Baker Hughes 2007 Annual Report Download - page 146

2007 Form 10-K 63
NOTE 15. COMMITMENTS AND CONTINGENCIES
Leases
At December 31, 2007, we had long-term non-cancelable
operating leases covering certain facilities and equipment. The
minimum annual rental commitments, net of amounts due under
subleases, for each of the five years in the period ending Decem-
ber 31, 2012 are $95.0 million, $64.9 million, $43.2 million,
$29.5 million and $21.7 million, respectively, and $123.0 mil-
lion in the aggregate thereafter. We have not entered into any
significant capital leases during the three years ended Decem-
ber 31, 2007.
Litigation
We are involved in litigation or proceedings that have
arisen in our ordinary business activities. We insure against
these risks to the extent deemed prudent by our management
and to the extent insurance is available, but no assurance can
be given that the nature and amount of that insurance will be
sufficient to fully indemnify us against liabilities arising out of
pending and future legal proceedings. Many of these insurance
policies contain deductibles or self-insured retentions in amounts
we deem prudent and for which we are responsible for pay-
ment. In determining the amount of self-insurance, it is our
policy to self-insure those losses that are predictable, measur-
able and recurring in nature, such as claims for automobile lia-
bility, general liability and workers compensation. We record
accruals for the uninsured portion of losses related to these
types of claims. The accruals for losses are calculated by esti-
mating losses for claims using historical claim data, specific
loss development factors and other information as necessary.
On March 29, 2002, we announced that we had been
advised that the SEC and the DOJ were conducting investiga-
tions into allegations of violations of law relating to Nigeria
and other related matters. The SEC issued a formal order of
investigation into possible violations of provisions under the
Foreign Corrupt Practices Act (“FCPA”) regarding antibribery,
books and records and internal controls. In connection with the
investigations, the SEC issued subpoenas seeking information
about our operations in Angola (subpoena dated August 6,
2003) and Kazakhstan (subpoenas dated August 6, 2003 and
April 22, 2005) as part of its ongoing investigation. We pro-
vided documents to and cooperated fully with the SEC and
DOJ. In addition, we conducted internal investigations into
these matters. Our internal investigations identified issues
regarding the propriety of certain payments and apparent
deficiencies in our books and records and internal controls
with respect to certain operations in Angola, Kazakhstan and
Nigeria, as well as potential liabilities to government authori-
ties in Nigeria. Evidence obtained during the course of the
investigations was provided to the SEC and DOJ.
On April 26, 2007, the United States District Court, South-
ern District of Texas, Houston Division (the “Court”) unsealed
a three-count criminal information that had been filed against
us as part of the execution of a Deferred Prosecution Agree-
ment (the “DPA”) between us and the DOJ. The three counts
arise out of payments made to an agent in connection with
a project in Kazakhstan and include conspiracy to violate the
FCPA, a substantive violation of the antibribery provisions of
the FCPA, and a violation of the FCPA’s books-and-records pro-
visions. All three counts relate to our operations in Kazakhstan
during the period from 2000 to 2003. Although we did not
plead guilty to that information, we face prosecution under that
information, and possibly under other charges as well, if we
fail to comply with the terms of the DPA. Those terms include,
for the two-year term of the DPA, full cooperation with the
government; compliance with all federal criminal law, including
but not limited to the FCPA; and adoption of a Compliance
Code containing specific provisions intended to prevent viola-
tions of the FCPA. The DPA also requires us to retain an inde-
pendent monitor for a term of three years to assess and make
recommendations about our compliance policies and proce-
dures and our implementation of those procedures. Provided
that we comply with the DPA, the DOJ has agreed not to pros-
ecute us for violations of the FCPA based on information that
we have disclosed to the DOJ regarding our operations in
Nigeria, Angola, Kazakhstan, Indonesia, Russia, Uzbekistan,
Turkmenistan, and Azerbaijan, among other countries.
On the same date, the Court also accepted a plea of guilty
by our subsidiary Baker Hughes Services International, Inc.
(“BHSII”) pursuant to a plea agreement between BHSII and
the DOJ (the “Plea Agreement”) based on similar charges
relating to the same conduct. Pursuant to the Plea Agreement,
BHSII agreed to a three-year term of organizational probation.
The Plea Agreement contains provisions requiring BHSII to
cooperate with the government, to comply with all federal
criminal law, and to adopt a Compliance Code similar to the
one that the DPA requires of the Company.
Also on April 26, 2007, the SEC filed a Complaint (the “SEC
Complaint”) and a proposed order (the “SEC Order”) against
us in the Court. The SEC Complaint and the SEC Order were
filed as part of a settled civil enforcement action by the SEC,
to resolve the civil portion of the government’s investigation of
us. As part of our agreement with the SEC, we consented to
the filing of the SEC Complaint without admitting or denying
the allegations in the Complaint, and also consented to the
entry of the SEC Order. The SEC Complaint alleges civil viola-
tions of the FCPA’s antibribery provisions related to our oper-
ations in Kazakhstan, the FCPA’s books-and-records and
internal-controls provisions related to our operations in Nigeria,
Angola, Kazakhstan, Indonesia, Russia, and Uzbekistan, and
the SEC’s cease and desist order of September 12, 2001. The
SEC Order became effective on May 1, 2007, which is the
date it was confirmed by the Court. The SEC order enjoins us
from violating the FCPA’s antibribery, books-and-records, and
internal-controls provisions. As in the DPA, it requires that we
retain the independent monitor to assess our FCPA compliance
policies and procedures for the three-year period.
Under the terms of the settlements with the DOJ and the
SEC, the Company and BHSII paid in the second quarter of
2007, $44.1 million ($11 million in criminal penalties, $10 mil-
lion in civil penalties, $19.9 million in disgorgement of profits
and $3.2 million in pre-judgment interest) to settle these inves-
tigations. In the fourth quarter of 2006, we recorded a finan-
cial charge for the potential settlement.