The Clock Has Started Ticking: Guidance to the UK Bribery Act 2010 Published Today

The UK Government has today confirmed that the Bribery Act 2010 (the Act) will come into force on 1 July 2011 and has published the much anticipated final version of its Guidance for commercial organizations about how they can reduce their exposure to bribery offences under the Act. A Quick Start Guide has also been published that sets out the key points.

For the purposes of the Act, a bribe is effectively the giving or receiving (or the offer or promise to do so) of a financial or other advantage with the intention of bringing about the "improper performance of a function or activity". The Act consolidates existing offences of offering or receiving a bribe, bribery of foreign public officials and introduces a new corporate offence of failure by a commercial organization to prevent a bribe being paid or received on its behalf. It will be a defense for an organization to show that it has "adequate procedures" in place to prevent such bribery. The long-awaited Guidance is important as it provides clarification in relation to what will constitute "adequate procedures".

The final version of the Guidance is formulated around six general principles:

• proportionate procedures;
• top-level commitment;
• risk assessment;
• due diligence;
• communication; and
• monitoring and review.

These principles largely follow those contained in the draft Guidance, previously published. As emphasized by Lord Chancellor Kenneth Clarke in his announcement today, following these six general principles and combating bribery is very much about adopting a common sense approach to addressing the organization’s exposure to bribery.

The Government also appears to have heeded concerns raised in consultation on the draft Guidance and has attempted to minimize those concerns. The clear emphasis in the final Guidance is that a proportionate approach to the implementation of "adequate procedures" is very much all that is necessary. Small businesses and organizations operating in low risk areas will require only modest procedures to mitigate their risks under the Act. In contrast, large scale, multinational organizations operating in high risk areas will be under a more onerous obligation to ensure that their duty to implement adequate procedures is properly discharged.

Helpfully, the Government has also given further clarification in relation to the following areas:

• Corporate Hospitality: One of the main criticisms leveled at the draft Guidance was that it did not provide clear advice on what level of corporate hospitality could be provided without exposing the organization to an investigation and potential prosecution. The final Guidance seeks to address these concerns and wants to reassure businesses that "bona fide hospitality and promotional, or other business expenditure which seeks to improve the image of a commercial organization, better to present products and services, or establish cordial relations" is not prohibited by the Act. The Government does not intend for the Act to prohibit "reasonable and proportionate" hospitality and promotional expenditure incurred in "good faith" for these purposes and that prosecutors would take into account the standards or norms applying in a particular sector when considering whether bribery had taken place. The Guidance makes clear however that it is still for businesses to establish and disseminate appropriate standards for hospitality and promotional or other similar expenditure. The Quick Start Guide states that tickets to sporting events, taking clients to dinner, offering gifts to clients as a reflection of your good relations or paying for reasonable travel expenses in order to demonstrate your goods or services to clients will not amount to bribery as long as they are proportionate to your business. Lord Chancellor Kenneth Clarke has assured businesses that the Act does not stop them getting to know their clients by taking them to events like Wimbledon, Twickenham or the Grand Prix.

• Facilitation Payments: As widely anticipated, the final Guidance makes it clear that facilitation payments (small payments paid to facilitate routine Government actions) are still unlawful, but says that it recognizes the problems that businesses face in some parts of the world and in certain sectors. The Quick Start Guide states that businesses can continue to pay for legally required administrative fees or fast-track services as these are not facilitation payments. The Guidance also recognizes that the common law defense of duress is likely to be available where individuals are left with no alternative but to make payments in order to protect against loss of life, limb or liberty. Separate prosecution guidance has also been issued today, stating that prosecutions will normally be instigated unless there are public interest arguments to the contrary. Large or repeated payments, or payments that were planned for or were accepted as a standard way of conducting business are stated as factors tending in favor of a prosecution.

• Commercial Organizations: Only a "relevant commercial organization" can commit the corporate offence under the Act. A "relevant commercial organization" is defined as a body or partnership incorporated or formed in the UK irrespective of where it carries on a business, or an incorporated body or partnership which carries on a business or part of a business in the UK irrespective of the place of incorporation or formation. The key concept here is that of an organization which "carries on a business". The Courts will be the final arbiter as to whether an organization "carries on a business" in the UK taking into account the particular facts in individual cases. As regards bodies incorporated, or partnerships formed, outside the UK, whether such bodies can properly be regarded as carrying on a business in any part of the UK will be answered by applying a common sense approach. The Government anticipates this to mean that organizations that do not have a demonstrable business presence in the UK would not be caught. It would not expect, for example, the mere fact that a company’s securities have been admitted to the UK Listing Authority’s Official List and therefore admitted to trading on the London Stock Exchange, would qualify that company as carrying on a business or part of a business in the UK.

