A Logical, Logistical Approach to Oil & Gas Supply Chain Compliance

Modern society is dependent on the oil and gas industry. Currently, over 200 multinational exploratory oil and gas corporations supply nearly 60 percent of the world’s total energy. Yet, when one thinks about the oil and gas industry, the reaction is likely visceral. Without knowing the details of trends or recent cases, this opinion is based on the reputation of oil and gas — a reputation, which, due to a host of factors, places this industry at great risk. Recent plunging prices add stress to an already precarious and complex industry. Thus, it should be no surprise that oil and gas companies are regularly entangled in corruption scandals and their attendant investigations, fines, and penalties.

Corruption

The Foreign Corrupt Practices Act (FCPA) investigation in the oil and gas industry initially involved one global logistics company within the supply chain of a number of companies in the Nigerian market. This matter commenced around 2002, although it wasn’t resolved completely until about 2010. As a factual background, a global logistics provider, performing services such as transportation, freight forwarding, and customs clearance, was ingrained in the supply chain of various oil and gas companies. The investigation began with a subpoena from the US Department of Justice (DOJ) for information about a global logistics company. The investigation, however, spread rapidly and resulted in the subsequent investigations of at least 20 oil and gas companies.

After years of ongoing proceedings, it was determined that US$27 million in bribes were paid to government officials in the customs departments in several countries, including Nigeria. The logistics provider played a critical role in this scheme, serving as the agent to the oil and gas companies. The provider charged customers an extra fee in order to accelerate the trade and transportation process. Given the agency relationship, the direction that the investigation brought the logistics company to was logical and foreseeable. The DOJ and the US Securities and Exchange Commission (SEC) announced a settlement of several cases in 2010. The settlement included penalties of US$237 million for civil and criminal violations against the logistics company. Similarly, the oil and gas companies were found responsible for corrupt conduct and were fined subsequently. As partners of the logistics provider, they either knowingly or unknowingly shared the responsibility for the illegal conduct.

Unfortunately, corporation links to oil and gas are not uncommon. Most recently, on July 13, 2016, the UK Serious Fraud Office (SFO) charged a global logistics company, seven other companies, and multiple individuals with bribery. A month earlier, the SEC separately charged the same freight operation company with bribery. Employees, in pursuit of lucrative oil and gas contracts, allegedly bribed an agent of the Angolan state oil company sometime around 2005 and 2006.

This trend of corruption has begun to impact the tone associated with prospective business. Recent deregulation of the oil and gas industry in Mexico allows for greater foreign investment than ever before. Even though billions of petroleum barrels are proven as reserves, businesses should consider compliance risks before making new investments in the Mexican market. The forecasted implication would be to enlist more cross-border business partners and seek more US involvement. On the heels of these revelations, the DOJ has warned that it will focus on the business of oil and gas with greater scrutiny because of its perceived corruption. This suspicious approach by the DOJ might deter new investors in the industry. Before the first deal is brokered, and any business is transacted, the DOJ is already warning that these investments and partnerships will be monitored closely.

Indeed, the reputational impact is significant and bleak. Is bribery just the cost of doing business in the oil and gas industry? Are you liable just by virtue of being a participant in another’s supply chain? Is your supply chain vulnerable because of the unethical conduct of someone else? How much control does one company really have? As more and more reputable oil and gas businesses find themselves vulnerable to bribery, business partners and competitors alike are asking these and similar questions.

Why is oil and gas at risk?

Global footprint

What factors make the oil and gas industry at risk for corruption? First, the global footprint of oil and gas is expansive with large scale operations in many jurisdictions. Oil and gas is a vital industry that supplies 60 percent of the world’s energy. The industry fuels society’s ability to participate in all transportation, whether on the ground, in the air, or at sea. Additionally, this industry facilitates industrial development, aiding in the production of electricity and household gas for heating and cooking. Oil and gas help create the fundamental materials for the production of fertilizers, fabrics, synthetic rubber, and plastic.

