Tom Fox: Oil price drop raises compliance risks
Friday, February 13, 2015 at 9:48AM
Thomas Fox in Charles Schwab, Cumberland Advisors, Extractive Industries, Kavid Kotok, Liz Ann Sonders, Texas

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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