Will Extractive Companies Move Away from Corruption-Prone Intermediaries?

Note: This post originally appeared as a contribution to the FCPA Blog on 29 July 2019.


Multinational companies regularly hire agents and fixers to help them win lucrative business in complex or unfamiliar environments. These intermediaries, who include both established firms and well-connected individuals, provide introductions to decision-makers, intelligence on how to secure a contract, and an on-the-ground presence in far-flung lands. Sometimes they also serve as conduits for bribes.

Recent events in the oil industry suggest that companies may start opening doors on their own, without relying on these “middlemen.”

Last Monday, the large commodity trader Trafigura announced that it would no longer hire third parties to perform “business development” functions. A few weeks earlier, two other commodities giants, Glencore and Gunvor, indicated that they would significantly reduce their use of this type of intermediary as well. That means three of the world’s largest trading companies may desert a decades-old playbook. Their statements follow an uptick in related anti-corruption investigations, with current inquiries examining trader activities in Brazil, the Republic of Congo, the Democratic Republic of Congo, Nigeria and Venezuela. Intermediaries feature prominently in most of the accusations.

And it’s not just the traders. Oilfield service companies may reconsider their approach to agents too. On Friday, Basil Al Jarah pled guilty to conspiring to bribe Iraqi officials corruption, charges brought by the UK’s Serious Fraud Office. Al Jarah led the Iraq operations of Unaoil, a firm that helped companies win oil contracts in challenging foreign contexts. Many Unaoil clients have faced legal proceedings themselves. SBM Offshore, a Dutch oilfield service company, will pay $238 million in fines to settle charges of bribing Iraqi government officials via Unaoil, as well as separate schemes in Angola, Brazil, Equatorial Guinea and Kazakhstan. Intermediaries featured in all five country cases. Technip FMC, another giant of the oilfield services field, faces $296 million in fines for conspiring to bribe officials via Unaoil in Iraq as well as making corrupt payments in Brazil.

Following Trafigura, Glencore and other risk-taking companies promise to move away from using agents and the unprecedented investigations into Unaoil’s client list, it’s a good moment to ask: how should companies that compete for lucrative contracts reduce corruption risks related to intermediaries?

Over and over and over again

Researchers at Stanford Law School checked 275 FCPA enforcement actions and found that a whopping 89 percent featured third-party intermediaries of one kind or another. OECD analysts found that intermediaries played a significant part in three quarters of the 427 foreign bribery cases that they studied. Intermediaries have played starring roles in many of the oil and mining industries’ most prominent recent corruption cases, including in Brazil, Nigeria, Algeria, the Republic of Congo, and the DRC.

As this record makes clear, working with intermediaries fails to insulate companies from corruption risks. Law enforcement authorities have repeatedly gone after companies who paid bribes via third parties. The U.S. Department of Justice has clearly stated several circumstances in which companies are liable for the actions of their agents, and the ample case history shows how vigorously this U.S. enforces this rule. The 2010 UK Bribery Act goes even further, holding companies liable for failing to prevent an entity from bribing on their behalf.

As a result, many large companies already have programs aimed at reducing third party corruption risks. Most already treat agents and fixers -- the kinds of intermediaries who open doors and sniff out opportunities -- as among their toughest anti-corruption challenges. These parties receive extra attention from corporate compliance teams and decision-makers including more thorough due diligence and oversight. Yet the recent track record suggests this approach may not prevent cases like the Unaoil saga from occurring again.

What else can be done?

The recent announcements by commodity traders suggest companies are willing to go further. Trafigura introduced a policy that prohibits hiring agents that provide “business origination and/or business development services” given the risks that these parties pose to the company even when robust oversight is applied. It then publicly announced the new policy.

This kind of change is hardly a silver bullet. Large companies will still enter into all kinds of third-party arrangements with advisors, lobbyists, lawyers, consultants, subcontractors and suppliers. If executives really want to make an inappropriate payment via an intermediary, they have many options at their disposal. A recent FCPA case illustrates the challenge. An executive for Halliburton, the large U.S. oilfield services company, wanted to partner with an intermediary closely linked to certain key Angolan officials. Halliburton’s internal anti-corruption controls twice blocked the deal from going ahead. But eventually, on the third repackaging, it was internally approved as a property management contract. Halliburton later self-reported the problem and negotiated a $29 million settlement with the SEC. No policy, including a ban on agents, can shut down all the ways to package a payoff.

And not all companies will be quick to enact this reform. While Glencore indicated it would hire more staff in countries like the DRC in order to use fewer intermediaries, smaller companies don’t have this option. Even for many large firms, cutting out agents altogether will be tough. Commodity trading companies have enjoyed great success thanks to their ability to swoop into high-risk markets and snap up deals. Oilfield service companies monitor and compete for frequent tenders all around the world. They use agents to find out about these opportunities, explain how they work, and represent their interests as the proceedings unfold. In some markets, abandoning agents may pose political or commercial obstacles, and some staff will remain loyal to old ways of working.

Despite these challenges, the explicit move away from business development agents is a promising step forward. For one thing, it goes beyond the more typical promises of better due diligence. The OECD, DOJ, Transparency International, and various legal experts all suggest that companies should carefully vet intermediary deals for certain red flags such as vague contracts, excessive commissions, links to public officials or underqualified parties. Of course this is good advice. But, recent controversies involving Shell and Eni in Nigeria, BP and Kosmos in Senegal and Och-Ziff in DRC, among others, indicate that companies engage with third parties even when their due diligence uncovered major red flags. Due diligence only helps if company executives apply robust standards too.

Along with banning the riskiest types of intermediaries, companies could also stop paying “success fees,” commissions or other payments that incentivize corruption. The DOJ found that Unaoil only got paid by Technip FMC if Technip won a contract and received payment from the Iraqi government. Leaked emails written by Unaoil fixer Al Jarah reveal the kind of elaborate, frantic and eventually illegal lengths that he went to as a result of this type of arrangement. Companies could also refuse to pay intermediaries in countries where they do not operate, such as in offshore secrecy havens.

Trafigura’s decision to publicly announce its new policy is another small step forward. Many companies create anti-corruption policies and practices primarily to convince law enforcement that they’re responsible players. This means that only anti-bribery authorities (and perhaps investors) end up monitoring a company’s practices. Public interest groups could play a key complementary role, especially local groups familiar with their country’s players and terrain. To enable more public accountability, companies should disclose their anti-corruption policies and the identify of the third parties they hire, starting with the highest-risk ones first.

Unaoil’s clients and several commodity traders are feeling the heat due to problematic deals they struck with intermediaries. As companies revisit their approach to these high-risk third parties, past cases suggest that they should consider eliminating certain types of agents especially when they’re going after new business, establishing what kind of red flags they won’t ever ignore, avoiding payments that increase corruption risks, and embracing transparency and public scrutiny as advantageous safeguards.
 

Alexandra Gillies is an advisor with the Natural Resource Governance Institute (NRGI).