Baker Hughes: Greasing the Wheels in Kazakhstan

1. Baker Hughes: Greasing the Wheels in Kazakhstan

2. 1. Introduction 2. FCPA and Anti-Bribery Legislation 3. SEC and DOJ Increase Enforcement 4. Roy Fearnley Bribes in Kazakhstan 5. Baker Hughes Compliance Program 6. Case Questions and Assignments

3. 1. Introduction 2. FCPA and Anti-Bribery Legislation 3. SEC and DOJ Increase Enforcement 4. Roy Fearnley Bribes in Kazakhstan 5. Baker Hughes Compliance Program 6. Case Questions and Assignments

4. Case Perspective Students are put into the positions of a newly appointed Audit Committee member of Baker Hughes board of directors shortly after Baker Hughes’s FCPA violations. Students have to research documents related to the Baker Hughes FCPA violations and answer ten case questions.

5. Baker Hughes (BH) Profile • Oil and Gas Services Industry - • Drilling, Evaluation, Consulting • 58,000 Employees in 80 Countries • Created in 1987 with the merger of Baker International and Hughes Tool Company - both founded over 100 years ago by R.C. Baker &Howard Hughes, Sr.

6. Kazakhstan Profile

7. Kazakhstan Profile • 9th largest country in the world (4x Texas) • In 1991, the USSR was dissolved and Kazakhstan became independent • Population is 15.5 MM • Kazakhstan holds 4 billion tons of proven recoverable oil reserves • By 2015, Kazakhstan will be among the top 10 oil-producing nations

8. The Karachaganak Oil Field is located near Aksai, Kazakhstan

9. Consequences of BH’s FCPA Violations • (2002-2007) • 330 lawyers, 82 support staff, 31 forensic accountants • Documents and electronic media from 20 cities on four continents • Reviewed data from approximately 300 computers • 245 witness interviews • BHI reviewed (either page-by-page or using term searches) approximately 1.69 terabytes of electronic data, the approximate equivalent of 90 million pages, as well as hundreds of thousands of pages of hard-copy documents • Source:Baker Hughes Inc. · 10-Q · For 3/31/07 · EX-99.3

10. 1. Introduction 2. FCPA and Anti-Bribery Legislation 3. SEC and DOJ Increase Enforcement 4. Roy Fearnley Bribes in Kazakhstan 5. Baker Hughes Compliance Program 6. Case Questions and Assignments

11. Two Events led to the FCPA’s Creation in 1977 Watergate 1972-74 Lockheed $22 million bribe to Japan 1976

16. 3 MAJOR PARTS OF FCPA Anti-Bribery Accurate Record-Keeping Internal Controls

17. 1. ANTIBRIBERY PROVISIONS “It is a crime for any U.S. person or company to directly or indirectly pay or promise anything of value to any foreign official to obtain or retain any improper advantage.”

18. 2. ACCOUNTING REQUIREMENTS “Make and keep books, records, and accounts, which in reasonable detail, accurately reflect the transactions and dispositions of assets.”

19. 3. INTERNAL CONTROLS “Devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that transactions are recorded appropriately and in accordance with rules and regulations.”

20. FCPA Penalties

21. Other FCPA Remedies • Criminal fraud charges • Civil injunctive action • Administrative cease and desist proceedings • Disgorgement of ill-gotten gains Implementation of FCPA compliance program Independent Monitor Continuing reporting obligation

22. Recent Changes in U.S. FCPA • Enforcement Agencies_____ • DOJ - added 25 FCPA prosecutors • FBI – FCPA unit of investigative agents • SEC - special FCPA enforcement unit

23. Significant Anti-Bribery and related Legislation FCPA (1977) OECD Anti-Bribery Convention (1997) Sarbanes-Oxley (2002) UK Bribery Act of 2010 Dodd-Frank – Whistleblower (2011) Canada’s Corruption of Foreign Public Officials Act (2013)

25. 1. Introduction 2. FCPA and Anti-Bribery Legislation 3. SEC and DOJ Increase Enforcement 4. Roy Fearnley Bribes in Kazakhstan 5. Baker Hughes Compliance Program 6. Case Questions and Assignments

31. 1. Introduction 2. FCPA and Anti-Bribery Legislation 3. SEC and DOJ Increase Enforcement 4. Roy Fearnley Bribes in Kazakhstan 5. Baker Hughes Compliance Program 6. Case Questions and Assignments

32. BH andthe Corruption Perception Index

33. Corruption Perceptions Index of 2001

38. Principal of the Agent Company, (identified in 2010 by Wikileaks cable as Robert Kissin, UK Banker) Agent Company (in Isle of Man) 2% of Baker Hughes Revenues - Bribes Roy Fearnley, Baker Hughes, Team Leader for the Tender 3 year Oil Service Contract ($200 million total) Baker Hughes, (VP of Marketing) Karachaganak Integrated Oil (KIO) British Gas (UK), 32.5 % Eni-AGIP (Italy) , 32.5 % ChevronTexaco (US), 20 % Lukoil (Russia), 15 % Kazakhoil (National Oil Company) & Government of Kazakhstan 40 year Production Sharing Agreement

40. Quotes from the SEC Complaint “Winning the Karachaganak Project was crucial for the future health of Baker Hughes in Kazakhstan” Baker Hughes VP of Marketing Nov., 1999 -------------------------------------------------------------------- “I heard unofficially Baker Hughes won the contract, we should know within a week” Roy Fearnley to the VP of Marketing, Sept. 2, 2000 -------------------------------------------------------------------- “An agent for Kazakhoil is demanding unless we pay a commission, we can say goodbye to this and future business” Roy Fearnley, Sept. 24, 2000

41. Timeline of the FCPA Violations • On Sept. 27, 2000, BH agrees to pay commissions • On Oct. 23, 2000, BH awarded contract by KIO • Between May, 2001 and Nov., 2003, BH made 27 • “Commission Payments” totaling $4.1 MM • Payments recorded on BH books as “Commissions”, “Fees” and “Legal Services”

42. 1. Introduction 2. FCPA and Anti-Bribery Legislation 3. SEC and DOJ Increase Enforcement 4. Roy Fearnley Bribes in Kazakhstan 5. Baker Hughes Compliance Program 6. Case Questions and Assignments

46. Example of Actual Case and Hypothetical Question

50. 1. Introduction 2. FCPA and Anti-Bribery Legislation 3. SEC and DOJ Increase Enforcement 4. Roy Fearnley Bribes in Kazakhstan 5. Baker Hughes Compliance Program 6. Case Questions and Assignments