Anti Corruption Risks In The Energy Industry

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Anti-Corruption Risks in the Energy Industry

How to Minimize Risk, Maximize Compliance, and Avoid EnforcementMichael Volkov Mark ComptonPartner Partner(202) 263-3288 [email protected] [email protected]

November 2011

Overview

• FCPA Enforcement Trends

• Corruption Risk Factors for the Energy industry

• FCPA Legal Elements

• UK Bribery Act

• UK Bribery Act versus the FCPA

• Compliance Program

FCPA: Enforcement Trends

Aggressive FCPA enforcementhas resulted in corporate mega-fines:

• For 2010, fines total over $1.6 billion - more than half of all federal criminal fines collected.

• Fueled by voluntary disclosures and industry-wide investigations - oil, pharmaceuticals and medical devices, military and law enforcement equipment, and telecommunications.

• FBI has dedicated FCPA squad which is using aggressive investigative tactics - consensual recordings, ambush interviews, undercover officers, informants, search warrants and wiretaps.

• SEC Dodd-Frank whistleblower bounty program will increase number of credible complaints, investigations and prosecutions.

The Current Enforcement Picture

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2004 2005 2006 2007 2008 2009 2010

DOJ

SEC

2010 witnessed an 85% increase in FCPA enforcement actions over 2009, which itself was a record year.

The Current Enforcement PictureFCPA: Increase in Enforcement Actions

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FCPA Enforcement at a Glance – BlockbustersEight of the top ten monetary settlements in FCPA history were reached in 2010

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$100

$200

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$400

$500

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$579

KBR/Halliburton

$800

Siemens

ENI/SnamprogettiBAE Systems

Technip

$185 $137

$365 $338

DaimlerAlcatel-Lucent

$82

Panalpina

$400

2008

2011

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2009

JGC Corporation

Johnson & Johnson

$218.8

$70

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FCPA Enforcement at a Glance – Prison Sentences

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84 monthsAlbert Jack Stanley, CEO and Chairman, KBR (2009)

63 monthsDouglas Murphy, President American Rice, Inc. (2002)

57 monthsJuan Diaz, OwnerThird party consultantto Haiti Telco (2010)

48 monthsRobert Antoine, Director Haiti Telco (2010)

37 monthsJohn Warwick, PresidentPorts EngineeringConsultants Corporation (2009)

37 monthsDavid Kay, Vice PresidentAmerican Rice, Inc. (2002)

87 monthsCharles Paul Edward Jumet,President, Ports EngineeringConsultants Corporation (2009)

FCPA: Whistleblower Bounty

• Whistleblower Bounty program offers rewards of 10 to 30 percent of any settlement over $1 million. SEC’s Whistleblower Office opened on August 12, 2011.

• SEC regulations have been adopted(pending appeal).

• SEC estimates it will receive 30,000 complaints a year; 1-2 credible complaints each day.

• With certain exceptions, whistleblowers must first file complaint internally with company and wait for 120 days before filing with SEC.

• Companies will increase self-reporting to pre-empt whistleblowers.

The Current Enforcement Picture

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TRENDS INGLOBAL ANTI-CORRUPTIONENFORCEMENT

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Anti-Corruption Enforcement

• GLOBAL enforcement is on the rise.

• In the past three years, US prosecutors have enforced the FCPA to the tune of $3.6 billion.

• The UK Bribery Act became effective on July 1, 2011

• In response to international pressure, Canada is increasing enforcement of its anti-corruption law.

• China and the US are increasing cooperation and beginning to establish a framework for information sharing and enforcement.

• China enacted its own foreign bribery law

• Germany, Spain and other EU countries are increasing enforcement

• Latin American and Asia countries have been slower to enact tough, new anti-corruption laws and begin aggressive enforcement programs

• Risk of anti-corruption multi-jurisdictional, “piggy-back” actions is growing

General Risk Factors for Corruption in the Energy Industry

• Governments play a significant role in the industry– Concessions and auctions

– Regulation, licensing and permitting

• Resources are often located in undeveloped countries which have weak political and social institutions

• Oil and gas industries have history of corruption and are very lucrative

• New energy sources are heavily subsidized by governments and ripe for corruption

Specific Risks in the Oil and Gas Industry

• The oil and gas industry is – and has been -- the focus of enforcement agencies.

