CATEGORIZED | 2010, Features, September/October

FCPA compliance: what every contractor needs to know

Posted on 08 September 2010

By Brady Long, Pride International

The Macondo incident has understandably seized our industry’s attention, leaving other developments comparatively unexamined in its vast shadow. One of these developments arose in July, when a US law was enacted to permit the Securities and Exchange Commission (SEC) to compensate “whistleblowers” for reporting violations of securities laws. Compensable violations include accounting fraud in an annual report to the SEC and insider trading on a US stock exchange. It also covers the payment of bribes.

Under the Dodd-Frank Act, any person – e.g., an employee, vendor, contractor – who reports “original information” to the SEC leading to the successful enforcement of a violation of the US Foreign Corrupt Practices Act (FCPA) can now receive between 10% to 30% of the SEC penalties that exceed $1 million. Given the size of recent FCPA settlements, the implications are clear: Whistleblowers stand to make a fortune by reporting a possible FCPA violation to the SEC, and companies have more reason than ever to ensure not only that they stay in compliance but also that they prevent, detect and remediate problems before it’s too late.

Meanwhile, UK regulators are doing their part to keep up with – and possibly surpass – US regulators. In April, the Bribery Act 2010 was passed into law. The Bribery Act is widely viewed as broader than the FCPA, and companies with connections to the United Kingdom are gearing up for increased enforcement.

On the topic of enforcement, Macondo also overshadowed several recent bribery cases of note. In June, Technip settled FCPA charges for $338 million, stemming from a joint venture and other operations in Nigeria. In July, Snamprogetti Netherlands and ENI (its former parent) settled FCPA charges for a combined $365 million in connection with the same joint venture, among other things. While these amounts are less than half of the largest FCPA settlement to date (Siemens in 2008, with US penalties of $800 million), they are each many times higher than the record settlement a mere three years ago (Baker Hughes in 2007, with combined penalties of $44 million).

Further, the aforementioned companies that are publicly traded were required to hire compliance monitors, which are costly.

That the recent cases, and many others, center around West Africa is no surprise to anyone familiar with our industry. Six of the largest drilling contractors have announced that they are under investigation for potential FCPA violations there. These problems are largely legacy matters, dating back in some cases beyond the FCPA’s statute of limitations of five years. However, the challenges of working in West Africa continue, as local enforcement of the antibribery laws of West African countries (which, on paper, are arguably more stringent than even the FCPA) is spotty at best, and the global economic crisis has not exactly diminished the demand for bribes. Regardless, these challenges are not insurmountable.

In 2007, IADC established the Ethics & Corporate Compliance Committee for, among other purposes, sharing practices for mitigating bribery risk. The committee has enjoyed increasing participation over the years, and our quarterly meetings have featured open discussions of the risks we face and the ways we address them. Each company tailors its practices to its resources and culture, and, thus, each company has a unique array of practices. However, four unifying principles for mitigating bribery risk have emerged, and they are instructive to anyone doing business, or planning to do business, in high-risk countries.

First, you need to know your employees. The value of antibribery training is beyond question; every company that is serious about preventing bribery conducts training to some degree, and the prominent enforcement agencies (SEC, UK Serious Fraud Office, US Department of Justice) insist that training is a baseline component of a compliance program. The form, substance and frequency of that training depend on a host of factors, including: employees’ cultural, political and religious views on bribery; their professional and educational background; their language; their understanding of antibribery laws and policies; their sensitivity to policies and internal controls in general; their philosophies on accountability; their access to policies; and the nature of their interactions with government officials.

Second, you need to know your locations. The Corruption Perceptions Index (published annually by Transparency International) is a good place to start, but corruption within a country is varied and fluid, with each major government institution potentially posing a different level of risk. Further, as your risk is directly proportional to your interactions with government officials, your risk is heightened when your customer is a government-owned or -controlled entity. Another acute challenge arises in the form of government-mandated social programs, where good intentions occasionally are frustrated by solicitations for bribes. The IADC committee has concluded that listening to your employees, peers and advisers can be helpful in identifying risks that might otherwise go undetected.

Third, you need to know your controls. The benefits of controls on disbursements and vendor engagement, for instance, were well known long before the explosion of FCPA cases. However, in the context of antibribery laws, these controls take on new importance. Also, the accessibility of reporting systems – anonymous and otherwise – is critical; employees need to know who to turn to when a question or concern arises.

Fourth, you need to know your vendors. Many things can be outsourced. Liability for bribes cannot. In the eyes of prosecutors, vendors (including agents, contractors and other intermediaries) are, in essence, employees – their acts are attributed to their customer. Thus, the same questions about your employees apply to your vendors. Further, the lack of physical proximity and financial oversight of vendors can contribute to a lack of antibribery oversight, which underscores the need for extensive contractual rights (including audit rights), monitoring, antibribery training and further assurances (e.g., certifications).

Macondo has subjected our industry to unprecedented scrutiny – scrutiny that can easily expand as antibribery scandals arise. It is in our best interests, and the best interests of our host countries, to embrace antibribery compliance and prevent what may be an interesting call from the SEC.

Brady K Long is the vice president, general counsel & secretary of Pride International. He is also chairman of the IADC Ethics & Corporate Compliance Committee.

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