Mark Filip, Brigham Q Cannon and Nicolas Thompson, Kirkland & Ellis LLP
This is an extract from the third edition of GIR's The Practitioner’s Guide to Global Investigations. The whole publication is available here.
Monitorships in the energy and environmental contexts present many of the same issues and challenges as monitorships generally, but there are concerns specific to those contexts of which practitioners and companies should be aware. This chapter discusses some of those concerns, as well as the structure of monitorships more broadly in the energy and environmental sectors.
There are several ways to think about the different forms of monitorship and various valid methods of classification. This chapter differentiates them according to how they arise and who implements or enforces them. In this sense, there are three main categories of monitorships commonly faced by companies in the energy and environmental sectors:
- monitorships imposed by US court order;
- monitorships imposed by agreement with a US governmental agency, such as the Department of Justice (DOJ), the Securities and Exchange Commission (SEC), or the Environmental Protection Agency (EPA); and
- for companies participating in energy or infrastructure projects that receive World Bank funding, monitorships imposed by the World Bank.
Types of monitorships arising in the energy and environmental sectors
The applicable legal frameworks for monitors
In cases involving potential US criminal violations, the legal authority for imposing a monitorship stems from the US Criminal Code and the Sentencing Guidelines promulgated thereunder. Pursuant to this authority, monitorship is just one potential term of corporate probation that courts may choose to impose on defendants.
Section 3563 of Title 18 of the US Criminal Code provides for the terms and conditions of criminal probation generally, while Section 3563(b)(22) of that same title is a catch-all provision allowing courts to impose discretionary conditions of probation that require defendants to 'satisfy such other conditions as the court may impose'. Similarly, Section 8D1.3(c) of the Sentencing Guidelines provides courts with broad authority to propose any conditions of corporate probation 'that (1) are reasonably related to the nature and circumstances of the offense or the history and characteristics of the organization; and (2) involve only such deprivations of liberty or property as are necessary to effect the purposes of sentencing'. Section 8B2.1 of the Guidelines, meanwhile, contains a more detailed outline for the structure of monitorships, mandating that a 'compliance and ethics program' be 'reasonably designed, implemented, and enforced so that the program is generally effective in preventing and detecting criminal conduct'. Consideration of a company's specific industry is relevant: 'An organization's failure to incorporate and follow applicable industry practice or the standards called for by any applicable governmental regulation weighs against a finding of an effective compliance and ethics program.'
In civil cases where a US court orders a compliance monitor, the terms of monitorship may look similar to the criminal context, but the authority stems from the court's plenary authority to enforce settlements reached by the parties, or from Federal Rule of Civil Procedure 53. Federal Rule 53 allows the court to appoint special masters to 'perform duties consented to by the parties' and to address various post-trial matters.
A court order is not a necessary predicate for a monitorship. Companies and US government agencies can, of course, agree to a monitorship without such an order. For example, the DOJ enters into deferred prosecution agreements and non-prosecution agreements with parties, pursuant to which the DOJ agrees not to prosecute as long as the party fulfils its obligations under the agreement, and those obligations can include engaging an independent compliance monitor. Courts have recognised that they have no authority to substantively manage, enforce or pass judgment on such agreements.5 Companies often have incentive to seek such an agreement rather than face prosecution and the prospect of a court order that could involve more severe penalties.
While most monitorships in the energy and environmental contexts arise from US criminal and civil law or from agreements made between the parties in the shadow of this law, they can arise from other sources as well. The World Bank, for example, has developed a compliance regime related to projects financed by the bank that can include a monitorship. Companies that work on World Bank-financed projects can be suspended or debarred from World Bank (and other multilateral development bank) contracts if the bank finds that they engaged in corruption or similar misconduct. Debarment with conditional release, meaning debarment until the company establishes a compliance programme satisfactory to the World Bank, is the default sanction. The World Bank's integrity compliance officer monitors a debarred party's performance of required conditions during debarment, and may require that an independent monitor be engaged. In addition, a party that voluntarily discloses misconduct to the World Bank can engage an independent monitor to help avoid further sanctions. The legal authority for the World Bank's compliance regime is its contractual arrangements with companies that work on World Bank-financed projects (which agree to be audited), and the World Bank's fiduciary duty to protect the use of bank financing.
