Ball Corporation Quietly Resolves FCPA Enforcement Action

Magic has returned to the Butler campus for a second straight March. Perhaps it is not magic. Just hard work, a bend-but-don't-break attitude, and poise under pressure. Whatever it is, Butler basketball continues to be an amazing story and teaches lessons beyond the hardwood.

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Last week, Ball Corporation (here), a publicly traded company with divergent business segments including an aerospace and technologies segment that derived 96% of 2010 sales from contracts funded by various agencies of the U.S. federal government (see here), resolved an SEC enforcement action.

In an administrative cease and desist proceeding (here) the SEC found, in summary fashion, as follows.

"From July 2006 through October 2007, Ball, through its Argentine subsidiary Formametal, S.A., offered and paid at least ten bribes, totaling at least $106,749, to employees of the Argentine government to secure the importation of prohibited used machinery and the exportation of raw materials at reduced tariffs."

"Although certain accounting personnel at Ball learned soon after Ball acquired Formametal in March 2006 that Formametal employees may have made questionable payments and caused other compliance problems before the acquisition, the Company failed to take sufficient action to ensure that such activities did not recur at Formametal after Ball took control of the Argentine company. Within months of Ball’s acquisition of Formametal, two Formametal executives—the then-Formametal President and then-Formametal Vice President of Institutional Affairs (hereinafter the “President” and “Vice President of Institutional Affairs,” respectively)—authorized improper payments to Argentine officials. The true nature of the payments was mischaracterized as ordinary business expenses on Formametal’s books and records and went undetected for over a year."

As set forth in the SEC's findings, Ball acquired Formanmetal in March 2006 and the wholly-owned subsidiary's (a manufacturer of aerosol cans) financial results are reported on a consolidated basis in Ball's financial statements.

According to the SEC's findings, the improper payments were in connection with equipment imports, copper scrap export waivers.

As to equipment imports, the SEC found as follows.

"Formametal paid bribes totaling over $100,000 in 2006 and 2007 to secure the importation of equipment for use in its manufacturing process. Formametal’s President authorized at least two of these payments. In most cases, the bribes were paid to induce government customs officials to circumvent Argentine laws prohibiting the importation of used equipment and parts. The bribes often appeared on invoices from a non-governmental customs agent for Formametal. The payments were invoiced as separate line items described inaccurately as “fees for customs assistance,” “customs advisory services,” “verification charge,” or simply “fees,” were invoiced in addition to other customs-related fees, and were sometimes in rounded peso amounts. To further obscure that the payments were really bribes, Formametal posted the payments inaccurately identified as “customs advice” or “professional fees” to an “Other Expenses” account or in some instances to an account named for the related equipment."

As to copper scrap export waivers, the SEC found as follows.

"Formametal paid a bribe that its President authorized in October 2007 in an attempt to bypass high government duties imposed on copper scrap exports. These duties, which were generally 40 percent of the value of the copper, were imposed by Argentina in an effort to discourage export sales of domestically produced copper and copper scraps. The President estimated the additional profit from exporting this copper scrap with the export duty waivers versus selling it inside Argentina would be approximately $1.5 million annually."

"For six months prior to August 2007, Formametal unsuccessfully sought to gain government approval to export the scrap without the customarily high duties. After giving up on obtaining the waiver legitimately, on October 18, 2007, Formametal disbursed $4,821, representing the first of five bribe installments authorized by its President to obtain an export duty waiver. The payment was funneled through Formametal’s third party customs agent. Obscuring that the transaction was a bribe, Formametal inaccurately recorded the payment as “Advice fees for temporary merchandise exported” in an “Other Expenses” account. Although the President believed that the payments were requested by a customs official and would result in a copper scrap export duty waiver, no copper scrap export shipments were made pursuant to the improper payment."

As to Ball's internal controls, the SEC found as follows.

"Ball’s and Formametal’s weak internal controls, which included importing equipment into Argentina in 2006 and 2007 without appropriate invoices and documentation, made it difficult to detect that the subsidiary was repeatedly violating Argentine law through the payment of bribes. Ball’s weak internal controls also factored into the Company’s failure to prevent further abuses at Formametal, after Ball accountants learned of a bribe paid by Formametal to import machinery for use in its manufacturing process. As a result, Formametal continued to make improper payments during 2007."

"Further, Ball lacked sufficient internal controls to bring about effective changes after information available to Ball’s executives indicated anti-bribery compliance problems at Formametal. For example, key personnel responsible for dealing with customs officials remained at Formametal, even though external due diligence performed on Formametal suggested that Formametal officials may have previously authorized questionable payments."

