The Foreign Corrupt Practices Act and its impact on the energy industry - Energy Board Network Roundtable Update

Page created by Perry Hayes
 
CONTINUE READING
The Foreign Corrupt Practices Act and its impact on the energy industry - Energy Board Network Roundtable Update
The Foreign Corrupt
Practices Act and its
impact on the energy
industry
     Energy Board Network Roundtable Update
The Foreign Corrupt Practices Act and its impact on the energy industry - Energy Board Network Roundtable Update
Multi-national energy
companies find themselves
under increased scrutiny
by federal investigators
intent on curbing violations
of the Foreign Corrupt
Practices Act. What should
directors know about
FCPA and what should
they be doing to ensure
compliance?
The Foreign Corrupt Practices Act and its impact on the energy industry - Energy Board Network Roundtable Update
Background

             The Foreign Corrupt Practices Act                   addition to increased numbers of
             (FCPA)—enacted by Congress in                       cases, the severity of punishment has
             1977 following a number of well-                    risen, including prison sentences for
             publicized bribery scandals—was                     those found guilty, and collateral civil
             designed to eliminate illegal or                    litigation, which is far more common.
             unethical payments to foreign
             officials and restore the public’s                  These trends have elevated the issue
             confidence in American business.                    of FCPA compliance and prevention
             For nearly three decades, the                       to the boardroom level.
             Department of Justice (DOJ) and the
             Securities and Exchange Commission                  The PricewaterhouseCoopers
             (SEC) prosecuted just a handful of                  (PwC) Energy Board Roundtable—
             cases annually.                                     held in Houston on October
                                                                 2, 2008—provided insight into
             In recent years, however, the DOJ–                  the changing nature of FCPA
             often working with its counterparts                 enforcement and how energy
             in other countries—has ramped up                    companies are responding. In
             efforts to investigate and prosecute                addition to members of the Energy
             FCPA violators. The action by other                 Board Network, the session
             countries to enact and enforce                      included a number of subject matter
             FCPA-like legislation has spurred                   specialists from PwC.
             the increase in DOJ attention. In

             The Foreign Corrupt Practices Act and its impact on the energy industry                    1
Discussion highlights

                   “FCPA has become a major issue                      These very public cases are also
                   for U.S. companies that operate                     spawning related civil litigation,
                   globally. There is no doubt that                    including securities fraud actions and
                   enforcement—and punishment—                         lawsuits from shareholders, foreign
                   is on the upswing.”                                 governments and business partners.

                   The U.S. federal government opened                  “The energy industry seems to
                   84 FCPA investigations in 2007,                     be a top target of the Department
                   compared to just three in 2002.                     of Justice. Is this perception
                   Prosecutions are increasing, too,                   accurate?”
                   with 15 in 2006 and 38 in 2007. As
                   of mid-year 2008, there were already                The energy industry’s global activities
                   16 prosecutions on the books – the                  are very visible to the DOJ and the
                   highest number ever in the first six                SEC, for a number of reasons. First,
                   months of a year.                                   energy companies do business
                                                                       in markets that are considered to
                   In addition to increased vigilance,                 be at the highest risk for bribery
                   the DOJ and SEC are seeking more                    and corruption. Second, energy
                   severe penalties for those involved,                companies often utilize foreign agents
                   including jail terms for individuals                or consultants who handle a number
                   and disgorgement of profits. For                    of “on-the-ground” transactions,
                   example, an oilfield services firm                  increasing the risk of illegal activity.
                   recently agreed to pay the largest                  Third, there is a history of energy
                   FCPA penalty on record—a total of                   companies enacting policies and
                   $44 million—for improper business                   procedures to prevent violations
                   activities. And in a case involving                 of the FCPA, but not necessarily
                   another oilfield services firm, the                 ensuring that they are followed to the
                   executive involved is facing up to                  letter everywhere the company does
                   seven years imprisonment and fines                  business. In other words, employees
                   totaling more than $10 million.                     may have received information about
                                                                       the FCPA and perhaps even signed
                   These penalties could be dwarfed                    an agreement that all laws would be
                   by those facing a major global                      followed. But unless the company is
                   electronics firm that is expected                   specific in its training and rigorous in
                   to be in the range of $1 billion,                   its enforcement, day-to-day activities
                   for a settlement involving a number of              sometimes fall short of compliance.
                   governments.

