Source: http://www.pepperlaw.com/publications/anti-corruption-law-and-the-oil-and-gas-industry-evolutions-in-both-demand-vigilance-2013-04-15/
Timestamp: 2018-07-17 13:37:18
Document Index: 203447615

Matched Legal Cases: ['§ 78', '§ 78', '§ 78', '§ 78', '§ 78', '§ 78', '§ 7241', '§ 1350', '§ 1504', '§ 78', '§ 1952', '§ 1346', 'Art. 1', '§ 1', '§ 1', '§ 6', '§ 7', '§ 7', '§ 1', '§ 3543']

Anti-Corruption Law and the Oil and Gas Industry: Evolutions in Both D...
Authors: Omar Y. McNeill, Gregory A. Paw and William A. Liess
Businesses in the oil and gas industry are cautioned to pay careful attention to evolutions in anti-corruption law in the jurisdictions where they operate. The U.S. government has successfully enforced the Foreign Corrupt Practices Act and related laws against several oil and gas firms, and recent developments in U.S. law point to further risk increases. Developments in foreign law are also expanding the anti-corruption traps for the industry. Furthermore, as oil and gas production expands dramatically in the United States, participating firms could face new risks under domestic state law. This paper reports on the present state of the anti-corruption landscape facing the oil and gas industry and encourages businesses to assess and mitigate the specific risks they face in their operations.
Oil and gas businesses operate in a dynamic realm of increasing anti-corruption enforcement risk. The industry is perceived to be among the most corrupt, with a high incidence of bribery of foreign officials in resource-rich countries.1 Prosecutions by the U.S. government have resulted in payments by oil and gas companies totaling hundreds of millions of dollars, and new developments in U.S. law have increased burdens on the industry. New prosecution risks are emerging as foreign governments enact and strengthen their anti-corruption laws and enforce them against oil and gas firms. Moreover, firms engaged in the booming but controversial renaissance in domestic oil and gas production may face additional risks under the anti-corruption laws of the states where they operate. Oil and gas businesses are accordingly advised to regularly re-assess their anti-corruption risk and implement compliance programs that are carefully tailored to their operational profiles.
Oil and Gas Firms Face Demonstrated Anti-Corruption Risk Under Evolving U.S. Law
The principal anti-corruption enforcement tool of the U.S. government has been the Foreign Corrupt Practices Act (FCPA).2 Anti-bribery provisions in the FCPA make it illegal to “corruptly” give, promise to give or authorize the giving of, whether directly or through another, “anything of value” to a “foreign official”3 for the purpose of influencing that foreign official to achieve a business advantage.4 The prohibitions apply to (1) the conduct anywhere of any business entity (or principal, employee or agent thereof) that issues securities in the United States, (2) the conduct anywhere of a non-issuing U.S. business entity or U.S. individual, or (3) conduct within the United States by a non-issuing, non-U.S. business entity or non-U.S. individual.5 The FCPA includes exceptions for certain payments that are expressly legal under foreign law, and for certain bona fide expenses.6 But the FCPA offers no “good faith” defense to corporations for acts of their employees or agents and no exception for de minimis violations.
