Companies take steps to avoid bribe hazards

“By enforcing the FCPA, and by encouraging our counterparts around the world to enforce their own anticorruption laws, we are making sure that your competitors do not gain an unfair advantage when competing for business overseas,” she said at an American Bar Association conference on the FCPA in October. “And we are ensuring the integrity of our markets at home so that investors will continue to invest in your companies.”

Settlements of foreign bribery allegations can be costly, whether with DOJ or with the US Securities and Exchange Commission. On Feb. 6, DOJ said three Vetco International Ltd. subsidiaries pleaded guilty to charges of violating FCPA antibribery provisions and agreed to pay $26 million in fines. The next day, the SEC said El Paso Corp. agreed to pay $7.7 million to settle charges that it and a company it acquired, Coastal Corp., paid kickbacks to Iraqi officials under the United Nations’ Oil for Food program in 2000 and 2001.

Violations of the law are not confined to oil and gas producers, drilling contractors, and service and supply companies operating overseas. But the industry’s global reach can create the potential for corruption. Multinational oil companies have dealt with the problem for years, but domestic firms venturing overseas for the first time may be surprised by it.

“Resources often are in parts of the world where there’s not the same urgency about the FCPA as there is here,” Mark H. Tuohey, a partner at Vinson & Elkins LLP’s Washington office, told OGJ recently. “American companies have to be very diligent because they’re vulnerable.”

Avoiding problems

Michael L. Burton, a partner at Arent Fox LLP in Washington, said, “No one wants to fall into this situation because becoming the target of an FCPA enforcement action can significantly harm your company’s stock price and reputation, in addition to the onerous terms of settlement with DOJ and the SEC.”

More FCPA cases are settled than go to trial, according to Gregory Baldwin, a partner with Holland & Knight LLP in Miami. “If you’re dealing with the FCPA, the chances of being also accused of violating the Money Laundering Control Act are substantial,” he said. “That’s a 20-year offense. If that’s added to the mixture, the incentive to pleading guilty to a lesser charge under the FCPA is substantially heightened.”

Companies charged often cooperate because “the government has so many hammers to beat them into submission,” noted Drew A. Harker, a partner at Arnold & Porter LLP in Washington. “It’s one thing to pay a fine, which can be significant. But it’s another to be barred from doing business with government customers who use formal bidding procedures or losing your export privileges.”

He and other attorneys interviewed for this article agreed that the best way to avoid FCPA problems is to establish and operate a strong anticorruption compliance program.

“Management must fully support it,” Harker said. “If it’s just a few in-house lawyers talking among themselves, it won’t work well. Management needs to show it rewards ethical conduct. It has to provide incentives for employees to behave properly.”

William E. Lawler III, also a partner in Vinson & Elkins’s Washington office, said the best FCPA compliance programs are formalized in writing, have someone with significant authority in charge, are disseminated through the company, and include an audit function. The program then has to be tailored to the company, he said.

He and Tuohey argued one of the first cases that led to establishing a core meaning of the law-namely, whether payments to foreign government officials were extortion instead of efforts to get or retain business. “Two federal courts in Texas ruled that obtaining or retaining business had to be proven,” Lawler said. “In one case, involving an Indonesian tax official who demanded a payment or threatened to raise a tax by five times, that relationship could not be proven.”

Due diligence

The FCPA excludes payments to a foreign government to support infrastructure associated with a project or agreements that a specific portion of the workforce will be from that country. “Often, contracts require indigenous participation-not necessarily a local partner, but a requirement for certain percentages of the staff to be local,” said Eugene A. Massey, another partner at Arent Fox in Washington who specializes in international energy transactions.

Much of his recent work has involved LNG export projects, which can require up to four times the capital for similar efforts involving oil to bring a comparable amount of energy to market. “There’s a tremendous amount of scrutiny that takes place as deals are being negotiated. When everyone is sharpening their pencils to get the best deal, someone will speak up if inappropriate influence on behalf of a competitor is suspected,” he said.

Dianne R. Phillips, a partner with Holland & Knight LLP in Boston, noted that several LNG developments are in countries where governments treat gas reserves as national assets and take active roles in related business projects. She said: “There is a high, high current demand for these projects and a huge value chain associated with them. There’s a lot of money at stake and a lot of necessary involvement with foreign governments. Many of these countries may not have natural trade relationships with the United States so there is some potential for problems.”

Thorough due diligence is crucial. “The agreements are for a long term, and a lot of money is involved,” Phillips said. “There are several multiple incremental steps before the projects start up. There are literally years of negotiations, starting with a memorandum of understanding. It takes quite a period of time before there’s a formal commitment to proceed. That provides an opportunity for due diligence.”

Due diligence has to extend to agents or other third parties acting on a company’s behalf. Burton said: “It’s relatively uncommon these days to see a US company’s employee make an illicit payment directly to a foreign official, although it certainly happens. Instead, the company might become involved with a third party under circumstances where the government would assert that the company should have known a payment was likely to be made for some improper quid pro quo.”

When performing overseas due diligence for a company, said Harker of Arnold & Porter, “We determine what its overseas profile is, whether it uses agents, and if those agents’ activities are continuously monitored.” While the focus can be on sales agents and marketing representatives, he said, “Law firms, accountants, and joint ventures also can get a company in trouble. That’s why negotiations are crucial, particularly in knowing what your joint-venture partner brings to the table and assuring that the joint venture is run properly.”