• Industry operates in countries known for corruption risks

•Many foreign governments are involved in oil and gas industry through state-owned enterprises and joint ventures

• Oil and gas industry relies on network of third-party agents and consultants who assist companies in local countries

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Anti-Corruption Enforcement in the Oil & Gas Industry

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US FOREIGN CORRUPT PRACTICES ACT “As President Obama has said, ‘The struggle against corruption is one of the great struggles of our time’… Corruption is, simply put, a scourge on civil society. We must vigorously enforce our own laws that prohibit bribery of foreign officials, such as… the Foreign Corrupt Practices Act. And we must work together to support our partners in anti-corruption enforcement.”

- Eric Holder, U.S. Attorney General (2009)

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FCPA Anti-Bribery Provisions, 15 U.S.C. 78dd-2 et al.

• A payment, offer, authorization, or promise to pay money or anything of value to

• a foreign government official

• or to any person, while knowing that the payment or promise will be passed on to a foreign government official,• with a corrupt motive for the purpose of

– influencing any act or decision of such foreign government official, – inducing such person to do or omit any action in violation of his or her

lawful duty, – securing an improper advantage, or– inducing such person to influence a foreign government (or

instrumentality thereof) to affect or influence its acts or decisions,– all in order to obtain, retain, or direct business for or to any person.

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FCPA Accounting/ Record-Keeping Provisions, 15 U.S.C. 78dd-1 et al. • Books and records must

accurately and fairly reflect transactions and dispositions of assets.

• Internal Controls: 1. Transactions are executed with management’s

authorizations;

2. Transactions are recorded to allow preparation of a report that conforms with generally accepted accounting principles;

3. Access to assets is permitted only in accordance with management’s authorization; and

4. Monitoring to ensure legitimacy of accounting.

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FCPA Elements – Who is covered?

•Domestic:– US “issuers” – US citizens, nationals, or residents– Entities organized under U.S. law– Entities with U.S. principal place of business

• Foreign:– Foreign corporations subject to SEC regulation (e.g.,

via ADRs) and using instrumentalities of interstate commerce

– Foreign persons when in US territory, whether or not they use instrumentalities of interstate commerce

This includes directors, officers, employees,and agents of entities subject to the statute

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FCPA Criminal Penalties

• Criminal Penalties for companies:– $2 million fine for an anti-bribery violation– $25 million fine for a books and records violation

• Criminal Penalties for individuals:– 5 years in jail with a maximum $250,000 fine for

an anti-bribery violation– up to 20 years in jail with a maximum $5 million

fine for a books and records violation

Under a federal alternative fine provision, companies and individuals may be fined up to

TWICE the benefit sought or received.

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FCPA Civil Penalties

• SEC and DOJ can impose a $10,000 fine per violation upon individuals and companies

• SEC may also impose further civil penalties ranging between $7,500 to $150,000 upon individuals and $75,000 to $725,000 upon companies

Alternatively, the SEC may impose a civil penalty equal to the gross pecuniary gain to an individual or company and

equitable relief, such as disgorgement of profits.

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FCPA Elements – What is Prohibited?

•A covered entity may not pay, promise to pay or authorize the payment of money or anything of value.– This covers direct bribery or kickback payment but also

includes, gifts, travel, meals or other lavish entertainment.

•With a corrupt intent to obtain or retain business or to secure a business advantage including: – Government contracts – Government-issued operating permits and licenses– avoiding or reducing inspection reports and certifications– tax refunds and reductions– customs clearance– health inspections– beneficial changes to laws and regulations

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Intent to Obtain / Retain Contracts or Any Other Business Advantage

• Clearly making a payment to obtain or retain a contract violates the law but securing a business advantage qualifies too. This includes:– Government-issued operating permits

and licenses– avoiding or reducing inspection reports and

certifications– tax refunds and reductions– customs clearance– health inspections– beneficial changes to laws and regulations

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Giving or Promising Anything of Value

No cash bribes or kickback payments. Laws also forbid gifts, meals, travel,

entertainment, or even charitable donations under certain circumstances.

CCI, a components manufacturer, gave a Ferrari, among other items, to a Mexican utility company official. $18.2 million FCPA fine

Veraz Networks, a telecom company, paid a $300,000 FCPA fine and incurred $2.5 million in legal fees to resolve FCPA charges. In the charging documents, the US government specifically mentioned giving $4,500 worth of flowers to a Chinese official’s wife.

