Baker Hughes: Greasing
the Wheels in Kazakhstan
1. Introduction
2. FCPA and Anti-Bribery Legislation
3. SEC and DOJ Increase Enforcement
4. Roy Fearnley Bribes in Kazakhstan
5. Baker Hughes Compliance Program
6. Case Questions and Assignments
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1. Introduction
2. FCPA and Anti-Bribery Legislation
3. SEC and DOJ Increase Enforcement
4. Roy Fearnley Bribes in Kazakhstan
5. Baker Hughes Compliance Program
6. Case Questions and Assignments
3
Case Perspective
Students are put into the positions of a newly
appointed Audit Committee member of
Baker Hughes board of directors shortly after Baker
Hughes’s FCPA violations.
Students have to research documents related to
the Baker Hughes FCPA violations and
answer ten case questions.
Baker Hughes (BH) Profile
• Oil and Gas Services Industry Drilling, Evaluation, Consulting
• 58,000 Employees in 80 Countries
• Created in 1987 with the merger of
Baker International and Hughes Tool
Company - both founded over 100 years
ago by R.C. Baker & Howard Hughes, Sr.
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Kazakhstan Profile
Kazakhstan Profile
• 9th largest country in the world (4x Texas)
• In 1991, the USSR was dissolved and
Kazakhstan became independent
• Population is 15.5 MM
• Kazakhstan holds 4 billion tons of proven
recoverable oil reserves
• By 2015, Kazakhstan will be among the top 10
oil-producing nations
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The Karachaganak Oil Field is
located near Aksai, Kazakhstan
Consequences of BH’s FCPA Violations
(2002-2007)
•
330 lawyers, 82 support staff, 31 forensic accountants
•
Documents and electronic media from 20 cities on four
continents
•
Reviewed data from approximately 300 computers
•
245 witness interviews
•
BHI reviewed (either page-by-page or using term
searches) approximately 1.69 terabytes of electronic
data, the approximate equivalent of 90 million pages, as
well as hundreds of thousands of pages of hard-copy
documents
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Source: Baker Hughes Inc. · 10-Q · For 3/31/07 · EX-99.3
1. Introduction
2. FCPA and Anti-Bribery Legislation
3. SEC and DOJ Increase Enforcement
4. Roy Fearnley Bribes in Kazakhstan
5. Baker Hughes Compliance Program
6. Case Questions and Assignments
10
Two Events led to the
FCPA’s Creation in 1977
1. Watergate 1972-74
2. Lockheed $22 million
bribe to Japan 1976
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3 MAJOR PARTS OF FCPA
1. Anti-Bribery
2. Accurate Record-Keeping
3. Internal Controls
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1. ANTIBRIBERY PROVISIONS
“It is a crime for any U.S. person or
company to directly or indirectly pay
or promise anything of value to any
foreign official to obtain or retain any
improper advantage.”
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2. ACCOUNTING REQUIREMENTS
“Make and keep books, records, and
accounts, which in reasonable detail,
accurately reflect the transactions and
dispositions of assets.”
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3. INTERNAL CONTROLS
“Devise and maintain a system of
internal accounting controls sufficient
to provide reasonable assurance that
transactions are recorded appropriately
and in accordance with rules and
regulations.”
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FCPA Penalties
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Other FCPA Remedies
Criminal fraud charges
Civil injunctive action
Administrative cease and desist proceedings
Disgorgement of ill-gotten gains
Implementation of FCPA compliance program
Independent Monitor
Continuing reporting obligation
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Recent Changes in U.S. FCPA
Enforcement Agencies_____
• DOJ - added 25 FCPA prosecutors
• FBI – FCPA unit of investigative agents
• SEC - special FCPA enforcement unit
Significant Anti-Bribery
and related Legislation
1.
2.
3.
4.
5.
6.
FCPA (1977)
OECD Anti-Bribery Convention (1997)
Sarbanes-Oxley (2002)
UK Bribery Act of 2010
Dodd-Frank – Whistleblower (2011)
Canada’s Corruption of Foreign
Public Officials Act (2013)
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1. Introduction
2. FCPA and Anti-Bribery Legislation
3. SEC and DOJ Increase Enforcement
4. Roy Fearnley Bribes in Kazakhstan
5. Baker Hughes Compliance Program
6. Case Questions and Assignments
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1. Introduction
2. FCPA and Anti-Bribery Legislation
3. SEC and DOJ Increase Enforcement
4. Roy Fearnley Bribes in Kazakhstan
5. Baker Hughes Compliance Program
6. Case Questions and Assignments
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BH and the Corruption Perception Index
Corruption Perceptions Index of 2001
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Principal of the Agent Company,
(identified in 2010 by Wikileaks cable as
Robert Kissin, UK Banker)
Agent Company
(in Isle of Man)
2% of Baker Hughes
Revenues - Bribes
3 year Oil Service Contract
($200 million total)
Baker Hughes,
(VP of Marketing)
Roy Fearnley, Baker Hughes,
Team Leader for the Tender
Karachaganak Integrated Oil (KIO)
British Gas (UK), 32.5 %
Eni-AGIP (Italy) , 32.5 %
ChevronTexaco (US), 20 %
Lukoil (Russia), 15 %
40 year Production
Sharing Agreement
Kazakhoil (National Oil Company)
& Government of Kazakhstan
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Quotes from the SEC Complaint
“Winning the Karachaganak Project was crucial for
the future health of Baker Hughes in Kazakhstan”
Baker Hughes VP of Marketing Nov., 1999
-------------------------------------------------------------------“I heard unofficially Baker Hughes won the contract,
we should know within a week”
Roy Fearnley to the VP of Marketing, Sept. 2, 2000
-------------------------------------------------------------------“An agent for Kazakhoil is demanding unless we
pay a commission, we can say goodbye to this and
future business”
Roy Fearnley, Sept. 24, 2000
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Timeline of the FCPA Violations
• On Sept. 27, 2000, BH agrees to pay commissions
• On Oct. 23, 2000, BH awarded contract by KIO
• Between May, 2001 and Nov., 2003, BH made 27
“Commission Payments” totaling $4.1 MM
• Payments recorded on BH books as
“Commissions”, “Fees” and “Legal Services”
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1. Introduction
2. FCPA and Anti-Bribery Legislation
3. SEC and DOJ Increase Enforcement
4. Roy Fearnley Bribes in Kazakhstan
5. Baker Hughes Compliance Program
6. Case Questions and Assignments
42
Example of Actual Case and
Hypothetical Question
1. Introduction
2. FCPA and Anti-Bribery Legislation
3. SEC and DOJ Increase Enforcement
4. Roy Fearnley Bribes in Kazakhstan
5. Baker Hughes Compliance Program
6. Case Questions and Assignments
50