This week I have been exploring the Key Energy, Inc. (Key Energy) Foreign Corrupt Practices Act (FCPA) enforcement action. Today, I want to consider the actions taken by Key Energy to obtain the very good resolution the company achieved in the form of a declination from the Department of Justice (DOJ) and the profit disgorgement of $5MM.
The Key Energy matter concluded with the filing of an Order instituting a Cease and Desist Order (Order) in a Securities and Exchange Commission (SEC) administrative proceeding. The matter involved conduct in the US corporate office and also its Mexican subsidiaries, “Key Energy Services de Mexico S. de R.L. de C.V., and a service payroll company, Recursos Omega S. de R.L. de C.V., which is the legal employer of Key Energy’s employees in Mexico” and which were collectively referred to as “Key Mexico” in the Order.
By any stretch, Key Energy obtained an excellent result from its FCPA journey. The company received a declination to prosecute from the DOJ and its only financial penalty was a $5MM disgorgement order from the SEC. The company remediated so thoroughly that it did not require a monitor going forward. All of this means, the Key Energy FCPA enforcement action should be studied by compliance professionals to determine how Key Energy obtained these positive results.
It is incumbent to note that this result was achieved even though Key Energy did not self-disclose to the DOJ or SEC. The Order reports that the SEC contacted Key Energy in January 2014 “with respect to potential FCPA violations”. In April 2014, “Key Mexico employees reported to Key Energy information they had received suggesting the recently resigned country manager had promised bribes to one or more Pemex employees during his employment with Key Mexico.” At that point, Key Energy reported these allegations to the SEC and the company undertook a “broad internal investigation and risk assessment of Key Energy’s international operations.”
However, from that point forward, it appears that the cooperation afforded by Key Energy to the SEC was exemplary as “To the extent the internal investigation identified additional issues of concern, Key Energy provided updates to the Commission staff.” Key Energy provided translated documents to the SEC and provided overall cooperation to the SEC; all of which “assisted the staff in its investigation.”
Key Energy also engaged in extensive remediation to its compliance program after it was notified by the SEC. Initially the company hired a new Chief Compliance Officer (CCO) who led an effort to make “significant remedial measures”. As set out in the Order, the company accomplished the following during the pendency of the investigation. These measures included:
- the suspension of payments to all vendors and third parties in Mexico shortly after the independent investigation/internal review began;
- the engagement of a manual review of over 600 vendors in Mexico for purposes of clearing legitimate payments and assessing whether to move forward with those vendors in current and future operations;
- reviewing all vendors in use in Russia and Colombia and instituting an enhanced due diligence procedure for all vendors globally;
- establishing enhanced financial controls around the procedure-to-pay process in Mexico, Colombia, and Russia including interim employee certifications requirements, revised vendor onboarding requirements, and heightened payment approval requirements;
- implementing a new business opportunities protocol to help Key Energy legal better understand business risks including the role played by agents, consultants or other vendors/business partners, so as to enable better assessment of corruption-related risks in future business opportunities;
- installing new controllers in the Colombia and Mexico businesses and more effectively enforcing a solid line reporting relationship to the U.S. Controller and ultimately the CFO;
- in-person visits to each international location by the CCO and others to, among other things, conduct training of all international employees; and
- developing and/or reviewing several company policies and procedures including the Code of Business Conduct, the FCPA and Anti-Corruption policy, the Travel and Expense policy, and the New Hire Screening Form; and
- a coordinated wind-down and exit of all markets outside of North America, and a commitment to exit Mexico by the end of 2016.
Initiatives 1-3 generally describe investigatory efforts; initiatives 4-5 are creation or enhancement of internal controls; initiative 6 speaks to appropriate business personnel to effect the doing of compliance; initiative 7 relates to putting on in-person training and having a CCO who gets out of the corporate office and visits the employees in the field; initiative 8 relates to updating and upgrading Hallmark Two of an effective compliance program as set out in the FCPA Guidance, including the company’s Code of Conduct and written policy and procedures; finally, initiative 9 demonstrates why a company should create an effective compliance program, as the company is moving away from all international markets, save and except Canada.
There is one other noteworthy component to this SEC resolution and that is the disgorgement of $5MM. There is no other financial penalty listed. One must assume this is based upon the company’s cooperation and remediation and its financial condition. Indeed, one paragraph of the Order reads, “In determining to accept the Offer, the Commission considered cooperation Key Energy afforded to the Commission staff and the remedial acts undertaken by Key Energy. In addition, in determining the disgorgement amount and not to impose a penalty, the Commission has considered Key Energy’s current financial condition and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.” In a section entitled ‘Undertakings’ the Order also specifies the actions the company will take if it is forced into or voluntarily goes into bankruptcy. Key Energy agreed to “undertake all reasonable efforts to obtain authorization from the bankruptcy court having jurisdiction over Respondent’s bankruptcy to pay the disgorgement amount”.
These final two provisions make clear the SEC has no interest in putting a company out of business. But, more importantly, it recognizes modern business economic reality including (but not limited to) the state of the energy industry, corporate debt and its attendant obligations, the unanticipated actions of creditors in forcing companies into involuntary bankruptcy, the maintenance of cash reserves and other factors as well. While there have been other FCPA resolutions which took into account a company’s ability to pay when assessing the fine or penalty; the Key Energy resolution makes clear they understand and accept the business realities on the ground.
The enforcement action presents clear evidence of what a company can do, when it finds itself in the throes of FCPA violations. While it is not clear if the same result would have been achieved before the advent of the Pilot Program, the company’s Declination received from the DOJ and the relatively modest overall penalty assessed by the SEC demonstrate that when a company shows its willingness to work with the DOJ and SEC in a manner which they have articulated, the government will actively reward such cooperation.
And finally, but certainly not least, to the Key Energy CCO and his compliance team. You all worked long, hard and diligently to get your company through all of this very challenging issue and very difficult economic times. The work you did in remediation and credibility you established with the government is reflected in both the declination and the SEC Order. A tip of the hat for a job well done.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at email@example.com.
© Thomas R. Fox, 2016