As a subset to that, the industry is present simultaneously in the jurisdictions most at risk, ever reconciling common culture and custom against the strict requirements imposed by headquarters’ jurisdictions. Conducting business in several jurisdictions with foreign personnel and cross-border transactions makes it even more complicated. Multiple laws are often attached to each transaction based on the site that the transaction took place, the corporate structure, the nationality of the employees, and the type of transaction. In this “spaghetti style” transaction, it is hard to follow which laws and regulations may be implicated.

Some of the countries that are richest in oil and gas are developing countries. In these countries, the government, legislation, and enforcement systems are developing as well. Therefore, while operating business transactions in these countries, a company should be well versed in the laws of the jurisdiction.

Governments in developing countries are not exposed to the public eye as much as governments in developed countries. The lack of supervision and transparency is what enables and fosters a corrupt atmosphere. It is especially relevant when there is wide government involvement in business decisions, and especially in the industry of oil and gas.

The presence of public corruption is grave. Money is stolen from the country’s population, and leads to severe poverty. Misuse of public money, through waste or bribery, is a theft of state funds that is diverted from the investment of public welfare. Severe poverty is the backdrop that leads to various illegal and unjust activities, such as slavery and child labor. A company that takes part in a corrupt transaction supports violations against the basic rights of the population in that corrupt country.

The downward cycle compounds the problem. Countries that experience severe government corruption seek to attract foreign investors to make up lost funds. However, foreign investors ask for incentives in return. Oftentimes, foreign investors seek profits from the natural resources of the country. Surely, the use of natural resources bears advantages to the public, such as providing more workplaces. Nevertheless, cheap labor and poor working conditions do not create a fair workplace, and poverty remains a national problem.

Accordingly, countries that have been blessed with oil and gas resources in their territory are not necessarily fortunate in terms of the welfare of the population. This dissonance between the natural resource treasure and the poverty of the countries is disturbing. The countries are wealthy, but the people are poor. The majority of the countries rife with oil and gas natural resources are developing countries. Multinational corporations recognize the immense economic potential in the natural resources and dominate the industry. The average citizen in a developing country enjoys the natural resource treasure only through employment. These workplaces are managed by multinational businesses. Insufficient labor laws, coupled with the low educational level and poor socioeconomic status, creates a convenient situation for the corporations to operate on cheap labor. It should be noted that foreign investors do not create the corruption, they are just trapped into a corrupt atmosphere. Thus, a multinational corporation should be able to control its transactions and avoid corrupt conduct.

Accordingly, countries that have been blessed with oil and gas resources in their territory are not necessarily fortunate in terms of the welfare of the population. This dissonance between the natural resource treasure and the poverty of the countries is disturbing. The countries are wealthy, but the people are poor.

Complex supply chain

The supply chain is the cumulative network of entities and people moving resources from raw materials to a finished product. Multinational corporations generate risk in complex supply chain operations, as it is increasingly dependent on many partners, multiple logistics arrangements, and numerous layers of sub-contracting to complete the transaction. In the oil and gas industry, the risk of unethical practices is compounded due to the involvement of several parties, including local consultants and foreign officials in both established and developing countries.

Even where your business practices are exemplary, working with a corrupt partner can implicate you in an investigation and subject you to the liability of that partner’s actions. The direct costs of these proceedings, including penalties and disgorgement, are considerable. Yet, these are often dwarfed by the indirect costs, such as legal fees, discovery demands, and damage to a company’s reputation.

The challenge of supply chain management involves a multilayered approach to trade, defining multiple participants with various, and sometimes competing interests and contractual non-uniform terms. Recent cases have shown that this complexity in the supply chain has allowed a lack of visibility that is needed to improve business practices.

The most significant corruption risks in the supply chain involve procurement fraud, perpetrated by suppliers who engage in corrupt practices with government officials and other public actors.

Current laws and regulations

Oil and gas companies cannot isolate themselves to their headquartered jurisdiction. One cross-border transaction can involve commercial, contract, tax, and other bodies of law in any number of jurisdictions. When this is extrapolated over a significant period of time, this creates exponential risk. The expectation and legal requirement is that each company tracks these “spaghetti style” transactions to stay abreast of all relevant laws and regulations. The complexity of these transactions is not a defense for breaking the law. Executives have to maintain control over each and every transaction.