The anti-bribery provisions of the FCPA are complemented by accounting provisions applicable to any issuer of securities in the United States.7 Issuers must maintain fair and accurate books and records, and must implement internal controls to assure that corporate acts are duly authorized.8 The Sarbanes-Oxley Act of 2002 sharpened the teeth of those provisions by mandating certain disclosures and corporate compliance procedures, and by requiring officers to certify financial statements under the threat of civil and criminal penalties.9
The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have enforced the FCPA aggressively in recent years, with the oil and gas industry accounting for many of the prosecutions.10 In 2006, the Norwegian firm Statoil ASA agreed to pay $21 million in penalties and disgorgement as part of a deferred prosecution agreement.11 Statoil admitted to violating the bribery provisions of the FCPA when it made payments to an Iranian official in exchange for assistance in securing a contract to develop certain oil fields in Iran.12 The company further admitted to violating the books and records provisions by failing to properly account for the payments and for characterizing the arrangement as a “consulting” agreement. Finally, the company admitted that it violated the internal control provisions by failing to maintain adequate compliance processes.13
A group of FCPA prosecutions further shook the oil and gas industry in 2010. Seven parent corporations and certain subsidiaries agreed to pay more than $236 million in payments to settle prosecutions arising from the investigation of the Swiss corporation Panalpina World Transport (Holding) Ltd. (PWT). PWT and its subsidiaries provided global freight forwarding and customs clearance services with a primary focus on the oil and gas industry.14 PWT admitted that, for its own benefit and as an agent on behalf of its customers, it paid approximately $49 million in bribes to foreign officials in at least seven countries, with more than $27 million paid on behalf of U.S. issuers or U.S. businesses.15 There were various reasons for the illicit payments, but the agreement highlighted payments made to customs officials in Nigeria to bypass the customs process or avoid the imposition of duties or penalties on improper imports.16 PWT agreed to pay a $70.6 million criminal penalty, an amount set below the federal sentencing guideline range in part in consideration for “substantial assistance” provided to the DOJ in investigating PWT and its customers.17
The United States disclosed six other oil and gas-related agreements on the same day it released the PWT deferred prosecution agreement. Four of the companies, Royal Dutch Shell plc, Transocean Ltd., Tidewater Marine International, Inc. and GlobalSantaFe Corporation (now a subsidiary of Transocean Ltd.), entered deferred prosecution agreements with payments totaling more than $90 million.18 The firms admitted to similar patterns of conduct relating to bribes paid through various subsidiaries and agents (apparently including PWT) and to related books and records violations.19 Admitted conduct included bribes paid to Nigerian officials to circumvent customs procedures and to avoid the costly re-importation of oil rigs after temporary import permits expired.20 Noble Corporation admitted to similar conduct but the DOJ agreed not to prosecute because the company made a “timely, voluntary and complete disclosure” of violations that it discovered internally, but the company still agreed to more than $8 million in payments.21 Pride International, Inc., a U.S. offshore drilling company, entered a deferred prosecution agreement with a $32.6 million penalty relating to bribes paid in Venezuela, Mexico and India and related books and records violations.22 The penalty was well below the federal sentencing range, again reflecting “substantial assistance” provided to the DOJ.23
In August 2012, despite substantial industry resistance, the SEC placed new burdens on oil and gas businesses by issuing a rule to implement Section 1504 of the Dodd-Frank Act.24 The rule requires any oil, gas or mineral company that files an annual report with the SEC to separately file a certified report of all payments totaling $100,000 or more made to the U.S. or a foreign government to develop any oil, gas or mineral project.25 The SEC also launched a whistleblower program to implement other provisions of the Dodd-Frank Act, which has led to thousands of tips of potential violations—including 115 FCPA tips—in Fiscal Year 2012 alone.26
