Kenny Baker died last week. For those not familiar with that name, you are most assuredly familiar with the character he played, that being R2D2. Baker had a long history in English vaudeville before filling the role of one of the most lovable characters in all of Star Wars. In his New York Times (NYT) obituary, Baker was quoted that “This film came along and I turned it down. I said, ‘I don’t want to be stuck in a robot, what for, for goodness sake.” But take it he did and he loved it, later saying, “he would do it again for free.” Free or for pay, we are all better off for Kenny Baker’s decision.
Yesterday I began a what I thought would be a two-part series on the Key Energy, Inc. (Key Energy) Foreign Corrupt Practices Act (FCPA) enforcement action. However (and as usual), I got carried away so today I will review the lessons to be learned from the underlying actions which led to the FPCA violations. Tomorrow, I will 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.
The vast majority of the corrupt payments were made through a “Consulting Firm”, which had close connections with a Pemex official, who had decision making authority over Key Mexico contracts. The Consulting Firm apparently did not have a written contract with the company, the contract was not approved by the Key Energy legal department and did not go through any background due diligence, even though both were required under the Key Energy compliance program in place at the time of the issues involved. Even more amazingly is that when these issues became known to the corporate headquarters of Key Energy, the third party was allowed to continue.
Yet even without the minimum of any enforcement of a contract management process or third party risk management process, Key Energy also failed in having a set of internal controls around payments. The Order noted that out of the $561,000 in payments made to the Consulting Firm, “at least $229,000 were payments made through April 2013 in connection with consulting services that were described in Key Mexico’s accounting system as “Expert advice on contracts with the new regulations of Pemex/Preparation of technical and economic proposals/Contract Execution.”” Such description of services is a clear red flag, which should always warrant additional investigation.
While Key Energy had a compliance program in place, it certainly did not engage in doing compliance. The corporate offices failed in the basic oversight of Key Mexico around compliance and did not monitor compliance in Mexico to “ensure they complied with and enforced anti-corruption policies and kept accurate records concerning payments to consultants and gifts to Mexican government officials.” Additionally, there was no oversight and monitoring by compliance or internal audit, who could enforce the requirements of the company’s anti-corruption compliance program or even clean up the mess with remedial actions.
Finally, there was one paragraph in the Order which demonstrated Key Energy’s complete failure of internal controls. More importantly, the SEC laid out in this same paragraph how the information about the violation could have been used by the company to stop the illegal conduct. In short, it lays out how transaction monitoring can be used on a case-by-case basis to detect and remediate illegal conduct and prevent it going forward. The specific issue was around monies made as a donation for a Christmas raffle intended to benefit Pemex employees.
No doubt there will be commentators who will use this paragraph to claim that money or gifts donated for customer raffles violates the FCPA. Such views miss the entire point of this paragraph. The Order stated, “in 2012, Key Energy approved Key Mexico’s contribution of gifts totaling approximately $118,000 to Pemex’s annual Christmas season celebration with the understanding that the gifts were to be intended for a raffle.” However, of this amount some $55,000 was designated to some 130 specific Pemex officials, not a general donation for the benefit of all Pemex employees.
The Order went on to specify the amount was nine times greater than the amount donated for the Christmas raffle for Pemex employees in 2010 and some 26 times the amount spent in 2011 for the same event. More interestingly, the SEC pointed out “Key Energy also failed to consider the implications of the explanation by Key Mexico’s country manager that the higher gift amount in 2012 was correlated to Key Mexico having done more business with Pemex that year.” If Key Energy had engaged in such transaction monitoring, it would have seen an increase in business with Pemex, which, of course, could then have been further investigated. As the Order noted, “Had Key Energy sought more information, it may have learned that Key Mexico was providing gifts to Pemex officials during a period Key Mexico was engaged in ongoing negotiations with Pemex, including negotiations to obtain additional funding for work required under its contracts with Pemex.”
This transaction monitoring analysis laid out by the SEC in its Order clearly intones the SEC will be expecting this type of monitoring going forward. This means a Chief Compliance Officer (CCO) or compliance function will need visibility into not only gifts, travel, entertainment and donation spends in high risk areas but also sales information so they can be correlated and reviewed from the compliance perspective. This is a new level of detail we have not seen before.
Tomorrow will focus on Key Energy’s comeback in the face of its compliance failure.
For the first time, the SEC details transaction monitoring in a FCPA enforcement action.Click to tweet
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© Thomas R. Fox, 2016