In October 2010 Royal Dutch Shell paid out $10m (£6.3m) in fines to the Nigerian government, following allegations of bribes paid on its behalf by freight forwarding company Panalpina Welttransport Holding to Nigerian government officials. The fines were part of the settlement of Foreign Corrupt Practices Act (FCPA) charges with the US Department of Justice (DoJ) and Securities and Exchange Commission following an investigation launched in early 2007 that involved up to a dozen energy companies that were customers of Panalpina.
Three of Panalpina’s customers, Tidewater Marine International, Transocean and the Nigerian subsidiary of Royal Dutch Shell admitted to approving or condoning Panalpina’s payments on their behalf. Shell entered into a deferred prosecution agreement with the DoJ, agreeing to pay a $30m criminal penalty and submit an annual report on its compliance regime on behalf of its Nigerian subsdiary.
The issue of dealing with third parties has been instructive. Certainly, for Shell, the Panalpina experience was a wake-up call. From the end of 2008 the company started to put together a comprehensive worldwide anti-bribery and corruption programme, much earlier than most of its UK peers.
“The main lesson we learned with Panalpina was that we did not follow the warning signs,” says chief ethics and compliance officer Richard Wiseman, who stepped into his role three years ago.
Shell, which has operations in around 90 countries, does business in a number of states deemed by Transparency International to be ’high-risk’, where ethical business standards are not routinely enforced by the authorities. Although the fines incurred in the wake of the Panalpina case were enforced under the FCPA, Shell’s experience will be of considerable interest to any international company considering the effects of Section 7 of the forthcoming UK Bribery Act.
“The FCPA already imposes on organisations obligations in relation to the actions of third parties, but the strength of the obligation depends on the control you have over them,” says Wiseman.
The section in the Bribery Act that deals with the actions of third parties is probably the most controversial.
It states: “A relevant commercial organisation (’C’) is guilty of an offence under this section if a person (’A’) associated with C bribes another person intending a) to obtain or retain business for C, or b) to obtain or retain an advantage in the conduct of business for C.”
“In other words,” says Wiseman, “you could be in the dock for the action of third parties over which we have no control. You have responsibility for a joint venture [JV] operator even if your legal ability to influence them is negligible.”
A further difficulty for in-house lawyers and compliance officers, Wiseman says, lies in Section 8 of the act, as the key phrase ’associated persons’ is defined as those who “perform services for or on behalf of [the organisation]”.
This covers not only employees or other members of the group but also business and JV partners, agents and counterparties – and the act makes it clear that this is not an exhaustive list. Problematically, there has been little guidance from the Ministry of Justice; it will be for the courts to determine the meaning of ’performs services’ on a case-by-case basis.
This creates particularly difficult issues for companies in extractive industries, most of whose business is conducted through JVs.
“You might have a small participating interest and the operator could be a state-controlled company that’s providing services which you have little or no meaningful control over,” Wiseman adds.
The challenge for legal and compliance officers is to monitor whether those organisations are indulging in bribery or corruption. Furthermore, Wiseman warns, anyone in the supply chain could be providing services.
“You have to be careful in relation to those who act as government intermediaries or are negotiating on your behalf,” he says. “It could even be a local law firm.”
The only defence available is that the company has in place “adequate procedures designed to prevent persons associated with [that commercial organisation] from undertaking such conduct”, but the scope of these procedures is not defined in the act.
As part of a worldwide tender process that was finalised in May 2010 all Shell’s panel firms were asked about their own compliance procedures as a matter of course. However, Shell has now extended its scrutiny to firms that are advising third parties involved in JVs – that is, firms not retained by the company. Along with global legal services coordinator Leanne Geale, Wiseman is asking non-panel law firms with which Shell does business around the world for details of their own anti-corruption compliance procedures.
This is thought to be the first time an organisation has extended these enquiries to third parties. Wiseman and Geale have tasked their local heads of legal to carry out checks, as local knowledge is key.
“What we have in mind is a law firm acting for us as an intermediary with a foreign government, or negotiating a contract or licence on our behalf, for example,” says Wiseman. “Our enquiry is about the law firms’ programmes for compliance with anti-bribery and corruption laws, and extends to all countries in which they practise. We’ve had no objections about these firms so far, but we know other companies have found that firms have obtained advantages for them by unauthorised, improper means. In some jurisdictions you can’t assume that a law firm is any cleaner than any other intermediary.”
The review of law firms is part of a wider programme of due diligence.
“We have tens of thousands of suppliers so you can only do this on a risk basis, starting with people who we’ve not previously dealt with – we prioritise them,” says Wiseman. “If you have a long-term relationship with suppliers it doesn’t make sense to throw your resources at looking at them, although there are exceptions of course, such as in difficult countries.”
Although sometimes a simple Google search can throw up plenty of information on the companies in question, Shell has four risk specialists working on this full-time out of a total risk and compliance team of 30. The process also involves colleagues from internal audit and the investigations department. Once they have identified a red flag, Wiseman’s legal and compliance team takes it from there.
Wiseman warns that an organisation should nevertheless be careful to avoid knee-jerk reactions.
“If a supplier’s record isn’t all it might be, it wouldn’t disqualify it absolutely as it might have learnt from its experience and put systems in place,” he says.
While the implications of the Bribery Act are still being played out, Wiseman is sure of one thing.
“The two questions everyone should be asking are, do we know what our obligations are and do we have a programme in place?,” he says. “Preparation is all.”