In November 2012, the SEC and DOJ jointly released long-awaited guidance regarding enforcement of the FCPA.27 The guidance provides, among other things, interpretations of certain key terms, including “corruptly,” “willfully” and “anything of value,” and also provides direction on corporate compliance programs and their impact on enforcement.28 The guidance further addresses related federal statutes that the DOJ has charged in FCPA actions. This includes the Travel Act, which broadly prohibits commercial travel or use of the mail to engage in “unlawful activity,” including violations of the FCPA.29 In February 2013, however, the U.S. Chamber of Commerce and other business groups identified a number of shortcomings in the guidance and asked the DOJ and SEC to address areas where businesses continue to be “left guessing.”30 Among the points raised were concerns that robust compliance programs would be inadequately considered in charging decisions and that the key terms “foreign official” and “instrumentality” remain inadequately defined.31
Oil and Gas Firms Face Increasing Anti-Corruption Risk Under Evolving Foreign Law
Foreign corruption is a matter of remarkable international cooperation. Forty nations, including every member of the G-7, are signatories to the Organisation for Economic Co-operation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the “Convention).32 The Convention requires each state to criminalize the bribery of foreign officials for business advantage, and to establish related accounting laws and regulations.33 It further instructs each nation to establish jurisdiction over offenses in its territory and, if consistent with internal law, offenses committed abroad by its nationals.34 The OECD Working Group on Bribery serves in a watchdog role by monitoring and critiquing anti-bribery legislation and prosecution efforts in member states.35
Recent developments demonstrate that oil and gas businesses must also look to international law to effectively assess and mitigate anti-corruption risk. The United Kingdom’s Bribery Act of 2010, and formal guidance issued thereto in 2011, demonstrates that the U.K. intends to “play a leading role in stamping out corruption and supporting trade-led international development.”36 Although there have been few prosecutions under the relatively new regime, Ernst & Young determined that the oil and gas sector was the most at risk from investigation under the U.K. Bribery Act.37 Described by one commentator as “the toughest anti-corruption legislation in the world,” the U.K. Bribery Act is similar to the FCPA in many respects.38 It criminalizes the promising or giving of a “financial or other advantage to a public official” to influence that official to achieve a business advantage.39 Also like the FCPA, the Bribery Act provides jurisdiction over acts of bribery committed anywhere by U.K. individuals and businesses. But the U.K. law further establishes jurisdiction over any “commercial organization” that fails to prevent bribery anywhere by any associated person, regardless of nationality, so long as the organization conducts business “in any part of the United Kingdom.”40
Unlike the FCPA, the U.K. Bribery Act does not contain a books and records provision and it provides a complete defense for a commercial organization that fails to prevent an act of bribery but proves that it had adequate preventative procedures in place.41 However, the U.K. Bribery Act reaches beyond bribery of foreign public officials to also criminalize general commercial bribery.42 In March 2012, the OECD Working Group on Bribery recommended that the U.K.’s Serious Fraud Office (SFO) reconsider its 2011 guidance indicating that it would generally seek civil sanctions in lieu of criminal prosecution of companies that self-report violations.43 In response, the SFO revised its policies to “make it clear that there will be no presumption in favour of civil settlements in any circumstances.”44
Recent OECD attention may also have spurred Canada to expand enforcement of its existing anti-bribery legislation, with a direct impact on the oil and gas industry. In 1999, Canada implemented the OECD Convention through the Corruption of Foreign Public Officials Act (CFPOA).45 The CFPOA criminalizes bribes to foreign officials to obtain or retain a business advantage, and includes related money laundering and trafficking provisions. Unlike the United States and the United Kingdom, Canada does not generally recognize criminal jurisdiction based solely on nationality, so liability under the CFPOA would likely require a “real and substantial link” to the territory of Canada.46
In March 2011, the OECD Working Group on Bribery issued a report evaluating Canada’s implementation and enforcement of the OECD Convention.47 The report recognized Canada’s progress in enacting legislation and creating enforcement structures but was sharply critical of Canada’s failure to dedicate sufficient resources to prosecution.48 Canada’s sole conviction under the CFPOA up until that point resulted in a fine of only $24,000 against Hydro-Kleen Group, Inc., an oil pipeline maintainer, which admitted to paying a $28,000 bribe to a U.S. immigration official.49 Since the OECD report, however, Canada announced two new guilty pleas under the CFPOA with substantially larger fines—both by Canadian oil and gas businesses.
