Halliburton Settles With the SEC
On July 27, 2017, Halliburton agreed to settle a cease and desist proceeding brought by the Securities and Exchange Commission (“SEC”), charging it with violating the books and records and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”). To settle, Halliburton agreed to pay $29.2 million and to obtain an independent compliance consultant to oversee anti-corruption procedures and policies in Africa. Halliburton’s payment included $14 million in disgorgement – the amount by which Halliburton had allegedly profited from the deals resulting from the asserted violations – as well as $1.2 million in pre-judgment interest and $14 million in penalties. The conduct alleged by the SEC was that a former Halliburton vice president had circumvented internal accounting controls and required approvals in order to steer contracts to a local Angolan company owned by a friend and neighbor of the Angolan official who approved the award of contracts to Halliburton.
Halliburton had previously taken substantial steps to reduce FCPA risk. It had put in place an FCPA compliance program, including a Code of Ethics that was intended to prevent FCPA violations. Moreover, in this specific instance, it had begun an internal investigation in Angola as a result of an anonymous “whistle blower” email and had self-reported the investigation to the Department of Justice (“DOJ”). Halliburton had kept the DOJ and the SEC advised on the status of the investigation and had supplied relevant documents to them. In resolving the case, the SEC stated it had taken into account that Halliburton had taken remedial actions, cooperated by making foreign witnesses available, compiled financial data and analysis relating to the transactions at issue, and made substantive presentations on key topics at the SEC staff’s request.
This case serves as an important reminder that the SEC and the DOJ continue vigorously to enforce the FCPA. The FCPA generally targets bribery to influence an award of business or to gain an unfair advantage by companies operating oversees. In 2016 alone, FCPA enforcement actions resulted in the recovery of a record breaking $2.46 billion dollars in fines, penalties, disgorgement and pre-judgement interest. This pace continues. So far, in 2017, the SEC has resolved six enforcement claims and the DOJ another seven. A significant number of these cases have been filed in the Southern District of Texas and several have involved energy companies.
How to Reduce FCPA Risk
How do companies doing business overseas in locations where there is an increased risk of prosecution for bribery protect themselves? To begin with, it is important that company managers dispel any notion that a different standard of behavior from that expected in the U.S. is acceptable outside this country. It may be true, as some might argue, that the rules are different in foreign countries. It may be true that local officials expect questionable payments and the failure to make them may harm the business. It may also be true that everyone else does it and business in that country has always been done that way. Having said that, none of those arguments will find any traction with government FCPA enforcers and they certainly don’t establish a defense to an FCPA violation.
There are concrete steps companies should take.
First, assess your risk:
- Are you doing business in a country where there is a high risk of corruption? Such countries include China, Russia, India, Pakistan, Brazil, Nigeria and much of the rest of Africa. Consult the Transparency International Corruption Perception Index to evaluate the level of corruption in the countries in which you operate.
- Do you require local permits or need to interact with customs officials? If so, these are potential problem areas.
- Do you conduct business through local agents, distributors or other intermediaries? Again, this is business that should be monitored.
Second, establish a specific anti-corruption policy:
- The policy should be separate from the code of ethics to emphasize its importance.
- It should follow industry best practices employed by similar organizations.
- It should designate a senior member of management to be responsible for FCPA compliance, someone with sufficient “clout” to demand compliance and convey seriousness.
- It should provide for the appointment of local compliance officers to supplement oversight.
Third, conduct training:
- Train the board, management and employees in the anti-corruption policy.
- Train and conduct due diligence for third parties involved in international distribution.
- Conduct training not only in English but also local languages.
Fourth, maintain internal accounting controls designed to prevent and detect corruption, to ferret out improper payments and to monitor commission payments.
Fifth, establish a phone line for confidential questions and reporting, including anonymous reports.
Sixth, include anti-bribery provisions in all third party contracts.
Seventh, if you discover a potential FCPA violation, be proactive:
- Self-report to the DOJ/SEC.
- Conduct a thorough internal investigation.
- Cooperate in any governmental investigation by making employees and documents available to the government.
Eighth, do not permit facilitating payments:
- The FCPA allows for what it calls “facilitating or expediting payments” – payments made in exchange for routine or non-discretionary governmental action.
- Such payments are difficult to define and the DOJ and SEC narrowly construe the term.
- Even if such payments do not violate the FCPA, they may, nevertheless, violate local anti-bribery local laws.
Ninth, discipline or terminate, as appropriate, employees who participate in misconduct.
Tenth, audit the effectiveness and adherence to the compliance procedures you establish.
In implementing an anti-corruption policy, it is important to keep in mind that there is no requirement of materiality applicable to an alleged violation of the FCPA. Small bribes and inaccurate books and records alone can be the basis of criminal prosecution. The FCPA’s anti-bribery provisions apply not only to public companies, but also to startups and private companies. Furthermore, small and medium companies venturing into the international markets are a specific focus of enforcement authorities. And it cannot be overemphasized that executives and other employees may have personal liability for the company’s FCPA violations and that the FCPA also reaches prohibited conduct by individuals and agents.
Is This Enough?
Even taking these steps are no guarantee that a company will avoid being charged with violating the FCPA. After all, Halliburton had taken many, if not all, of the above precautions and still was the subject of an enforcement proceeding. What then, additionally, might the company have done? Perhaps not much since typically a due diligence review would not necessarily have identified a friendship, as was the issue for Halliburton. But, had Halliburton not followed these best practices, the outcome would likely have been much worse for it. Halliburton was not criminally charged. Criminal violations can lead to the imposition of fines in the amount of twice the benefit obtained by the bribery, not to mention the attendant crippling defense costs and the inevitable disruption, if not devastation, of people’s lives. Thus, while having policies and procedures will not preclude liability, they are likely to significantly and positively affect charging decisions and penalty assessment and result in less catastrophic outcomes.