Category: Risk Aversion

FCPA Parallels

I tend to read the news with Foreign Corrupt Practices Act goggles on. It’s an occupational hazard I guess.

Sure, the FCPA is a specific statute, enforced in unique and specific ways, but there are many issues highlighted in the news that have FCPA parallels.

This post provides several examples.

Merely A Coincidence Or FCPA-Related?

Like many other laws, the Foreign Corrupt Practices Act has always had more of a “soft” enforcement impact than a “hard” enforcement impact. In other words, the FCPA will impact business operations (“soft” enforcement) even if the company is not the subject of an FCPA enforcement action or inquiry (“hard” enforcement).

It is often sound public policy for a company subject to the FCPA to make business decisions because of the threat of “hard” enforcement. Yet public policy issues arise when that business decision is the result of the threat of “hard” enforcement based on aggressive enforcement theories not subjected to any meaningful judicial scrutiny.

The risk/reward calculus of corporate leaders is a business judgment issue that the law clearly allows business leaders to make.

This prior post explored excessive risk aversion when Hercules Offshore abandoned a $92 million contract in Angola and posed the question of who really benefits from excessive FCPA risk aversion? A company’s shareholders certainly do not benefit.  The foreign country (including its government and citizens) would seemingly not benefit when an otherwise ethically sound company subject to the FCPA retreats from a foreign country.

Yet 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 – perhaps even a “remedial measure.”

For instance, in the Ralph Lauren FCPA enforcement action based on alleged conduct in Argentina (see here for the prior post), under the heading “remedial measures” the DOJ noted that the company “ceased retail operations in Argentina and is in the process of formally winding down all operations there.”

Likewise, in the Bio-Rad FCPA enforcement action based in part on alleged conduct in Vietnam (see here for the prior post) one factor the DOJ articulated as a basis for the NPA was the company “clos[ed] its Vietnam office after learning of improper payments by its Vietnam subsidiary.”

Notwithstanding the DOJ applauding the above examples, the fight against bribery and corruption is not advanced when ethically sound companies that are generally viewed as selling the best products and services retreat from foreign markets.

Yet, the remainder of this post highlights recent examples of retreat from foreign markets by companies that were recently under FCPA scrutiny or that remain under FCPA scrutiny.

Whether such retreats are merely a coincidence or FCPA-related is an open question.  However, if the latter, the below retreats are a significant public policy issue in this new era of FCPA enforcement.

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Cobalt International

For approximately four years Cobalt International Energy was under FCPA scrutiny concerning its business in Angola, specifically Blocks 9 and 21 of an oil and gas project offshore Angola.  As highlighted here, in January 2015 the company disclosed that it prevailed over the SEC and there would not be an FCPA enforcement action.

Nevertheless, Cobalt recently disclosed:

“The Angolan National Concessionaire Sociedade Nacional de Combustíveis de Angola – Empresa Pública (“Sonangol”) and Cobalt International Energy, Inc. … announced the signing of a Sale and Purchase Agreement for Sonangol to acquire all of Cobalt’s 40% participating interest in Blocks 21/09 and 20/11 offshore Angola (the “Blocks”) for $1.75 billion with an effective date of January 1, 2015. This transaction is subject to customary Angolan government approvals which are expected prior to the end of the year. The Sale and Purchase Agreement provides for a smooth transition to a new operator and underscores the parties’ commitment to attain the final investment decision for the Cameia development in Block 21/09 by year end 2015 …”.

In other words, Cobalt pulled out of the project that was the focus of its FCPA scrutiny.

Layne Christensen

As highlighted here, in October 2014, Layne Christensen resolved an FCPA enforcement action concerning alleged business practices in a variety of African countries. The alleged conduct involved the company’s minerals division.

Recently the company disclosed that its Minerals Services division plans to exist its Africa business.

General Cable

General Cable is currently under FCPA scrutiny for its alleged business practices in a number of countries including Thailand.