• Associated Persons: A company will only be guilty of failing to prevent bribery if a bribe was paid by a person associated with it. A person is associated with a business if that person performs services for or on its behalf, which is to be determined by reference to all the relevant circumstances and not just by reference to the nature of the relationship. The final Guidance seeks to address concerns that businesses could be liable for third parties over whom they have no control. It states that associated persons could include employees; agents; contractors; suppliers where they are performing services rather than simply acting as a seller; joint ventures where the bribe is paid for a member of the joint venture and with the intention of benefitting that member; and subsidiaries if the bribe was made to benefit the parent company. The Guidance makes it clear however that indirect benefit is not sufficient to constitute an offence.
The Guidance also provides 11 case studies to assist organizations to identify what procedures they should introduce to prevent acts of bribery within their organizations and for which they may be culpable.

Is the final Guidance helpful? I believe it is, and the risk-based approach will be welcomed by most organizations. However, it does not (and in all fairness, could not) provide all the answers. Businesses will still have to be pragmatic in their assessment of their risk and take a common sense approach to the adequate procedures that are required to minimize those risks.

The final Guidance places great emphasis on "proportionality", "common sense" and "public interest". As the cuts in public expenditures begin to bite, it is anticipated that "prosecutorial discretion" will be exercised sparingly to target the minority of organizations that are responsible for the most serious bribes or for allowing the continued practice of corruption to exist within their business. However, every organization that is touched by this Act needs to review its risk profile and decide upon the antibribery and corruption program it requires in order to protect itself from enforcement action.

Japan's Nuclear Woes Make Bi-Partisan Energy Bill Unlikely

Problems with nuclear power plants in Japan make it less likely Congress will pass significant energy-related legislation before the next election. Republicans and Obama found common ground on nuclear as part of energy policy, so it would have been critical for a bipartisan energy bill. However, in light of recent events in Japan, it will be much more difficult to promote the use of nuclear power.

Republicans have advocated streamlining the approval process for nuclear power plants, making them easier and cheaper to build. After what has transpired in Japan, it will be nearly impossible to advocate a less rigorous approval process. Nonetheless, Republicans in the House of Representatives have stated they will attempt to (A) pass individual, targeted bills rather than comprehensive legislation, and (B) bring to a vote bills to open more federal land and waters to oil and gas drilling, (C) promote the use of natural gas vehicles, (D) block a variety of EPA rules, and (E) obtain approval for the Keystone pipeline, allowing oil produced in Canadian oil sands to be transported to Gulf coast refineries.

Obama and the Democrats have adopted a “clean” energy standard that would require a shift away from coal to nuclear and renewable energy. Again, since nuclear was going to lay the groundwork for a bipartisan energy bill, the odds of grand bargain have diminished.

A factor that could raise the odds of an energy bill is higher gasoline prices. Gasoline prices have been on the rise and may reach levels where they become a political issue since many analysts tie presidential approval ratings (in part) to gas prices.

Offshore Safety: Repackaging RP75

Although most Americans don't know it, Macondo is nothing new and neither is the importance of safety as a driving force in offshore operations. A defining event for offshore safety management was the Piper Alpha incident that occurred in the North Sea in 1988. The loss of 147 lives and the destruction of the platform unequivocally demonstrated that the offshore industry needed to improve its safety management practices. The industry has been focused on improving safety ever since.

Yesterday the American Petroleum Institute (API) announced it is establishing a "Center for Offshore Safety" (to be based in Houston) upon the recommendation of the Presidential Oil Spill Commission.

The Center's purpose is to promote the implementation of "Recommended Practice for Development of a Safety and Environmental Management Program (SEMP) for Offshore Operations and Facilities" or "RP75".

RP75 was first issued in the year 1993 and the latest update was published in May 2004. RP75 is a recommended practice, not a regulatory requirement. It describes how offshore operators can create a Safety, Environmental Management Program. RP 75 incorporates input from many organzations including BOEMRE, the Coast Guard, the Offshore Operators Committee, the National Ocean Industries Association, the Independent Petroleum Association of America, and the International Association of Drilling Contractors.