In June 2011, Niko Resources Ltd. agreed to a $9.5 million Canadian fine after admitting to bribes paid to an official in Bangladesh for assistance in securing a favorable gas purchase and sales agreement and favorable treatment after an accident at a gas well in that country.50 In January 2013, Griffiths Energy International Inc. agreed to a $10.35 million Canadian penalty after self-reporting a $2 million U.S. bribe (couched as consulting fees) to the wife of Chad’s ambassador to Canada in order to gain an advantage in negotiations over access to certain oil fields in Chad.51 Furthermore, in February 2013 Canada’s Foreign Affairs Minister announced that legislation had been introduced to eliminate an exception in the CFPOA for “facilitation payments,” to expand jurisdiction over Canadian nationals and to increase the maximum jail term for convictions from five years to 14.52 Oil and gas businesses with any connection to Canada are accordingly on notice to ensure compliance with the CFPOA and to pay careful attention to legal developments in that country.
Oil and Gas Firms Operating Within the United States Should Consider Potential Risks Under State Law
While recent developments in foreign bribery laws demand careful attention, game-changing shifts in oil and gas production may also present new anti-corruption risks under domestic state law. Hydraulic fracturing and horizontal drilling operations in the United States are expected to fundamentally alter global patterns of trade in the industry. But the new techniques are also controversial, having been linked to groundwater contamination and increases in seismic activity.53 In New York, natural gas interests have reportedly spent more than $4.5 million lobbying in recent years to have a hydraulic fracturing moratorium lifted in that state, while other interest groups are pushing for a permanent ban.54 Similarly, a recent draft of regulations intended to govern hydraulic fracturing in California—a state estimated to have two-thirds of the shale oil reserves in the country—has drawn vocal opposition and litigation from environmental groups.55
In this divisive environment, oil and gas firms operating and engaging political processes in the United States do so under intense scrutiny. Those businesses accordingly face potential anti-corruption prosecution risk under the diverse laws of the states where they operate. California, for instance, has an expansive criminal bribery law under which prosecutors do not need to prove that a particular official act was pending, or an intention on the part of the bribing party to influence any particular act.56 New York has an array of bribery provisions that criminalize a host of interactions with public servants.57 Businesses must also consider local law before any interactions with politicians. Pennsylvania, for instance, forbids corporations from making political donations.58 As oil and gas production in the United States continues to expand, participating firms are advised to consider any new anti-corruption risks that may come with the territory.
Oil and gas companies operate in a dynamic anti-corruption risk landscape. Recent FCPA prosecutions and developments in related U.S. law have added to the burdens and potential traps facing the industry. Developments in foreign law signal additional evolutions in prosecution risk. Moreover, major changes in the oil and gas industry itself could expose businesses to local prosecution under anti-corruption laws in the states where they operate. Oil and gas firms are accordingly advised to develop comprehensive compliance programs specifically tailored to their unique business activities. History is a useful guide, but evolutions in law and the industry itself require careful assessment and regular updates.
1 Transparency International, Bribe Payers Index 15 (2011); See Transparency International, Promoting Revenue Transparency: 2011 Report on Oil and Gas Companies 5 (2011).
2 15 U.S.C. § 78dd-1, et seq.
3 A “foreign official” is “any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity” with regard to any such government entities or organizations. 15 U.S.C. § 78dd-1(f)(1)(A).
4 Id. §§ 78dd-1(a); 78dd-2(a); 78dd-3(a). Note that a thorough discussion of the contours, traps and exceptions of the FCPA is beyond the scope of this article.
6 Id. §§ 78dd-1(a); 78dd-2(a); 78dd-3(a).
7 15 U.S.C. § 78m
8 Id. § 78m(b)(2).
9 See 15 U.S.C. §§ 7241, 7262; 18 U.S.C. § 1350.
10 Ernst & Young, Oil and gas sector most at risk from investigation under the UK Bribery Act, warns Ernst & Young, May 9, 2011, http://www.ey.com/UK/en/Newsroom/News-releases/Assur---11-5-9---Oil-and-gas-sector-most-at-risk-from-investigation-under-the-UK-Bribery-Act.
11 Press Release, U.S. Department of Justice, U.S. Resolves Probe Against Oil Company that Bribed Iranian Official, http://www.justice.gov/opa/pr/2006/October/06_crm_700.html (Oct. 13, 2006).
