EARNING COOPERATION CREDIT IN AN FCPA CASE
Cooperation is often critical to effective law enforcement. SEC enforcement director Robert Khuzami has acknowledged this point in recent public remarks, noting that he would like to develop incentives to encourage more cooperation by individuals.
For corporations, the SEC, like the Department of Justice and other federal law enforcement agencies, has long held out the prospect of credit in the charging process in exchange for cooperation. While there is no talismanic test which will guarantee a company that it can secure enough credit to avoid being charged, the SEC’s Seaboard Release, discussed here, contains an example of a company that did in fact earn sufficient credits and discusses general principles regarding cooperation.
Typically, when acknowledging that a company has cooperated, the Commission does not enumerate what specific acts were done or how they benefited the company. One notable exception last year occurred in In the Matter of Black, Adm. Proc. File No. 3-13625 (Sept. 24, 2009) and SEC v. Black, Case No. 09-cv-0128 (S.D. Ind. Sept. 24, 2009). These are the Reg. FD actions brought against Christopher Black discussed here. There, the Commission discussed the reasons an action was not brought against the company.
The Commission’s discussion of the cooperation of NATCO Group Inc. in resolving an FCPA case this week provides an additional window into the otherwise opaque world of cooperation credit. In the Matter of NATCO Group Inc., Adm. Proc. File No. 3-13742 (Filed Jan. 11, 2010); SEC v. NATCO Group, Inc., Civil Action No. 4:10-CV-98 (S.D. Tex. Filed Jan. 11, 2010). See also Litig. Rel. 21374 (Jan. 11, 2010). These FCPA cases were settled with a consent by the company to a cease and desist order based on the FCPA books and records and internal control provisions and the payment of a $65,000 penalty.
Houston-based NATCO manufacturers and markets oil and gas production equipment and systems that are used worldwide. TEST Automation & Controls is a wholly owned subsidiary with an office in Kazakhstan. The subsidiary fabricates and sells control panels and packaged automation systems and furnishes related field services.
According to the Order, TEST won a contract to provide certain instrumentation and electrical services in Kazakhstan. The subsidiary hired local Kazakh workers and expatriates to perform the work. During an audit of TEST in 2007, Kazakh immigration prosecutors claimed that the expatriate workers did not have the proper documentation and threatened to impose fines and to either jail or deport the workers if the company did not pay the fines. TEST senior management approved the payments based on the belief that the workers would be jailed. A February 2007 $25,000 wire transfer made to an affected employee was inaccurately described as a salary advance. A subsequent $20,000 wire transfer to reimburse other payments advanced by the individuals was booked as “visa fines.”
TEST used consultants to assist in obtaining immigration documentation for the expatriate employees. One consultant who did not have the proper license, but had close ties to the Ministry of Labor requested cash in two instances to facilitate obtaining the visas. To secure the payments, the consultant provided TEST with bogus invoices totaling $80,000 for the funds. The invoices, which were necessary under local law to withdraw the money from the bank, were later submitted to TEST and reimbursed despite knowledge of the true purpose.
The cooperation of the company was critical to the settlement. The Order for Proceedings details eleven specific steps taken by the company which the Commission considered in evaluating credit which do not reference the waiver of privilege:
1) NATCO discovered the TEST payments during a routine internal audit review in 2007;
2) The company conducted an internal investigation and self-reported to the SEC;
3) It undertook what were described as “numerous remedial measures” including “employee termination and disciplinary actions;”
4) It revised the form of documentation for agent agreements;
5) New due diligence procedures for the vetting and the retention of third party intermediaries were created;
6) Staffing in the global compliance department was bolstered including the retention of a full time Chief Compliance Officer;
7) The company joined a non-profit association which specializes in anti-bribery due diligence and screens potential partners and other third parties that work with multinational corporations;
8) Improved FCPA compliance training was implemented;
9) The company invested heavily in software to assist in enhancing internal controls and compliance;
10) It restructured its internal audit function and enhanced its monitoring and audit process for the compliance programs; and
11) In view of its initial findings, the company expanded its review into other high risk areas and did not find any malfeasance.
To foster cooperation in the future it would be beneficial if the Commission continues to provide such guidance.