Lessons of Weatherford ~ Part II

This post is the second in a series that draw lessons from the compliance failures of

Weatherford International Ltd. (now known as Weatherford International plc). An

overview of the violations for which Weatherford has been penalized – to the tune of

$253 million – appears in Part I of this series, together with definitions of capitalized

terms that are not defined below.

 

Foreign Subsidiaries & Operations

Weatherford purports to have made more than 250 “strategic acquisitions”

since 2000, allowing for operations in more than 100 countries. The result is

a hodgepodge of global operations that gives a compliance attorney like me a

headache, just to read the list. For example, Weatherford’s “Locations” web page for

Africa alone lists multiple offices:

• for the parent company in Algeria, Angola, Congo, Egypt, Ghana, Kenya, Libya

and Mauritania;

• for its main services outfit Weatherford Services Ltd. and an affiliate

in Mauritania, Morocco, Mozambique, Nigeria, South Africa, Tanzania,

Cameroon, Chad, Congo, Egypt, Equatorial Guinea, Gabon, Ghana, Ivory Coast,

Kenya, Tunisia and Uganda; and

• for five additional subsidiaries.

 

To be sure, most readers of this blog do not work for companies with such far-flung

operations. But the lessons of Weatherford are the same, even if you’re acquiring

only one foreign subsidiary, or joining just one joint venture overseas.

 

Lesson 1 from Weatherford is: Be careful where you operate, and design your

compliance systems to surface illegal activity by your agents abroad. Weatherford

was penalized, not only for its subsidiaries’ bribing of agents of foreign governments

in violation of the FCPA (see Part I for definitions of abbreviations) but for failure to

take adequate anti-corruption precautions in places of known corruption-risk (see

the list above of just the African locations in which Weatherford operated, not to

mention its many locations in the Middle East and Asia), but for failing to implement

and enforce internal accounting controls that – if properly designed and maintained

as required by the FPCA and American securities laws – would have surfaced its

subsidiaries’ illegal activities. For example, the government alleged:

Weatherford, which operated in an industry with a substantial corruption risk

profile [i.e., the global oil/gas exploration industry], grew its global footprint in

large part by purchasing existing companies, often themselves in countries with

high corruption risks [e.g., Angola]. Despite these manifest corruption risks,

Weatherford knowingly failed to establish effective corruption-related internal

accounting controls designed to detect and prevent corruption-related violations,

including FCPA violations … .

As a result, the government alleged, “a permissive and uncontrolled environment

existed within which employees of certain of Weatherford International’s wholly

owned subsidiaries in Africa and the Middle East were able to engage in corrupt

conduct over the course of many years … .” More specifically, the government

alleged civil and criminal violations arising out of Weatherford’s failures to act, in

that Weatherford knowingly failed:

• to implement, monitor, and impose internal accounting controls and to

maintain their effectiveness;

• adequately to train key personnel to implement internal accounting controls

to detect and avoid illegal payments and to identify and deter violations of

those controls;

• to monitor and control the financial transactions of its subsidiaries, in

a manner that provided reasonable assurances that its subsidiaries’

transactions were:

o executed in accordance with management’s general and specific

o recorded as necessary to permit preparation of financial statements in

authorization;

conformity with generally accepted accounting principles;

• to maintain a sufficient system for the selection and approval of, and

performance of corruption-related due diligence on, third party business

partners and joint venture partners, which, in turn, permitted corrupt

conduct to occur at subsidiaries

• to investigate appropriately and respond to allegations of corrupt payments;

• to discipline employees involved in making corrupt payments;

• to take reasonable steps to ensure the company’s compliance and ethics

program was followed, including training employees, and performing

monitoring to detect criminal conduct;

• to maintain internal accounting controls sufficient to prevent a subsidiary

from:

o entering into a joint venture agreement to funnel improper benefits to,

o making payments to a channel partner not authorized by contract

and receive preferential treatment from, foreign government officials;

knowing there was a substantial likelihood that those payments were

used to make corrupt payments; and

• to maintain internal accounting controls sufficient to prevent kickbacks paid

to the government of Iraq by a subsidiary.”

This litany of failures amounts to a checklist of steps that well-run companies

should take to avoid violations, prosecutions and fines.

Bottom Line: Failure to take reasonable compliance precautions, even within far-
flung subsidiaries and at foreign outposts, is itself a violation of US law, over and

above the violations that result due to failures of compliance oversight.

 

Part III of this series on the Lessons Of Weatherford will focus on accounting

law violations resulting from Weatherford’s essentially non-existent regulatory

environment.

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