It’s not unfair to single out oil and gas companies as frequent violators of anti-corruption regulations. At any given time, several dozen such companies are under some kind of corruption-related scrutiny. 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 and gas) cited the FCPA in their 2017 annual reports, although not all that mention the FCPA may be under actual investigation.
In addition, there are investigations that other countries might be conducting under their own anti-bribery statutes, as well as FCPA investigations that haven’t yet been made public. So then, “dozens” is a fair estimate.
The oil and gas sector is set up in such a way that high corruption risk comes with the territory. Consider these factors:
- Oil and gas assets often are controlled by state-owned companies, particularly in emerging markets. 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 and gas business will encounter a foreign official is high.
- Oil and gas projects are composed of many components and are extremely complex. Companies must orchestrate 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.
- In addition, there can be exacting local legal and operational requirements in those markets. For example, large Western companies might be required to partner with a local business in the emerging market 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 forms of corruption.
These three aspects of the industry alone create 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 these three forces?
An Anti-Corruption Action Plan
It is useful to keep those factors top of mind to assess your organization’s corruption risk. So what simple rules of thumb do they imply for building anti-corruption programs? Focus on three.
1. Contract Management
Those intent on bribery or other corrupt practices have devised all sorts of ways to disguise their dealings. 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.
2. Third Party Due Diligence
If your company is required by local regulations or foreign government officials 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.
3. Accounting Controls
Despite all your best efforts, some employees and third parties will disregard the law and 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.)
There’s much more that could be said on this topic, but a reminder of the basics provides an opportunity to make sure that all the needed resources are in place, from people to policies to technology. The oil and gas industry is often the first to come to mind when you think of corruption risk, but it is by no means the only vulnerable sector. Everyone can learn from its risk factors, avoid past mistakes, and remain compliant.
Valerie Charles is chief strategy officer with GAN Integrity.