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Foreign Government Official

• Under the FCPA: Any officer, employee, or agent of a foreign government or any department, agency, or any instrumentality thereof.

• This includes any entity that is owned or controlled by a Foreign Government. – i.e. all employees of a JV where a state owned

or controlled entity is a party to the JV

– Factors: percentage of financial ownership, designation under local law, appointment of management, membership on Board, even the company’s representations.

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FCPA Risk – Third Parties

• A covered entity may not make payments to any other person, knowing that the payment or promise will be passed on to a foreign official. • Knowledge means…

– Actual knowledge

– Awareness or suspicion that an event is likely to occur

– Avoiding knowledge of corrupt acts through willful blindness

• A company must investigate all red flags involving agents, joint venture partners, brokers, consultants, distributors, professional service firms, etc.

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FCPA Risk – Third Parties: RED FLAGS

•Red flags are facts and circumstances that raise serious questions about the possibility of an FCPA violation and which require further investigation.

• Red flags include (but are not limited to):– Transactions in high risk countries

– Objection to anti-compliance contractual provisions

– Unusual payment arrangements: request for cash payments, excessive commission rates, payment to offshore accounts

– Known affiliation with corrupt officials

– No significant experience relevant to the business

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FCPA Risk – Mergers & Acquisitions “Buying an FCPA violation”

• Acquiring company can be held liable for FCPA violations which occurred prior to the acquisition. – Corruption risk will also impact M&A considerations: value of a

target company, acquisition structure, warranties and indemnification, or in some cases, withdrawal from the deal.

• To limit exposure, the acquiring company must conduct a due diligence review and adequately respond to red flags.– Due diligence is not a legal defense but it can minimize risk of

liability when coupled with compliance commitment .

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FCPA Exception – Facilitation Payments

• Anti-bribery provisions do not apply to payments made to low level foreign government officials to expedite or secure performance of routine governmental action. – Examples: obtaining permits or licenses; processing governmental

papers (visas and work orders); scheduling inspections; providing phone service, power, and water supply; loading or unloading cargo; protecting perishable products from deterioration; or actions of a similar nature

• Applies only when the foreign government official has no discretion in performing duties. Payment must be for something to which the payor was already entitled.• UKBA bars facilitation payments.• Best Practices: Prohibit facilitation payments entirely – 80%

of U.S. companies have banned them.

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FCPA Affirmative Defense – Reasonable and Bona Fide Expenditures

• Reasonable and bona fide expenditures, such as travel and lodging expenses that are legal under local law and are directly related to:

A. the promotion, demonstration, or explanation of products or services, or

B. the execution or performance of a contract with a foreign government or performances of a contract with a foreign government or agency thereof.

To: Foreign Gov. OfficialFrom: Covered Entity

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FCPA Affirmative Defense – Reasonable and Bona Fide Expenditures

• 315 Trips• Value = $10 million• “Side trips:” Las Vegas, Disney World, Hawaii,

Niagara Falls• Spouses and children included• Per diem: $500 - $1,000• MBA tuition - $21,000• Internal controls violations – Lack of training• Books and records violations – “Factory Inspection

Account” without factory tours

The Wrong Way: Lucent (2007)

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U.K. BRIBERY ACT "The Bribery Act is good news for the UK and UK business. It confirms our commitment to helping to eradicate bribery from business practices. It will help ensure that ethical businesses do not lose out to others that use bribery and corruption to win contracts. We shall enforce the act vigorously.”

- Richard Alderman, Director, UK Serious Fraud Office

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UK Bribery Act Basics – Four New General Offenses

• Offering, promising, or giving a bribe (Section 1 Offense)

• Requesting, agreeing to receive, or accepting a bribe (Section 2 Offense)

• Bribing a foreign public official to obtain or retain business or a business advantage (Section 6 Offense)

• Failure to prevent bribery on behalf of a commercial organization (Section 7 Offense)

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UK Bribery Act – Jurisdiction

• Sections 1, 2, and 6 Offenses – UK national or resident

– Entity incorporated in the UK

– Foreign persons committing an act in the UK

• Section 7 Offense – Entity incorporated or formed in the UK

– Entity carrying on business or part of a business in the UK (wherever in the world it may be incorporated or formed)