Based on the above findings, the SEC found that Ball violated the FCPA's books and records and internal control provisions.

The SEC's order notes that the "Commission considered remedial acts promptly undertaken by Respondent, Respondent's voluntary disclosure of these matters to the Commission, and cooperation afforded the Commission staff."

Without admitting or denying the SEC's findings, Ball agreed to a cease and desist order prohibiting future FCPA book and records and internal controls violations and agreed to pay a $300,000 civil penalty.

The last paragraph of the SEC order states "that the Commission is not imposing a civil penalty in excess of $300,000 based upon [Ball's] cooperation in a Commission investigation and related enforcement action."

Charles Smith (Skadden - here) represented Ball.

SEC FCPA enforcement actions, including administrative actions, are often announced with a SEC press release. However, there was no SEC press release issued last week as to the Ball enforcement action.

Ball's most recent annual report, filed February 28, 2011, stated as follows.

"As previously reported, the company investigated potential violations of the Foreign Corrupt Practices Act in Argentina, which came to our attention on or about October 15, 2007. The Department of Justice and the SEC were also made aware of this matter, on or about the same date. The Department of Justice informed us in 2009that it had completed its investigation and would not bring charges. The SEC’s staff has concluded its investigation and a resolution is expected during 2011. Based on our investigation to date, we do not believe this matter involved senior management or management or other employees who have significant roles in internal control over financial reporting."

FCPA Aches and "Payne"s

Helmerich & Payne Inc. ("H&P") is an international drilling contractor headquartered in Tulsa. It has land and offshore operations in South America. To operate in that region, H&P must import and export equipment and materials. According to the DOJ and SEC, therein lies the problem.

H&P recently settled a DOJ and SEC FCPA enforcement action based on the conduct of two wholly-owned second tier subsidiaries, Helmerich & Payne (Argentina) Drilling Company ("H&P Argentina") and Helmerich & Payne de Venezuela, C.A. ("H&P Venezuela").

Pursuant to a two-year DOJ non-prosecution agreement, H&P acknowledged responsibility for the conduct of H&P Argentina and H&P Venezuela in making various improper payments to officials of the Argentine and Venezuelan customs services. According to a DOJ release (see here), the payments "were made in order to import and export goods that were not within regulations, to import good that could not lawfully be imported, and to evade higher duties and taxes on the goods." Pursuant to the agreement, H&P will pay a $1 million penalty.

In a parallel action, H&P agreed to an SEC settlement under which it agreed to pay approximately $375,000. The SEC cease-and-desist order ("Order") (see here) finds that: (i) "H&P Argentina paid Argentine customs officials approximately $166,000 to permit the importation and exportation of equipment and materials without required certifications, to expedite the importation of equipment and materials, and to allow the importation of materials that could not imported under Argentine law; and (ii) "H&P Venezuela paid Venezuelan customs officials approximately 19,673 either to permit the importation and exportation of equipment and materials that were not in compliance with Venezuelan importation and exportation regulations or to secure a partial inspection, rather than a full inspection, of the goods being imported."

According to the Order, the payments were "falsely, or at least misleadingly" described as "additional assessments," "extra costs," "extraordinary expenses," "urgent processing," "urgent dispatch," or "customs processing." The SEC found that as a result of the payments, H&P avoided approximately $320,000 in expenses it would have otherwise incurred had it properly imported and exported the equipment and materials. The subsidiaries' financial results were included in H&P's filings with the SEC and, based on the above conduct, the SEC found that H&P violated the FCPA books and records and internal control provisions.

The Order is silent as to H&P's knowledge of or involvement in the above described payments.

No doubt H&P received an SEC cease and desist order (the least harsh SEC sanction) and a DOJ non-prosecution agreement because of its conduct upon learning of the payments. As described in the Order, during an FCPA training session, an employee voluntarily disclosed some potentially problematic payments, through a customs broker, in Argentina to customs officials. Thereafter, H&P hired FCPA counsel, conducted an internal investigation, and voluntarily reported the conduct at issue to the government.

According to H&P's Form 8-K filed on July 30, 2009 (see here), "[t]here are no criminal charges involved in the settlements and disciplinary action has been taken by the company with respect to certain employees involved in the matter, including in some cases, termination of employment." The 8-K also notes that both settlements "recognize the company's voluntary disclosure, cooperation with both agencies, and its proactive remedial efforts."