Economic Downturns and Increased Compliance Risk
Oil is hovering around $50 per barrel. For most of the US economy this drop in oil price has provided a much-needed economic boost. Liz Ann Sonders, the chief investment strategist at Charles Schwab, was quoted as saying "The U.S. economy is 68 percent consumer spending, so right there you know that falling oil prices is a benefit.”
But in the energy space, this plunge has been devastating. It is so bad that in a recent issue of the Houston Business Journal (HBJ), is provided a ‘Box Score’ for energy company lay-offs. And that was before Halliburton announced a 10%-15% reduction and Hercules Offshore announced that it had laid off some 30% of its work force since last October.
I thought about what this plunge in the price of oil could mean for the compliance function in energy and energy related companies going forward. Many Chief Compliance Officers (CCOs) and compliance practitioners struggle with metrics to demonstrate revenue generation. Most of the time, such functions are simply viewed as non-revenue generating cost drags on business. This may lead to compliance functions being severely reduced in this downturn. However I believe such cuts would be more than short-sighted; they would actually cost energy companies far more in the short and long term.
The DOJ and SEC will not allow companies to use economic arguments in the face of known and recognized increase in compliance risks. Indeed they may focus on some of these points as reasons for increased compliance vigilance in an energy company’s compliance function going forward.
Almost any energy company of any size has gone through a Foreign Corrupt Practices Act (FCPA) investigation, whether internal or formal by the Department of Justice (DOJ) or Securities and Exchange Commission (SEC). Many have gone through enforcement actions. The risk profiles of these companies did not change because of the drop in oil prices. Extractive resources are still located largely in countries with a high perception of corruption. In others, the inherent compliance risks that currently exist for energy companies will certainly not lessen. Unfortunately they may well increase.
At this point I see two increasing compliance risks for energy companies. The first is that companies will attempt to reduce their costs by cutting their compliance personnel. A tangential, but equally important, component of this will be that companies that do not invest the monies needed to beef up their oversight through monitoring or other mechanisms today are setting themselves up for serious compliance failures tomorrow.
Moreover, what will the pressure be on the business folks of such companies to ‘get the deal done’ with this slashing of oil prices? Further, if there is a 10% to 30% overall employee reduction, what additional pressures will those remaining employees feel to make their numbers or face the same consequences as their former co-workers?
I think both of these scenarios are fraught with increased compliance risks. For companies to engage in behaviors as I have outlined above would certainly bring them into conflict with the Ten Hallmarks of an effective compliance program as set out in the FCPA Guidance. For instance on resources, the FCPA Guidance does not say in a time of less income, when your compliance risk remains the same or increases, you should cut your compliance function. Indeed it intones the opposite, when stating, “Those individuals must have appropriate authority within the organization, adequate autonomy from management, and sufficient resources to ensure that the company’s compliance program is implemented effectively.” Moreover, the FCPA Guidance adds, “The amount of resources devoted to compliance will depend on the company’s size, complexity, industry, geographical reach, and risks associated with the business. In assessing whether a company has reasonable internal controls, DOJ and SEC typically consider whether the company devoted adequate staffing and resources to the compliance program given the size, structure, and risk profile of the business.” So the resource issues are stated in reference to the risk profile of the business not the current or fleeting economic issues of the day.
But there is a second reason I believe that energy companies’ risk profiles will increase in this industry-specific downturn. Unfortunately it will come from those employees who survive the layoffs. They will be under increased pressure to do the jobs of the laid-off folks so there will be a greater chance that something could slip through the cracks. If you are already working full time at one job and one, two or three other employees in your department are laid-off, which job is going to get priority? Will you only be able to put out fires or will you be able to accomplish what most business folks think is an administrative task?
What might be the DOJ or SEC reaction to the downsizing of compliance in the face of such increased compliance risk? The energy industry has not gone through this type of economic downsizing in the new age of FCPA prosecutions, largely since 2004, so there is no relevant time frame of FCPA enforcement to draw upon. However, the financial industry did go through such a contraction in the 2007-2010 time frame. We have seen the DOJ and other financial industry regulators draw huge penalties for a series of anti-money laundering (AML) and LIBOR scandals. My guess is that the DOJ and SEC will not allow companies to use economic arguments in the face of known and recognized increase in compliance risks. Indeed they may focus on some of these points as reasons for increased compliance vigilance in an energy company’s compliance function going forward.
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Author: Thomas Fox has practiced law in Houston for 25 years. He is now assisting companies with FCPA compliance, Risk Management and international transactions. He was most recently the General Counsel at Drilling Controls, Inc. and previously Division Counsel with Halliburton Energy Services, Inc. The author can be reached at firstname.lastname@example.org.