• Requires “demonstrable business presence”

• UK stock listing is not sufficient by itself to satisfy this requirement, nor is a UK subsidiary if it acts “independently” of the parent

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UK Bribery Act Offenses - Bribing Another Person (Section 1 Offense)

• Directly or indirectly offers, promises or gives a financial or other advantage to another person:

– to induce a person to perform a function or activity improperly or to reward a person for the improper performance of a function or activity or

– knowing or believing that the acceptance of the advantage in itself constitutes the improper performance of a relevant function or activity

• Bribe may take any form (“financial or other advantage”)

• “Directly or indirectly” – it is not necessary for the person to whom the bribe is promised to be the same person who acts improperly

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UK Bribery Act Offenses - Receiving a Bribe (Section 2 Offense)

• Requests, agrees to receive, or accepts a financial or other advantage, intending, in consequence, a relevant function or activity should be performed improperly

• Financial or other advantage can be for the benefit of the person receiving the bribe or another person

• An offence may be committed even if there is no intention to commit a criminal act

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UK Bribery Act Offenses - Bribing a Foreign Public Official (Section 6 Offense)

• Prohibits the offering, promising, or giving of a financial or other advantage to a foreign public official intending:

– (i) to influence the official in his capacity as a foreign public official and

– (ii) to obtain or retain business or an advantage in the conduct of business, and the official is not permitted or required by written law to be so influenced

• “Foreign Public Official”

– an individual who holds a legislative, administrative or judicial position in a country or territory outside the UK

– an individual who exercises a public function for or on behalf of a country or territory outside the UK or for any public agency or enterprise of that country or territory

– an individual who an official agent of a public international organisation

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UK Bribery Act Offenses – Corporate Failure to Prevent Bribery (Section 7 Offense)

•Strict Liability if person associated with a commercial organization bribes another.•Defense: If the commercial organization has “adequate procedures” to prevent such bribery from occurring.•The bribery may occur anywhere in the world – a conviction for bribery in the local jurisdiction is not required.

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UK Bribery Act – Associated Persons (Section 7 Offense)

• Persons who performs services for or on behalf of the company– An agent, subsidiary, joint venture partner, or employee if the payment is

intended to obtain or retain business, or a business advantage, for the commercial organization (not solely for the associated person or a third party)

• Categorizing Associated Persons:– Employees are presumptively associated persons .– Bribes made by a subsidiary create liability only if the subsidiary intended the

parent to benefit.– Joint Ventures/Joint Venture Partners are not automatically “associated” with

their members and co-venturers. A member will be liable only if the JV performs services for the member, AND a bribe was paid with the intention of benefiting the member. (Indirect benefit is not enough.)

– A supplier performing services probably is an associated person.

– A seller of goods probably is not an associated person.

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UK Bribery Act – Adequate Procedures, UK Ministry of Justice Guidance (March 30, 2011)

SIX PRINCIPLES FOR BRIBERY PREVENTION

1. Proportionate Procedures: Procedures to prevent bribery by persons associated with the organisation are proportionate to the bribery risks it faces and to the nature, scale and complexity of the organisation’s activities. They are clear, practical, accessible, effectively implemented and enforced.

2. Top Level Commitment: Top level management should issue statement of commitment to counter bribery in all parts of the organisation’s operation.

3. Risk Assessment: Regular and comprehensive assessment of the nature and extent of the organisation’s risks relating to bribery.

4. Due Diligence: Polices and procedures cover all parties to a business relationship, including the organisation’s supply chain, agents and intermediaries, all forms of joint venture and similar relationships. Business partners: Reputation for bribery, Linked to public office holders or Politically Exposed Persons.

5. Communication: Policy and Procedures, training, and support and operational procedures.

6. Monitoring and Review: Institute monitoring and review mechanisms to ensure compliance with relevant policies and procedures and to identify any issues as they arise. Implement improvements where appropriate.

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UK Bribery Act – Civil / Criminal Penalties

• Unlimited fine for individuals and/or companies

• Ten years imprisonment

• Prevention Orders, Confiscation Orders, winding up proceedings, debarment, director disqualification and regulatory/disciplinary action

• Civil Recovery Orders – no criminal conviction required (lower threshold of proof)

• Note: UK does NOT permit non-prosecution & deferred prosecution agreements

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UKBA VS. FCPA“Partnerships like the one we have with the Serious Fraud Office are critical to our transnational approach to combating foreign bribery, and we intend increasingly to rely on our foreign partners in future cases.”

