After uncovering widespread corruption in the wake of the Watergate political scandal, the U.S. Congress enacted the Foreign Corrupt Practices Act (FCPA) in 1977 to prohibit individuals and businesses from bribing foreign officials in order to retain or obtain business. Since then, the FCPA has been amended several times and has become one of the most effective transnational anticorruption laws in the world. It has been particularly impactful in revealing widespread corruption in the oil and gas industry.
Identifying which companies may be violating the FCPA can be difficult. To encourage individuals with knowledge of potential violations to submit reports, the FCPA has powerful whistleblower provisions. The FCPA allows whistleblowers to file claims anonymously, reducing the risk of retaliation. Whistleblowers can obtain financial rewards of 10% to 30% of recovered sanctions, even if bribes are paid in a foreign country and the whistleblower is a foreign national. The FCPA is extremely broad in scope and applicable worldwide, and whistleblowers can report on issuers and their subsidiaries and personnel, as well as foreign entities and agents.
While FCPA violations take place across many industries, the global oil and gas industry has developed a particularly strong reputation for foreign bribery and corruption, and it has more FCPA enforcement actions than any other industry. Following allegations of widespread foreign bribery in the oil field services industry, the U.S. Securities and Exchange Commission and Department of Justice launched an investigation into violations of the FCPA in the oil industry. It was described as the “first sweep of a particular industrial sector in order to crack down on public companies and third parties who are paying bribes abroad,”.
The Panalpina Bribery Scandal
In 2010, that investigation revealed a scheme through which seven companies were paying millions in bribes to foreign officials. Between 2002 and 2007, Panalpina Inc., a U.S. subsidiary of the global freight forwarding company Panalpina World Transport, paid millions in bribes to foreign government officials on behalf of oil industry customers. These customers included at least six major oil companies and their subsidiaries: Royal Dutch Shell plc, Pride International, Inc., Tidewater Inc., Transocean, Inc., GlobalSantaFe Corp, and Noble Corporation.
Panalpina had paid bribes on behalf of the companies to officials in at least ten countries, including India, Brazil, Mexico, Angola, and Nigeria. The bribes Panalpina admitted to paying on behalf of the six companies allowed the companies to circumvent local rules and importing regulations, to gain preferential treatment to expedite importation of goods and equipment, and to obtain lower tax estimates. It also allowed them to extend drilling contracts and to obtain false paperwork related to offshore drilling rigs.
A critical element of the Panalpina scheme was the company’s strategy for helping its customers hide the payments. In addition to the anti-bribery provision of the FCPA, the FCPA also has an accounting provision which requires that issuers create and keep books, records, and accounts to accurately reflect the transactions of corporations and devise and maintain an adequate system of internal accounting controls.
To pay the bribes, Panalpina would use a portion of the payments to pay the bribes and then submit an invoice for reimbursement. As part of the scheme, the invoices used at least 160 misleading terms designed to hide the nature of the payments, including phrases such as “local processing” and “special handling.” By providing invoices that appeared to be legitimate requests, Panalpina allowed the companies to use those invoices to record the payments as legitimate charges.
In exchange for the Department of Justice (DOJ) dropping criminal conspiracy charges, Panalpina World Transport agreed to a deferred prosecution agreement. In the agreement, the DOJ stated that knowledge of the bribery scheme was widespread at the company and had been enabled by a “culture of corruption” in which senior level management in the Swiss headquarters treated bribery as “business as usual.” The agreement required the company to comply with antibribery statues in the future.
Five of the oil companies pled guilty to violations of the Foreign Corrupt Practices Act or paid settlements under a deferred prosecution agreement. The sixth company, GlobalSantaFe, paid a civil settlement. In total, the settlements amounted to more than $236 million, including $80 million to the SEC for civil disgorgement of profits, interest and penalties, and $156 million to the DOJ in criminal penalties.
The Panalpina scheme unveiled by the joint SEC and DOJ investigation confirmed concerns about corruption in the oil and gas industry, which have been furthered by future investigations. Since 2000, FCPA enforcement has steadily risen, as have enforcement tactics and penalties. A disproportionately large share of these actions has been related to the oil and gas industry. Since 2000, according to data from Violation Tracker, there have at least 268 penalty records in the oil and gas industry related to the Foreign Corrupt Practices Act, totaling more than $14 billion in monetary sanctions.
The Panalpina case also revealed the importance of third parties in facilitating FCPA violations. More than 90% of reported FCPA cases involve the use of third-party intermediaries such as agents or consultants. In April 2016, a similar scandal was revealed through a massive leak of confidential documents to Australia’s Fairfax media and the Huffington Post. The documents revealed that a third-party company, Unaoil, had been paying bribes on behalf of dozens of energy companies in at least nine countries for over a decade. In 2019, three executives from Unaoil pled guilty to facilitating bribes. The SEC and DOJ also launched an investigation into multiple of Unaoil’s energy company clients.
Although these two major cases have drawn attention to the potential consequences of FCPA violations, bribery in the industry is likely to continue. These violations could even occur at the same companies, as several companies who have violated the FCPA are repeat offenders, including oil companies Halliburton and TechnipFMC. Without targeted industry investigations or evidence from company insiders, it can be difficult to detect bribery facilitated by third parties. However, for those with information on potential violations, the whistleblower provision of the FCPA provides a powerful tool to report potential violations while keeping their identity secret and potentially obtaining a substantial reward.