Oil is hovering around $50 per barrel. For most of the US economy this drop in oil price has provided a much-needed economic boost. One piece on the NPR website, entitled “Oil Price Dip, Global Slowdown Create Crosscurrents For U.S.”, said “economists have suggested the big drop in oil prices is a gift to consumers that will propel the economy.” Liz Ann Sonders, who is the chief investment strategist at Charles Schwab, was quoted as saying “The U.S. economy is 68 percent consumer spending, so right there you know that falling oil prices is a benefit.” Another economist said the positive effects could be “worth $400 billion” for the US economy as a whole.
But in the energy space, particularly in the city of Houston, Texas, this plunge has been devastating. It is so bad that in this past week’s issue of the Houston Business Journal (HBJ), it provided a ‘Box Score’ for energy company lay-offs. And that was before Halliburton announced a 10%-15% reduction and Hercules Offshore announced that it had laid off some 30% of its work force since last October. Nationally, for the energy industry, it will be just as bad. In the NPR piece, David R. Kotok, of Cumberland Advisors, said, “cuts in production and energy company payrolls will cost the U.S. economy up to $150 billion.” The Houston Chronicle headlined it was a “Bloodbath”.
I thought about what this plunge in the price of oil could mean for the compliance function in energy and energy related companies going forward. Many Chief Compliance Officers (CCOs) and compliance practitioners struggle with metrics to demonstrate revenue generation. Most of the time, such functions are simply viewed as non-revenue generating cost drags on business. This may lead to compliance functions being severely reduced in this downturn. However I believe such cuts would be far from short-sighted; they would actually cost energy companies far more in the short and long term.
Almost any energy company of any size has gone through a Foreign Corrupt Practices Act (FCPA) investigation, whether internal or formal by the Department of Justice (DOJ) or Securities and Exchange Commission (SEC). Many had gone through enforcement actions. The risk profiles of these companies did not change because of the drop in oil prices. Extractive resources are still located largely in countries with a high perception of corruption. In others, the inherent compliance risks that currently exist for energy companies will certainly not lessen. Unfortunately they may well increase.
At this point I see two increasing compliance risks for energy companies. The first is that companies will attempt to reduce their costs by cutting their compliance personnel. A tangent but equally important component of this will be that companies that do not invest the monies needed to beef up their oversight through monitoring or other mechanisms are setting themselves up for serious compliance failures.
Moreover, what will be the pressure on the business folks of such companies to ‘get the deal done’ with this slashing of oil prices? Further, if there is a 10% to 30% overall employee reduction, what additional pressures will be on those employees remaining to make their numbers or face the same consequences as their former co-workers?
I think both of these scenarios are fraught with increased compliance risks. For companies to engage in behaviors as I have outlined above would certainly bring them into conflict with the Ten Hallmarks of an effective compliance program as set out in the FCPA Guidance. For instance on resources, the FCPA Guidance does not say in a time of less income, when your compliance risk remains the same or increases, you should cut your compliance function or the resources to support it. Indeed it intones the opposite, when stating, “Those individuals must have appropriate authority within the organization, adequate autonomy from management, and sufficient resources to ensure that the company’s compliance program is implemented effectively.” Moreover, the FCPA Guidance adds, “Moreover, the amount of resources devoted to compliance will depend on the company’s size, complexity, industry, geographical reach, and risks associated with the business. In assessing whether a company has reasonable internal controls, DOJ and SEC typically consider whether the company devoted adequate staffing and resources to the compliance program given the size, structure, and risk profile of the business.” So the resource issues is stated in reference to the risk profile of the business and not the current or fleeting economic issues of the day.
Also note that the FCPA Guidance speaks to an analysis from the DOJ side, which would presumably be a criminal side review. For instance, if a company cuts its compliance staff while its risk profile has not decreased, does this provide the required intent to commit a criminal act under the FCPA? Moreover, who would be the guilty party under such an analysis? Would it be the Chief Executive Officer (CEO) who ultimately decides we need a fixed percentage cut of employees or simply a raw number to be laid off? How about the department head (as in the CCO) who is told to cut your staff 10% or we will make the cuts for you? Or is it a company’s Human Resources (HR) department who delivers the dreaded knock on a compliance practitioner’s door (I’m from HR and could you come with me). What if a company’s decision-making authority is so decentralized that there is no one person who can be held accountable?
You should also note the SEC role in FCPA enforcement, as alluded to in the quote from the FCPA Guidance. There will be an assessment of internal controls. Now that the COSO 2013 Framework has become effective, will companies delay plans to implement the new Framework and to begin to audit against it? If so, would that be a per se FCPA violation?
But there is a second reason that I believe that energy companies risk profiles will increase in this industry-specific downturn. Unfortunately it will come from those employees who survive the lay offs. They will be under increased pressure to do the jobs of the laid-off folks so there will be a greater chance that something could slip through the cracks. If you are already working full time at one job and one, two or three other employees in your department are laid-off, which job is going to get priority? Will you only be able to put out fires or will you be able to accomplish what most business folks think is an administrative task?
But more than the extra work the survivors will have laid upon them will be the implicit message that some companies senior management may well lay down, that being Get the Deal Done. If economic times are tough, senior management will be looking even more closely at the sales numbers of employees. The sales incentives could very well move from a question of what will my bonus be if I close this transaction to one of will I be fired if I do not close this transaction. If senior management makes clear that it is bring in more business or the highway, employees will get that message.
Once again, where would the DOJ look for to find intent? Would it be the person out in the field who believed he was told that he or she either brought in twice as much work since there were half as many employees left after lay-offs? Would it be the middle manager who is more closely reviewing the sales numbers and sending out email reminders that if sales do not increase, there may well have to be more cuts? What about the CEO who simply raises one eyebrow and says we need to hunker down and get the job done?
What might be the DOJ or SEC reaction to the downsizing of compliance in the face of such increased compliance risk? The energy industry has not gone through this type of economic downsizing in the new age of FCPA prosecutions, largely since 2004, so there is no relevant time frame of FCPA enforcement to reflect from. However, the financial industry did go through such a contraction in the 2007-2010 time frame. We have seen the DOJ and other financial industry regulators draw huge penalties for a series of anti-money laundering (AML) and LIBOR scandals. My guess is that the DOJ and SEC will not allow companies to use economic arguments in the face of known and recognized increase in compliance risks. Indeed they may focus on some of these points as reasons for increased compliance vigilance in an energy company’s compliance function going forward.