FCPA, for example, is exceedingly broad in its application for companies and persons with any nexus to the United States. However, this is only one anticorruption statute application. Many others, including the 2010 UK Anti Bribery, Russia’s 2008 Federal Anticorruption Law, and Brazil’s 2014 Clean Company Act, are also examples of regulations that impose strict anticorruption requirements that companies must respect.

One example includes the Russian anticorruption law, officially named the National Anticorruption Plan. A new section was added recently to the Russian law in January 2013. This extension of the law goes beyond the FCPA. For instance, the new Russian legislation does not distinguish between commercial organizations or Russian organizations in terms of the application of the law. Therefore, while conducting business in Russia, alignment with FCPA is not enough in order to meet with Russian anticorruption standards.

Another example is the Brazilian Clean Company Act. This regulation was created as part of a series of actions made by the Brazilian government in order to handle corruption. The act expands the civil and organizational liability, including harsh fines and penalties. This example illustrates the frequent changes of foreign anticorruption legislation. As such, a company should stay abreast of all relevant anticorruption legislations for each transaction in order to avoid unexpected penalties.

One transaction may involve an export from one country that’s mixed or consolidated in a second country, and then imported to a third. In instances like this, executives from outside any of any of these countries are oftentimes affecting the deal. With multiple jurisidictions, contract provisions could be made that apply to another country’s law, which is a daunting challenge for this industry

How to mitigate risks — Advice from a logistics provider

The oil and gas industry is faced with a problem it must confront head-on. There are no other options. Contemplating and designing a strategy is the first step. An investment in this strategy is an investment in your company’s sustainability. One global logistics provider offers 10 tips to assist with managing anticorruption compliance through a supply chain.

1. Map your supply chain and identify your vulnerabilities

At the onset, a company must visualize and docket all details of its supply chain. Successful compliance programs are risk-based. Thus, each company must know the who, what, when, where, and why of each business transaction at every level of its supply chain.* Start with the visualization of your supply chain. Complex supply chains are fraught with hidden risks. Therefore, make sure to expose all layers of each transaction, attacking any information loopholes in order to avoid the loss of control for your supply chain. Only then can you pursue a further quest to gather all the information needed from the beginning of the transaction to its end. Absolute transparency of your supply chain is necessary to ensure that you remain in control of it.

* Christopher M. Chima et al., Supply- Chain Management Issues in The Oil And Gas Industry, 5(6) J. Buss. & Econ. Res. 27, 31 (2007).

When independent contractors play a role, business tasks, documents production, and payments flow through layers of a supply chain. Thus, business leaders need to scrutinize parties and processes in an ongoing fashion. Moreover, do not try to extract yourself from your liability by hiding behind these layers of consultants. The days of hiding behind the complexity of a transaction have passed. You should know your supply chain, map it, and be responsible for it. In such circumstances, you are your own partner, and it will be expected that you are equally aware of your own responsibilities.

Individuals, as well as businesses, are accountable to the DOJ and to other similar governmental bodies in jurisdictions where you conduct business. Initially, you should engage an internal team including business, accounting, legal, and risk management to fully analyze your supply chain. Once you can visualize the end-to-end supply chain, lean on your team, in conjunction with your logistics group, in-house or outsourced, to capture and mitigate the risks at every level of your supply chain.

2. Simplify your supply chain

A company must simplify its supply chain in order to control it. Identify and remove unnecessary complexity from your supply chain. Make an analysis of complexity against the benefit. If there is no significant improvement generated by an additional layer of the transaction, remove it. Avoid working with unnecessary parties. Do not outsource business services that put you at risk if there is no need, and avoid multiple unnecessary business entities. Aim for a simple and transparent corporate structure and supply chain. A clear corporate governance program will serve to simplify each and every transaction. One effective tool to plan and simplify your supply chain is to build and maintain an electronic supply chain model. This could be effective in-house or through software that builds one. Thus, you will be able to visualize your supply chain and control each and every part of it.

Another effective tool to simplify your supply chain is to take an analysis-based approach to manage your stocking strategy, especially in the oil and gas industry. This approach can reduce dead and slow-moving inventory, stabilize production schedules, and generate critical savings. Complexity costs money and wise stock management in the oil and gas industry is crucial to ensure ongoing efficiency.