- Lanny Breuer, Assistant US Attorney General

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FCPA v. UK Bribery Act: Key DifferencesOffences and Defenses

FCPA UK Bribery Act

Bribery of foreign government officials (including state enterprise employees, political parties, party officials, political candidates, public international organization employees)

Bribery of public and private sector individuals – includes a discrete offence of bribing a foreign public official

Only penalizes those making bribes Accepting bribes is also punishable

Prosecutes active participation in bribery,though internal controls requirement isindependent of any bribery activity

No accounting offence in the Bribery Act but Companies Act 2006 includes an offence of failing to keep adequate accounting records

Consideration of compliance programs at prosecution and sentencing stages

“Adequate procedures” is the only potential defense available against failing to prevent bribery

Statutory exception for “facilitation payments” narrowly defined

Facilitation payments only permitted if local written law so permits

Reasonable and bona fide expenditure ontravel, lodging and entertainment expenses permitted if directly related to promotion of product or service or to performance of government contract

No express exception for corporate hospitality but Guidance advises that “reasonable and proportionate” hospitality is permissible.

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FCPA v. UK Bribery Act: Key DifferencesTerritorial Effect and Punishment

FCPA UK Bribery ActConduct within the US by anyone Conduct (including omissions) within the UK by

anyoneConduct outside of the US if by an issuer of US Securities or a “domestic concern” (e.g. a company organized under US law or having its principal place of business in the US) – or anyone acting on its behalf; foreign persons who commit an act in the United States in furtherance of a subject act are also covered

Conduct (including omissions) outside of the UK by persons (natural and legal) with a close connection to the UK, if that conduct would form an offence if committed in the UK. If a commercial organization “carries on a business or part of a business in the UK” then may beprosecuted for “failing to prevent” bribery even if the bribery occurs entirely outside of the UK

Up to 5 years prison sentence for bribery, 20 years for accounting offences

Up to 10 years prison sentence – accounting offences may be prosecuted under other Statutes

Criminal fine for entities up to $2m for bribery or $25m for violation of accounting provisions, or twice the benefit sought, and debarment; forindividuals, fines of up to $100,000 (bribery) or $5 million (accounting offences)

Unlimited fine; additionally Serious CrimePrevention Orders, Confiscation Orders, Winding up proceedings, debarment, director disqualification and regulatory/disciplinary action

Civil penalties up to $10,000 per briberyviolation or $500,000 per corporateaccountancy violation

Civil Recovery Orders – no criminal conviction required (lower threshold of proof)

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Jurisdiction Over Non-UK Companies

• Extends to non-UK companies that carries on a business or part of a business in the UK

• Guidance defines to require “demonstrable business presence”

• UK stock listing is not sufficient by itself to satisfy this requirement, nor is a UK subsidiary if it acts “independently” of the parent

• Key issue will be harm to UK business interests

UK Bribery Act: Effective this Year

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Corporate Hospitality

• “Reasonable and proportionate” hospitality is legal

• Legitimate purposes: Improving your image, Presenting products and services, and Establishing cordial relations

• Use of limits and pre-approval is recommended

• MoJ examples of acceptable hospitality (private sector): Wimbledon, Grand Prix, Airport transfers, and Dining and tickets to an event

• MoJ examples of acceptable hospitality (FPOs):

– Reasonable travel and accommodation to visit mining operations

– Flights and hotel in New York, along with fine dining and baseball(“match”) for FPO and partner, as long as there is “genuine mutual convenience”

– Ordinary travel and lodgings to enable a visit to a hospital

• But, if hospitality is not clearly connected with business activity, or is excessively lavish, the likely inference is that it is a disguised bribe

UK Bribery Act: Effective this Year

CompliancePrograms

Principles for a Successful Compliance Program

The key elements of a successful program require:

1) A commitment to compliance from top management and a consistent message throughout the company.

2) A careful weighing of risk, commitment to compliance and business needs so that there is “buy-in” at every level of the company.

3) A business-practical approach which is flexible to respond to risks, local business operations, and effective compliance needs.