2                  The Foreign Corrupt Practices Act and its impact on the energy industry
And finally, there is a form of “guilt              Most employees want to comply
by association” at play. As federal                 with FCPA, but at companies where
investigators find evidence of                      business expectations are not
wrongdoing at companies within                      aligned with the realities of individual
the industry, this strengthens the                  markets, mistakes can be made. It
impression that competitors could be                is critical that board members and
involved in illegal activities, as well.            senior management understand the
                                                    pressure that unrealistic expectations
“Compliance is a multi-faceted                      can place on employees who find
issue that can be difficult and                     themselves balanced between
expensive. But the alternative is                   meeting corporate goals and
even worse.”                                        maintaining compliance with federal
                                                    laws. Only management can embed
Energy companies must implement                     the importance of FCPA compliance
stringent training and communication                into the culture of the company and
programs that ensure all applicable                 that requires a real understanding
staff have in-depth knowledge                       of what is allowed—and what is
of FCPA:                                            expected in certain countries.

•   Companies must institute                        The reality is that some countries
    structured policies and                         might not be suitable for business
    procedures that spell out—in                    opportunities, and management must
    detail—how business is to                       be aware of that fact.
    be conducted to maintain
    compliance.                                     “How do companies manage
                                                    the cost of investigations? The
•   A FCPA compliance team—                         investigations are lengthy and are
    comprising of general counsel,                  extremely costly.”
    internal audit and the in-house
    ethics/compliance officer                       Typically, 80% of the necessary
    —should routinely audit the                     information is found in the first
    company’s activities and records.               30 days of an investigation.
                                                    Unfortunately, the remaining 20%
•   Compliance with FCPA should be                  of facts can take years to uncover.
    part of every employee’s annual                 A leading practice is to quickly
    performance evaluation.                         conduct the investigation and at
                                                    that 30 day point when 80% of the
                                                    facts are known, share information
                                                    with the DOJ.

The Foreign Corrupt Practices Act and its impact on the energy industry                    3
Another factor to share is how                      If agents or consultants are making
    information was gathered and what                   illegal payments—even without the
    the processes are to identify and                   client’s knowledge—it is a violation of
    prevent violations. Not only are the                the FCPA and the company is liable.
    facts from an investigation important
    to expeditiously bring the case to                  “It can be difficult to audit third-
    closure but so is illustration and                  party consultants or agents, but it
    disclosure of business practices.                   is necessary for compliance.”

    “Business consultants in foreign                    Energy companies doing business
    markets—‘They are you’”                             in foreign countries must conduct
                                                        regular business audits of their third-
    The actual statutes of the FCPA were                party agents and shipping firms.
    written as broadly as possible, and                 These audits should be written into
    the language is often considered                    the contract and must be carried out
    vague by many business executives.                  as scheduled. If the agent or shipping
    What does the law mean by a “U.S.                   company is uncooperative, it is time
    person?” What exactly constitutes a                 to find new vendors.
    “foreign official?” How do you define
    “something of value?”                               These business reviews should
                                                        include discussions with employees,
    This vagueness should not be                        field visits, on-site inspection of
    interpreted as flexibility—the reality is           financial and operational records
    just the opposite. Companies need to                and back-of-house investigation of
    take the most disciplined approach                  invoices that the agent or shipper
    to their business practices to ensure               has paid on the company’s behalf.
    that they are in compliance.                        Energy companies should focus on
                                                        high-risk countries and be proactive
    For example, one of the biggest                     in monitoring agent activities.
    issues facing U.S. companies is the                 There must be a detailed paper
    use of foreign business consultants                 trail; companies should do what is
    or agents. These businesses                         reasonable and practical to review
    represent the U.S.-based companies                  the business operations of their
    that hire them and their actions are                agents and shippers and maintain
    covered under the FCPA. Thus,                       solid records to prove that there is a
    companies need to be extremely                      rigorous attempt at compliance.
    careful to properly screen any third
    parties and make certain that they                  Companies should also be aware of
    understand where their payments are                 potential red flags—such as requests
    going and how they are being used.                  to wire money to a different country
                                                        than where business is conducted
    As the saying goes, “They are you …                 —and investigate each concern
    and their actions are your actions.”                thoroughly.

