This prior post  summarized the recent Foreign Corrupt Practices Act enforcement action against Key Energy Services. This post continues the analysis by highlighting additional issues to consider.
Pre-Enforcement Action Professional Fees and Expenses
As highlighted in “FCPA Ripples ,” settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.
According to Key Energy’s 10-K filed in February 2015, the company had “legal expenses related to the FCPA investigation of $41.1 million.” Key Energy’s 10-K filed in February 2016 did not mention a specific figure, but merely stated that there “lower expenses related to our FCPA investigations compared to the prior year.”
A conservative estimate would seem to be that Key Energy’s pre-enforcement action professional fees were over $50 million. This represents a 10:1 ratio compared to settlement amount.
As highlighted in this previous post , on April 28th the company disclosed:
“Key has been informed by the Department of Justice that the Department has closed its investigation and that it has decided to decline prosecution of the Company.”
According to Key Energy’s disclosures:
“In January, 2014, the SEC advised us that it is investigating possible violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) involving business activities of Key’s operations in Russia. In April 2014, we became aware of an allegation involving our Mexico operations that, if true, could potentially constitute a violation of certain of our policies, including our Code of Business Conduct, the FCPA and other applicable laws. A Special Committee of our Board of Directors is investigating this allegation as well as the possible violations of the FCPA involving business activities of our operations in Russia. The Special Committee’s investigations, which also include a review of certain aspects of the Company’s operations in Colombia, as well as our other international locations, are ongoing. On May 30, 2014, we voluntarily disclosed the allegation involving our Mexico operations and information from the Company’s initial investigation to the SEC and Department of Justice (“DOJ”). We are fully cooperating with investigations by the SEC and DOJ.”
From start to finish, the FCPA scrutiny concerning Mexico (what the enforcement action was about) was approximately 2.5 years. While this time frame is lower than other typical instances of FCPA scrutiny (3-5 years), the gray cloud of FCPA scrutiny lasted for a long time.
What About Russia and Colombia?
As indicated by the above disclosure, Key Energy’s FCPA scrutiny went beyond just Mexico. The SEC’s order is silent as to Russia or Colombia other than noting under the heading “Internal Investigation and Remedial Measures” that Key Energy:
- reviewed all vendors in use in Russia and Colombia and instituted an enhanced due diligence procedure for all vendors globally;
- established enhanced financial controls around the procedure-to-pay process in Mexico, Colombia, and Russia including interim employee certifications requirements, revised vendor onboarding requirements, and heightened payment approval requirements; and
- installed new controllers in the Colombia and Mexico businesses and more effectively enforcing a solid line reporting relationship to the U.S. Controller and ultimately the CFO.
No-Charged Bribery Disgorgement
The Key Energy enforcement action is the latest of numerous examples of the SEC ordering disgorgement even though the offending company was not charged with violating the FCPA’s anti-bribery provisions.
As highlighted in this  previous post, so-called no-charged bribery disgorgement is troubling.
Among others, Paul Berger (here ) (a former Associate Director of the SEC Division of Enforcement) has stated that “settlements invoking disgorgement but charging no primary anti-bribery violations push the law’s boundaries, as disgorgement is predicated on the common-sense notion that an actual, jurisdictionally-cognizable bribe was paid to procure the revenue identified by the SEC in its complaint.” Berger noted that such “no-charged bribery disgorgement settlements appear designed to inflict punishment rather than achieve the goals of equity.”
Speaking of disgorgement, this FCPA Blog  post seems to suggest that the disgorgement only settlement was unusual.
It was not.
Six of the last eleven corporate SEC FCPA enforcement actions have been disgorgement (often along with pre-judgment interest) only. This statistic is brought to you by FCPAnalytics .
The SEC’s order notes that “in April 2015, Key Energy announced that it was winding down its international business outside of North America, and intends to exit Mexico once its current contractual obligations to Pemex are complete [in October 2016].”
Further, among the remedial efforts noted by the SEC was that Key Energy engaged in a “coordinated wind-down and exit of all markets outside of North America, and a commitment to exit Mexico by the end of 2016.”
As highlighted in this prior post  which details several other examples, a troubling aspect of the current FCPA enforcement climate is that the enforcement agencies seem to view retreat from a foreign country that presents FCPA risk as a good thing, indeed even a “remedial measure” to be lauded.