Moreover, a company should be able to monitor the transactions on a daily basis, audit the finances, and watch all payments, while recognizing outliers and risk transfers. The company should have clearly defined contracts that include clauses that provide the immediate trigger of termination in cases of suspected bribery. General simplification of the payables and receivables terms and conditions is another way to make your supply chain simpler and easier to monitor.

One more strategy is to embrace a self-regulatory approach. A company should acknowledge its mistakes and disclose them. That way, the company will send a clear message to its partners in the supply chain that they are watching, monitoring, and avoiding unethical practices. A company that follows a high ethical standard sends a great message to both the industry and to potential clients.

3. Know your partners

Working globally requires the support of partners from all around the world. Choosing your partners is key to maintaining an ongoing business and ensuring a supply chain is ethical, clean, and compliant. In order to choose the right partners, detailed due diligence is required. While researching prospective partner, it is crucial to pay attention to the possible partner’s reputation.

A partner with a bad reputation is a clear red flag. A company should not share business with an individual with a bad reputation. On the other hand, a partner with an unreasonably good reputation should also raise a red flag. If the reputation of a possible partner seems ‘too good to be true,’ you should dig deeper to ensure that there is no hidden information behind their ‘outstanding’ reputation.

A company should know all partners in its supply chain. If you are working with a corrupt partner, you could be liable for their actions. Lean on your global logistics supplier to assist with data procurement as well as transportation. If your logistics supplier is not compliant, YOU are not compliant. For example, one oil company, who worked with a corrupt logistics company in a supply chain, had to pay civil and criminal penalties for a bribe that occurred through the supply chain. Therefore, make sure that your partners are compliant and reliable.

Another example is a recent case involving a foreign oil logistics company, which arranged illegal business in the oil and gas industry in the Middle East, resulting in risk to its clients with a violation of the FCPA. The company’s clients are multinational corporations from all around the globe. Therefore, you should expect more from your logistics partners. As a partner to a supply chain, you are entitled to ask more questions about the security surrounding the transaction as a whole. Additionally, you are entitled to demand more information from the logistics company about the partners, documents, and local regulations involved in the deal. Ask for specific documents and specific standards in order to ensure that your partner’s ethical standards are suitable.

On this note, it is important to treat your logistics partner with respect. Even if your partner is your vendor, and you paid for certain services, you are partners in the supply chain. Due to the shared liability of partners to the supply chain, a respectful relationship will lead to shared interests and a fully transparent relationship. This will ensure that you know about crucial changes and facilitate a move forward toward more compliant practices.

4. Stay up-to-date with local regulations, trends, and cultural differences

International businesses bind together cross-border and cultural knowledge. This means that the country that is willing to have worldwide business should have knowledge of different jurisdictions, different regulations, and different cultures. One way to achieve this goal is by working with local agents and having local branches in each region that the company operates. One crucial key to success is understanding the local laws relevant to conducting business, and defining how each government views a foreign business and investment in its jurisdiction.

An initial question one should ask while starting an operation in a foreign country should be is: “Is this a suspected country?” According to Transparency International research, there are some countries where corruption is perceived as “high.” The question that was posed to participants was whether they paid bribes while operating in these countries (whilst providing nine different services). For example, countries that were found with high risk for bribery are Afghanistan, Cambodia, Cameroon, India, Iraq, Liberia, Nigeria, Senegal, Sierra Leone, and Uganda. Through such research, a company can be aware of “red flag” countries. Developing countries are mainly suspect as it is not a coincidence that corruption scandals are prevalent in such countries.

Implementing an internal global corporate policy is one strategy to prevent corruption. Today, multinational corporations are gigantesque. Such corporations can have branches all over the world, including employees from different nations and business in different regions. By having a global anticorruption policy that is mandatory for each employee to follow, a corporation can draw a clear line for all of its employees in different departments and in different regions of the world. Mandatory anticorruption policies clarify the ethical way to behave to all employees, and bridge the gap between different business cultures and diverse industry practices. Additionally, the policy raises awareness about the importance of ethical norms.

