Regulatory officials are putting oil and gas companies and service firms under a microscope as they examine overseas energy deals, particularly those involving government licenses.
Palmina M. Fava, Keren Tenenbaum, Bob Gruendel, Carl Ortiz, and DLA Piper New York
Energy companies face increased prosecutions under the Foreign Corrupt Practices Act (FCPA), with severe consequences.
Notably, the enforcement focus appears to be shifting from investigations of the United Nations Oil-for-Food Program to industry-wide probes in geographic areas where oil resources are being developed and where corruption is perceived to be a high risk.
In addition, more enforcement actions have been initiated against oilfield services providers rather than oil companies. In fact, the largest monetary penalty levied by regulators in any FCPA case to date was imposed on an oilfield service company. That fine – totaling over $44 million – involved allegations of bribing officials with Kazakhstan’s national oil companies.
The energy sector is particularly vulnerable to FCPA violations for two reasons. First, government licenses are critical to operations. Second, many oil-rich countries are developing economies that lack the infrastructure and controls necessary to combat corruption, thereby creating more opportunities for undetected bribery in the public and commercial sectors.
Recent settlements
Last month, an oilfield construction services provider and its subsidiary entered a deferred prosecution agreement with the Department of Justice (the DOJ) and a settlement with the Securities and Exchange Commission (the SEC) over allegations that its former employees and partners had made improper payments in Africa and Central America. The company paid a criminal fine and disgorged over $8 million.
Similarly, in November 2007, an oil and gas company reached a settlement with the SEC in which it agreed to pay a civil fine and to disgorge $25 million in profits in connection with allegations that its subsidiary’s employees or agents had made unlawful payments to Iraqi officials for oil purchased in 2001 and 2002 under the Oil-for-Food Program.
The penalty imposed on the oil company was larger than the penalty imposed on four other corporations implicated in the oil-for-food scandal, which all settled similar charges involving alleged violations of the books and records and internal controls provisions of the FCPA when their subsidiaries allegedly paid, or promised to pay, kickbacks to Iraqi government officials through third-party agents.
In each instance, the United States government examined the scope of the company’s compliance program and the resources the company devoted to compliance. The findings of these examinations clearly affected the outcomes.
The government’s conduct demonstrates that a robust compliance program is essential. Companies must be able to prove that their culture is inimical to corruption. A policy without teeth will not protect a company from prosecution, much less prevent misconduct.
Company executives also must be mindful of the risks of personal liability in connection with FCPA violations. In November 2007, a former executive of an oilfield construction services provider entered into an agreement with the DOJ, in which he pled guilty to violations of the FCPA, namely conspiring to give Nigerian officials more than $6 million in bribes to secure gas pipeline construction business. The executive faces five years in prison and a $250,000 fine. Last month, the executive settled a related FCPA action brought against him by the SEC.
Ongoing investigations: an industry-wide probe
The DOJ is currently investigating possible FCPA violations at more than a dozen large oil and gas services companies, including the world’s largest oilfield services provider and the world’s largest offshore oil and gas driller, as part of an industry-wide probe. This emerging trend of conducting industry-wide investigations of multiple companies may have significant implications for companies that currently are not under investigation. Such inquiries allow the DOJ and the SEC to obtain information on companies that were not initially targeted and thus widen their investigation.
The DOJ is now investigating a Swiss-based freight company for making improper payments to customs agents in Nigeria. As part of that investigation, it has sent letters to oil and services companies.
Many of these companies have commenced internal investigations into payments made through the freight company as their agent. For example, in March 2008, a global group of energy and petrochemicals companies disclosed in its Annual Report and Form 20-F for the year ended Dec. 31, 2007 that it has started its own internal investigation following an inquiry by the DOJ regarding its use of the freight company’s services.
Companies that have reason to believe they are subject to investigation should examine their compliance and internal audit programs, review their transactions with government officials, and consider self-reporting possible violations. Such voluntary action may help ameliorate potential enforcement actions.
International enforcement growing more aggressive
More aggressive international enforcement and cross-border cooperation are other emerging trends of which companies must be aware. In a recent case, the DOJ asserted jurisdiction over a company whose principal place of business is outside the United States, whose alleged improper conduct occurred outside the United States and who had been fined in Europe in connection with such misconduct.
This case is a precursor for a future in which international oil companies may face the increased likelihood of multiple enforcement actions in multiple country jurisdictions. Notably, the United States and Nigeria are reportedly conducting a joint investigation of alleged improper payments made by United States oilfield service companies to Nigerian government officials.
Energy sector companies must adopt a proactive approach
With FCPA enforcement against the energy sector on the rise, companies should be aware of certain areas of potential risk and take a proactive approach toward compliance.
A primary area of risk involves mergers and acquisitions in which the acquiring companies may assume successor liability for FCPA violations if they fail to conduct appropriate due diligence.
Under the “willful blindness” doctrine, a prosecution can be brought against a party that had no “knowledge” of corrupt payments if the company was aware of potential “warning signs” and consciously failed to conduct adequate due diligence. As a consequence, companies should undertake FCPA-sensitive due diligence whenever they acquire a significant stake in another entity.
Another common risk involves third-party agents, whose activities can impose FCPA liability on the companies for whom they act. Accordingly, it is critical for companies to develop strict due diligence procedures for vetting and approving relationships with third parties including consultants, joint venture and teaming partners, distributors, and sub-contractors. Contracts with third parties must set forth the FCPA’s prohibitions and requirements and demand compliance.
To ensure compliance with the FCPA, it is crucial for companies to maintain up-to-date corporate policies on the FCPA, implement a strong compliance program, monitor activities of its agents and employees involving government officials, and conduct intensive training.
In the event that a company learns of a potential FCPA violation, it must act promptly and efficiently to minimize the impact on its business. The company should obtain legal assistance on a range of issues including how to conduct an internal investigation, whether to voluntarily disclose the violations to the authorities, and what remedial actions to take.
About the authors
Palmina M. Fava [[email protected]] has extensive experience conducting internal investigations and due diligence with respect to the FCPA and anti-corruption and anti-bribery restrictions worldwide. She has led investigations and advised multinational clients on matters involving FCPA violations, kickbacks, corruption, and fraud in the Middle East, Europe, Africa, and Latin America.
Keren Tenenbaum [[email protected]] is an associate in the litigation department in New York. Her practice focuses on white collar criminal defense, regulatory enforcement, government affairs, and internal investigations. She has designed FCPA training materials and investigated allegations of FCPA violations in Asia, Central America, and Europe.
Bob Gruendel [[email protected]] concentrates his practice in the energy and maritime sectors with emphasis on project work related to port infrastructure, fleet development, LNG, and oil and gas matters. He has spent considerable time on such projects in the Middle East and Latin America.
Carl Ortiz [carlos.ortiz@dlapiper] is a seasoned trial lawyer with extensive white collar experience. His background as a federal prosecutor gives him a keen appreciation of the issues facing organizations and individuals when confronted with high-risk tax controversies, allegations of fraud against government agencies, as well as securities fraud.
