Bribery in the mining and energy sectors

November 2018 | EXPERT BRIEFING | FRAUD & CORRUPTION

financierworldwide.com

With mining giant Glencore the subject of a US corruption investigation into its business in the Democratic Republic of Congo, Venezuela and Nigeria, the effect on the company has already been notable.

When the Swiss-based company announced this summer that it had received a subpoena from the US Department of Justice (DOJ), requesting documents as part of an inquiry into bribery and money laundering, its share price fell by more than 8 percent. In response to the request for information, Glencore set up a committee made up of board members, including company chairman Tony Hayward, to coordinate its response to the subpoena.

In a statement, Mr Hayward said: “The company will cooperate with the DOJ, while continuing to focus on our business and seeking to maximise the value we create for our diverse stakeholders in a responsible and transparent manner. Glencore takes ethics and compliance seriously throughout the group.”

At the time he made the statement, Glencore had just suffered its largest one-day fall in value, with $4bn wiped off its shares. This prompted Glencore to announce a $1bn buy back of shares to help calm investors’ nerves.

So, as the result of one subpoena, Mr Hayward found himself having to find the time to sit on a committee to respond to the corruption probe while overseeing a huge buy back of shares because his company’s value had plunged dramatically. If that was not enough, Glencore is also facing the prospect of a UK investigation by the Serious Fraud Office (SFO) and a major legal action brought in the US by lawyers acting for investors – who allege that the company made misleading statements and failed to disclose information to the market.

Glencore is a huge company, producing and marketing more than 90 commodities in more than 50 countries. There is little doubt it has the resources to fight these battles. But how did it find itself in them in the first place?

Risk

As a mining company, Glencore frequently does business in countries that are recognised as being high-risk regarding bribery. This is not a situation unique to Glencore: many energy and resources companies seek to do business in countries where bribery is often seen as endemic. It can hardly be a coincidence, therefore, that a number of oil companies and mining groups have been the subject of investigations in the last couple of years. All the allegations centre on countries that do not make it into the top half of any league of the world’s least corrupt nations.

Such a situation could possibly be down to the argument that bribery is a necessity when it comes to getting business done in such countries – that bribery greases the wheels so that everyone gets what they want. But the current plight of Glencore – and the other energy and resources companies that have also come under investigation – shows that such an argument is holding less and less credibility with the authorities in any country.

With many countries now increasingly aware of the need to tackle bribery – and many now cooperating more with other countries to achieve this – it is surprising that such major corporations are taking what appears to be, at best, a lax approach to bribery. When it is considered that, even though it is in its early stages, the bribery investigation has already cost Glencore billions, the belief that bribery can be seen as a worthwhile route to success in business has to be doubted.

Factors

The energy and resources sectors do face the prospect of doing business in countries where bribery is accepted – and maybe even expected. This can be due to various factors. A lot of this work is carried out in remote areas, where cash is often needed to secure goods, services and staff. Any negotiations may include government officials, various third parties and bureaucratic systems that may involve permits and the frequently risky need to make facilitation payments.

It is an area of business where the need to secure lucrative mining or drilling rights can be paramount. This can make bribery a tempting short-cut to success. It may also explain why, when the Organisation for Economic Cooperation and Development (OECD) examined 427 bribery enforcement actions in 2014, one in five related to the extraction industries.

But none of these factors will be a defence to a bribery investigation. A conviction under the UK’s Bribery Act, for bribery anywhere in the world, can lead to unlimited fines, up to 10 years in prison and assets being confiscated. And that is before any financial costs to the company – as Glencore has suffered – reputational damage and future restrictions on doing business are considered. This is why bribery in any line of business must be tackled rather than tolerated.

Compliance

Any company in any industry needs a properly devised and implemented compliance programme to reduce the chances of bribery being committed. This is done by identifying the potential risk of bribery and taking steps to prevent it.

Awareness of the corruption risks where a company trades, checks on those it employs or works with in any capacity and whistleblowing procedures so that suspicions are reported and investigated are essential components of such a programme. Such an approach will massively reduce the chances of bribery. But it may also increase the chances of lenient treatment if bribery is still committed. There is a defence under the UK’s Bribery Act of having adequate procedures in place. Leniency is also a possibility if a company self-reports any wrongdoing it discovers has been committed in its name.

DPAs

The issue of leniency has become increasingly important with the arrival of deferred prosecution agreements (DPAs) into the UK legal system. DPAs give the SFO or Crown Prosecution Service (CPS) the option of imposing conditions on a firm – such as paying fines or compensation, changing working practices or removing certain staff – rather than prosecuting it. But a DPA is unlikely to be offered to a company that has made little attempt to either report the wrongdoing or put it right.

We can say with certainty that companies must utilise the right legal expertise and ensure they are fully informed of their legal options in any such discussions with the SFO. Reporting the wrongs and correcting them will never guarantee that a company gains a DPA and escapes prosecution.

Obtaining a DPA requires genuine cooperation with the SFO or CPS, a tactical approach, being able to demonstrate – and then act upon – a genuine intention to change working practices, emphasising any mitigating factors for the wrongdoing, articulating why a DPA would be in the best interests of justice and being able to show why the market would be better if a criminal prosecution was avoided.

Seeking a DPA – or anything that can be considered the most favourable outcome – when bribery has been identified requires a well thought-out and carefully executed approach. This has to be handled by a defence team that knows how to open a dialogue with the SFO, is aware of how to best meet the above requirements and is experienced and up-to-date when it comes to the latest legal developments.

This is an area of law that is both changing and challenging. Penalties for failing to comply with it can be large. The importance of taking action to prevent bribery ever becoming a problem for companies in the mining and energy sectors, therefore, cannot be overemphasised.

Aziz Rahman is the founder of Rahman Ravelli. He can be contacted on +44 (0)203 947 1539 or by email: aziz.rahman@rahmanravelli.co.uk.

Aziz Rahman

Rahman Ravelli