The Weatherford settlement – what lessons can be learnt?

June 3, 2014 Michael Woodward

The breaches which sparked the investigation and subsequent prosecution display all the hallmarks of a complete failure in the implementation of adequate controls, as well as a severe lack of a culture which embraces ethical business conduct.

A high-level view of the facts reveals nothing that has not been seen before: a prominent multinational organisation authorises bribes, improper travel and entertainment for foreign officials in the Middle East and Africa to win business. As the United States Securities and Exchange Commission (SEC) alleged, “Weatherford and its subsidiaries falsified its books and records to conceal not only these illicit payments, but also commercial transactions with Cuba, Iran, Syria, and Sudan that violated US sanctions and export control laws. Weatherford failed to establish an effective system of internal accounting controls to monitor risks of improper payments and prevent or detect misconduct.”

The claims against Weatherford have an all-familiar ring. Whether it was negligence or deliberate oversight, commitment to compliance and monitoring fell by the wayside. Whilst this case presents a fresh example of what not to do, it also provides a perfect demonstration of how serious the repercussions can be for an insufficient compliance programme and when ethics and integrity are low on a company’s radar.

So what went wrong?

It is difficult to fathom that despite literally hundreds of actions against companies globally for similar bribery, corruption and sanctions breaches, Weatherford had not adequately prepared itself for the risks posed by operating in the Middle East and Africa. It cannot be assumed that Weatherford had complete disregard for ethics and compliance, but they were simply an afterthought, with increasing the value of Weatherford shares the priority. At the time the settlement was reached, Bernard J. Duroc-Danner (the chairman, president and chief executive officer of Weatherford) expressed that violations of United States law abroad was attributable to rapid expansion of the company. While there is no doubt procedures and controls failing to catch up with rapid growth was a contributing factor, the veracity of the allegations against Weatherford suggest some more substantial and deep-rooted causes.

Amongst the improprieties reported by the SEC, Weatherford employees (and employees of its subsidiaries) created false books and records to hide improper transactions with sanctioned nations, and the company failed to set up an effective system to detect and prevent corruption. Such conduct is more than just indicative of a rapidly-growing business lacking the time and resources to implement systems and controls – it presents a complete disregard for ethics and integrity in the name of facilitating a business deal. In one instance highlighted by authorities, payments to an Angolan official were funnelled through a Swiss agent who, during contract negotiations, had rejected an anti-bribery clause in his services agreement with Weatherford. In what should have been a deal-breaker, Weatherford’s legal department approved the agreement, and this agent was identified as helping Weatherford win contracts in Congo by making illicit payments.

What Weatherford lacked was an underlying culture which prioritised ethical conduct above and beyond everything else. This type of culture starts at the top and must work its way down the organisation. Any break in this flow is critical. If a legal department is dismissive about a vendor’s complete lack of commitment to bribery and corruption, what example does this set for other areas of the business?

Implementing a culture of compliance is about establishing a fabric within an organisation where employees are constantly on the lookout for any kind of behaviour which could damage the image of that organisation. Establishing this underlying ethos requires commitment, persistence and dedication. But as the fallout for Weatherford demonstrates, from both a financial and reputational standpoint, committing to such efforts is a valuable investment in the long run.

Culture of compliance

Statements issued by the SEC and the Department of Justice subsequent to the Weatherford settlement confirm the view of regulators that a robust, sustainable compliance programme is an integral part of eradicating incidents of bribery and corruption. There are many cogs which are required to build the machine that is a successful compliance programme; however, many companies fall short by gearing their programme towards “ticking the boxes” to keep regulators at bay. This approach is merely treating the symptoms of a much deeper, more serious problem.

Drafting policies, procedures and guidelines and conducting routine audits are all important aspects of a compliance programme. But unless efforts are geared towards sustained communication, revising training methodologies, providing varying awareness mechanisms and placing constant emphasis on the importance of integrity and ethics, the practices of drafting and distribution of documents and oversight become largely redundant.

Even with procedural controls in place there is always the risk of a representative behaving illegally if the potential personal reward is great enough. However, if there is a culture instilled in an organisation where people know the difference between right and wrong, are on the lookout for such behaviour, and adopt values of ethics and integrity in every decision they make, then whatever procedures are in place to prevent illegal behaviour are galvanised. Instilling such a culture is no easy feat, but a strategic approach to awareness, education and understanding of the issues and ramifications will allow a business to get to the core of honesty, fairness and trust, and what those words mean to individuals in their roles.

Honesty, fairness and trust are the words which always spring to mind when ethics and a culture of compliance are the topic of conversation. It is widely considered that ethical behaviour is the standards which individuals adopt for themselves and how they want to be perceived by others. In that sense, knowing the difference between right and wrong when making decisions will often boil down to an individual considering how the people around them will perceive the particular course of action they choose to take. Facilitating an environment where an individual steps back and considers how they might be viewed by their friends, family and colleagues if they behave unethically and that behaviour is discovered will always prompt more careful thought before a decision is made. Whilst the risks a company faces as a result of unethical behaviour are important to communicate, a culture of compliance is built upon individuals understanding personal, as well as collective, consequences of inappropriate behaviour.

Conclusion

Weatherford no doubt learnt an extremely hard lesson from their FCPA and sanctions breaches. The positive outcome is that, where once low on the radar, ethics and compliance are now seen as invaluable components of the sustainability and growth of the global organisation. Where share value might have been the previous main focus of Weatherford, the value of a world-class compliance programme is now recognised.

In a statement, Mr Duroc-Danner said, “We move forward fully committed to a sustainable culture of compliance. With the internal policies and controls currently in place, we maintain a best-in-class compliance program and uphold the highest of ethical standards as we provide the industry’s leading products and services to our customers worldwide.”

In addition to this leadership initiative, Weatherford now prominently displays its code of business conduct and ethics on its website, and the code contains appropriate messaging from senior management.

Mr Duroc-Danner’s statement and the subsequent emphasis on ethical conduct demonstrate the right level of commitment and convey the right message. Ensuring this culture and commitment is permeated throughout all levels of the organisation is Weatherford’s next challenge.

 

About the author:

Michael Woodward, Head of Legal & Compliance at The Red Flag Group, has a breadth of experience advising multi-national organisations on a range of legal, corporate governance and compliance related issues.

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