Expansion and investment by energy companies into Asia, the Middle East and Africa involves both opportunity and risk, including corruption-related risks and potential enforcement activity. The risk of the latter is increasing with Australian and UK authorities seeking to step up their anti-bribery investigations, and the US Department of Justice (DOJ) and Securities and Exchange Commission (SEC) continuing to take anti-bribery enforcement activity against non-US companies in order to ‘level the playing field’ for US businesses. The ramifications of any such enforcement are significant, from disgorgement of profits, possible class actions, debarment from public contracts to reputational damage.
Regulators are also particularly focussed on the energy and resource sector given the inherent interaction with government officials (from the rewarding of licences to the provision of contracts) and the fact that countries rich in natural resources are also those most prone to corruption based on Transparency International’s Corruption Perceptions Index. According to TRACE’s Global Enforcement Report 2011, the extractive industries sector has been the subject of international anti-bribery enforcement actions more than any other sector. This focus on the sector is also reflected in the recent US decision, on 22 August 2012, to require oil, gas and mining companies listed on US Stock Exchanges to publish the payments that they make to governments. In this context, we set out 5 lessons for energy companies on mitigating corruption risks based on recent developments in Australia and overseas.
Investing in a robust anti-corruption compliance program
Having in place a strong and effective anti-bribery and corruption compliance program not only mitigates the risk of corruption occurring, but may also save you significant costs in the event that an employee or business partner engages in bribery.
This has recently been reinforced in the US, with the DOJ and SEC deciding not to take enforcement action against Morgan Stanley, notwithstanding that representatives of the company had engaged in corrupt conduct. Subsequently, the DOJ and SEC have also made public decisions not to take enforcement action against Hercules Offshore Inc, a global provider of offshore contract drilling, liftboat and inland barge services. In both cases, this decision was in largely due to the rigorous compliance programs in place at these companies.
A properly focussed anti-corruption compliance program may also provide a defence to any allegations of bribery under Australian or UK anti-corruption legislation.
Retaining control and oversight of third parties
The risks associated with the use of agents and contractors has recently been highlighted by the UK’s Serious Fraud Office (SFO) investigating British Petroleum (BP) in relation to one of BP’s contractors in Azerbaijan. Whilst there is no suggestion that BP or any of its employees paid bribes, the UK Bribery Act’s strict liability provisions mean that companies may be criminally liable for acts of their agents and contractors.
This serves as a timely reminder that the conduct of business partners (including agents, joint venture partners, advisers and contractors) can be the basis of liability, irrespective of whether the company is aware of their conduct.
In this regard, an effective compliance program needs to include mechanisms for ensuring appropriate control and oversight over business partners’ activities.
Recognising the broad scope of ‘foreign public official’
Foreign bribery provisions hinge on an intention to influence a ‘foreign public official’. The question is who this phrase encompasses. One group potentially overlooked is indigenous leaders or representatives.
Within Australia, making payments to representatives of aboriginal groups may risk the operation of both Commonwealth laws and State or Territory laws on bribery and corruption. Risks also arise in relation to dealings with indigenous leaders and representative overseas – both under local law and Commonwealth law.
Companies dealing with indigenous groups, both in Australia and overseas, should be mindful of this risk and implement controls in relation to the provision of benefits to indigenous representatives.
Undertaking corruption due diligence in M&A transactions
Acquiring, or investing in, a company with corruption issues can lead to a number of legal and reputational risks for the investor (including criminal liability for past or ongoing corruption). It follows that corruption due diligence is a critical part of pre-acquisition / investment activities, particularly in Asia, the Middle East and Africa.
The scope of such due diligence will of course depend on, for example, available time, the value of the transaction and whether or not the buyer has exclusivity. However, being mindful of the prospect of acquiring corruption-related liabilities enables you to consider, and obtain advice on, how best to minimise that exposure within the parameters of the particular transaction.
Identifying potential corruption issues through due diligence does not have to be a deal breaker. Rather, it allows investors to consider the full cost and benefit of the transaction. It may also enable companies to negotiate with relevant regulators for a grace period, following acquisition, during which time agreed steps are to be carried out by the investor (for example, conducting a fulsome investigation and implementing a compliance program).
Responding appropriately when potential issues arise
When a potential issue arises, it may be appropriate to conduct an internal investigation to identify the nature and extent of the potential issues and take action against relevant people. Such investigations also enable an informed assessment of whether it is necessary or appropriate to engage with the regulators, and if so, to cooperate in an informed way. This may in turn lead to leniency in respect of any proposed sanctions.
In particular, the US has long had deferred prosecution agreements, such that a company which ‘self reports’ may avoid prosecution. The SFO is currently considering introducing similar measures, and has highlighted the possibility of assisting companies secure ‘global’ settlements of corruption issues. Given the multi-jurisdictional nature of corruption risks and enforcement activity, the finality provided by a global settlement cannot be underestimated.
How a company chooses to respond to potential corruption issues may also be scrutinised by shareholders. For example, in the Walmart case in the US, multiple derivative actions and a class action have been commenced claiming, among other things, that Walmart’s directors failed to act appropriately when issues were identified. ASIC has indicated that, in such cases, it may be interested only in the conduct of directors, and whether they met their directors’ duties. In contrast, on 15 May 2012, Griffiths Energy reported that it had self-reported to Canadian and US authorities in November 2011 that it had commenced an internal investigation in relation to certain consulting fees and had committed to providing full cooperation and findings of that investigation to the authorities. The company also announced at that time that it had undertaken significant initiatives to establish corporate governance and internal controls consistent with industry best practices. While the results of the regulatory investigations into Griffiths Energy have not yet been announced, its regulatory and reputational fate will undoubtedly be more favourable than that of Walmart.