In February 2009, Kellogg Brown & Root LLC, KBR Inc., and Halliburton Company agreed to settle DOJ and SEC enforcement actions relating to the award of $6 billion in Nigerian construction contracts between 1995 and 2004. The $579 million in combined criminal and civil penalties are the largest ever against a U.S. company in an FCPA enforcement action and the second largest ever.
Kellogg Brown & Root LLC is a wholly-owned subsidiary of KBR, Inc., a publicly traded company headquartered in Houston. Together these entities and their predecessor companies ("KBR") and their ultimate parent company, Halliburton, were engaged in the business of providing engineering, procurement and construction services around the world, including designing and building liquefied natural gas ("LNG") production plants.
The enforcement actions arise out of KBR's activities in Nigeria, specifically its involvement in over $6 billion of contracts to build LNG facilities on Bonny Island, Nigeria and the awarding of those contracts by entities owned or controlled by the Nigerian government. Resolution of the matter involved both DOJ and SEC enforcement actions summarized below.
As detailed in the criminal information (which charges Kellogg Brown & Root LLC with conspiracy to violate the FCPA and violations of the FCPA's antibribery provisions), KBR was part of a joint venture ("JV") in Nigeria with a French, an Italian, and a Japanese company to design, build and expand LNG facilities on Bonny Island. JV profits, revenues, and expenses were equally shared among the four JV partners. The JV's Steering Committee consisted of high-level executives from each of the four companies, including Albert Stanley, an officer and director of KBR. The information charges that the Steering Committee made major decisions on behalf of the JV, including whether to hire agents to assist the JV in winning contracts, who to hire as agents, and how much to pay the agents. The information charges that the JV operated through three Portuguese special purpose corporations, including a corporation (#3) specifically used to enter into consulting agreements with JV agents. The information charges that, "as part of KBR's intentional efforts to insulate itself from FCPA liability for bribery of Nigerian government officials through the JV agents" KBR held its interest in #3 indirectly rather than directly and avoided placing U.S. citizens on the board of managers of #3.
The criminal conduct charged centers on two agents hired by the JV and KBR's efforts to use these agents to pay bribes to Nigerian government officials and officials responsible for awarding Bonny Island contracts. The first agent was a citizen of the United Kingdom (the "UK Agent"), who used a Gibraltar-based consulting company as a vehicle to enter into agent contracts and receive payments from the JV. The information charges that the JV paid the consulting company over $130 million to bribe high-ranking Nigerian government officials, including top-level executive branch officials. The second agent was a global trading company headquartered in Tokyo (the "Japanese Agent"), which was hired by the JV to help it obtain business in Nigeria, including by paying bribes to Nigerian officials. The information charges that the JV paid the consulting company over $50 million to bribe lower-level Nigerian government officials, including employees of the government owned entity tasked with developing Bonny Island. According to the information, the payments were largely orchestrated and coordinated by Stanley and certain of the payments were made to the foreign officials in cash-stuffed briefcases or in vehicles left at hotel parking lots. The information charges that these and other payments assisted the JV in securing four contracts at Bonny Island valued at over $6 billion.
Pursuant to a DOJ plea agreement, Kellogg Brown & Root LLC acknowledged its responsibility for the acts of its predecessor companies' officers, employees, and agents and agreed to plead guilty to a five-count criminal information charging it with conspiracy to violate the FCPA and FCPA antibribery violations. The plea agreement contains the following core terms: (i) an agreement to plead guilty to the charges in the criminal information; (ii) a criminal fine of $402 million; (iii) a continuing obligation to cooperate with U.S. and foreign law enforcement agencies, including the investigation of potentially culpable individuals; and (iv) retention of an independent compliance monitor for a three-year period to assess and monitor the company's compliance with the terms of the plea agreement and to evaluate the company's FCPA compliance program. The $402 million criminal fine was below the maximum $754 million available under the advisory U.S. Sentencing Guidelines.
In September 2008, Stanley pleaded guilty to conspiracy to violate the FCPA for his participation in the bribery scheme. He faces seven years in prison sentence and was ordered to pay a $10.8 million fine.
Based on the same core conduct charged in the DOJ's criminal information, the SEC filed a settled civil complaint against Halliburton and KBR, Inc. charging violations of the FCPA's antibribery and books and records and internal control provisions. The SEC alleged that Halliburton exercised control and supervision over its business units and that during the relevant time period: (i) KBR's board of directors consisted solely of senior Halliburton officials; (ii) the senior Halliburton officials hired and replaced KBR's senior officials, determined salaries, and set performance goals; (iii) Halliburton consolidated KBR's financial statements into its own, and all of KBR's profits flowed directly to Halliburton and were reported to investors as Halliburton profits; and (iv) Stanley discussed the Bonny Island LNG projects with senior Halliburton officials who were aware of the JV's use of the UK agent.
The SEC alleges that Halliburton failed to devise adequate FCPA internal controls relating to foreign sales agents and failed to maintain and enforce the internal controls it had. Accordingly, the SEC charged that Halliburton failed to detect, deter, or prevent KBR's FCPA violations and that numerous books and records of Halliburton and KBR contained false information, including entries related to the payments to the UK and Japanese agents.
Even though the SEC acknowledged that Halliburton's legal department conducted a due diligence investigation of the UK agent, it alleged that the due diligence was inadequate because Halliburton's policies did not require a specific description of the agent's duties and because the agent did not agree to any accounting or audit of fees received. Further, the SEC alleged that Halliburton and KBR attorneys never learned the identity of the owners of the Gibraltar-based consulting company used by the UK Agent as a vehicle to enter into agent contracts and receive payments from the JV and did not check all of the agent's references, some of which turned out to be false. According to the SEC, Halliburton approved the use of the UK agent even though a senior Halliburton legal officer knew that the due diligence investigation had failed to learn significant information. As to the Japanese Agent, the SEC alleged that Halliburton conducted no due diligence and that Halliburton's policies and procedures were deficient because the agreement was not scrutinized because it was characterized as a "services" contract. The SEC further alleged that in numerous Halliburton and KBR records, the payments to the UK and Japanese agents were falsely characterized as legitimate "consulting" or "services" fees when in fact they were bribes.
Based on the above, the SEC charged Halliburton with violating the FCPA's books and records and internal control provisions and KBR Inc. with violating the FCPA's antibribery provisions and books and records and internal control provisions and aiding and abetting Halliburton's violations.
Without admitting or denying the SEC's allegations, Halliburton and KBR consented to entry of a court order that: (i) permanently enjoins them from violating the FCPA's provisions; (ii) orders the companies to disgorge $177 million in ill-gotten profits from the bribery scheme; and (iii) imposes an independent compliance monitor for a three-year period.