12 United States v. Statoil, 06 Cr., Deferred Prosecution Agreement at 4 (Oct. 11, 2006), http://www.justice.gov/criminal/fraud/fcpa/cases/statoil-asa-inc/10-09-06statoil-agree.pdf.
13 Id. at 4-5.
14 United States v. Panalpina World Trans. (Holding) Ltd., Deferred Prosecution Agreement at B-2 (Nov. 4, 2010), http://www.justice.gov/opa/documents/panalpina-world-transport-dpa.pdf.
15 Id. at B-3.
17 Id. at 5-7, 11.
18 United States v. Shell Nigeria Exploration and Prod. Co. Ltd., Deferred Prosecution Agreement (Nov. 4, 2010), http://www.justice.gov/opa/documents/shell-dpa.pdf; United States v. Transocean Inc., Deferred Prosecution Agreement (Oct. 21, 2010), http://www.justice.gov/opa/documents/transocean-dpa.pdf; United States v. Tidewater Marine Int’l, Inc., Deferred Prosecution Agreement (Nov. 1, 2010), http://www.justice.gov/opa/documents/tidewater-dpa.pdf; see Press Release, Securities and Exchange Commission, SEC Charges Seven Oil Services and Freight Forwarding Companies for Widespread Bribery of Customs Officials, http://www.sec.gov/news/press/2010/2010-214.htm (Nov. 4, 2010).
21 Letter from Denis J. McInerney to Mary C. Spearing (Nov. 4, 2010), http://www.justice.gov/opa/documents/noble-npa.pdf.
22 United States v. Pride Int’l, Inc., Deferred Prosecution Agreement (Nov. 4, 2010), http://www.justice.gov/opa/documents/pride-intl-dpa.pdf.
24 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1504, 124 Stat. 1376, 2220 (2010) (codified at 15 U.S.C. § 78m(q)); 17 C.F.R. 240.13q-1. Industry representatives have sued to preclude enforcement of the provision but it remains effective at the time of this writing. Am. Petroleum Inst. v. SEC, No. 12-1668, (D.D.C. Oct. 10, 2012) (complaint). The SEC denied a motion to stay enforcement of the rule on November 8, 2012. In re Am. Petroleum Inst., Release No. 68197 (Nov. 8, 2012) (order denying stay), http://www.sec.gov/rules/other/2012/34-68197.pdf.
25 17 C.F.R. 240.13q-1. In addition to the Section 1504 rule, the SEC also issued a new rule implementing Section 1502 of the Dodd-Frank Act on the same day. This “conflict minerals” provision requires reporting companies that utilize certain minerals determined to be financing conflicts in and around the Democratic Republic of Congo to undertake a country of origin inquiry and make certain disclosures to the SEC. 17 C.F.R. 240.13p-1.
26 U.S. Securities and Exchange Commission, Annual Report on the Dodd-Frank Whistleblower Program Fiscal Year 2012 (Nov. 2012) Appendix A, http://www.sec.gov/about/offices/owb/annual-report-2012.pdf.
27 U.S. Department of Justice and U.S. Securities and Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act (Nov. 14, 2012), http://www.sec.gov/spotlight/fcpa/fcpa-resource-guide.pdf.
28 Id. at 52-60.
29 Id. at 48; See 18 U.S.C. § 1952. Another broad provision of federal criminal law that can extend to FCPA fact patterns exists in 18 U.S.C. § 1346, which brings the deprivation of “honest services” under the ambit of mail and wire fraud. A recent decision of the U.S. Court of Appeals for the D.C. Circuit confirmed the breadth of this statute by upholding a conviction in the campaign contribution context. United States v. Ring, No. 11-3100, 2013 U.S. App. LEXIS 1655 at *8-*19 (D.C. Cir. Jan. 25, 2013).