Furthermore, while a company’s services are part of a supply chain, like BDP International, Inc., it is critical to ensure that the other companies in the chain are following anticorruption legislation as well. Adequate due diligence before contracting with a company is a way to fulfill this requirement. Also, contract conditions that elucidate the company’s ethical policies are another way to ensure that the contracting party is aware and actively accepts anticorruption practices and legislations.

In order to make sure that employees around the globe completely understand the restrictions of anticorruption policies, it is first important to implement mandatory training. In global corporations, the training must be translated into all appropriate languages. Additionally, it is important to bear in mind that not all employees have legal knowledge. Therefore, the training should be designed in plain language and presented in an approachable way. Repeated training is another tool to keep all employees aware of the ethical standard of the company.

As part of the mandate of knowing the law, a company must assess what payments or gifts are legal and which are not. The best approach is to avoid facilitating payments and gifts all together. However, if this is not reasonable given local norms, the company should be fully versed in the law, and abide by the standards under which gifts might be acceptable and legal.

5. Control your data

Certain documentation and data filings are necessary for international trade and cross-border business transactions. In order to ensure seamless trade, it is incumbent on each multinational corporation to strictly follow the regulatory and procedural mandates of that governing jurisdiction. Data, form, and time requirements must be respected. At the onset, companies should have an internal team dedicated to and accountable for compliance. In the event this is outsourced, an internal executive team should manage the vendors tasked with this.

An immediate way for oil and gas companies to mitigate the risk of corruption on import or export is to file documents in accordance with regulatory requirements. Drafting the documents correctly, including adequate and accurate information, and managing the filing process will mitigate any chance of corruption. Missing information, improper forms, or late filings are risks that make employees immediately vulnerable to noncompliance. By getting the documentation correct, you avoid a potential confrontation with a corrupt and opportunistic government official.

Finally, in the zeal for managing costs, do not substitute budgetary concerns for compliance in any case. Managing compliance cost and efficiency is important, but you need to ensure that careful consideration governs these decisions. Otherwise, cutting such costs may put a company or its executives in harm’s way. As a result, the company may become vulnerable to cutting compliance corners, which leads to a concern for efficiency.

6. Monitor your partners

While choosing your partners, you should conduct suitable due diligence reviews. However, due diligence is not the end of compliance obligations. You should track and monitor your partners as an ongoing process. The best way to avoid corruption is to be prepared. Knowing your partners and monitoring them is a great way to do so.

Two examples of monitoring your partners include annual visits and regular contact. Make visits to your partners’ facilities. Physical presence might reveal a lot of information about the nature of the business. Second, continuously track and monitor key documentation. For example, ask for insurance documents twice a year. For this purpose, you might want to use automatic programs. That way you can collect information about your partners from different sources, cross-check the information, and share this information with your employees or partners globally.

While choosing your partners, you should conduct suitable due diligence reviews. However, due diligence is not the end of compliance obligations. You should track and monitor your partners as an ongoing process. The best way to avoid corruption is to be prepared.

Additionally, be aware of any significant changes occurring in your partners’ company. One way to achieve this information is from the partner itself. Establish and maintain trusting relationships with your partners so they will share significant information with you. Another way to obtain this information is to monitor your partners’ main documents. For instance, check ownership documents and acquisition sheets on a regular basis. Thus, you will be able to notice important changes. Lastly, you should expect to receive such information from your global logistics company. Expect them to assist you with gathering useful information about your partners.

7. Audit

Another aspect of monitoring is financial and contractual auditing. In addition to internal audits, oil and gas companies should contractually mandate audits of all consultants and business partners. The contract should articulate the rules of the audit upon annual review and/or the concern of impropriety. The contract should further include what information is discoverable in support of the audit and what is punishable by automatic and immediate termination with legal impunity in the event of such violation.

Through monitoring financial documents, one can uncover unusual payments or unknown transactions. One can also look out for facilitating payments or gifts, which might be illegal. Thus, financial audits are a great way to reveal red flags or illegal payments. Ultimately, a company can find the audited invoice, resolve the problem, and avoid future illegal payments. Notwithstanding, a company should audit its financials carefully according to the government request. Hence, auditing is not just a privilege.