Lawler said due-diligence issues for a joint venture can differ from those of a sale because the participants’ relationship continues. During the past few years the process has become more extensive. It now can involve books and records, which once were secondary but have gained in importance since passage in 2002 of the Sarbanes-Oxley Act on corporate governance. “Any time there’s an opportunity to affect a $10 billion project, there’s an opportunity to violate the FCPA,” he said.

Spreading standards

When Congress passed the FCPA in 1977, many US companies complained it would place them at a disadvantage with foreign competitors. “Many still believe they’re subject to a stricter standard,” said Harker. But he added that DOJ worked hard to persuade other countries to pass similar laws, including a few that had provisions in their tax codes allowing bribes to be deducted.

Baldwin of Holland & Knight pointed out that in 1998 amendments to the law, Congress directed the government to encourage other countries to pass similar legislation. “Among the [Organization for Economic Cooperation and Development] countries, the main industrialized nations of the western world have statutes similar to the FCPA, although most aren’t quite as extensive,” he said. “Since around 2002, a lot of different countries signed the agreement and implemented the legislation.”

In her October address to the ABA’s FCPA conference, Fisher also cited the United Nations Convention Against Corruption, under which 140 countries have agreed to criminalize bribery of domestic and foreign public officials. “My hope and belief is that if our foreign law enforcement partners see our commitment to combating corruption around the world and to enforcing our own anticorruption laws, it is more likely they will prosecute corruption in their own countries,” she said.

That has begun to happen, according to Burton. “With the OECD convention, other multilateral anticorruption initiatives, and pressure from the international financial institutions, cases are being brought under local laws, particularly when there has been a change of government and the new one wants to hang its predecessor out to dry. The World Bank also has anticorruption standards and can bar countries from its financing,” he said.

Tuohey confirmed that the World Bank and other financial sources’ demands for more transparency in deals have helped the US persuade other countries to adopt antibribery laws. “This country has been able to be aggressive because its businesses have been responsible for so much commercial good,” he said.

Investigations and cases

FCPA investigations can start in many ways, the attorneys said. “They have come from references from foreign governments, competitors, former employees, self disclosure, contractors, joint venture partners,” Baldwin said. “There’s no unique type of source you can point to for allegations. There’s no central mechanism. You engage in this activity at your own risk because there are a lot of people out there with axes to grind. There also are bribery hotlines and complaint centers.”

Harker said most FCPA cases he has encountered began with internal whistle-blowers. The Sarbanes-Oxley law contains a provision that encourages employees to come forward when they see questionable behavior, although it’s not certain whether it applies to FCPA violations, he told OGJ. “If you measure effectiveness in prosecuting FCPA violations by the number of charges brought and settlements reached, the FCPA would appear to be an important and expanding prosecutorial tool for the government,” he said.

Fisher noted that DOJ has a procedure under which companies and individuals can seek its opinion regarding proposed business conduct or a proposed transaction. “What we’re talking about here is asking for advice before undertaking a transaction, not after you have discovered an FCPA violation,” she said.

The law firms’ FCPA specialists agreed that this could be helpful but limited in its effectiveness. “There often isn’t the luxury of time in a live transaction to be able to present DOJ with the facts and get its opinion,” Burton said. “In addition, DOJ can be very conservative, and the procedure often is used only when a company doesn’t expect the deal to go forward.”

The procedure can be “time-consuming and a deal-killer,” said Harker. “If a company’s inside and outside counsels are doing their jobs, it shouldn’t be necessary.” Companies seeking DOJ guidance also may err in submitting best-case scenarios that don’t materialize, he said.

Compliance issues

Experience is important in matters of compliance, Tuohey observed. “Large entities have experience and know how to set up joint ventures and make them work,” he said. “A small, start-up oil field service company planning to bid for part of a contract may be more vulnerable.”

But small companies “don’t operate in a vacuum,” Lawler said. “Some small companies are surprised at what they have to do because their larger partners don’t want to be liable. A 20-person company isn’t going to need a hotline. Its compliance framework may look different, but it still has to be active.”

Baldwin noted that there are important ambiguities in the FCPA: “A foreign public official includes an officer or employee of a foreign government or instrumentality. The act doesn’t say what a ‘foreign instrumentality’ is. Another ambiguity is in facilitating, or grease, payments. While facilitating payments are an exception to the act, there’s no particular amount mentioned, so it’s hard to determine what’s reasonable. The higher the amount paid to the official, the less the payment looks like it’s ‘facilitating’ and the more likely it is to appear a bribe.”

Legitimate training and promotion expenditures also are allowed, including bringing foreign officials to the US as long as the trips are not lavish, he said, adding: “Anything can be deemed a corrupt payment. It depends on the purpose. It’s ambiguous in the sense that the definition of a corrupt purpose depends on the circumstances.”

Burton said, “You try to build features into any agreement so you have some indemnification rights. If a potential partner refuses to let you audit its finances or find out who its shareholders are beforehand, that’s when to exert pressure or start looking for another deal.”

Harker stressed the need for good compliance programs. “They’re necessary if you’re doing business overseas,” he said. “Government contracts are not for the faint at heart. You need good advice. There are a lot of minefields.”

Tuohey said, “The FCPA is alive and well around the world because corruption is alive and well. And the oil and gas industry is fertile ground for potential problems and will continue to be so.”