The Foreign Corrupt Practices Act and its impact on the energy industry - Energy Board Network Roundtable Update
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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?
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 1Discussion 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 industryAnd 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 3Another 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 5When 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 industryAbout 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 7Dale 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 industryJoin 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
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