4   The Foreign Corrupt Practices Act and its impact on the energy industry
“Most internal auditors view bribes                 accounting experts are looking
with a U.S.-centric point of view.                  at agent relationships, distributor
But a $400 payment to an individual                 agreements, banking relationships—
in Angola represents twice the                      anything that can provide a clearer
average annual salary.”                             picture of the target company’s past
                                                    activities and possible problems.
Without proper training, accounts
payable staff and internal auditors will            The key area of focus should be
not be able to recognize a small item               acquisitions in countries where
on a shipping invoice, for example,                 corrupt business practices are
that could represent a customs bribe.               commonplace. In those instances,
Any small payment made in a high-                   companies must identify the local
risk country could be an issue.                     agents and banks being used
                                                    by the acquisition target. Are
Companies that are looking for                      these agents reputable? Do they
million-dollar payouts may be missing               understand and follow FCPA in
a wide range of FCPA violations                     their other dealings? What are
that fly under the radar. That is                   their technical qualifications? What
exactly what unscrupulous agents                    are their reputations with the U.S.
and shippers are counting on. In                    Embassy or Consulate and with local
response, some companies are                        bankers, clients and other business
turning to FCPA compliance control                  associates?
audits that are conducted by outside
auditors with detailed experience                   It is also necessary to understand the
in reviewing invoices and other                     target company’s sales cycle and go-
documents for violations.                           to-market model. What structure did
                                                    the company use? Were consultants,
“The FCPA is becoming a major                       distributors or other third-parties
issue in acquisitions of foreign                    involved in their sales efforts? If so,
companies. It does not matter if                    what was their role? A distributor
it is an asset or stock acquisition.                could be making illegal payments
If you buy the company, you may                     to win business by funneling money
have bought any problems they                       through yet another vendor—and the
may have.”                                          responsibility still lies with the U.S.-
                                                    based company.
Many energy companies interested
in foreign acquisitions are
                                                    This increased focus on FCPA-based
expanding their due diligence efforts
                                                    due diligence is making it more
dramatically in an attempt to uncover
                                                    common for American companies to
any potential FCPA violations prior
                                                    walk away from potential international
to closing. It is no longer enough to
                                                    acquisitions. In addition, some
study financial statements—most
                                                    companies are handling potentially
underlying transactions that violate
                                                    risky assets in an acquisition by
FCPA regulations are small dollar
                                                    carving out those assets that may be
figures. Attorneys and forensic
                                                    tainted by ethics violations or bribery.

The Foreign Corrupt Practices Act and its impact on the energy industry                    5
When a foreign acquisition closes,                  “The increase in enforcement
    it is critical for acquiring companies              of FCPA is having an impact on
    to implement a rigorous compliance                  boards and their areas of focus.
    program in the newly acquired                       For example, our audit committee
    company, beginning on Day 1. The                    is spending less time on Sarbanes-
    program should include:                             Oxley compliance and more on
                                                        FCPA. And it has us rethinking
    •   Training enforcement                            where we want to do business.”

    •   Due diligence updates on agent                  Roundtable participants agreed that
        relationships                                   audit committees, in particular, were
                                                        being reshaped to handle FCPA
    •   Clearly articulated and widely                  compliance, and at some companies,
        communicated anti-corruption                    the responsibility was spreading to
        policy                                          the entire board to share the risk.
                                                        Board members are increasingly
    •   Establishment of an information                 asking for training on FCPA and
        line for ethics questions or                    are requiring management to share
        concerns                                        in-country strategies and plans for
                                                        achieving compliance. Some boards
    •   Swift investigation of any                      are requiring that the company’s
        violations                                      FCPA experts—general counsel,
                                                        internal audit and compliance—report
    In addition, the acquiring company’s                directly to the audit committee on
    management team, compliance                         a regular basis.
    group and general counsel must be
    immediately inserted into all business              In turn, management teams are
    decisions of the acquired company.                  investing significant resources
                                                        on compliance, adding legal and
    It is important to remember that in the             accounting staff, conducting
    event of wrong-doing, it is the value               audits and stepping up training
    of the contract or business gained                  and communications.
    that is subject to disgorgement of
    profits. A $400 bribe might lead to                 In the long run, participants said,
    the disgorgement of a $35 million                   the focus on FCPA may push
    contract.                                           companies to move their
                                                        headquarters overseas because
                                                        maintaining compliance means
                                                        losing out on business opportunities.

6   The Foreign Corrupt Practices Act and its impact on the energy industry
About the facilitators

Manny Alas               Manny A. Alas is a Partner in the New York          Ponzi schemes. He assists clients and law
PricewaterhouseCoopers   office of PricewaterhouseCoopers LLP.               firms with DOJ and SEC investigations.
                         He is the Co-Leader of the Global FCPA              His FCPA, forensic accounting, mergers &
                         Investigations and Forensic Services practice       acquisitions and compliance experience
                         which includes investigations, compliance,          include: Aerospace, Automotive, Consumer
                         controls, pre and post merger due diligence         and Industrial Products, Energy, Financial
                         and training programs.                              Services, Technology, Not-for-Profit, Sports,
                         His area of expertise is FCPA as well as fraud      Entertainment, Insurance and Agriculture.
                         investigations and forensic accounting. He          Mr. Alas is a CPA, and has over 25 years
                         has led significant international and domestic      of public accounting experience. He is a
                         investigations covering such areas as:              frequent speaker at Anti-corruption and
                         accounting fraud, asset diversion, foreign          FCPA conferences.
                         corrupt practices, money laundering and