RP75 was recently incorporated into federal regulations by BOEMRE.

To the public, the Center appears to be a hallmark of good government regulating an industry gone bad. In fact, the BOEMRE regulations adopt what has largely already been developed by industry in the form of RP75. The difference is that the elements of RP75 incorporated into the new regulations are no longer mere recommendations.

New regulations mean new compliance costs. The question is how much those costs will be and how will companies monitor and report on compliance? Will the Center step in to assist companies in doing so? That remains to be seen. It is still unclear what form the Center will take, how it will operate, and how it will be funded.

Does your company envision participation in or providing funding assistance to the Center? If so, what are your company's plans? Tell us what you think about the Center and the implementation of RP75 in the new regulations.

Political Risk: What Higher Gasoline Prices Mean for U.S. Legislation

Higher gasoline prices are starting to put pressure on consumers just as many people are starting to feel better about the economy. What does this mean for the near future relative to new energy legislation? For now, prices aren't high enough to warrant serious concern, but keep your eyes on the horizon.

Higher energy prices impose an effective “tax” on households and businesses, leaving fewer funds available for spending and investment.
This poses a threat to the current recovery and could significantly set back an improving labor market. Higher prices also impact headline inflation (inflation measures the rate of change of prices, not their level). Politicians, especially Democrats, hate news about unemployment and inflation. This means the oil and gas sector is a prime target for Democrats' legislative efforts, especially in light of the ever-closer presidential election. It also explains why the Obama administration has come back four times with proposals for new taxes on the industry. Since most consumers have no clue about the relationship between oil and gasoline prices (the "gas crack") we are an easy target.

Many analysts believe that gas prices would probably have to stay closer to four dollars per gallon to create sufficient political pressure to force Congressional action. Never mind the fact that there is little Congress can actually do to impact the price of gasoline (besides increase it by imposing even more taxes). Nonetheless, high gas prices create political pressure to be seen as "doing something."

The rumbling has already begun.

Last week Senate Democrats called for Obama to release the Strategic Petroleum Reserve to help drive oil prices lower, though it's unlikely he will do so at current prices. Democrats will also demand an FTC investigation of price manipulation (blaming increases on some sort of cabal). Expect these types of proposals to increase in frequency (and volume) as we near the next presidential election cycle.

In the near future, Republicans will continue to pressure the Obama administration to force BOEMRE to change its behavior (which has virtually stopped new drilling in GOM). Interior Secretary Ken Salazar testifies before Congress tomorrow and could announce that a few permits will be forthcoming. However, even if BOEMRE relaxed the standards for permits, the resulting new production would represent a drop in the bucket of world oil supply and have little, if any, short-term impact on prices.

As prices increase further, there will be more calls for an energy bill. This means another bite at the apple for Democrats; another opportunity to use the industry as a whipping post and an excuse for new taxes and new regulations.

Brace yourself.

The Risky and Profitable Business of Investing in Spin-Off Companies

Investments in spin-off companies are often profitable (depending on their timing, of course). These transactions can take many different forms (spin-off IPO, carve-out, split-off, etc.). Marathon Oil Corporation’s decision to spin off its refinery business, Marathon Petroleum Corporation, for example, is one of many spin-offs in 2011’s transaction pipeline. Other recent and pending spin-offs include ConocoPhillips’ divestiture of its 20% ownership interest in Lukoil, Lundin Petroleum and Petrofrac’s spin-off of EnQuest PLC, and Norse Energy’s spin-off of Panoro Energy, to name a few.

What is a “spin-off” really? Provided certain rules under the Internal Revenue Code are met, spin-offs are a tax-free way for a company to divest a business (compared to an outright sale). And while a company’s specific circumstances may alter the outcome, the basic requirements to qualify for spin-off treatment include:

1. The parent company must control the “spun-off” company through either 80% or more of the total combined voting power of the company and 80% of all of the classes of shares entitled to vote.

2. The spun-off company cannot be used to distribute earnings and profits of the parent company.

3. The spin-off must have a legitimate business purpose.

4. The parent company and the spun-off company must have been involved in an “active trade or business” for the 5 year period leading up to the transaction closing date (and must continue to do so immediately after the spin-off).

5. There must be a “continuity of interest” (ownership) among the parent company and the spun-off company after the closing.

6. The parent company must distribute all of the stock it owned in the spun-off company.

Once a company chooses to spin off part of its business, there is a lag time between announcement and when the transaction becomes effective. This is because certain tax, legal and regulatory steps are required. Company lawyers must draft documents to legally divide the business and file the necessary paperwork (e.g., an SEC Form 10 registration).

