Reducing the risk of exposure

Toby Duthie, Forensic Risk Alliance, explains how production sharing agreements and joint ventures can expose companies to bribery and corruption charges unless the proper measures are taken.

With the increasing zeal of post-recession regulatory enforcement, compliance breaches have be-come one of the key risks facing businesses and individual executives. This risk exposure very much includes the area of bribery and corruption - both deal-specific (such as during capital-raising or a M&A transaction) and at an operational level (including logistics, procurement and distribution channels). Increasingly, it is not just the USA that prosecutes these matters, but Germany, the UK and Switzerland as well as many other non-Western regulators. Brazil and China are also becoming especially active, while in Africa, regulatory scrutiny is increasing quickly - for example, in Nigeria, Guinea and Gabon.

Also a dramatic increase in scrutiny has been seen from in multi-lateral or international financial instructions (such as the World Bank, The African Development Bank, European Investment Bank etc.) – most significantly if one such organisation determines that a breach has occurred, it may debar the company from participating in projects that they fund or guarantee – often if one such institution debars a company then the others follow suit automatically.

Oil and gas companies, especially some would argue non US-ones, operating in Africa have been the main focus of US prosecutors, and examples of prosecutions both corporate and individual abound. Indeed, six of the top 10 Department of Justice settlements relate to the oil and gas sector.

Both production sharing agreements (PSAs) and joint ventures (JVs) expose oil and gas companies to risk: these exposures manifest both at the outset as bids are finalised and terms negotiated, as well as during the life of the agreement itself.

Before starting, it is worth mapping out the key risk areas:

JV liability

PSAs and JVs can take various forms and the purpose of this article is not to look at the legal structure per se. In essence both are business structures intended to manage and apportion risk and raise funding. Typically there is a lead operating partner responsible for the day-to-day management of the asset development and exploitation. The other JV partners are then invoiced periodically in respect of their cost share and, as and when profits arise, these are similarly distributed.

The problem arises for a non-operator, who might have both financial and compliance exposure, but does not adequately see what is going on, and finds it hard to monitor. The level of accounting detail provided to PSA and JV partners varies case by case, but is rarely down to an individual transaction level for practical accounting and operational reasons. To date the prosecutors have only looked at the main operator and have left the junior partners untouched. But will this change? This raises the question, “What should non-operating partners do?”

There is likely to be increased scrutiny of PSA and JV groups in the event of bribery investigations. It is worth noting that the largest single US prosecution was of a JV formed by a number of leading oil services companies to construct the Bonny Island LNG facility in Nigeria. Indeed 4 of the top 10 FCPA settlements related to this project – yielding around US$ 1.5 billion in fines. It is also resulted in the CEO of the lead contractor, KBR, going to prison. Prosecutors alleged that the illicit payments made were known by consortium members and funded pro rata. It is not difficult to see how prosecutors may seek to make similar arguments with other PSA members.

What is prevalent in the field is a reliance by PSA/JV members on the lead operator, who is charged with implementing robust controls at each stage - both pre- and post-award. This situation is slowly changing as PSA partners become concerned by what is legally known as ‘vicarious liability’ – that is being exposed by a JV partner member or vendor or agent to the JV. This is leading to increased scrutiny both of partners and vendors.

Investor liability

“We thought he [Bourke] knew and definitely could have known. He’s an investor. It’s his job to know.” - Jury member interviewed after the verdict was handed down.

Companies and individuals can be held accountable to FCPA and similar statutes if they demonstrate ‘conscious avoidance’ or ‘wilful blindness’ in a bribery scheme, even if they may not have actual knowledge of the violation. This applies to both investors, and non-operating PSA and JV partners.

In the case of United States v. Kozeny, the US Court of Appeals reaffirmed Frederic Bourke’s conviction of violating the FCPA in connection with a failed investment scheme in Azerbaijan, where it involved bribing Azeri government officials to privatize SOCAR the National Oil Company. The conviction was based on Bourke’s “wilful blindness” as to the probability that bribes were made to foreign officials, as opposed to having actual knowledge of the bribe. Note that Bourke only held around 3.5% of the full investment amount, and he actually lost his entire US$ 7 million investment as SOCAR was eventually not privatised. Nonetheless, based on circumstantial evidence such as the reputation for corruption by the deal’s sponsor, Viktor Kozeny (the alleged bribe payee), the level of perceived corruption in Azerbaijan, and the bribery-risk of the investment in question, they were sufficient for the conviction.

The main issue for Bourke and companies facing prosecution is that there is typically a reversal as to the burden of proof combined with the need to prove a negative – that a bribe was not paid. This is clearly problematic and unless contemporaneous records evidence robust due diligence and compliance, the risk of an absence of information or actions carrying negative inference is significant.

So what to do?

• Ensure the tone from the top and across the PSA group — appoint a ‘Bribery Czar’ - agree a plan to educate management and employees at the asset level as well as their agents and suppliers on the likely impacts of the bribery and corruption risks, and show people how to avoid falling foul of the law. Implement rigorous controls regarding payments and expenses.
• Check high risk areas: set out a programme to review past practice to identify areas or transactions at risk, and seek independent advice and help to deal with problems and to improve processes. Allow PSA members to review, comment and enhance as appropriate.
• Business partners: the operating partner must structure their business to ensure there are contracts with all agents and suppliers that require clear, honest practice. They must put contingency arrangements in place wherever risks lie and retain the right to audit a business partner’s practices – and actually be prepared to audit in the event of a red flag or whistleblower allegations. Increasingly, many companies are rolling out specific programmes to do just this taking into account the risk-based approach referenced above.
• Invoicing structure and detail: agree a credible and robust invoicing structure along with accessibility to underlying transactional detail as and when needed.

Adapted by David Bizley

Read the article online at: https://www.oilfieldtechnology.com/exploration/31122013/reducing_the_risk_of_exposure/