Michael Collier          Michael Collier has over 22 years of                and was the CFO of a small public company
PricewaterhouseCoopers   professional experience; the last nine              in Austin, Texas.
                         focusing solely on advising clients on              In the mid 1990s, Mr. Collier was selected
                         mergers and acquisitions, due diligence,            to service as Executive Assistant to PwC’s
                         transaction structuring/strategy, financial         Global Chairman where he worked in Global
                         modeling and analysis, closing support,             Strategy and Planning.
                         post-deal integration, and divestiture
                         support.                                            Mr. Collier returned to Houston in 1997 to
                                                                             help launch the firm’s merger and acquisition
                         Mr. Collier holds an MBA from the University
                                                                             practice. He has lead numerous global
                         of Texas at Austin and is a Certified Public
                                                                             transaction engagements for clients across
                         Accountant. Before joining PwC, Mr. Collier
                                                                             the energy industry.
                         worked for Exxon Corporation in Houston

                         The Foreign Corrupt Practices Act and its impact on the energy industry                             7
Dale Jensen              Dale Jensen leads the Forensic Services             investigations experience, he has extensive
PricewaterhouseCoopers   practice in the Houston office and has              experience in other dispute areas, including
                         more than 30 years of experience in                 antitrust allegations, breach of contract,
                         providing dispute analysis and financial            Ponzi schemes, director and officer liability
                         investigation services, audit and accounting        lawsuits, environmental claims, and
                         services, internal control and management           securities fraud.
                         reviews, cost accounting analyses, and              He is a Certified Public Accountant licensed
                         other financial analyses. He has been               in the State of Colorado. He is a member of
                         accredited as an expert, and has testified on       the American Institute of CPAs, a member
                         accounting and financial matters in Federal         of the Colorado Society of CPAs, and
                         and state courts.                                   an associate member of the American
                         Mr. Jensen has extensive financial                  Bar Association Section of Litigation and
                         investigations experience, including                Section of Environment, Energy, and
                         investigations related to: stock option             Resources. Mr. Jensen received a Bachelor
                         granting procedures and the appropriate             of Science degree in accounting from the
                         accounting for such grants; whistleblower           University of Denver, and earned the Silver
                         claims under the False Claims Act;                  Medal Award for the highest grades in the
                         Foreign Corrupt Practices Act claims;               State of Colorado on the May 1978 CPA
                         misappropriation and mismanagement of               Examination.
                         assets; and other matters. In addition to his

8                        The Foreign Corrupt Practices Act and its impact on the energy industry
Join the Energy Board Network

                 The PricewaterhouseCoopers Energy Board Network is a group of directors that comes
                 together throughout the year to discuss unique issues facing the energy industry.

                 2009 Event Schedule

                 Energy Board Symposium May 20, 2009
                 Opening keynote: Ian Bremmer, Eurasia Group
                 Luncheon keynote: T. Boone Pickens
                 Houstonian Hotel, Houston, TX

                 Energy Board Roundtable Series:

                 Impact of Capital Markets January 26, 2009
                 Houstonian Hotel, Houston, TX

                 Topic TBD October 29, 2009
                 Charles Schwab Cup–Fairmont Sonoma Mission Inn, Sonoma, CA

                 Past Events

                 Energy Board Symposium May 2008
                 Full day seminar with topics on geopolitics, fair value accounting, IFRS, energy policy,
                 sustainability, MLPs and a keynote address by Lee Raymond, former Chairman and CEO of
                 Exxon Mobil Corporation.

                 Energy Board Roundtable August 2008
                 Facilitated roundtable discussion on succession planning.

                 Energy Board Roundtable October 2008
                 Facilitated roundtable discussion on the Foreign Corrupt Practices Act.

                 Energy Board Roundtable October 2008
                 Facilitated roundtable discussion on U.S. energy policy with Peter Robertson, Vice Chairman
                 of Chevron Corporation and John Felmy, Chief Economist, American Petroleum Institute.

                 To join the Energy Board Network and receive publications and event invitations, contact
                 Kirstin Feazel at 713-356-4031 or kirstin.feazel@us.pwc.com.
About PricewaterhouseCoopers
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public
trust and enhance value for its clients and their stakeholders. More than 154,000 people in 153 countries across our network
share their thinking, experience and solutions to develop fresh perspectives and practical advice.

About the PricewaterhouseCoopers Energy Practice
Recognized globally for deep energy industry experience, PricewaterhouseCoopers has an extensive history of providing
expert resources and proven solutions that enable energy companies to meet their business imperatives. By providing audit,
tax, and business advisory services to the Supermajors and key National Oil Companies and the vast majority of the Fortune
500, PricewaterhouseCoopers’ professionals possess the experience necessary to provide optimal insight and impact. The
global energy practice of more than 3,100 professionals, including 300 partners, is headquartered in Houston, Texas, and
is committed to building meaningful relationships with energy clients. Commitment to the energy industry goes beyond
service delivery and is demonstrated by an additional focus on knowledge sharing accomplished through thought leadership
publications, educational opportunities, and industry event participation and sponsorship.

pwc.com
© 2008 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the
context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. LA-09-0131 VC
You can also read