Risk & Compliance

Baker Hughes Greased Palms in Oil Deal

Record criminal penalties are levied on company for handing out bribes in Kazakhstan oil deal.
Stephen TaubApril 27, 2007

Baker Hughes Inc. has agreed to pay a total of $44 million to settle criminal and civil charges that it violated the Foreign Corrupt Practices Act (FCPA). The charges and fines were levied on both the parent company and a subsidiary.

Baker Hughes Services International (BHSI), a wholly owned subsidiary of Baker Hughes, pleaded guilty to criminal charges that it violated the FCPA and agreed to pay a $11 million fine, according to Assistant Attorney General Alice S. Fisher of the Criminal Division. Meanwhile, Baker Hughes Inc. agreed to pay $33 million to settle civil charges brought by the Securities and Exchange Commission that it violated the FCPA.

The $44 million in combined fines and penalties is the largest monetary sanction ever imposed in an FCPA case, according to the Department of Justice. BHSI pleaded guilty to violations of the antibribery provisions of the FCPA, conspiracy to violate the FCPA, and aiding and abetting the falsification of the books and records of its parent company Baker Hughes, noted DoJ documents.

Baker Hughes also simultaneously entered into a deferred prosecution agreement with the DoJ regarding the same underlying conduct, and accepted responsibility for the conduct of its employees. In addition to the fine, BHSI agreed to serve a three-year term of organizational probation and adopt a comprehensive antibribery compliance program.

The DoJ said that BHSI admitted that it violated the FCPA when company officials paid approximately $4.1 million in bribes during a two-year period to an intermediary whom the company understood and believed would transfer all or part of the payments to an official of Kazakhoil, the state-owned oil company of Kazakhstan. These payments were made through a consulting firm retained as an agent for Baker Hughes in connection with a major oil field services contract.

In addition, the SEC says that Baker Hughes paid about $5.2 million to two agents while knowing that some or all of the money was intended to bribe officials of state-owned companies.

“Today’s announcement demonstrates that the Department of Justice will continue to hold U.S. companies and their subsidiaries accountable for foreign bribery,” said Fisher in a statement. “The record penalties leveled in this case leave no doubt that foreign bribery is bad for business.”

The resolution of the criminal investigation reflects, in large part, actions taken by Baker Hughes officials to voluntarily disclose the matter to the Justice Department; the extensive and thorough internal investigation of company practices in Kazakhstan, as well as in other high-risk global operations; and the remedial steps and controls enhancements the company has implemented, explained the DoJ announcement. Under terms of the deferred prosecution agreement, Baker Hughes will hire an independent monitor for three years to oversee the creation and maintenance of a robust compliance program and to make a series of reports to the company and the Justice Department.

The company also agreed to continue to cooperate with the DoJ in ongoing investigations into corrupt payments by company employees and managers. If the company fully complies with all the terms and conditions of the deferred prosecution agreement for two years, the government has agreed not to bring any further criminal charges based on the underlying conduct and other conduct uncovered in the course of the investigations.

The SEC, however, was less forgiving. The regulator admonished Baker Hughes for violating a 2001 SEC cease-and-desist order prohibiting violations of the books and records and internal-controls provisions of the FCPA. In the same complaint, the SEC also charged Roy Fearnley, a former business development manager for Baker Hughes, with violating and aiding and abetting violations of the FCPA. Fearnley has not reached any settlement with the commission regarding these charges.

“Baker Hughes committed widespread and egregious violations of the FCPA while subject to a prior Commission cease-and-desist [o]rder,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, in a statement. “The $10 million penalty demonstrates that companies must adhere to Commission [o]rders and that recidivists will be punished.”

According to the SEC, Baker Hughes paid one agent $4.1 million in September 2000 with the understanding that Kazakhoil had demanded that the agent be hired to influence senior-level employees at the oil company to approve the Baker Hughes contract. Baker Hughes retained the agent principally at Fearnley’s urging, the SEC claimed.

Reportedly, Fearnley told his bosses that the “agent for Kazakhoil” told him that unless he was retained, Baker Hughes could “say goodbye to this and future business.” Baker Hughes engaged the agent and was awarded an oil services contract in the Karachaganak oil field in Kazakhstan that generated more than $219 million in gross revenues from 2001 through 2006, according to the SEC.

The complaint also alleges that in 1998, Baker Hughes retained a second agent in connection with the award of a large chemical contract with KazTransOil, the national oil transportation operator of Kazakhstan. Between 1998 and 1999, Baker Hughes paid more than $1 million to the agent’s Swiss bank account. The payment was made in spite of a Baker Hughes employee knowing in as early as December 1998 that the agent’s representative was a high-ranking executive of KazTransOil, added the SEC.

The SEC’s complaint against Baker Hughes also charges that the company violated the books and records and internal-controls provisions of the FCPA in Nigeria, Angola, Indonesia, Russia, Uzbekistan, and Kazakhstan. In addition to violating the FCPA, some of the illegal conduct occurred after September 12, 2001, and consequently violated the commission’s 2001 cease-and-desist order, the SEC charged.