Commentary: Juniors vulnerable to running afoul of US anti-bribery laws

Imagine this: a small mining company in Denver hires a consultant in a small African country to buy mining rights to a promising gold acreage. The company feels lucky to have hired the consultant because he is well known and connected in the community, someone who can get the deal done.

The company is aware that corruption is a way of life in many small countries, so the chief financial officer (CFO) has the consultant sign the company’s Foreign Corrupt Practices Act (FCPA) policy and code of conduct. Enacted in 1977, the FCPA is a federal law that prohibits companies from paying bribes to foreign political figures and government officials for the purpose of obtaining business.

The consultant signs the documents, ensuring the CFO that he will not bribe any officials in order to buy the mineral rights. This is good news because the CFO knows that the consultant will be expected to produce a cash payment to get the permitting process started. Everything is done in cash in places such as this — small, inflationary countries — and the cash literally has to come in a sizeable box.

Ignoring the agreement he made with the company, the consultant follows his country’s customary practices, and pays a low-level clerk to ensure that the company’s application is the only one that is forwarded to the Ministry of Mines. The cash is produced and the permit won, but in these countries, there are few secrets. The consultant and his company have attracted the attention of a non-governmental organization (NGO), whose mandate is to protect the environment from the likes of these mining companies.

Unbeknownst to our CFO, who didn’t believe the consultant would break any laws to obtain the mineral rights, the consultant has made himself and the company vulnerable. Additionally, to cover up the illegal activity, the consultant bills the work he performs as “consulting services.” Unfortunately, the NGO has its eyes and ears on the ground and learns about the unlawful payment. The NGO also knows that the easiest way to stop the company is to show that it violated the U.S. FCPA.

Serious consequences

The mining company that hired the consultant — as well as the consultant — faces serious penalties under the FCPA, which has gained greater attention worldwide because of new Department of Justice (DOJ) and Securities and Exchange Commission (SEC) guidelines, and strong prosecution efforts. The DOJ enforces the anti-bribery sections while the SEC is the enforcer of the books and records parts of the law. This is bad news not only for the consultant, but also for company officers and even stockholders on the basis of a “continuum of responsibility” that they should have known what was going on in Africa. As outlined in the DOJ and SEC’s resource guide to the FCPA:

“For each violation of the anti-bribery provisions, the FCPA provides that corporations and other business entities are subject to a fine of up to US$2 million. Individuals, including officers, directors, stockholders, employees and agents of companies, are subject to a fine of up to US$100,000 and imprisonment for up to five years.

Additionally, for each violation of the accounting provisions, the FCPA provides that corporations and other business entities are subject to a fine of up to US$25 million. Individuals are subject to a fine of up to US$5 million and imprisonment for up to 20 years.”

The reality is that mining companies are on the radar of enforcement agencies more than ever before. In its February 2013 foreign bribery fact sheet, the Organisation for Economic Co-operation and Development (OECD) named the mining industry as one of the industries most affected by foreign bribery. According to the September 2012 Searle Civil Justice Institute’s preliminary policy report, “from 1978 to 2004, 34% of the FCPA actions involved companies in the extractive industry, and from 2005 to mid-2011 the extractive industry comprised 28% of the FCPA actions.”

It should also be noted that from 1978 to mid-2011, the extractive industry represented the largest percentage of all FCPA actions. According to the OECD, there are roughly 300 ongoing investigations in the 40 States Parties concerning allegations of corruption of foreign public officials that could be covered by the OECD Anti-Bribery Convention. These 40 State Parties include 34 OECD members, plus Argentina, Brazil, Bulgaria, Colombia, Russia and South Africa. Smaller companies are the least prepared and most exposed to being prosecuted.

Protect yourself

All of these factors point to overseas mining as hazardous to one’s career. After all, any kind of conviction under the FCPA is likely to end up with senior officers losing their jobs and being banned from the industry. If mining in foreign countries usually involves corruption, then how does a U.S. company get it done without breaking laws? Fortunately, it can be done with a common-sense compliance program.

The authorities realize there is no one-size-fits-all compliance program. But here are the hallmarks of a good program that can protect you from prosecution:

• Commitment from senior management and a clearly articulated policy against corruption

• A code of conduct and compliance policies and procedures

• Adequate oversight, autonomy and resources to affect the program

• Risk assessment

• Training and continuing advice for employees and consultants

• Incentives and disciplinary measures

• Third-party due diligence and payments

• Confidential reporting and internal investigation

• Continuous improvement, periodic testing and review

• Pre-acquisition due diligence and post-acquisition integration of mergers

Above all, avoid at all costs paying someone with the proverbial box of cash, despite the widespread practice overseas, even if it’s to buy beds for the local hospital. Buy the beds yourself and have them delivered. You need to exhibit an unwavering representation to everyone you deal with that in no circumstance will you be handing over a box of cash for services you don’t fully understand, or participating in any form of corruption. Insist on writing a corporate check that can be fully accounted for.

Occasionally, you may lose a deal because someone made a bribe to a foreign public or private official. That person will be seen as a mark and continuously be hit up for more bribes. You have a better chance of establishing a long-term prospect in a host country because you are working within their laws in addition to those of your home country. If you are going to be successful in rewarding your shareholders, you should play by the rules.

— Dan Edwards, CPA, is a manager of business advisory services in the Denver office of Hein & Associates LLP, a full-service public accounting and advisory firm. He specializes in technical GAAP and SEC advisory services, as well as SOX 404 implementation services, and also leads the firm’s mining practice area. He can be reached at dedwards@heincpa.com or (303) 298-9600.

John “Jack” Engele is CFO of Vista Gold, a mining company focused on gold exploration and development. He has over 25 years of experience in the gold mining industry, where he has worked in top management with several senior and mid-tier gold producers. His experience includes extensive exposure to the laws and customs of many third-world and developing countries. He can be reached at jengele@vistagold.com.