Baker Hughes 2007 Annual Report Download - page 98

2007 Form 10-K 15
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
liability, 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 September 12, 2001, we, without admitting or deny-
ing the factual allegations contained in the Order, consented
with the SEC to the entry of an Order making Findings and
Imposing a Cease-and-Desist Order (the “Order”) for violations
of Section 13(b)(2)(A) and Section 13(b)(2)(B) of the Exchange
Act. Among the findings included in the Order were the follow-
ing: In 1999, we discovered that certain of our officers had
authorized an improper $75,000 payment to an Indonesian
tax official, after which we embarked on a corrective course
of conduct, including voluntarily and promptly disclosing
the misconduct to the SEC and the DOJ. In the course of our
investigation of the Indonesia matter, we learned that we had
made payments in the amount of $15,000 and $10,000 in
India and Brazil, respectively, to our agents, without taking
adequate steps to ensure that none of the payments would
be passed on to foreign government officials. The Order found
that the foregoing payments violated Section 13(b)(2)(A). The
Order also found us in violation of Section 13(b)(2)(B) because
we did not have a system of internal controls to determine if
payments violated the FCPA. The FCPA makes it unlawful for
U.S. issuers, including us, or anyone acting on their behalf,
to make improper payments to any foreign official in order to
obtain or retain business. In addition, as discussed below, the
FCPA establishes accounting and internal control requirements
for U.S. issuers. We cooperated with the SEC’s investigation.
By the Order, dated September 12, 2001 (previously disclosed
by us and incorporated by reference in this annual report as
Exhibit 99.1), we agreed to cease and desist from commit-
ting or causing any violation and any future violation of
Section 13(b)(2)(A) and Section 13(b)(2)(B) of the Exchange Act.
Such Sections of the Exchange Act require issuers to: (x) make
and keep books, records and accounts, which, in reasonable
detail, accurately and fairly reflect the transactions and dispo-
sitions of the assets of the issuer and (y) devise and maintain
a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in
accordance with management’s general or specific authorization;
and (ii) transactions are recorded as necessary: (I) to permit
preparation of financial statements in conformity with generally
accepted accounting principles or any other criteria applicable
to such statements, and (II) to maintain accountability for assets.
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 has issued a formal order
of investigation into possible violations of provisions under the
FCPA regarding anti-bribery, books and records and internal
controls. In connection with the investigations, the SEC has
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 provided documents to and
cooperated fully with the SEC and DOJ. In addition, we con-
ducted internal investigations into these matters. Our internal
investigations identified issues regarding the propriety of cer-
tain 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 liabili-
ties to government authorities 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 provisions. 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 informa-
tion, 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 govern-
ment; 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 violations of
the FCPA. The DPA also requires us to retain an independent
monitor for a term of three years to assess and make recom-
mendations about our compliance policies and procedures and
our implementation of those procedures. Provided that we com-
ply with the DPA, the DOJ has agreed not to prosecute us for
violations of the FCPA based on information that we have dis-
closed 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 cooper-
ate 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 investi-
gation of us. As part of our agreement with the SEC, we con-
sented 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