The SEC, last week, announced its $5 million settlement with Key Energy. As always, FCPA settlements contain important examples of enforcement priorities and policies. Key Energy’s recent settlement is an example of the benefits of cooperation, especially when a company, like Key Energy, did not initiate the investigation by disclosing the matter to the government.
Key Energy agreed to a books and records and internal controls violation arising from payments made by its Mexican subsidiary, Key Mexico, through a third-party consultant to a contract employee at Petroleos Mexicanos (Pemex), Mexico’s state-owned oil company.
Key Mexico made illegal payments to the Pemex contract employee to obtain inside information of upcoming bids and to negotiate favorable terms in Pemex contracts. Key Mexico made payments to the contract employee through a consulting firm, even though the consulting firm had never been subjected to due diligence and the consulting firm never provided documentation to confirm the work performed by the consulting firm.
Five Key Takeaways:
Paper (Tiger) Compliance Program. Key Energy had adopted a Code of Conduct, an FCPA and Anti-Corruption Policy and Procurement Policy. Despite these policies, Key Energy made no effort to ensure that these policies were made operational or enforced in Key Mexico. Key Energy’s failure to implement its paper policies is a stark example of what DOJ and the SEC have cited on numerous occasions – company adoption of a paper compliance program.
Failure to Act in Response to Red Flags. Two years after Key Mexico entered into the relationship with the third-party consultant, Key Energy officials and attorneys learned of the existing relationship, despite the failure to follow due diligence and written contract requirements. Eventually, Key Mexico entered into a written contract but Key Energy failed to investigate the matter, conduct due diligence or review expenditures and invoices provided by the consultant to verify the services and the payments for such services.
Absence of Independent Compliance Staff and Internal Audit Functions. The SEC’s Order cites the fact that Key Energy had no independent compliance staff and no internal audit function that could have intervened in Mexico to prevent Key Mexico from engaging in bribery and other misconduct. As part of its remediation effort, Key Energy retained a Chief Compliance Officer and gave the CCO independent authority to ensure compliance by all parts of Key Energy.
Excessive Gift Giving to Pemex Officials involved in Key Energy Contract Decisions. The SEC also cited Key Energy’s
acceptance of Key Mexico’s justification for spending $118,000 on gifts in one year for Pemex officials during the holiday season. When questioned about this extraordinary expense, the Key Mexico official stated that the gift amount was higher than prior years because Key Mexico’s business was expanding with Pemex. The SEC cited the absence of Key Energy’s internal controls surrounding the gift process to ensure proper consideration and review of such expenditures.
Financial Condition and Ability to Pay. Key Energy received credit for cooperation and remediation of its compliance program. Along with these two factors, the SEC cited Key Energy’s financial condition and its ability to pay to justify its decision not to impose any civil penalties on Key Energy. In the end, Key Energy was required to pay $5 million in disgorgement.