A common question among those new to corporate ethics and compliance is this: Why do oil and gas companies seem to fall into anti-bribery trouble so often, anyway?
The simple answer is that they fall into anti-bribery trouble for understandable reasons. And exploring those reasons can help compliance officers grasp the nature of corruption risk, and how their own organization might map to those risk factors.
First — how many oil and gas companies are under some sort of corruption-related scrutiny? Several dozen at any moment, if not more.
The FCPA Blog, for example, was tracking 28 Foreign Corrupt Practices Act investigations in that sector as of January. According to financial research firm Calcbench, more than 20 companies in the mining sector (which encompasses oil & gas) cited the FCPA in their 2017 annual reports, although not all that mention the FCPA may be under actual investigation.
Then add FCPA investigations that haven’t been made public, plus investigations that other countries might be conducting under their own anti-bribery statutes. So “dozens” is a fair estimate.
Nature of the Industry
Oil and gas are at such high risk for corruption because of how that sector is structured. Consider these characteristics:
- Oil and gas projects are enormously complex, with many components: exploration, drilling, facilities support, transport, marketing, and more. Each component usually means another business partner, and each partner can pose corruption risk to the whole.
- Especially in emerging markets, oil and gas assets are controlled by state-owned companies. The employees at those state-run companies qualify as foreign government officials under the FCPA and other anti-bribery statutes. So the chance that the oil & gas business will encounter a foreign official is high.
- Meanwhile, local legal and operational requirements in those markets can be exacting. For example, Western energy giants might be required to partner with a local business in the emerging market business to extract oil. Or you may need to source capital equipment locally (rather than transport it there) to keep costs low. Those needs create an opportunity for local officials to extract bribes, rig contracts, or engage in other corruption.
Those three factors — complex projects with many business partners; frequent contact with foreign government officials; daunting local regulatory and operational requirements — are a powerful brew of corruption risk.
No wonder, then, that healthcare, defense contracting, and aviation are other sectors brimming with corruption risk. They have all three factors, too. Any compliance officer who wants a rough sense of his organization’s corruption risk can simply ask: How often does my sector encounter those three forces?
Those are the simple rules of thumb for sizing up your corruption risk. So what simple rules of thumb do they imply for building anti-corruption programs? Focus on three.
Third-Party Due Diligence
If foreign government officials and local requirements drive your company to work with business partners in emerging markets, you must know who those third parties truly are. Any number of bid-rigging or improper payment schemes can filter through those potential partners.
Improper payments can be masked as training visits that bring foreign officials to the West (with a layover in Hawaii, for example), donations to local charities in the emerging market, price rebates, or other sleights of corporate hand. Precise contracts, with a management system that lets compliance officers see those contracts, are crucial to reducing that risk.
Spoiler alert: some employees and third parties will try to make improper payments anyway, and some will be quite good at it. So corporations also need strong accounting controls and payment processes that let you identify suspicious transactions and, ideally, intercept them. (Remember, the Securities and Exchange Commission may enforce books-and-records violations stemming from weak accounting controls, even if the Justice Department doesn’t prosecute any criminal violations from paying a bribe.)
Could we say much more about any of the above issues? Yes, and in due course, we will. Still, we all benefit from an occasional reminder of the basics — and for oil & gas companies, constant vigilance against corruption risk is a basic fact of life.