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Tom Fox: Oil price drop raises compliance risks

Oil is hovering around $50 per barrel. For most of the U.S. economy this drop in oil prices has provided a much-needed economic boost. One piece on the NPR website said “economists have suggested the big drop in oil prices is a gift to consumers that will propel the economy.”

Liz Ann Sonders, who is the chief investment strategist at Charles Schwab, was quoted that “The U.S. economy is 68 percent consumer spending, so right there you know that falling oil prices is a benefit.” Another economist said the positive effects could be “worth $400 billion” for the US economy as a whole.

But in the energy space, particularly in the city of Houston, Texas this plunge has been devastating. It is so bad that in this past week’s issue of the Houston Business Journal, it provided a “Box Score” for energy company lay-offs. And that was before this week, when Halliburton announced a 10% reduction and Hercules Offshore announced that it had laid off some 30% of its work force since last October. Nationally for the energy industry it will be just as bad. In the NPR piece, David Kotok of Cumberland Advisors said, “cuts in production and energy company payrolls will cost the U.S. economy up to $150 billion.”

I wondered what all this will mean for the compliance function in energy and energy related companies going forward. Many chief compliance officers (CCOs) and compliance practitioners struggle with metrics to demonstrate revenue generation. Most of the time, such functions are simply viewed as non-revenue generating cost drags on business. This may lead to compliance functions being severely reduced in many energy companies, in this downturn. However I believe such cuts would be far from short-sighted; they would actually cost energy companies far more in the short and long term.

First understand that almost any energy company of any size has gone through an FCPA investigation, whether internal or formal by the DOJ or SEC. Many have gone through enforcement actions. The risk profiles of these companies did not change because of the drop in oil prices. Extractive resources are still located largely in countries with a high perception of corruption. Companies cutting their compliance personnel and not beefing up their oversight through monitoring or other mechanisms are setting themselves up for serious compliance failures.

Moreover, what will be the pressure on the business folks of such companies to “get the deal done” with this slashing of oil prices? Further, if there is a 10% to 30% overall employee reduction, what additional pressures will be on those employees remaining to make their numbers or face the same consequences as their former co-workers?

I think it all means that compliance risk may actually increase due to this drop in oil prices. I do not think the DOJ or SEC will look favorably on companies who intentionally reduce compliance in the face of such increasing compliance risk.


Thomas Fox is a contributing editor of the FCPA Blog. He’s the founder of the Houston-based boutique law firm A popular speaker on compliance and risk-management topics, Fox is also the creator and writer of the widely followed FCPA Compliance and Ethics Blog. His book Lessons Learned on Compliance and Ethics topped Amazon’s bestseller list for international law. He can be contacted here.

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  1. Tom, in my opinion you are incorrect. When companies reap large and questionable profits they see fit to pay bribes for contracts and other special favors. Noe their "slush funds" are diminished they first lay off workers and then reduce their "philanthropic" ways. Either way the general public loses. Your specialty is getting work from the large corporations and I am sure the downturn has affected your business. Why should the oil prices be manipulated by these companies,OPEC and banks to assist with their billions in profits? Unfortunately, the small to medium size companies will suffer as the rely on business from the large oil companies who have 90 day credit terms most of the time. Maybe it is time to teach them humility and donate their "slush funds" to build up industry in those poor countries they are ravaging for oil and gas.

  2. Tom raises an excellent point with respect to the pressures "to get the deal done" from the business perspective. I am curious if he thinks there might be a propensity among state employees at the producer countries to increase requests for bribes, fearing regime instability and social turmoil. In other words, if those who demand bribes fear that the continuation of their function might be at risk, and hence their income stream, will that add an additional danger at the front-line?

  3. I've heard it said (recently) that the plunging oil price means that deals will go on hold and bribery will stop. No deal, no need to bribe, that argument goes.

    My attempts to suggest otherwise were not well received (or received at all).

    I suspect that plunging oil prices will be the foundation for unethical behavior.

    Desperate economic times cause people to take desperate measures. I have no doubt that the risk is now equal or greater than it was before.

    Compliance functions will get cut, pressure to generate revenue and stay profitable (or afloat) will mount. Combine that with some in the industry who think that those pointing to more risk are crazy and you have a heady mix of risk and blindness to it.

    It will end in tears.

  4. I totally agree with Barry. I think this is a perfect storm of compliance cuts (it is only a matter of time when revenue model reductions lead to equivalent calls for expense re-forecastiing) and greater pressure to "win above all else" at the field level. My question to Barry and Tom is do you think that C-Suite executives will be less likely to ask "how did you do that?" when financial targets are achieved in low-integrity regions in the context of "plunging oil prices?" As Barry well states, "risk and blindness" present peril for all.

  5. I guess some may not ask at all.

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