Ed. Note-today I continue my sometimes series of blog posts based on lunches with the FCPA Compliance and Ethics Blog. In this post, I report on a visit with Donald Anderson, the Partner in Charge for TD International’s (TDI) Houston Office.
I recently had the chance to sit down for a lovely lunch at the Federal Grille with Donald Anderson, the Partner in Charge for TD International’s (TDI) Houston Office. Donald is a Louisiana native who attended LSU, receiving a BS in Civil Engineering and later a MS in the same discipline. He worked for many years in the energy sector with Fugro Consultants, a geosciences firm. He later obtained a MBA from Rice University in Houston and began his career with TDI, where he specializes in country and regional business strategies, pre-transaction due diligence for mergers and acquisitions (M&A), compliance investigations for anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA) and UK Bribery Act, assessment and mitigation of above-ground risks, and litigation support.
TDI is a strategic intelligence advisor to business and financial leaders operating in emerging and first world markets. It has four main focus areas including strategic advisory services, which combines the company’s commercial, diplomatic, and intelligence experience; its business risk services for domestic and internal business and reputational issues; due diligence work from third parties under the FCPA to potential business acquisitions and business partner reputational issues; and localized assessments for corporate strategy.
Anderson and I enjoyed a wide-ranging chat on a variety of topics. He always has some great strategic insights. Since we are both in Houston, the current state of the energy industry was one of our initial topics of conversation; ranging from the current price of oil to where it may go with the ongoing instability in the Middle East. Within the FCPA context, one of the more interesting set of issues is coming out of Iraq.
Unfortunately the corruption issues surrounding the current Iraqi government are well-known. But the status of the Islamic State (ISIS) has only acerbated the corruption situation. Anderson expounded that this is because Iraq’s financial woes are caused by the two-fold problem of dramatically increased military expenditures, coupled with decreasing oil revenues. This dip in oil revenues comes from the twin problems of the world-wide drop in the price of oil and the country’s internal loss of oil resources to ISIS. In the short term, the government can fund its operations against ISIS at the expense of other government programs. However, this will seriously increase Iraqi government’s debt to foreign energy companies and negatively impact desperately needed investments for critical infrastructure and other government related construction projects.
Anderson explained that the Iraqi government has resorted to ceasing payments to energy firms with oil supplies. Instead, the government is selling oil on the open international market. Of course with the drop in prices from more than $100 per barrel to somewhere now hovering in the neighborhood of $50 per barrel, this has seriously impacted the ability to raise significant cash, so the government has to sell ever-increasing amounts of oil to maintain revenues.
Moreover, in the long-term, this is a very risky strategy for the country. These changes have made bribery and corruption more rampant because the contracts that directed where the oil was to be sold have become porous, with many sales going to the highest bidder. It is not hard to see how an Iraqi government official might well be tempted to make a sale, in this situation, facilitated through the payment of a bribe.
Another issue coming out of Iraq is the implosion of the oil agreement between the government and the Kurdistan Regional Government (KRG). Under this oil agreement, there was a contractually mandated formula for the exporting of oil out of the area held by the KRG with a revenue sharing component from the central Iraqi government back to the Kurds. The KRG has attempted to export oil unilaterally and the Iraqi government has cut off the KRG from receiving its full portion of the federal budget. We had this conundrum come up in Houston late last year, when a tanker of KRG oil was stopped from unloading their oil by the Iraqi government through an injunction it obtained in US Federal District Court in Houston.
Anderson emphasized that if the oil agreement continues to be held in abeyance, both the central Iraqi government and the KRG will suffer financially. But from the compliance perspective, he indicated that if the KRG exports oil, it could be through a pipeline which goes out through Turkey or some other country. I view this situation as one which could well lead to bribery and corruption to get KRG oil out in violation of the agreement between the central government and the KRG.
Later in the lunch, our conversation turned to Brazil and the ever-burgeoning corruption scandal, which began with Petrobras. Anderson gave his opinion that the matter could become one of the world’s largest corruption scandals. When I brought up GlaxoSmithKline PLC (GSK) and how I thought it would be such a game-changer in anti-corruption compliance, Anderson responded that while the Chinese corruption scandal certainly was large, it is still largely focused on China and Chinese persons and entities. He did acknowledge the role of GSK but pointed out that the Brazil corruption scandal had exploded beyond Petrobras and Brazilian companies to a number of western companies from the US and Europe. Further, the recently announced scandal in the Brazilian tax appeal board has implicated a number of non-Brazilian companies.
In our discussions relating to Petrobras, I raised with Anderson the issue of the scheme used by Petrobras employees to obtain bribes. It appeared that contract prices were over-inflated by 3% and then the company paying the bribe would rebate the money to the corrupt Petrobras official or his Swiss bank account. My question to Anderson was how could you determine if 3% is truly an overcharge to the contract or is even outside a reasonable range of profit. Anderson had a great phrase which was to “follow the money” by looking at similar contracts awarded to the company or where they had bid to determine. One might need to look at a large number of contracts to determine the full value of services or products offered but he believes that such an analysis could be done.
We both agreed that this type of analysis is something any US or UK company which has done business with Petrobras over the past 5 years should do so sooner rather than later. We also discussed any companies, which may have won Brazilian contracts for infrastructure or other construction projects for the 2014 World Cup or 2016 Olympics. There is already one European company, the German company Bilfinger, which has announced an internal investigation into contracts from construction projects relating to these events. We both believe that there will be others so ensnared and that the better approach for any US or European company would be to engage in an internal investigation now to see if there are issues along these lines.
Finally, Anderson had an insight I had not seen previously, around bribery and corruption the energy space. He drew out a graph, which detailed the spending in any mineral extraction process. He explained to me that at certain points the lifecycle of a project you have increased spending. One time is during the bid process, a second time is during the exaction or drilling process and finally in the divestiture or sale of the asset phase. It is during these times where there is money being bid out for work but also a large number of permits or other government interactions required. There may also be a new set of players in each phase, who have their collective hands out. It is during these phases that companies have the highest risk of their employees engaging in bribery and corruption. Armed with this knowledge, a company can bring greater compliance resources and risk management to bear to prevent or detect FCPA or UK Bribery Act issues.
Unfortunately our time for lunch ran out and we had to return to our respective offices. As you can tell from this article, Anderson has an extremely interesting background and his work with TDI allows him to utilize his wide variety of educational and professional tools. If you have the need for any of the services discussed in this article, I would urge you to contact Anderson. He can be reached at email@example.com.
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© Thomas R. Fox, 2015