Regardless of the exact source of authority, it is important for companies and practitioners to recognise that US courts and governmental agencies, as well as international bodies like the World Bank, have broad discretion to impose, define and enforce terms of monitorship. The relevant statutes, guidelines and contracts typically contain few specific limitations.
Court-ordered energy and environmental monitorships
Court-ordered monitorships can arise in a variety of contexts, including when an environmental crisis heightens the degree of public scrutiny and the government desires to seek a conviction, guilty plea, or liability verdict, as demonstrated by the following examples.
BP and the Deepwater Horizon drilling rig
In November 2012, oil and gas company BP agreed to plead guilty to 11 counts of felony manslaughter under federal law, as well as misdemeanour criminal violations of the Clean Water Act and the Migratory Bird Treaty Act of 1918.11 The guilty plea was reached with the DOJ after the Deepwater Horizon explosion and subsequent oil spill that occurred in the Gulf of Mexico in April 2010. In January 2013, the US District Court for the Eastern District of Louisiana sentenced BP to a fine, probation and a term of monitorship.
Pursuant to the guilty plea, the court imposed dual terms of monitorship: BP was required to retain, subject to the DOJ's approval, an ethics monitor to review and offer improvements to BP's corporate code of conduct and its implementation; and a process safety monitor with special experience in safety and risk management procedures applicable to oil and gas drilling. In contrast to the ethics monitor, the purpose of the process safety monitor was to provide a more technical review and recommendations relating to BP's safety and accident prevention policies and procedures.
The court's order outlined the process for selecting the monitors and many of their duties. BP was permitted to select a list of candidates in rank-order of preference, subject to the DOJ's approval. The term of monitorship was set to last for four years unless earlier terminated by the DOJ. The DOJ was provided sole discretion to resolve disputes that might arise between BP and the monitors, and BP was required to pay the monitor's expenses. The court described the process safety monitor's duties in broad strokes:
[T]o review, evaluate and provide recommendations for the improvement of defendant's process safety and risk management procedures, including, but not limited to, the defendant's major accident/hazard risk review of drilling-related process safety barrier and mitigations, for the purpose of preventing future harm to persons, property and the environment resulting from deepwater drilling in the Gulf of Mexico by the defendant and its Affiliates.
The court granted the monitors a large degree of authority to carry out their duties and imposed on BP an obligation to fully cooperate. It ordered the monitors to take steps to maintain the confidentiality of all non-public information, and made clear that BP did not automatically waive the attorney–client privilege or work product protections over any material simply because it was provided to the monitors to carry out their duties. The court ordered the monitors to prepare periodic reports on their findings and on BP's progress, to be shared with the DOJ (but not the public).
In August 2016, a federal jury found Pacific Gas & Electric Company (PG&E) guilty of, among other things, violations of the Natural Gas Pipeline Safety Act of 1968. The guilty verdict stemmed from the September 2010 incident where a natural gas pipeline in San Bruno, California exploded. The US District Court for the Northern District of California sentenced PG&E to a term of probation, at the DOJ's request, that included a corporate compliance and ethics monitorship. Similar to the BP example discussed above, the monitor's duties outlined in the court order include preparation of periodic reports on the status of PG&E's compliance efforts. The order also contemplates that the final report issued by the monitor be publicly available.
Monitorships created by agreement with the government
As part of settlements, consent decrees and agreements to defer prosecution, federal agencies such as the DOJ, the SEC and the EPA may agree to terms of monitorship that contain similar provisions to the court-ordered monitorships described above. If there are disputes regarding these agreements, the relevant agency may still in some cases seek intervention from the courts. As such, these may be considered hybrid monitorships, where the provisions are closely negotiated with the opposing party, but the final terms may ultimately be enforced, if necessary, by a court. In the case of a deferred prosecution agreement, the government may simply decide to pursue charges and prosecute the case if the agreement is breached. While the process by which these hybrid agreements develop differs from their court-ordered counterparts, their impact can be similar.
Wood Group PSN and West Delta 32
In February 2017, Wood Group PSN Inc entered into a plea agreement with the DOJ to pay $9.5 million for a violation of the Clean Water Act relating to conduct that led to an oil spill in the Gulf of Mexico. The case involved a failure to properly inspect and maintain facilities for which Wood Group had responsibility on the Outer Continental Shelf's Creole Loop. This led to an explosion at an offshore oil production facility in the West Delta 32 area of the Gulf of Mexico and to the discharge of oil into the Gulf.