4) Create positive compliance structure which emphasizes common sense, communication and issue identification; solutions to common problems; and recognizes importance of business operations and new opportunities.

Designing And Implementing An Anti-Corruption Compliance Program

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Basic Elements of FCPA Compliance Program

FCPA Compliance Policy and Tone at the Top.

• The Company should develop and promulgate a clearly articulated and visible corporate policy against violations of the FCPA and a strong commitment from senior management.

• Strong policy statement should be adopted by the Board.

• Board and senior management should be required to make commitment to anti-corruption compliance.

• Compliance commitment must be demonstrated by actions.

Designing and Implementing an Anti-corruption Compliance Program

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Use of Risk Assessment

The Company should develop its compliance standards and procedures using a risk assessment.

• The risk assessment should be a formal and documented review which examines:

− the nature and extent of corruption in each country in which the company does business relying on public and internal sources of information (Transparency International, OECD, etc);

− the extent of government interactions and the persons in the company responsible for such interactions; and

− the use of third-party agents, consultants in each country.


Corruption Risks

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Senior Management Oversight and Reporting

• The Company should assign responsibility to one or more senior corporate executives of the Company for the implementation and oversight of its Company's anti-corruption policies.

• Company should designate a compliance officer in senior management and provide adequate resources to compliance office.− Compliance officer should be separate from General Counsel

and internal auditing functions.


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Anti-Corruption Policies and Procedures

The Company should develop and promulgate compliance standards and procedures which shall include policies governing:

• gifts;

• hospitality, entertainment, and expenses;

• customer travel;

• political contributions;

• charitable donations and sponsorships;

• facilitation payments; and

• solicitation and extortion.


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Ongoing Assessment

• Annual Review. The Company should review its anti-corruption compliance standards and procedures, on no less than an annual basis to ensure they are working.

• Ongoing Assessment. The Company should conduct ongoing assessments of its FCPA compliance program.

− During the year, spot checks and quarterly audits of the compliance program should be conducted.

− Dynamic process for modifying the compliance program should be made as new information is learned.


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Internal Controls

The Company should ensure that it has a system of internal controls for the purpose of foreign bribery or concealing bribery.

• Internal controls are key to identifying and preventing bribery.

• Internal audits must be supplemented with forensic audits since internal audits hinge on “materiality” and may not catch bribery schemes.

• Every expenditure of money where bribery may occur should have specific controls and management procedures to prevent bribery (e.g. gifts and hospitality, review form for certain amounts and review by compliance and legal offices).


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Training

• FCPA training which shall include: (a) training for all directors and officers, and, where necessary and appropriate, employees, agents, and business partners; and (b) annual certifications, certifying compliance with the training requirements.

• Training programs should be tailored to different audiences and risks. Offices that have interactions (sales and regulatory) with foreign officials should have different program from senior management.

• Legal and compliance staff throughout organization should have separate training program.


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Ongoing Advice and Internal Reporting

• The Company should establish or maintain an effective system for

− Providing Guidance;

− Internal Reporting; and

− Response to such internal reporting

• Internet-based guidance and reporting systems

• Hot-line reporting system for employees to make anonymous reports

• Detailed procedure for review and response to internetand hot-line reports


Third Party Agents and Due Diligence

• Screen the Initial Terms of Relationship with Third Party:− Review the creation of relationship, or any subsequent changes to

responsibilities or countries where agent operates.− Establish procedure for centralized review of contracts to ensure

consistent standards.− Depending on size of company, should establish review at highest

level within the company.

• Develop a Different Screening Procedures for Review of Individual Transactions.

Due Diligence Screening of Third Party Agents

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Guidelines for Due Diligence Process

• Do not over-standardize procedure.− Need to tailor to individual circumstances in each country based

on risk.

• Need to conduct background check to determine (5-10 year history).− Existence of ties to foreign government officials and employees.− Existence of any pending or prior investigations of bribery or other

criminal conduct or civil violations.

• Create written package and record of review and approval process to demonstrate compliance.


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Basic Issues to Cover

• Existence of relationships with foreign government officials− Purchasing authority− Licensing or other regulatory authorities

• Prior history of bribery and other crimes

• Nature of services, compensation and payment method

• Written contract− Representations and warranties on compliance− Right to inspect and audit third-party books− Right to terminate contract if believe violation has or will occur

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Anti Corruption Risks In The Energy Industry

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