The energy and natural resources sector: business crime risks and remedies

January 2021  |  SPECIAL REPORT: ENERGY & UTILITIES

Financier Worldwide Magazine

January 2021 Issue

The energy and natural resources sector is made up of several industries that face differing levels of risk and regulation, from oil & gas to water and waste. But the oil & gas industries attract more instances of high-profile criminal and regulatory investigations and enforcement action.

This is not because those involved in these industries are fundamentally more corrupt than others. It is due to the nature of these industries, their global reach and them being perceived as lucrative and profitable. There are distinctive challenges and risks facing the energy and natural resources sector.

Sector risks

The energy and natural resources sector has global, fast moving and dynamic markets, involving the producing countries and those nations and companies that deal with the trade and investment side. As a result, allegations of wrongdoing can prompt multiagency and multijurisdictional investigations. Prosecutions can be brought in the country where the offence has been committed, but also in other countries if there is a breach of, for example, UK, US or EU law.

Another unique aspect of this sector is that political and financial factors can make the production and trading of resources very challenging. The nature of the extractive process for finite natural resources means that private companies have significant contact with foreign officials, which heightens the risk of bribery and corruption. The importance of the revenues from the production and extraction of energy and natural resources to countries cannot be overstated. This sector can make up a large proportion of a country’s gross domestic product (GDP), which can enhance the risk of corruption in countries which may already have been identified as high risk.

Business crime developments in the sector

Increased scrutiny. It is clear there has been growing legal scrutiny placed upon the sector, as shown through the number of cases and the specific guidance published in the UK and US. One high-profile example is the ongoing Petrobras case. It began in March 2014 as an investigation into allegations that executives at Brazil’s state oil company Petrobras had accepted bribes from construction firms, in return for awarding them contracts at inflated prices. Dozens of foreign corporate suppliers (of engineering equipment, power lines, drilling rigs and so forth) also face regulatory and shareholder inquiries about the bribes they paid to secure contracts with Petrobras. Among them was Rolls-Royce, which posted losses as a result of penalties imposed in January 2020 by Brazilian, UK and US authorities.

The UK Serious Fraud Office (SFO) also has several live investigations into allegations of bribery and corruption in the sector, including ENRC Ltd, Glencore group of companies, Unaoil, Petrofac PLC, Rio Tinto group, Amec Foster Wheeler and KBR Inc (although part of this investigation has been closed).

In May 2020, the SFO announced the end of its investigation into UK-based subsidiaries of the Swiss-incorporated engineering company ABB, which was related to the Unaoil investigation.

Financial pressures. As the world moves toward more clean energy options, some industries within the sector (notably, oil & gas) are suffering. Research shows that companies under financial strain face a heightened risk of fraud and other illicit activity. Added to this, a recent report by EY found that 90 percent of businesses surveyed at the height of the pandemic believed COVID-19 poses a risk to ethical conduct. The current financial health of the sector generally and the pressures faced from that are, therefore, bound to affect the ways in which individuals and businesses act when faced with ethical quandaries.

The UK’s Bribery Act 2010. The Bribery Act 2010 was a major development in anti-corruption legislation. The Act is capable of affecting businesses and individuals in many situations, both at home and abroad. The act created four separate offences: (i) Section 1 – a general offence of offering, promising or giving a bribe; (ii) Section 2 – a general offence of requesting, agreeing to receive or accepting a bribe; (iii) Section 6 – a distinct offence of bribing a foreign public official to obtain or retain business; and (iv) Section 7 – a strict liability corporate offence of failing to prevent bribery.

The consequences of failing to comply with the Act can be severe. A company convicted of an offence under the Bribery Act can receive an unlimited fine, which is likely to be substantial. Individuals face up to 10 years imprisonment and/or an unlimited fine on conviction. A director convicted of an offence under the Bribery Act is also likely to be disqualified from holding a position as a director for up to 15 years.

