Q&A: Companies take steps to avoid greasing palms in oil search

Multinational companies operating in countries where bribery is rife face increasing scrutiny by federal investigators, who have been cracking down on violations of federal anti-corruption laws.

The government rarely prosecuted offenders for decades after Congress enacted the Foreign Corrupt Practices Act in 1977. But that tide has turned in recent years as the U.S. Department of Justice teamed up with its counterparts in other countries to investigate companies working abroad.

The government filed more cases and stepped up the severity of punishment, doling out hefty civil penalties and, in some cases, prison sentences, according to a report by PricewaterhouseCoopers Energy Board Network.

Energy companies are a particular target because they often work in countries with histories of corruption and bribery, says George Terwilliger, who served as deputy attorney general in President George H.W. Bush’s administration.

The scrutiny has forced companies to rethink their practices, spawning an industry of professionals who vet foreign officials with whom energy companies do business.

While large multinational companies have the capital to fund that level of scrutiny, smaller firms may not, Terwilliger said. And that could pose problems for companies that want to expand their footprint abroad, a relevant concern as Mexico privatizes its energy industry and opens up the country’s resources to foreign exploration for the first time in 75 years.

Terwilliger, who has represented companies accused of violating the Foreign Corrupt Practices Act as head of the white collar practice at law firm Morgan, Lewis & Bockius, spoke with the Chronicle about how the federal government’s anti-bribery crackdown affects energy companies. Excerpts, condensed and edited for clarity:

Q: How will enforcement of the Foreign Corrupt Practices Act (FCPA) hinder U.S. energy companies from doing business abroad?

A: Notwithstanding all the good things that are happening with energy upstream production in the United States, the real growth opportunities remain overseas. And a lot of them are in places that are ethically challenged at best in terms of their business and legal cultures. Two things cause problems for companies subject to U.S. law.

One, ambiguities are in the law itself. What is a foreign official? What organizations are covered as entities of foreign governments that are state-owned enterprises three times removed?

Then there’s the uncertainty of the parameters of enforcement policy. Why is this case prosecuted and that one isn’t? Why does this case settle for this much money and that one for that much money? There’s not a lot of transparency, and it’s not apparent to the people who work at this all the time exactly where those parameters are.

Q: Why is that a problem?

A: A company subject to U.S. law that is looking at an opportunity overseas looks at what the profitability model is and then they look at the risk inherent in doing business in that environment. The least little thing that comes up in that process — there’s a piece of real estate they want us to use as a staging area that’s owned by the brother-in-law of the cousin of the oil minister — and they look at it and go, “You know what? We’re not going to do that. It’s not worth the risk.”

Q: Are companies passing up business opportunities because of those risks?

A: Yes, that happens. Companies forgo economic opportunities because the uncertainties are perceived to be too great given the potential return on the investment. The objective of the law is to have a corruption-free level playing field. Most American business people I think believe that given a level playing field they can compete very well, particularly with foreign competitors. The problem is when that playing field is knocked out of kilter by the influence of corruption. Perhaps companies from other countries don’t operate under these constraints, then the playing field isn’t level anymore.

Q: What can mitigate those risks and balance the playing field for U.S. companies abroad?

A: For some time I have advocated some kind of corporate amnesty for companies that investigate themselves, fix their problems and disclose them to the government. If companies become aware of corrupt activity, I think given an incentive to report that they would do it. And that will help the government and help the objectives of this program rather than playing a kind of gotcha game.

Q: Are there any incentives now for companies to disclose potential violations?

A: The Securities Exchange Commission and the Justice Department have articulated policies that whatever the penalty should be for some wrongdoing, it will be less if you self-report, cooperate with an investigation and so forth. I don’t think that’s widely believed in the U.S. corporate community. And it’s almost impossible to measure. I have represented companies where we have made voluntary disclosures that have not been prosecuted. And the government has said the reason they are not prosecuting is because of internal investigation and cooperation. So I’m not saying it doesn’t happen. At the end of the day, companies wrestle with the question of, “Is it really worth it?” All the heartache that’s going to flow from a voluntary disclosure, particularly on something that may be marginal as a violation, is it worth what that’s going to cost? In terms of damage to reputation, shareholder issues, management issues with the board and so forth, is that going to be worth it in terms of what a company might get in terms of some forbearance of penalty?

Q: So are voluntary disclosures rare in the energy industry?

A: No, I don’t think it’s rare. Voluntary disclosure has continued but I think it involves a much more measured and considered decision than it might have five or six years ago.

Q: Three years ago, Wal-Mart announced that it was investigating possible violations related to alleged bribes in Mexico. Does Mexico’s energy privatization plan increase the potential for U.S. companies to violate the Foreign Corrupt Practices Act?

A: Major oil companies are not without experience in dealing in difficult environments like Argentina, Colombia, Venezuela. Are the risks greater? Yes. But you have to go where the resources are.  On the good news side, companies have grown exponentially in their own infrastructure to manage and address that risk without completely avoiding it.

The Wal-Mart situation really opened some people’s eyes because for a long time we thought of risk in terms of: Who are you directly doing business with? What kind of foreign governments and officials are you dealing with? Nobody thought about it in the project development phase, in terms of getting licenses and permits and zoning exceptions. It just showed people that the very nascent stages of project development themselves could carry a tremendous amount of risk. But that risk can be managed once you recognize it.

 

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