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Energy Sector Companies Face Increased Penalties for FCPA Violations


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									DLA Piper | Publications | Energy Sector Companies Face Increased Penalties for FCPA ...

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17 FEB 2009

Energy Sector Companies Face Increased Penalties for FCPA Violations

Sharie A. Brown Robert J. Gruendel Palmina M. Fava

Enforcement under the US Foreign Corrupt Practices Act (FCPA) continues in oil and gas-rich countries where corruption is perceived to be a high risk, resulting in huge fines and penalties. This scrutiny, marked by unprecedented international law enforcement collaboration, has led to increased prosecution of energy sector companies and their executives. Indeed, last week, the Houston-based former subsidiary of a US-based oilfield services corporation pleaded guilty to a five-count criminal information charging conspiracy to violate, and violating, the FCPA. This plea comes on the heels of plea agreements by two former executives of a valve supplier to the oil and gas industries for conspiracy to make corrupt payments to foreign government officials. According to the plea agreement with the Houston-based company, over the course of 10 years, the subsidiary or its associates paid $182 million to Nigerian government officials to obtain contracts worth $6 billion to build liquefied natural gas facilities. The subsidiary agreed to pay a $402 million fine and retain an independent compliance monitor for three years. The former parent, charged with inadequate internal controls based on its failure to conduct appropriate due diligence over its agents and falsification of records, settled civil FCPA charges with the SEC, and agreed to pay $177 million in disgorgement. The former parent was obligated under indemnity agreements with the subsidiary’s purchaser to pay fines and penalties incurred due to violations of the FCPA by the subsidiary. Confirming the trend of international cooperation among law enforcement officials, the DOJ noted that it received significant assistance from authorities in France, Italy, Switzerland and the United Kingdom. The SEC, in turn, acknowledged cooperation from authorities in Europe, Asia, Africa and the Americas. Notably, the subsidiary was required to plead to formal criminal charges in court, rather than proceeding

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informally by a non-prosecution or deferred prosecution agreement. This approach confirms that the DOJ is returning to a practice of resolving FCPA violations by formal charges. With the use of formal charges, several advantages previously realized by companies in settling FCPA violations, such as no automatic debarment from federal contracting, may not be as readily available. Also of note to the energy industry is the DOJ’s finding of “corrupt” intent, a required element under the FCPA’s anti-bribery provisions. The government charged that the creation of the joint venture, operating through three Portuguese special purpose corporations and owned by the subsidiary only indirectly through one of the special purpose corporations was “an intentional effort to insulate itself from FCPA liability for bribery of Nigerian government officials through the Joint Venture’s agents.” US enforcers are adept at analyzing complex business structures and related transactions; thus, convoluted, less economically justified structures may be viewed by the DOJ as presenting chargeable evidence of corrupt intent to violate the FCPA. Equally important is the fact that the charges against the subsidiary included charges not only for violating the FCPA, but also for conspiring with others to violate the FCPA. The subsidiary’s coconspirator was the former director, president, CEO and chairman of the subsidiary at various points of the charged conspiracy; in September 2008, he pleaded guilty to two counts of conspiracy to violate the FCPA and mail/wire fraud, resulting in a sentence of seven years in prison and $10.8 million in restitution. His sentence remains subject to a motion for reduction based on the DOJ’s evaluation of his degree of cooperation against his former employer. This settlement demonstrates that DOJ is using all available incentives to force officers to cooperate against their former companies. One of the major advantages of charging the subsidiary and its director/officer with conspiracy to violate the FCPA is that the statute of limitations for conspiracy does not run until the final act in furtherance of a conspiracy has occurred, effectively expanding the period under review beyond the five year statute of limitations. Here, acts forming the basis of the criminal charges in the criminal informations against both the subsidiary and the officer/director occurred from approximately August 1994 through June 2004. In another recent FCPA enforcement action, two former executives of a California-based company that produces valves for use in the power generation, oil, gas, nuclear and coal industries each pleaded guilty to conspiracy to make corrupt payments to foreign government officials in violation of the FCPA. Both former executives have entered into plea agreements with the DOJ, and each has agreed to cooperate with the DOJ’s ongoing investigation, which may result in additional charges being brought against their former employers or colleagues. Both face a maximum of five years in prison and are scheduled for sentencing this July. Energy Sector Companies Must Approach Compliance Proactively With FCPA enforcement against the energy sector on the rise, companies must identify new areas of potential risk and take a proactive compliance approach. Mergers and acquisitions present risks because the acquiring companies may assume successor liability for FCPA violations if they fail to conduct appropriate due diligence. Under the “willful blindness” doctrine, a prosecution can be brought against a party that had no “knowledge” of corrupt payments if the company was aware of potential “warning signs” and consciously failed to conduct adequate due diligence. The recent enforcement actions also illustrate another common risk: the activities of third-party agents

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can impose FCPA liability on the companies for whom they act. Accordingly, it is critical for companies to develop strict due diligence procedures for vetting and approving relationships with third parties, including consultants, joint venture and teaming partners, distributors and sub-contractors. Contracts with third parties must set forth the FCPA’s prohibitions and requirements, and the contracts must mandate compliance. Finally, it is imperative to maintain updated corporate policies on the FCPA, implement a strong compliance program, monitor activities of agents and employees involving government officials and conduct intensive training for employees and key third parties. In the event that a company learns of a potential FCPA violation, it must act promptly and efficiently to minimize the impact on its business. This includes investigating any corruption pattern to its inception rather than the five-year FCPA statute of limitations period. Because DOJ is now charging conspiracy to violate the FCPA, it will also be scrutinizing companies to determine if there has been historical misconduct, meaning companies may face an extended period of legal exposure. The company should obtain legal assistance on a range of issues from how to conduct an internal investigation, whether to voluntarily disclose the violations to the authorities, and what remedial actions are required.

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