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While encouraged to develop alternate sources of petroleum outside of the Middle East, US companies and even individuals are judged by the first-world standards of the US Foreign Corrupt Practices Act of 1977 and may become subject to its civil and criminal penalties.
|The scopes, schedules, and costs of contracts should be finalized after the US company has performed its careful due diligence on proposed providers. Finalizing the contracts before project kickoff minimizes the possibility of the US company having its leverage eroded after a contractor has begun construction.|
The Department of Justice is targeting the petroleum industry in geographic areas it perceives to be susceptible to corruption, and that exposes oil companies to increased risk.
Companies are often dependent on foreign governmental concessions, and there may be little to no choice regarding which local partner or local contractors a company will work with if it wants to do business in that country. Some developing countries are governed by nascent democracies recently ravaged by war where a deep understanding of the politics and culture are critical to negotiating business in the country.
With the enactment of similar regulations in other countries to address bribery and corruption, compliance has become more complicated and more crucial. The myriad legislation, including the US Foreign Corrupt Practices Act of 1977 (FCPA), OECD Anti-Bribery Convention, the UN Convention against Corruption, Inter-American Convention Against Corruption, conventions by the Council of Europe and the European Union, and the African Union Convention on Preventing and Combating Corruption, are neither readily transparent nor easily predictable. Public sector structures that include various quasi-governmental entities blur roles and contribute to uncertainty.
Expert advice from a qualified lawyer on navigating the regulatory nuances is a prerequisite for international operations. Beyond this, there are practical strategies that can be implemented before a project begins to achieve success and avoid allegations of FCPA violations.
Start early, show commitment
Creating an environment in-country in which the US company is a welcomed and desired participant assures that the company receives an informal favored status and corresponding protection by the government and the populous. To do this, the US company should clearly communicate its commitment to contributing to the country’s economic development and social welfare in its initial discussions with the government.
A strong message can be sent by pledging a defined monetary amount
to social programs. The US company should gain an understanding from the sovereign regional governmental bodies about what social programs would be most beneficial. In developing countries, infrastructure projects help build a foundation for the society that is a prerequisite for progress. Some, such as road repair and expansion, electricity generation, and water sanitation can be performed using local laborers, yielding the additional benefit of job creation.
As on-time, on-schedule project difficulties will be most pronounced during the construction phase, social program funding should be established in tranches, with the bulk to be spent during the term of the construction and a small fraction to be allocated annually to social programs after startup, so long as the US company maintains a certain ownership percentage in the project.
Another area to demonstrate commitment is the upgrading of human capital. Beyond providing local technical training and professional development, companies should consider short-term international vocational training and long-term career development through rotation opportunities within the US company.
Hiring local labor in all project phases (procurement, fabrication, construction, commissioning, start-up, and operation) is key to aligning the local community with the best interests of the project. In developing countries, projects quickly draw attention from workers in nearby regions looking for employment. Only workers that are citizens of that country with legitimate documentation evidencing citizenship should be hired. In most cases, workers should come from the region directly surrounding the project, with later expansion into the remainder of the country. Regional focus helps to foster relations with the local community, which may then be more tolerant of incremental noise, effluents, and traffic generated by project construction, viewing these as a tradeoff for the positive impact on the community.
To ally workers with the goals of the project, labor agreements should include eligibility by all local workers for semi-annual bonuses when the project meets cost and schedule objectives.
When practical, the US company should contract locally for goods and services to the extent they are of sufficient quality and workmanship and are competitively priced.
Likewise, if services of suitable performance, timeliness, and pricing are available from local service providers, these should be preferred in any bidding process. Local companies providing goods and services should be at least 50% owned by documented citizens, and incentives should be considered for timely performance delivered within scope.
Together, the social programs, training, job creation, and local business support set a comprehensive foundation for pervasive national support for the economic interests of the project because of the benefits that directly accrue to the population and government.
Finalize providers, labor before project begins US companies may face strong pressure from the foreign government, sometimes through a quasi-governmental entity, to use certain providers of goods and services (or even to take a local partner) before the US company is permitted to work in that country.
Contrary to normal assumptions, yielding to such pressure does not equate to violating the FCPA. Reduced to its essence, the FCPA is essentially two-pronged. First, it prohibits inducements to people in certain categories: those in the foreign country’s political party, foreign officials, candidates for foreign office, or those that can influence those people. Second, it stipulates no inducements or bribes can be given directly or indirectly to any of these people in exchange for a business benefit.
Many individuals fall into none of these categories. Hiring them would result in no business benefit to the US company other than simply being permitted to conduct business in that country.
