For energy, mining and resources companies, the cost of corruption – and getting caught – is real. Less than two months ago, Odebrecht SA was ordered by a US federal judge to pay a fine of more than $2.6 billion in connection with bribery and other illegal conduct relating to Brazil's Operation Lava Jato, with $93 million going to the United States, $2.39 billion to Brazil and $116 million to Switzerland. Earlier this year, Sociedad Química y Minera de Chile SA, a Chilean chemicals and mining company, paid $30 million in civil and criminal penalties relating to bribery charges. In 2010, a global freight-forwarding company and six oil and gas service companies paid a total of $236.5 million in criminal and civil penalties and disgorgement for bribing foreign officials.
Energy and mining companies, along with other resources companies, remain a major focus of bribery and corruption investigations worldwide. The US government wields a potent weapon against bribery and corruption in the form of the Foreign Corrupt Practices Act (15 USC Section 78dd-1 and following). Congress enacted the law in 1977 following numerous scandals in which US companies admitted paying bribes to foreign officials who promised to favour their products, lower taxes or otherwise exercise their governmental functions in return for compensation. The act was meant to re-establish trust in the integrity of US business on the international stage.
Recently, President Donald Trump publicly claimed that the act is "horrible" and that "the world is laughing at us" for enforcing it and some critics assert that it discourages US investment in foreign countries. However, Attorney General Jeff Sessions has committed to its continued enforcement by the Securities and Exchange Commission and the Department of Justice and as a result, the Foreign Corrupt Practices Act is not going away anytime soon.
For individuals, the act prohibits the bribery of foreign government or political officials when the goal is to obtain or retain business or to secure any improper business advantage. The bribe can be monetary or the provision of anything of value, either directly or through intermediaries. For companies, the act requires the maintenance of accurate books and records, comprehensive compliance procedures and internal accounting controls. The act applies to:
- US companies;
- foreign corporations trading on US markets;
- US nationals, regardless of whether or not they are physically present in the United States; and
- foreigners who violate the law if they are in the United States at the time.
Energy, mining and resources companies are particularly susceptible to potential liability and enforcement actions under the Foreign Corrupt Practices Act for the following reasons:
- These companies tend to operate in high-risk locations governed by entrenched cultural norms at odds with Foreign Corrupt Practices Act-mandated compliance – for example, South American and African countries where unstable national governments, local influences and low standards of living encourage and even foster corruption.
- Lucrative resource-extraction enterprises can result in tremendously profitable payoffs that weigh in favour of cutting corners and against strict compliance.
- A company's corporate leaders might advocate for Foreign Corrupt Practices Act compliance, but translating this into 'on-the-ground' compliance practices in foreign locations is often difficult.
- Energy, mining and resources companies often enter into complex transactions whose many parts (eg, permitting, security, environmental regulations and community relations) require cooperation and engagement with multiple parties and are challenging to control or oversee.
- Finally, and perhaps most importantly, off-the-shelf risk-assessment programmes and compliance controls may not fit a company's specific risks for mining operations, and creating a plan that matches the vulnerabilities and obligations of the company can be difficult.
In order to minimise risks while ensuring Foreign Corrupt Practice Act compliance, companies need comprehensive compliance plans that are designed to tackle actual risks and that demonstrably work in every location for every employee.
Creating a compliance plan presents the following challenges:
- transactions which may seem immaterial, might not be immaterial for compliance;
- there must be top-to-bottom commitment and tone throughout an organisation that is reflected in the plan;
- the plan must account for affiliates and third-party relationships; and
- the plan must include strong whistleblower, monitoring and auditing provisions.
A plan that is merely a 'paper tiger' with implementation that amounts to little more than lip service, will not suffice. Therefore, compliance planning takes time, effort, money and a thorough willingness to adhere to the law. When done properly, compliance planning can help to eliminate instances of bribery and corruption that expose energy, mining and resources companies to enormous risk and financial penalties under the Foreign Corrupt Practices Act.
As more countries are taking bribery and corruption more seriously, international companies have been and will continue to see the issue arise in the context of commercial disputes. Parties in disputes governed by US law can argue in a commercial arbitration that a party which has procured, performed or maintained a contract through bribery or fraud – including bid-rigging and collusion – is not entitled to bring claims to enforce contractual rights. Therefore, a party that finds itself accused of illegal conduct should expect its counterparty to use that illegal conduct as a defence in any contract dispute between the parties.
Separate and apart from the law of the contract, there is an argument that the tribunal has the inherent obligation to evaluate any issues of illegal conduct and act in a manner that avoids supporting such illegal conduct. In other words, a tribunal may find that it has the independent obligation to evaluate arguments and evidence relating to illegal conduct and refuse to enforce a contract in favour of a party involved in the illegal conduct or risk implicitly endorsing the illegal conduct. The reported precedent supporting such an approach is relatively limited, but the trend appears to favour this type of approach by tribunals.
There is developing law in the United States that supports an argument that a party engaged in illegal conduct should not be entitled to enforce a contract claim. Some of the earlier law in this area was relatively absolute in its statements. More recent decisions appear to take a more measured approach, generally affirming the principle, but considering additional factors that do not necessarily penalise a party that performed under a contract even if it was procured by illegal means.
These trends require parties in commercial disputes to consider a number of important issues when there is an issue of illegal conduct that may be implicated. The following should be considered by both parties:
- The parties should recognise that there will be additional time and cost associated with litigating the issue of illegal conduct. There is considerable risk that the commercial dispute will be overshadowed by the issue of illegal conduct and the parties will need to think strategically about how this will affect the resolution of the dispute.
- The parties face considerable risk of illegal conduct being exposed or adjudicated in a forum that is not their first choice. The party accused of illegal conduct will likely be forced to make sensitive disclosures and key witnesses may be subject to cross examination. However, the opposing party also faces risk. In many cases, the party accused of illegal conduct will respond with an argument that its counterparty is equally culpable based on an unclean hands or similar argument.
- In a commercial arbitration the parties are likely to be unable to ensure that the facts developed during the arbitration will stay confidential. They should assume that law enforcement will gain access to them, which could complicate criminal or other government investigations.
- The parties should recognise that a decision by a civil court or an arbitral tribunal with respect to illegal conduct may influence criminal or government investigations or other business relationships, even if it does not bind anyone outside of the proceeding where it is rendered.
While every situation is different, the recent focus on investigating illegal conduct is likely to influence parties in commercial disputes that may seem secondary or removed from the criminal or government investigation that is taking place. Parties accused of illegal conduct must consider whether to pursue commercial disputes that may impact a criminal or government investigation and opposing parties must think carefully about whether to raise illegal conduct as a defence and risk being accused of illegal conduct itself.
For further information on this topic please contact Robert B Wolinsky or Christopher T Pickens at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600) or email (firstname.lastname@example.org or email@example.com). Alternatively, contact Andrew C Lillie or Jessica Black Livingston at Hogan Lovells US LLP's Denver office by telephone (+1 303 899 7300) or email (firstname.lastname@example.org or email@example.com). The Hogan Lovells US LLP website can be accessed at www.hoganlovells.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.