Recently the company disclosed that “it has completed the sale of its Thailand operations to MM Logistics Co. Ltd. for cash consideration of approximately $88 million.”

JPMorgan

Although not exactly “recent,” another example of risk aversion highlighted in “Foreign Corrupt Practices Act Ripples” relates to JP Morgan. In August 2013, the New York Times highlighted the company’s FCPA scrutiny based on alleged hiring practices in China.

As a result of JPMorgan’s FCPA scrutiny, the company withdrew from several lucrative financial deals. For instance, it was reported by the Wall Street Journal that JPMorgan “has withdrawn from underwriting midtier lender China Everbright Bank Co.’s $2 billion initial public offering in Hong Kong.” The reason given was that since its FCPA scrutiny surfaced, “deals have faced intense scrutiny from the U.S. bank’s compliance division.” Similarly, it was soon thereafter reported that JPMorgan “has pulled out of a $1 billion initial public offering of a Chinese chemical company and won’t seek a role in the IPO of a Chinese stateowned train maker, as the bank walks away from deals that could come under scrutiny from U.S. investigators probing its hiring practices in China.”

Hercules Offshore: A Case Study In Risk Aversion

In passing the Foreign Corrupt Practices Act, Congress (and the Executive branch) accepted the fact that U.S. companies would lose out on certain business by complying with the FCPA’s provisions.  For instance, as highlighted in “The Story of the Foreign Corrupt Practices Act,” Treasury Secretary Michael Blumenthal stated during Congressional hearings:

“To the very, very small extent a particular company may lose a particular contract because it refuses to engage in [improper payments], I would be willing to say, all right, we will be at a slight competitive disadvantage and we will all sleep the better for it.”

Losing business because of a refusal to make improper payments is one thing, losing business because of risk aversion is quite another.

This post concerns Hercules Offshore and how its FCPA risk aversion resulted in the company abandoning a $92 million contract in Angola, which when disclosed, resulted in the company’s stock falling approximately 11% (see here).

In this recent SEC filing, Hercules disclosed:

“Due to the failure of Sonangol [an entity the DOJ/SEC have alleged in past FCPA enforcement actions is the state-owned and controlled oil and gas company of Angola] officials to accept a local representative that meets the Company’s international legal compliance standards, the Company has experienced delays in obtaining Angolan visas for required crewmembers and delays in importing required parts and equipment into Angola to support operations under the drilling contract for the Hercules 267 (the “Contract”). As a result of these delays, the Contract will be terminated. Pursuant to an agreement with the customer, the Company will not have any contractual exposure to the customer as a result of the Contract termination.Sonangol has failed to accept any of three different local representatives proposed by the Company who meet our legal compliance standards, notwithstanding the legal and technical sufficiency of our proposals. The Company understands that working with a local representative is required under the Contract, and the transition to a representative meeting our compliance standards is a necessary condition for the Company to continue to perform its obligations under the Contract in Angola.

As previously disclosed in our fleet status report on May 20, 2014, the Company recently moved the Hercules 267 to Gabon from Angola. The Hercules 267 has been on zero dayrate since late April 2014, and final cessation of the rig’s operations under the Contract will reduce our current estimated future backlog by an estimated $91.8 million, until we are able to obtain a contract for the rig in another location.

Also as a result of these circumstances, the Company will voluntarily forgo a three-year contract award it previously received in Angola for the Hercules Triumph.”

“And I guess compliance — if you have followed us, you know what — we pulled out of Angola last Friday. Tough decision for us. We could not get comfortable, and then the agents that we sent to Sonangol that had gone through our vetting process they would not accept. So we walked away from 2 1/2 years at $110,000 a day and three years at north of $200,000 a day on two assets, but it’s the right thing to do.We’re not going to get embroiled in an FCPA investigation. So it was a tough decision, but it was the right decision, and a decision we will make every time around the world every day.”