Anti-bribery, corruption, and disputes – it's not as easy as ABCD

For energy, mining, and resources companies, the cost of corruption — and getting caught — is high.

In April 2017 a U.S. federal judge ordered Brazilian conglomerate Odebrecht S.A. to pay a fine exceeding US$2.6 billion regarding bribery and other illegal conduct relating to Operation Car Wash (Lava Jato), one of the largest corruption scandals in history. A few months earlier, Sociedad Química y Minera de Chile S.A., a Chilean chemicals and mining company, paid US$30 million in civil and criminal penalties related to bribery charges. In 2010 a global freight-forwarding company and six oil-and-gas service companies paid US$236.5 million in criminal and civil penalties and disgorgement for bribing foreign officials.

Energy, mining, and other resources companies remain a major focus of bribery and corruption investigations worldwide. The United States government wields a potent weapon against bribery and corruption in the form of the Foreign Corrupt Practices Act (FCPA). Congress enacted the law in 1977 on the heels of numerous scandals in which U.S. companies admitted to paying bribes to foreign officials who promised to favor their products, to lower taxes, or to otherwise exercise their governmental functions in return for compensation.

The Act was meant to reestablish trust in the integrity of American business on the international stage. For companies, it requires the maintenance of accurate books and records, comprehensive compliance procedures, and internal accounting controls. The FCPA applies to American companies, foreign corporations trading on U.S. markets, Americans (whether they are physically present in the U.S.), and foreigners who violate the law if they are in the U.S at the time.

For individuals, the FCPA prohibits bribery of foreign government or political officials when the goal is to obtain or retain business, or to secure any improper business advantage. The bribe can be monetary or the provision of anything of value, either directly or through intermediaries.

Recently, President Trump publicly claimed that the law is “horrible,” that “the world is laughing at us [America]” for enforcing it. Some critics assert that the Act discourages U.S. investment in foreign countries. However, Attorney General Jeff Sessions has committed to its continued enforcement by the Securities and Exchange Commission and the Department of Justice, so the FCPA is not going away anytime soon.

Mining companies are particularly susceptible to potential liability and enforcement actions under the FCPA for at least five reasons:
1. Mining companies tend to operate in high-risk locations governed by often-entrenched cultural norms at odds with FCPA-mandated compliance. For example, South American and African countries’ unstable governments, local influences, and low standards of living encourage and even foster corruption.
2. Lucrative resource-extraction enterprises can result in tremendously profitable payoffs that weigh in favor of cutting corners and against strict compliance.
3. A company’s corporate leaders might advocate for FCPA compliance, but translating that into “on-the-ground” action in foreign locations is often difficult.
4. Mining companies often enter into complex transactions whose parts (permitting, security, environmental regulations, and community relations) require cooperation and engagement by multiple parties and are challenging to control or oversee.
5. Finally, and perhaps most importantly, off-the-shelf risk-assessment programs and compliance controls may not fit the specific risks of mining operations. Creating a plan that matches the vulnerabilities and obligations of the company can be expensive, time-consuming, and difficult (even though it is a best practice).

To minimize risks while ensuring FCPA compliance, mining companies need comprehensive compliance plans that are designed to tackle actual risks, and that demonstrably work in every location for every employee. Yet creating a compliance plan presents numerous challenges:
• What might seem like “immaterial” transactions might not be immaterial for compliance.
• The plan must reflect top-to-bottom commitment and tone throughout the organization.
• The plan must account for the compliance of affiliates and third-party relationships.
• The plan must include strong whistleblower, monitoring, books-and-records, and auditing provisions.

A plan that is merely a “paper tiger” — where implementation amounts to little more than lip service supported only by words on a page rather than actual compliance activity — will not suffice. Therefore, compliance planning takes time, effort, money, and a thorough willingness to adhere to the law. But done properly, compliance planning will help to eliminate instances of bribery and corruption that expose mining companies to enormous risk and financial penalties under the FCPA.

Key considerations for parties in commercial disputes
As more countries are taking bribery and corruption seriously, international companies have been and will continue to see the issue arise in the context of commercial disputes. Parties in disputes governed by U.S. or United Kingdom law can argue in a commercial arbitration that a party who has procured, performed, or maintained a contract through bribery or fraud (which would include bid-rigging and collusion) is not entitled to bring claims to enforce contractual rights.

Thus, a party that finds itself accused of illegal conduct should expect its counterparty to use that illegal conduct as a defense in any contract or other dispute between them.

Separate and apart from the law of the contract, there is an argument that a tribunal or court has the inherent obligation to evaluate any issues of illegal conduct and to avoid supporting such illegal conduct. In other words, the court may have an independent obligation to evaluate arguments and evidence relating to illegal conduct and refuse to enforce a contract in favor of a party involved in the illegal conduct.

There also is developing law in the United States and England that suggests that a party engaged in illegal conduct should not be entitled to enforce a contract claim. Although earlier law in this area was relatively absolute, more recent decisions indicate that courts generally affirm this principle. These trends require parties in commercial disputes to consider several important issues when corruption or other illegal conduct might be at play:
• Additional time and cost to litigate the issue of illegal conduct. There is considerable risk that the commercial dispute will be overshadowed by the illegal conduct and the parties will need to think strategically about how this will impact resolution.
• Companies face considerable risk of illegal conduct being exposed or settled in an undesirable forum. The party accused of illegal conduct likely will be forced to make sensitive disclosures, and key witnesses may be required to testify. There also is risk for the opposing party. In many cases, the party accused of illegal conduct will respond with an argument that its counterparty is equally culpable.
• Commercial arbitrations in various jurisdictions are not necessarily confidential; information disclosed during the arbitration could influence or complicate criminal or other government investigations.
• Judicial decisions with respect to illegal conduct may influence criminal or government investigations or other business relationships even if they do not bind anyone outside of the proceeding where it is rendered.

Although every situation is different, the recent focus on investigating illegal conduct is likely to influence parties in commercial disputes that may seem secondary or removed from the criminal or government investigation that is taking place. Mining companies accused of illegal conduct must consider whether to pursue commercial disputes that may impact a criminal or government investigation, and opposing parties must think carefully about whether to raise illegal conduct as a defense and risk being accused of illegal conduct themselves.

Andy Lillie, Partner, Hogan Lovells
Robert B. Wolinksy, Partner, Hogan Lovells
Christopher T. Pickens, Partner, Hogan Lovells
Jessica Black Livingston, Senior Associate, Hogan Lovells

[1] SEC Press Release, Chemical and Mining Company in Chile Paying US$30 million to Resolve FCPA Cases, Jan. 13, 2017.

[1] SEC Press Release, SEC Charges Seven Oil Services and Freight Forwarding Companies for Widespread Bribery of Customs Officials, Nov. 4, 2010.

For other recent decisions, see:

Charles Quintard Beech III and Juan Jose Hernandez-Comerma