If SFO enforcement trends are anything to go by, the sector offers ample opportunities for bribery and corruption. This presents a significant risk for those doing business in the sector, who cannot afford to be blind to the consequences, both financially and reputationally, associated with an investigation into such allegations. The Bribery Act also has considerable extraterritorial effect, applying whether the conduct happens within or outside the UK. This, paired with the extensive and inclusive scope of the Act, is particularly relevant to the energy and natural resources sector, which is global in nature. The SFO’s guidance on the Bribery Act offers direction for companies looking to make risk assessments.

Avoiding possible pitfalls

Effective due diligence and anti-bribery and corruption deterrence systems are vital. A robust and extensive compliance programme – and there is no one-size-fits-all solution – is key to managing risk in the energy and natural resources sector. Companies must consider the countries in which their conduct could be held to account and be familiar with all aspects of the relevant law in those jurisdictions.

Having detailed, thorough procedures in place to prevent and identify bribery and corruption means spending on resources and relevant experts. But far too often, the fallout from not having such procedures in place has been more costly than any initial outlay on proper preventative measures would have been.

It is important, therefore, to do much more than just pay lip service to the idea of compliance. The SFO will expect to see evidence of much more than this if it is to have any intention of treating a company leniently, as will authorities in the US and any other country investigating bribery and corruption. The authorities that investigate bribery (and the legislation they have at their disposal) have a long reach and will work together. A company’s compliance needs to be ‘stress tested’ regularly to ensure it is fit for purpose – regardless of whether or not allegations of wrongdoing have arisen.

If issues arise, an internal investigation can determine the exact nature of the problem, how it has arisen and the best course of action to minimise its potential effect upon the organisation. In recent years, there has been a growing trend toward such corporate investigations. Regulators and law enforcement agencies now often expect organisations to take ownership of the issues and conduct investigations.

A carefully planned and conducted internal investigation is the best way for a company to assess the position it is in and identify the most appropriate way to proceed. This will be the case whether allegations have already been made against it by the SFO, another authority or a third party, or if the company discovers the wrongdoing for itself and wants to self-report the problem.

Self-reporting may lead to more lenient treatment. The SFO, much like the authorities in the US and an increasing number of other countries, can decide whether to offer a deferred prosecution agreement (DPA) instead of prosecuting the company. This involves the company agreeing to meet a set of conditions over a set period of time – and if it does this it will not be prosecuted. But the most favourable outcome can only be achieved if a company knows exactly how to carry out an internal investigation. If it does not, it must seek legal advice from those who are experienced in these matters.

In the short term, the ongoing pandemic and its restrictions will have an impact on the way internal investigations are conducted. But notwithstanding the disruption, the basis of any successful internal investigation is founded on robust legal advice to ensure the corporate is well placed to be able to stand up to any scrutiny by prosecuting authorities, the effective collection and management of documentation and evidence, and gathering witness evidence.

Put simply, if a company knows or suspects internal involvement in bribery or corruption, it cannot wait and sit idly by. Companies must be both pre-emptive and reactive to any such suggestion. Internal investigations can be a substantial expenditure in terms of finances and resources and place a burden on corporates to take on this investigatory role themselves. But the value of this is now clear. Internal investigations enable corporates to manage, mitigate and even take control of the situation, from a public relations, legal and regulatory point of view.

Conclusion

The challenges facing the energy and natural resources sector are unique. Companies in this sector, particularly regarding oil & gas, experience risks of bribery and corruption. Those in the industry must make every effort to manage these risks and seek appropriate assistance and guidance where necessary.

The consequence of failing to effectively handle bribery and corruption is the very real threat of multijurisdictional law enforcement investigations into any alleged wrongdoing. Having a robust compliance programme in place and being willing to internally investigate any allegations of wrongdoing will significantly reduce the risks that are associated with working within the energy and natural resources sector.

 

Syedur Rahman is legal director at Rahman Ravelli. He can be contacted on +44 (0)20 3947 1539 or by email: syedur.rahman@rahmanravelli.co.uk.

© Financier Worldwide

BY

Syedur Rahman

Rahman Ravelli

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