Historically, in a spin-off transaction, the parent company’s stock does well, outperforming industry averages, in these months leading up to the announced transaction, but often not nearly as well in the months following the closing. Making a short term gain on parent stock in a prospective spin-off, therefore, means investors should understand how likely the company is to meet the legal requirements for completing the transaction because this can impact the speed and possibly the “steam” behind a pre-closing run-up.

Spun-off companies, by contrast, often tend to have negative share price returns in the months following a transaction. For example, take Pride International’s (PDE) 2009 spin-off of Seahawk Drilling (HAWK). According to some industry analysts, Seahawk experienced a -60% share price return in 2010. Spun-off companies can make attractive acquisition targets and are valued as longer term investments, however, because spun-off companies (especially smaller cap companies) have relatively high and absolute share price returns over the long term. A word of caution, however: analysts say that energy industry spin-offs have historically underperformed when compared to similar size transaction in other industries.

Have you been involved in a spin-off transaction? Please share your thoughts on spin-offs with us.

Obama Tax Hikes on Oil & Gas Now Unlikely

Earlier this week Senate Republicans voted unanimously against an amendment that would have offset the revenue loss associated with repealing a controversial proposal in the health care bill by raising taxes on oil and gas companies.

This amendment included a number of tax increases, the most important of which would have the effect of (1) raising the corporate tax rate on oil and gas companies by denying them a more favorable rate than other manufacturers pay, and (2) reduce oil and gas companies' ability to claim a credit against foreign taxes paid for purposes of calculating their U.S. tax burden.

This vote is the best indicator that a tax "Obamination" on the industry will have little chance of becoming law in the next year to two years.

Enemy Mine: Munitions Cause Explosive Situation in Iraqi Hydrocarbons Development

Estimates put the number land mines scattered across Iraq at 25 million or more (most in the southern part of the country). Yet despite their obvious danger to human life and their impediment to economic development, you won’t find Hollywood celebrities on camera in these areas asking for your donations or thoughtfully nodding while a village chieftain explains the plight of his people. That’s because many of these mines are concentrated in areas being developed by foreign oil companies.

The Iraqi Oil Ministry and Iraqi NGOs describe the mine problem as “catastrophic.” Yet despite the fact that oil production represents the country’s best hope for raising the Iraqi people out of poverty, international organizations are not contributing enough to the de-mining effort and the government can’t seem to get its act together. Why?

There are nearly a dozen national and international agencies working to get rid of munitions in Iraq. Sources within the energy community have told me, however, that cooperation among these groups has been problematic, based on a perceived bias by non-Iraqi NGOs, in particular, against cooperation with the petroleum industry. The result: the burden has fallen on the service companies to make their areas of operation safe for development. Without the effective support of the government and NGOs, oilfield companies must turn to private firms for help.

Outside of Kurdistan, all development is being let by the Iraqi government on a service contract basis. This means that oil companies don’t share on any of the upside of oil prices, but instead receive a low, flat fee per barrel produced.

Since the Iraqi government did not take mines into account until after the bid rounds closed on current contracts, it made no allowance for delays and cost increases attributable to de-mining activities. Foreign oil companies that have signed contracts to develop Iraq's oil reserves may therefore be unable to meet deadlines due to the danger of land mines. This theoretically places their whole contract at risk.

Service companies, already on thin margins (because many of these contracts are considered brownfield developments in established fields) stand to get the worst end of this situation. With a relatively impotent government and little cooperation from international non-profits, they have had to turn to contract assistance. The impact on margins is obvious.

Iraq could hold the greatest potential for growth in global oil production. With 115 billion barrels of oil, Iraq has the world’s third-largest proven reserves, behind only Saudi Arabia and Iran. Some geologists believe that Iraq’s reserves are even greater than that, as many oil fields have yet to be fully explored. There are few, if any, places that have as much oil that’s untapped and close to the surface (and thus relatively economical to extract) as Iraq does. But oil production in Iraq has fallen woefully short of its potential. The government has announced double digit projections for mmboe production. These numbers are far from realistic, and, more to the point, should the Iraqi government fail to resolve issues like de-mining, continued development under a service contract model could make new projects unprofitable, and untenable, for IOCs.

Tell me what you think (or what you have heard) about these and other operational issues on the ground in Iraq!