30 Letter from U.S. Chamber of Commerce, et al. to Lanny A. Breuer and George S. Canellos (Feb. 19, 2013).
32 Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions, Nov. 21, 1997, http://www.oecd.org/daf/briberyininternationalbusiness/anti-briberyconvention/38028044.pdf.
33 Id. Art. 1 §§ 1, 2.
34 Id. Article 4 §§ 1, 2.
35 See, e.g., OECD Working Group on Bribery, Phase 3 Report on Implementing the OECD Anti-Bribery Convention in the United Kingdom (Mar. 2012).
36 Bribery Act of 2010 (c. 23) (U.K.), http://www.legislation.gov.uk/ukpga/2010/23/pdfs/ukpga_20100023_en.pdf; U.K. Ministry of Justice, The Bribery Act 2010: Guidance 3 (Mar. 2011) (hereinafter “Guidance”).
37 Ernst & Young, supra, Note 10.
38 Jonathan Russell, Fears Bribery Act will harm UK plc, The Telegraph (U.K.), Jan. 21, 2011, http://www.telegraph.co.uk/finance/yourbusiness/bribery-act/8272140/Fears-Bribery-Act-will-harm-UK-plc.html.
39 Bribery Act of 2010 § 6.
40 Id. § 7. In its 2011 Guidance, the Ministry of Justice stated that a “common sense approach” will apply to assessing the existence of a business presence in the United Kingdom, but acknowledged that the courts will be the final arbiter of such questions. Guidance at 15.
41 Bribery Act of 2010 § 7; Guidance at 33.
42 Bribery Act of 2010 § 1; Guidance at 10.
43 OECD Report, supra, Note 35 at 32-33.
44 Serious Fraud Office (U.K.), Questions and Answers, http://www.sfo.gov.uk/bribery--corruption/the-bribery-act/questions-and-answers.aspx.
45 Corruption of Foreign Public Officials Act, S.C. 1998, c. 34 (Can.), http://laws-lois.justice.gc.ca/PDF/C-45.2.pdf.
46 R. v. Libman, [1985] 2 S.C.R. 178 (Can.); see OECD Working Group on Bribery, Phase 3 Report on Implementing the OECD Anti-Bribery Convention in Canada (March 2011) 40, http://www.oecd.org/canada/Canadaphase3reportEN.pdf.
47 OECD Report, supra, Note 46 at 37-39.
48 Id. at 5, 36.
49 Canada News Center, Strengthening Canada’s Fight Against Foreign Bribery (Feb. 5, 2013), http://news.gc.ca/web/article-eng.do?nid=719079.
52 Susan Mas, Canada to crack down on foreign corruption, bribery, CBCNews (Feb. 5, 2013), http://www.cbc.ca/news/politics/story/2013/02/05/pol-john-baird-combating-corruption-bribery.html.
53 Kevin Bullis, Can Fracking Be Cleaned up?, MIT Technology Review (June 5, 2012), http://www.technologyreview.com/news/428076/can-fracking-be-cleaned-up/; Charles Choi, Fracking-Earthquake Connection Suggested in New Study, Huffington Post (Aug. 7, 2012), http://www.huffingtonpost.com/2012/08/07/fracking-earthquake-conne_n_1752414.html.
54 Danny Hakim, Cuomo Proposal Would Restrict Gas Drilling to a Struggling Area, New York Times (June 13, 2012), http://www.nytimes.com/2012/06/14/nyregion/hydrofracking-under-cuomo-plan-would-be-restricted-to-a-few-counties.html.
55 Norimitsu Onish, Vast Oil Reserve May Now Be Within Reach, and Battle Heats Up, New York Times (Feb 3, 2013), http://www.nytimes.com/2013/02/04/us/vast-oil-reserve-may-now-be-within-reach-and-battle-heats-up.html.
56 See People v. Diedrich, 643 P.2d 971 (Cal. 1982).
57 N.Y. Penal Law Article 200.
58 25 P.S. § 3543 (2012).
Omar Y. McNeill, Gregory A. Paw and William A. Liess