Although the case was brought by the US Attorney's Office in Louisiana, the investigation was led by the US Department of the Interior's Office of Inspector General (OIG) and the EPA. As part of Wood Group's plea agreement with the DOJ, the company agreed to enter into an 'administrative agreement' with the EPA – essentially a corporate compliance programme dictated by the agency.
Wood Group's administrative agreement with the EPA was detailed and imposed many duties and responsibilities on the company. Wood Group was required to maintain a corporate ethics and compliance officer who would report directly to a safety, assurance and business ethics subcommittee of the company's board to ensure that communications regarding compliance activities and fraud risks would be shared regularly and directly with company leadership. The administrative agreement also overhauled the requirements of Wood Group's existing ethics and compliance training programme, including by imposing new requirements relating to record-keeping, tracking and review protocols for training materials used in the programme, in addition to other substantive changes.
The administrative agreement required Wood Group to hire an independent monitor for the duration of the agreement (three years), subject to the EPA's approval. The monitor was required to be a subject-matter expert capable of evaluating the company's compliance with the agreement's many provisions. In addition, the monitor was tasked with performing periodic reporting on Wood Group's compliance activities and progress toward the goals of the company's corrective action plan, as well as performing on-site audits. The monitor was required to share its reports, which covered several predetermined subject-matter categories, with both the EPA and Interior Department's OIG.
Citgo and the Lemont Refinery
In November 2016, Citgo entered into a consent decree with the DOJ and the EPA over Citgo's alleged violations of the Clean Air Act involving a failure to control pollutants released from a refinery in Lemont, Illinois. The consent decree, which was the product of a long period of negotiation and cooperation between Citgo and the government, did not involve the appointment of a traditional monitor per se, who would have broad authority to oversee improvements and make recommendations. However, the decree did contain detailed requirements regarding specific emissions at the refinery and required appointment of an independent technical auditor who would measure the rates of leaks of various pollutants to determine if they exceeded allowable limits as part of the agreement's 'Leak Detection and Repair' programme.
The consent decree in the Citgo case was more detailed than typical court orders implementing monitorships, likely in large part because it resulted from years of input from the EPA's and the DOJ's environmental subject-matter experts.
Total SA and the Foreign Corrupt Practices Act
Allegations of violations of the Foreign Corrupt Practices Act (FCPA) may lead to monitorships for companies in every industry, and the energy industry is no exception.
In May 2013, French oil and gas company Total S.A. (Total) entered into a deferred prosecution agreement with the DOJ relating to allegations that it violated the anti-bribery, internal controls and books-and-records provisions of the FCPA. The charges related to the payment of $60 million in bribes meant to induce Iranian officials to give Total rights to certain oil supplies.
Total agreed to a monetary penalty and a three-year term of monitorship in exchange for deferred prosecution. It also entered a related settlement with the SEC to resolve a parallel FCPA civil action. As part of the agreement with the DOJ, Total admitted the facts included in the DOJ's criminal information, and agreed that if it breached the agreement, and the DOJ pursued the deferred prosecution, it would not contest the charges.
The monitor's mandate included ongoing evaluation of Total's internal controls, bookkeeping, and financial reporting policies in light of US and French anti-corruption laws. The agreement required the monitor to report on the company's progress, but also expressly provided that the reports would stay confidential and not be disclosed to the public.
Monitorships imposed by the World Bank
The World Bank's Integrity Vice Presidency, which is responsible for deterring and investigating corruption in World Bank projects, has imposed sanctions on hundreds of companies and individuals since 2010, including in the energy and environmental sectors. The bank has its own internal monitor, the integrity compliance officer, but can also mandate third-party monitorships, as shown by the following examples.
In April 2013, the World Bank debarred subsidiaries of Canadian infrastructure and energy construction group SNC-Lavalin for 10 years after finding that the company had paid bribes to officials in Bangladesh and Cambodia in connection with infrastructure and power transmission projects that the World Bank financed.
As part of a negotiated resolution between the company and the bank, the company agreed to engage an independent compliance monitor. The monitor reports directly to the World Bank at least twice per year on the company's progress. Specifically, the monitor reviews the implementation and effectiveness of the company's ethics and compliance programme, measuring it against the World Bank's Integrity Compliance Guidelines. The monitor also offers recommendations for improvements. The debarment period can potentially be shortened to a period of eight years if the company implements an effective compliance programme and complies with all other aspects of the settlement.