8. Marketing and communicating corporate social responsibility

Corporate social responsibility (CSR) involves the efforts that a company puts forth which go beyond the requirements of the regulation. As previously discussed, choice of jurisdiction, which is usually contingent upon following the business, might lead oil and gas companies to do business in countries with a culture of corruption and human rights violations with little or inconsistent support from the local court system. A focused CSR policy should provide guidelines to ensure employees understand how to navigate outreach programs to the local communities.

By managing a CSR policy, the company can participate in saving the society, the environment, and the fundamental values of human dignity. Moreover, by managing and communicating a CSR policy, the reputation of a company can be more positive, and future clients might prefer that company over others that do not bear CSR in mind.

9. Make your company’s ethical standard clear

Your code of conduct should make a clear, unequivocal statement of your values and include behaviors that will not be tolerated. Such an ethical standard should create a best practices approach that’s compliant with all relevant laws and regulations. Encourage your employees and partners to do “the right thing.” One does not have to be a professional lawyer or ethical consultant in order to know that a practice is wrong. Include a directive in your code of conduct to avoid any “gray” areas.

Your company’s integrity is essential to its image and ability to attract prospective clients. Promote your employees’ personal integrity as well as the company’s integrity. Additionally, track your integrity through a supply chain. Use technology to do so. Furthermore, you should enforce your code of conduct. Having a great code of conduct with a lack of enforcement is worse than not having a superb policy at all. Therefore, a strict enforcement and zero tolerance policy towards unethical conduct is imperative.

A company can also achieve this goal with clear and straightforward terms in a contract. In addition, a company should consider acquiring information management software that gathers information about your partners, but also requires information to flow directly from the partners themselves. By doing this, a company can specifically ask for a code of conduct, or for an acceptance of the FCPA regulations, from its partners to the supply chain. Lastly, a company can publish on its website, social media, and in news articles that the company mandates clean business with anticorruption compliance as its main vision.

10. Engage technology to the effort

By using technology, you can gain access to more information and have the ability to share it with more employees in your company. Information management software is a way to collect information from different sources, cross-check the information, and share it with your employees or partners globally. The data feeds from multiple sources, and public and private data can be internally integrated and generated to provide more timely and actionable information.

Additionally, information management software can be used to cooperate with your partners in the supply chain. For example, if you work with agents, an option might be to collect information about your agents from different sources. This may also allow the agents to add information about their own businesses. This cooperative approach might lead to some advantages. First, it is a clear message to your agents (partners to a supply chain), that your ethical standard is high and uncompromised. Second, your agents will be able to provide internal information about themselves. Third, it might encourage your agents to be more compliant. This kind of software will push the agents to act ethically because your company is following its agents’ behavior and may terminate any business with a corrupt party.

“Leveraging the advantages of cloud computing organizations has an unprecedented opportunity to more rapidly share their valuable data within their extended organization including customers, employees, partners, and vendors,” says Edward Sullivan, CEO of G2Link. “When the collaborative economy technologies are fully embraced by enterprises, the value is exponential. Automation and true real-time decision making have come of age.”

Conclusions

Strict adherence to high ethical standards is essential to work in the oil and gas industry. With the level of governmental scrutiny, the margin for error is thin. Navigating in risky jurisdictions requires a disciplined approach to compliance. Logistics companies that manage a complex supply chain should bear a large part of the responsibilities. History shows us that the unethical conduct of a company in the supply chain will likely reflect on other partners and individuals, even if they did not share the conduct directly.

Improvement of the management of your supply chain, strict monitoring and auditing should be the first steps to conduct business in a suspected industry with a complex supply chain. Additionally, improvement of internal anticorruption policies in corporations that dominate this industry is a crucial process for the overall movement of this industry away from corrupt practices. Alignment of all moving parties of a supply chain in the oil and gas industry, will leave no option but for all participants to align as well.

Oil and gas is the lifeblood of the world economy with a unique and complex transport infrastructure. It is critical that the supply chain of each player is compliant to ensure sustainability.