Foreign Corrupt Practices Act
David A. Holley
The energy industry has long been fertile ground for corruption and bribery and, therefore, ripe for Foreign Corrupt Practices Act (FCPA) enforcement activity. By its very nature, the international energy business, including the oil and gas sector, requires a high degree of government involvement and cooperation, particularly when entering markets overseas, constructing facilities in new territories, applying for permits from foreign agencies, or reaching distribution agreements with countries. Such cooperation can be achieved in many ways, and some firms resort to methods with FCPA implications.
The most recent example of an energy company undergoing an FCPA investigation and prosecution ended in a December 2008 settlement between Siemens AG, the United States Department of Justice (DOJ), and the Securities and Exchange Commission (SEC). The case provides lessons for every international energy firm on how to remain FCPA compliant as it develops business and establishes a presence overseas.
Cooperation with Government investigations: Siemens’ approach to the FCPA investigation has been universally recognized as the “right way” and can serve as a model for those facing similar actions. Siemens retained a multi-national team of accountants and lawyers to establish the facts and circumstances surrounding all of the allegations. The company was also reportedly timely and forthcoming with all of the DOJ’s requests for documents and information. The settlement agreement calls Siemens’ level of cooperation “exceptional.” This behavior is said to be why the company secured the terms it did. Approaching an FCPA investigation cooperativly, rather than contentiously, is the single greatest lesson coming from the case.
Due diligence failures: Siemens’ failure to perform meaningful due diligence on some third-party consultants led to many of its FCPA-related problems. Numerous “red flags” relating to their hiring and use went mostly undetected because of a failure to centralize the due diligence and third-party retention processes. For example, Siemens engaged certain consultants with no relevant experience in their contracted tasks and many received unusually high fees relative to the going rate for such work. In addition, the company used third parties concurrently employed by the governments with which it was seeking a business relationship. Engagement of a third party should always be preceded by a level of due diligence which will yield full knowledge of its proposed activities, remuneration, and expertise to carry out its mission.
Management’s role in compliance: Siemens was harshly taken to task for management’s apparent failure to ensure FCPA compliance in parts of its overseas business. The SEC complaint criticized Siemens’ FCPA compliance program, saying bribe payments and inadequate controls were “accepted by senior management.” The DOJ admonished Siemens’ senior leadership for failing to instill ethics into its business by, for example, not making a clear statement of company policy to employees on the payment of bribes. In essence, the government was condemning a failure of corporate leadership to create a “tone at the top” consistent with effective compliance. Management buy-in involves more than just promulgation of FCPA related rules: senior executives must be actively engaged to ensure not merely conformity with the letter of the law, but also an ethos of compliance.
The Siemens case provides numerous FCPA compliance lessons for the energy industry. As expansion in foreign markets makes contracting with unfamiliar governments inevitable, energy concerns will sometimes face unfamiliar cultural expectations and challenges. Meeting these ethically and legally will certainly test even the most compliant entities. In these efforts, the Siemens case can provide some guidance and may even become an example for regulators in future enforcement activities.
Global Fraud Report
2009/2010 Annual Edition