In February 2012, the World Bank debarred two subsidiaries of Alstom S.A. (Alstom) for three years owing to improper payments to a former government official in Zambia connection with a World Bank-financed hydropower project. As part of a negotiated resolution, Alstom agreed to engage an independent compliance monitor. The monitor was responsible for verifying that Alstom would design and implement a compliance programme consistent with the World Bank's Integrity Compliance Guidelines.
In December 2014, Alstom entered into an unrelated plea agreement in the United States for violations of the FCPA that involved bribes to officials in countries including Indonesia, Saudi Arabia, Egypt, and the Bahamas. As part of the plea, the court and the DOJ agreed not to impose a second compliance monitor, and instead took the somewhat unusual step of deferring to the Word Bank monitorship that was already in place. If the company satisfied the requirements of the World Bank monitorship, no DOJ monitorship would be required. In February 2015, the World Bank determined that Alstom had implemented an appropriate corporate compliance programme, released Alstom from debarment and ended the monitorship.
Unique challenges in the energy and environmental sectors
Many of the challenges posed by compliance monitors in the energy and environmental industries are the same challenges faced by companies in all industries, including the costs relating to engaging a monitor and implementing new compliance regimes; the disruption of company operations; managing difficult or overzealous monitors; and protecting the company's confidential information from public disclosure or leaks. There are some issues, however, that practitioners and companies should be particularly sensitive to in the energy and environmental contexts.
Practitioners should be prepared for and comfortable with the high level of complexity that attends companies in this sector (typically oil and gas, power generation or infrastructure companies). While these companies are not the only ones that exist against a highly complex and technical backdrop, there is a broad range of statutes, including environmental statutes, that can serve as hooks for liability, and such liability may lead to terms of monitorship that are substantively different from those of a typical FCPA compliance programme, for example.
Managing complexity and the related costs
The BP monitorship discussed previously is a good example of the complexity that can be associated with monitorships in this industry. The BP probation order called for dual monitorships: one was the more typical ethics monitor intended to police the company's code of conduct; the other was a more technical process safety monitor, responsible for assessing BP's risk management and safety policies and suggesting improvements, with the goal of preventing future incidents like the one that occurred on the Deepwater Horizon.
The court's order in BP required the process safety monitor to have expertise specifically applicable to oil and gas drilling. As such, the monitor would likely need to be an engineer, or supported directly by engineers, with knowledge of oil drilling and related matters. Such a monitor represents a relatively new development in corporate compliance, in that the monitor is not just applying legal standards and assessing compliance, but is appointed specifically to engage in a form of root-cause analysis, to determine how the company's internal systems led to the violation in the first instance. In the case of BP, the process safety monitor would need to know, from a technical perspective, how BP's risk management systems were deficient in the first place before recommending new procedures or mitigation.
Legal practitioners representing energy and environmental clients in connection with monitorships should be prepared to engage subject-matter experts to help address technical complexities where necessary. Moreover, practitioners and their clients should recognise that engaging specialised experts can be costly and disruptive, beyond what may be typical in other industries. In addition, monitors like the process safety monitor in BP may have highly technical, data-driven thresholds that they require companies to meet, which can cost more in terms of both money and time to achieve than more flexible, non-technical standards.
A corollary to the points above regarding anticipating and managing complexity, practitioners should also be familiar with the many environmental statutes that may lead to liability in these cases and thus result in subject-matter specific compliance monitors. Many of these statutes involve criminal in addition to civil liability for violations. A non-exhaustive list of such environmental statutes with criminal provisions includes: the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Hazardous Materials Transportation Act, the Safe Drinking Water Act, the Toxic Substances Control Act, the Endangered Species Act, and the Migratory Bird Treaty Act of 1918, and the Natural Gas Pipeline Safety Act of 1968.
Resolving disputes with monitors against a highly technical backdrop
Although supervised by a government authority, monitors in the energy and environmental sectors may, as a practical matter, wield a larger amount of discretion than usual because they possess a level of expertise that at least some at the relevant government agency may not. Practitioners should thus be prepared to identify and push back on unreasonable or unfounded monitor recommendations that the relevant agency may be less able to detect, and should contest such recommendations articulately and plainly if a court or a government agency must mediate a dispute.
