The Trade Compliance Update
By: Jennifer S. Huber and Adam Munitz
October 10, 2016
Welcome to the Trade Compliance Update- a weekly FH+H publication that discusses recent trade compliance matters and the manner in which international businesses can learn from such matters and reduce their risk profiles.
This week, we discuss Key Energy Services, Inc.’s settlement with the Securities and Exchange Commission, and practical strategies international businesses can take to enhance their anti-corruption programs and mitigate violations of the Foreign Corrupt Practices Act.
On August 11, 2016, Key Energy Services, Inc. (“Key Energy”) agreed to disgorge $5,000,000 in order to settle charges brought by the Securities and Exchange Commission (“SEC”) that it violated the Foreign Corrupt Practices Act (“FCPA”). According to the resulting Cease and Desist Order filed by the SEC, Key Energy’s Mexican subsidiary (“Key Energy Mexico”) paid at least $229,000 via a “consulting” company to a contract employee at Petroleos Mexicanos (“PEMEX”), a Mexican state-owned oil company, in exchange for inside information, guidance on PEMEX contracts, and “amplifications or amendments” to existing contracts. Of course, the SEC’s enforcement mandate is not the FCPA’s anti-bribery provisions, but rather its accounting provisions, so its investigation focused on the fact that Key Energy (a) did not maintain books and records that accurately noted the corrupt payments; and (b) did not implement and maintain effective accounting controls to prevent such payments.
1. Effectively implement your compliance programs. Notably, Key Energy had a number of compliance policies in place; however, it failed to effectively implement its policies to such an extent that it could detect and prevent Key Energy Mexico’s corrupt payments. This failure highlights a mistake that international businesses often make, which is to invest a great deal of time (and money!) in a compliance program, only to forego an effective implementation campaign that ensures that each component of the program is active and synced, as appropriate, with other components.
2. Due diligence, due diligence, due diligence! The criticality of sophisticated and comprehensive due diligence on all customers, subcontractors, vendors, local representatives, brokers, consultants, and agents cannot be overstated. In this instance, effective due diligence would have likely mitigated the extent of Key Energy’s FCPA violations, as its legal department knew about Key Energy Mexico’s relationship with its “consultant” but the absence of any due diligence prevented it from detecting that the relationship violated Key Energy’s internal policies. Indeed, a minimum amount of due diligence would have helped Key Energy determine that Key Energy Mexico’s “consultant” was nothing more than a conduit for corrupt payments.
3. Empower your accountants. Accountants are every international business’ first line of defense against corrupt payments, as it is accountants that are best positioned to detect, early on, payments that are not tied to bona fide expenses. Without adequate empowerment and training, however, the role of an accountant is, from a compliance standpoint, significantly reduced. Here, not only did Key Energy’s accountants fail to detect that Key Energy Mexico’s payments to its “consultant” were not legitimate expenses, but they also missed obvious indications that Key Energy Mexico’s Christmas gifts in 2012 were part of a related improper payment strategy.
4. Localize compliance. One of Key Energy Mexico’s obvious vulnerabilities was that it had no compliance staff of its own, which is symptomatic of a compliance program that has not been fully “localized.” For a multinational corporation this is a significant error, as it is insufficient to implement a compliance program solely at the corporate level. Rather, international businesses should ensure that their domestic compliance programs are fully “flowed down” to foreign offices and subsidiaries, and are customized to account for the unique compliance challenges that such offices and subsidiaries face. Furthermore, local compliance programs should be buttressed with regular communication between U.S. and foreign compliance officers and the implementation of practical reporting requirements at the local level.
5. Comprehensively address compliance failures. Although Key Energy did not voluntarily disclose its misconduct to the SEC, it can be credited with conceptualizing and implementing robust remedial measures, including the hiring of a new Chief Compliance Officer; the development of a strengthened compliance program; the prompt suspension of “payments to all vendors and third parties in Mexico[;]” and the implementation of enhanced due diligence procedures for all vendors. Additionally, once the SEC notified Key Energy of its investigation, Key Energy promptly submitted additional incriminating information to the SEC on an ongoing basis. Ultimately, Key Energy mitigated what could have otherwise been hefty penalties, and international businesses can learn from the aggressive and cooperative remedial posture that Key Energy assumed.
6. Conduct a global assessment of compliance vulnerabilities. Rather than simply remedying its flawed Mexico operation, Key Energy also decided to review the compliance of its branches in other environments that have high levels of corruption, namely, Russia and Colombia. In doing so, Key Energy reduced the likelihood that it would be subjected to future fines and penalties, and used its unfortunate circumstances to help ensure that its company was, as a whole, compliant with U.S. laws and regulations. International businesses facing investigation by any U.S. agency would be wise to take a similarly global and proactive approach.
Jennifer S. Huber and Adam Munitz are attorneys in FH+H, PLLC’s International Trade & Transactions Practice. Focusing primarily on the defense, security, and intelligence sectors, Jennifer and Adam help businesses translate their domestic successes into overseas growth, and assist foreign entities with sensitive investments in, and acquisitions of, U.S. businesses. Additional information regarding their capabilities and previous representations can be found here.