The Securities and Exchange Commission kicked off the FCPA-enforcement year this week with civil books and records and internal controls charges against Texas-based oil and gas services firm NATCO Group Inc. The company admitted that its wholly owned subsidiary, TEST Automation & Controls, Inc., "created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan."
NATCO agreed to pay a $65,000 civil penalty. In settling with the SEC in federal court in Houston, NATCO admitted that its "system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO's consolidated books and records did not accurately reflect these payments." It also consented to an administrative cease and desist order against future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
The case confirms that civil FCPA charges can result from paying blackmail money to protect the welfare of employees overseas. Many companies are faced with extortionate demands from foreign police, bureaucrats and regulators, who threaten to hold, expel or even harm employees if ransoms aren't paid. There have always been questions whether those involuntary payments can violate the FCPA.
In criminal antibribery cases -- where intent is an element of the FCPA offense -- extortion is a defense. The issue came up in last year's criminal trial of Frederic Bourke for conspiracy to violate the FCPA. When he asked for a jury instruction on "true extortion," Judge Shira Scheindlin said evidence of extortion would go to the issue of whether Bourke possessed a corrupt intent in making alleged illegal payments. She explained that the government must prove beyond a reasonable doubt that a defendant had an improper motive or purpose for a payment intended to induce the recipient to misuse his official position in discharging an official act. On the other hand, she said, evidence of extortion can show the defendant acted without a corrupt intent. See our post here.
But unlike criminal cases, civil books and records and internal controls charges don't require mens rea or corrupt intent. So extortion isn't a defense. In NATCO's case, the SEC acknowledged the extortion. It said TEST's employees were threatened with fines, jail or deportation, and they believed the threats to be genuine. NATCO's violations, however, occurred not in paying the ransom but in mischaracterizing the payments to cover them up.
Here, from the SEC's complaint, is more of what happened:
In February and September 2007, Kazakh immigration prosecutors conducted audits and claimed that TEST expatriate workers lacked proper immigration documents. The prosecutors threatened to fine, jail or deport the workers if TEST did not pay cash fines. The TEST employees believed the prosecutor’s threats to be genuine. They sought guidance from TEST’s senior management in Harvey, Louisiana, who authorized the payments.
The TEST employees in Kazakhstan used personal funds to pay the prosecutors $25,000 in February and $20,000 in September, and then obtained reimbursement from TEST.
For the February 2007 payment, TEST made a $25,000 wire transfer to the affected employee. TEST inaccurately described it in an email as “an advance against his [the paying employee's] bonus payable in March.” As further camouflage, the email noted the bonus would be “substantial.” And in TEST’s letter to the bank providing wire instructions, the company inaccurately described the payment as a “Payroll Advance.” TEST then falsely recorded the payment in its books and records as a salary advance.
The SEC said TEST Kazakhstan used consultants to help obtain immigration documentation for its expatriate employees. It said,
One of these consultants did not have a license to perform visa services, but maintained close ties to an employee working at the Kazakh Ministry of Labor, the entity issuing the visas. On two instances, the consultant requested cash from TEST Kazakhstan to help him obtain the visas. . . . [T]he consultant provided TEST Kazakhstan bogus invoices for “cable” from third-party entities he controlled. TEST Kazakhstan knew these invoices were false, but nonetheless presented them to Kazakh banks to withdraw the requested cash. TEST Kazakhstan later submitted the false invoices – which totaled in excess of $80,000 – to TEST for reimbursement. TEST reimbursed these requests despite knowing the invoices mischaracterized the true purpose of the services rendered.
When the violations occurred, NATCO was an issuer. Its common stock was registered with the SEC under Section 12(b) of the Exchange Act and listed on the New York Stock Exchange. In November 2009, NATCO became a subsidiary of Cameron International Corporation, a publicly held reporting corporation listed on the NYSE, and the registration of NATCO’s common stock and its listing on the NYSE ended.
View the Securities and Exchange Commission's Litigation Release No. 21374 and Accounting and Auditing Enforcement Release No. 3102 (both dated January 11, 2010) in Securities and Exchange Commission v. NATCO Group Inc., Civil Action No. 4:10-CV-98 (S.D. Tex.) here.
Download the SEC's civil complaint here.
Download the federal court's final judgment here.
Download NATCO's consent to the final judgment here.
Download the order instituting cease-and-desist proceedings here.
Special thanks to Marc Bohn in the District of Columbia for help with this post.