided their report of investigation to the Commission and the Department of Justice, and disclosed the scheme in its public filings. It then cooperated fully with the investigation conducted by the Commission staff.”
Under the heading “Violations” the order finds:
“Because HWC improperly recorded the payments to the PDVSA employees as ordinary business expenses, its books, records and accounts did not, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets. As a result of the conduct, … Oil States violated [the books and records provisions].”
“In addition, HWC failed to take steps to ensure that the Consultant complied with the FCPA and to ensure that the nature and purpose of the payments to the PDVSA employees were accurately reflected in HWC’s books and records. As a result of the conduct, … Oil States violated [the internal controls provisions].”
Without admitting or denying the SEC’s findings, Oil States agreed to cease and desist from future violations of the books and records and internal controls provisions.