Significantly, the DOJ's policy manual anticipates disputes with monitors, and provides a path for companies to contest burdensome or unfounded recommendations. The DOJ's Grindler Memorandum from 25 May 2010 states:
With respect to any Monitor recommendation that the company considers unduly burdensome, impractical, unduly expensive, or otherwise inadvisable, the company need not adopt the recommendation immediately; instead, the company may propose in writing an alternative policy, procedure, or system designed to achieve the same objective or purpose. As to any recommendation on which the company and the Monitor ultimately do not agree, the views of the company and the Monitor shall promptly be brought to the attention of the Department. The Department may consider the Monitor's recommendation and the company's reasons for not adopting the recommendation in determining whether the company has fully complied with its obligations under the Agreement.
The DOJ's Grindler memorandum suggests that monitors should not be allowed to exceed their mandates, and practitioners should be proactive in defining the company's relationship with the monitor early in the process. Effectively working with a monitor in this context requires up-front and clear communication with the monitor and, perhaps more importantly, the supervising government agency about the appropriate scope of work and objectives. Such proactive management also requires the ability to understand and engage with complex and technical industry-specific topics.
Maintaining confidentiality and privilege
Although applicable to any context, it is imperative that practitioners in this area do everything they can to protect confidentiality and privilege during the pendency of a monitorship. Just because a monitorship may involve as many or more technical matters than legal ones does not lessen the importance of legal advice or diminish the role of the lawyer in guiding the client through the process. Moreover, the fact of monitorship does not waive attorney–client privilege with respect to the monitor. Indeed, the applicable order or agreement that creates the monitorship, whether a plea, consent decree or deferred prosecution, is often sensitive to the fact that the company's confidential information will be shared with the monitor, an outside party.
Practitioners should take all steps necessary to ensure that privilege protections are included in whatever agreement governs the monitorship. In the BP example discussed above, the order entered by the court after the guilty plea explicitly stated that providing privileged materials to the monitor would not automatically waive such privilege. Another provision required the DOJ or monitor to give notice to the company before seeking disclosure of any privileged material, presumably so the company would have the opportunity to challenge any such disclosure in court. The court was also sensitive, generally, to the sort of confidential information BP would be providing in the course of the monitorship:
Each monitor shall maintain as confidential all non-public information, documents and records it receives from the defendant, subject to the monitor's reporting requirements herein. Each monitor shall take appropriate steps to ensure that any of his/her consultants or employees shall also maintain the confidentiality of all such non-public information.
Further, companies can, and often do, engage their own experts to conduct work similar to what the monitor will undertake, both to prepare for the monitor and to improve further their operations and risk profile. Such work can be done under the protection of the attorney–client privilege if appropriate steps are taken in advance. The work should always be done, for example, at the direction of counsel and for the purpose of providing legal advice (e.g., compliance with the company's legal obligations). This work may involve experts who are not familiar with working under these conditions, and it is crucial that both the in-house and outside attorneys directing the work are vigilant in instructing all involved of the importance of maintaining best practices for maintaining privilege and confidentiality in this area.
Finally, despite the fact that many cases historically have expressly made reports by the monitor confidential, there is an increasing push to make monitors' reports public. Practitioners should be prepared for public disclosure and, in light of the possibility of such disclosure, take steps to prevent privileged information from ever being provided to the monitor.
The future of monitors in the energy and environmental sectors
In many industries, there may be reason to believe that the number of monitorships sought by US authorities will decrease. The DOJ's Criminal Division released a memo on 11 October 2018 noting that 'the imposition of a monitor will not be necessary in many corporate criminal resolutions, and the scope of any monitorship should be appropriately tailored to address the specific issues and concerns that created the need for the monitor'. The memorandum elaborates that in evaluating the prudence of a monitor, the government should consider:
(a) [W]hether the underlying misconduct involved the manipulation of corporate books and records or the exploitation of an inadequate compliance program or internal control systems; (b) whether the misconduct at issue was pervasive across the business organization or approved or facilitated by senior management; (c) whether the corporation has made significant investments in, and improvements to, its corporate compliance program and internal control systems; and (d) whether remedial improvements to the compliance program and internal controls have been tested to demonstrate that they would prevent or detect similar misconduct in the future.
The memorandum was widely seen as a signal that the DOJ would exercise more restraint in future cases in determining whether to seek a compliance monitor.
Whether this apparent policy shift will impact monitorships in the energy and environmental space remains to be seen. Given the scale and public attention often accompanying environmental incidents, it is possible, and perhaps even likely, that companies in this sector in particular will continue to face a high risk of monitorships.
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