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In the first case of its kind, two Texas businessmen are challenging the U.S. government’s enforcement of a landmark international bribery law. Last month, the Securities and Exchange Commission sued two oil executives for allegedly authorizing a bribe to an Indonesian official in exchange for wiping out a $3 million tax bill for the company’s Indonesian subsidiary. If the SEC makes its case, it will increase pressure on American corporate officers to tightly monitor — and perhaps alter — overseas business practices. If it fails, the ruling will strike a major blow to the SEC’s ability to curb international corruption. The case highlights lingering questions regarding the reach of the Foreign Corrupt Practices Act (FCPA). Specifically, does the law cover any corrupt payment to a foreign official, or only payments made with the intention of winning business contracts? Because most SEC enforcement actions are ultimately settled, the scope of the FCPA has been vigorously debated behind closed doors — but never before in court. The suit, filed in the U.S. District Court for the Southern District of Texas on Sept. 11, was largely overlooked because of the terrorist attacks on the World Trade Center and the Pentagon. According to the SEC complaint, in 1999 the former chief financial officer and controller of Houston oil company Baker Hughes Inc. authorized a $75,000 bribe to an Indonesian official in order to reduce a tax payment owed by Baker Hughes’ Indonesian subsidiary. Attorneys for former Baker Hughes CFO Eric Mattson and Controller James Harris maintain that if a payment was authorized by their clients, it was due to extortion by a corrupt government official who threatened to stick the company with an excessive tax bill if not paid off. “The FCPA was intended to keep companies from gaining a business advantage by paying bribes to foreign officials. Here there was no business to attain or to retain. There was no illegal advantage gained,” says Foley & Lardner Washington, D.C., partner Martin Weinstein, who represents Mattson. “Unfortunately, these are the decisions that major multinational corporations face every day.” Weinstein and lawyers for Harris plan to file a motion to dismiss the charges on Nov. 5. The stakes in the case are even higher after last month’s terrorist attacks, says attorney Stephen Best, a partner in the D.C. office of Coudert Brothers who focuses on international white-collar litigation. “What you will find in light of Sept. 11,” Best says, “is that there is a zero tolerance policy for companies that are alleged to have committed FCPA or money laundering violations.” Congress passed the FCPA in 1977 to halt widespread bribery of foreign officials by U.S. corporations. In addition to anti-bribery provisions, the law requires publicly traded companies to maintain accurate books and records and to implement internal control systems to prevent corrupt payments. In 1998, the FCPA was amended to prohibit payments made to “secure any improper advantage.” But defense attorneys maintain the language of the statute — before and after its amendment — applies only to bribes paid with the purpose of “attaining or retaining business.” “Under the FCPA, a payment giving rise to liability must both have corrupt intent and be made to attain or retain business. That is our strong position,” says Vinson & Elkins D.C. partner Mark Tuohey, who represents Harris. “The SEC’s position simply does not square with the language of the statute.” The SEC and the Department of Justice, which share responsibility for enforcing the law, embrace a far broader reading of the statute. “The commission views payments made for the purpose of securing a reduced tax assessment as falling under the FCPA,” says Paul Berger, SEC associate director of investigations. “We consider it in keeping with the position that the Department of Justice has taken and also think it’s consistent with the legislative history.” Never before has the SEC been forced to defend its interpretation in court. “It’s an argument that we’ve made to the commission which has been consistently rejected,” says Roger Witten, a partner at D.C.’s Wilmer, Cutler & Pickering. In the 1990s, Witten represented the Triton Energy Corp. in a probe of potential FCPA violations. The matter settled in 1997. “There’s no precedent that I’m aware of where the issue has actually been litigated and decided by a court.” According to the SEC’s allegations, the Indonesian government notified Baker Hughes’ Jakarta subsidiary PT Eastman Christensen in November 1998 that it would be auditing the company’s 1997 tax returns, which claimed a refund. In February 1999, the directorate general of taxation issued a preliminary finding that the company actually owed $3.2 million in unpaid taxes. PT Eastman Christensen retained an Indonesian subsidiary of the international accounting firm KPMG to represent the company in negotiations with the directorate general. After meeting with the Indonesian official, KPMG informed a Baker Hughes tax manager that the assessment would be reduced to $270,000 if it paid $75,000 to the directorate general. The tax manager then brought that information to Harris, the company’s vice president and controller, and to Arthur Downey, Baker Hughes vice president for government affairs. The men were told the company had two options: pay the bribe or pay the full $3.2 million tax assessment. Harris then consulted with Baker Hughes’ chief financial officer, Mattson, and the company’s then-general counsel, Lawrence O’Donnell III. Downey and O’Donnell both instructed Harris and Mattson not to authorize any payment to the Indonesian tax official. But according to the SEC, Harris and Mattson directed that a $143,000 payment go to the KPMG accountants in Indonesia, with the understanding that $75,000 would then be paid to the directorate general. Attorneys for Harris and Mattson dispute the allegations. Harris’ lawyer says his client authorized the $143,000 payment believing the money would cover KPMG’s accounting fees and that no payment would be made to the tax official. When Downey and O’Donnell discovered that the payment had been made despite their counsel to the contrary, Baker Hughes disclosed the matter to the SEC, attempted to stop the payment, asked for the resignations of Harris and Mattson and ultimately paid $2.1 million in taxes to the Indonesian government. Baker Hughes settled with the SEC last month without admitting to or denying the SEC’s findings. KPMG’s Indonesian subsidiary also settled with the SEC. If Harris and Mattson lose the civil suit, they could be prohibited from serving as officers in publicly traded companies and fined up to $10,000. “I don’t think this law was created to punish companies who are victims of economic extortion, and that is how it is being applied here,” says Weinstein.

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