Careful due diligence must be performed regardless of whether a potential contractor is one that was selected or imposed. This exercise quickly becomes a challenging task in certain countries, like some in West Africa, where there are few records from which to perform diligence. And unfortunately, all-inclusive inquiries signal a cultural message of distrust. An objective manager outside the project team must balance the need for detailed diligence while being mindful of potential relationship harm as he or she gathers a comprehensive file to be used in decision-making. This file should be stored so it is available should it become necessary to demonstrate the reasonableness of the US company’s diligence efforts in an inquiry, contract dispute, or to the US government as “Exhibit #1.”
Preliminary information may be available from the US Department of Commerce and the local embassy. Often, a questionnaire given to the potential contractor is the primary source of information. The questionnaire should request:
• Names of the owners or stakeholders;
• Names of managers;
• Number of employees;
• Exhaustive background checks on owners, managers, and employees;
• Names of the entity’s bankers and lawyers;
• Reputation for ethical behavior and expertise;
• Length of time the company has been in existence;
• Approximate date of commencement of business;
• Number of and information on other similar projects it has completed;
• Information about the contractor’s customers;
• Information regarding direct and indirect relationships with government officials;
• Credit check to reveal if the company is a mere shell; and
• If a prospective partner, the books and records.
Once the questionnaire is returned, the manager should verify the information with a reasonable degree of certainty. This process should reveal companies that lack a solid reputation and raise “red flags” for FCPA compliance. The US company should perform diligence independently if it is using a US-based general contractor, but it could coordinate information sharing with the general contractor given that both are subject to the same federal restrictions.
A US company should be extremely concerned, for example, if it discovers that the helicopter company suggested by the foreign government is owned by the wife of an official, was recently formed, or has no helicopters. If there are obvious red flags, inconsistencies, or little verifiable documented information, the next step should be to consult reputable FCPA counsel for a formal written opinion. If counsel issues an adverse or qualified opinion, the US company should open a dialogue with the entity and foreign government to explain the US legal constraints and that it will accordingly begin diligence on an alternate entity.
The scopes, schedules, and costs of contracts should be finalized after the US company has performed its careful due diligence on proposed providers. Finalizing the contracts before project kickoff minimizes the possibility of the US company having its leverage eroded after a contractor has begun construction. The US company should attempt to include provisions with its local partner and local contractors that prohibit acts that would violate the FCPA or other applicable anti-corruption and anti-bribery laws, with automatic termination of the contract should these clauses be breached.
It may be unrealistic to convince the counterparty to accept such provisions because non-US companies have little incentive to comply with US law. This is especially challenging if the counterparty knows it is the favored bidder with the backing of the foreign government.
Even if the counterparty accepts such a provision, and in spite of a choice of law clauses indicating English law and arbitration provisions that designate a neutral and highly regarded authority such as the London Court of International Arbitration, the ability to monitor and enforce may be limited.
Still, in the event of an FCPA inquiry, it is helpful for the US company to be able to demonstrate it has made all reasonable efforts to comply.
The contract also should delineate escalation limits on time and cost that are tied to internationally discernable benchmarks and indices to safeguard price renegotiations. Liability, damage, and indemnity provisions should also be carefully drafted to include the value of certain risk assumptions in the contract price. Permit and authorization procurement should be clearly allocated to the contractor, and termination options should be defined.
Governmental legislation that grants concessions and is tailored to the specificities of the project should be drafted and published to form the regulatory framework for the project. It should memorialize the US company’s social programs, training, job creation, and local business commitments. And it should specify how labor costs that accrue to the committed local labor amount are measured, including whether associated costs such as training are included in the calculation. Legislation also should grant the rights and privileges necessary to support the project’s economic viability (including tax, customs, and foreign exchange incentives) so the US company can earn a competitive return on its direct investment.
To protect the US company against a subsequent adverse change in law, the regulatory framework should also contain a “stability clause” that obligates the sovereign to restore the US company’s rights to keep it in the same economic position as it would have been if the change had not occurred.
The US company and any partners should also finalize their own contract. This contract would be an appropriate document in which to clearly define the aggregate monetary amount, on a dollar basis, for the US company’s social policies, including specific names of the local providers of goods and services to be used throughout the project. This is especially important if the US company has partnered with a local company due to pressure from the government. The contract should also include a methodology for choosing alternates if the initial prospective contractors fail legal scrutiny.
Plan for success
Negotiating the amount and allocation of the US company’s local commitment before project commencement demonstrates the positive and meaningful pecuniary impact that the US company’s presence will have on the government and people of the country. Quantifying the significant source of employment and income for local individuals and businesses can create the necessary momentum for governmental support to achieve project goals on time and on schedule. Finalizing the requisite diligence and all contracts before the US company begins to incur engineering, procurement, and construction costs minimizes surprises and maximizes leverage to avoid FCPA pitfalls.
About the Author
Natalie Regoli is an energy attorney in Houston and can be reached at firstname.lastname@example.org.