This is a guest post from noted FCPA expert Tom Fox. You can find Tom on Twitter @tfoxlaw and on his blog, the FCPA Compliance and Ethics Blog. Keep an eye out for Part Two of this series, viewable on JDSupra and, of course, The Network blog.
I. The Problem
As I write, oil is hovering around $50 per barrel. The price will inevitably rebound, but all compliance officers need to be prepared for responding to economic downturns in their respective industries because price and market fluctuations bring with them numerous compliance risks.
For most of the US economy this drop in oil price has provided a much-needed economic boost. One piece on the NPR website, entitled Oil Price Dip, Global Slowdown Create Crosscurrents For U.S., said, “economists have suggested the big drop in oil prices is a gift to consumers that will propel the economy.” Liz Ann Sonders, the chief investment strategist at Charles Schwab, said “The U.S. economy is 68% consumer spending, so right there you know that falling oil prices is a benefit.” Another economist said the positive effects could be “worth $400 billion” for the US economy as a whole.
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, so it’s logical to think we may see compliance functions being severely reduced in this downturn. However I believe such cuts would be not only short-sighted; they would actually cost energy companies far more in the short and long term.
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 when of the price of oil dropped. 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 tangent 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 are setting themselves up for serious compliance failures.
Moreover, with the dip in prices, will there be a corresponding increase in pressure on the sales side to ‘get the deal done’? Further, if there is a 10% to 30% overall employee reduction, what additional pressures will be put on those remaining employees 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 when your compliance risk remains the same or increases, but your income decreases, you should cut your compliance function. Indeed it intones the opposite, 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.” The FCPA Guidance adds, “Moreover, the amount of resources devoted to compliance will depend on the company’s size, complex¬ity, 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 pro¬file of the business.” So the resources issue is stated in reference to the risk profile of the business and not the current or fleeting economic issues of the day.
Also note that the FCPA Guidance speaks to an analysis from the DOJ side, which would presumably be a criminal side review. For instance, if a company cuts its compliance staff while its risk profile has not decreased, does this provide the required intent to commit a criminal act under the FCPA? Moreover, who would be the guilty party under such an analysis? Would it be the Chief Executive Officer (CEO) who ultimately decides we need a fixed percentage cut of employees or simply a raw number to be laid off? How about the department head (as in the CCO) who is told to cut his or her staff by 10% or “we will make the cuts for you?” Or is it a company’s human resources (HR) department who delivers the dreaded knock on a compliance practitioner’s door (I’m from HR and could you come with me). What if a company’s decision-making authority is so decentralized that there is no one person who can be held accountable?
But there is another 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 lay-offs. 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?
But more than the extra work the survivors will have laid upon them will be the implicit message that some companies senior management may well lay down, that being Get the Deal Done. If economic times are tough, senior management will be looking even more closely at the sales numbers of employees. The sales incentives could very well move from a question of what will my bonus be if I close this transaction to one of will I be fired if I do not close this transaction. If senior management makes clear that it is bring in more business or the highway, employees will get that message.
Once again, where would the DOJ look to find intent? Would it be the person out in the field who believed he was told that he or she either brought in twice as much work since there were half as many employees left after lay-offs? Would it be the middle manager who is more closely reviewing the sales numbers and sending out email reminders that if sales do not increase, there may well have to be more cuts? What about the CEO who simply raises one eyebrow and says we need to hunker down and get the job done?