07/08/2015

By Toby Duthie, Partner, Forensic Risk Alliance


With the increasing zeal of post-recession regulatory enforcement, compliance breaches have become 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 cap-ital-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 we have seen a dramatic increase in scrutiny 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 organization determines that a breach has occurred, it may debar the company from partic-ipating in projects which they fund or guarantee – often if one such institution debars a compa-ny 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 indi-vidual 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.

PSAs Explained

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 dis-tributed.

The problem arises for a non-operator, who might have both financial and compliance expo-sure, 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 prose-cutors have only looked at the main operator and have left the junior partners untouched. But will this change, raising the question, “What should non-operating partners do?”

Four “Top Tips”

• 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 related en, 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 program 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 a specific programs 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.

Conclusion:

We think there is going 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 settlements set out in Table 1 related to this project – yielding around $1.5billion 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 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 situa-tion is slowly changing as PSA partners become concerned by what is legally known as ‘vicari-ous liability’ – that is being exposed by one of your JV partner members or vendors or agents to the JV . This is leading to increased scrutiny both of partners and vendors.