The challenges of ethics and compliance in EPC

Nathalie Louys, General Counsel of Subsea 7 led GoodCorporation’s Business Ethics Debate on ethics and compliance in EPC at the House of Lords on April 2nd. The discussion focussed on Anti-Bribery and Corruption (ABC) compliance and looked at the pressures on contractors to comply with Adequate Procedures.

The key issues:

Prescriptive compliance clauses: Clients increasingly impose rigorous compliance clauses on contractors with severe consequences for any breaches and little consideration for the contractor’s own ABC procedures and how they could be applied to manage the risk. An agreement on what contractual clauses can be reasonably applied and what will reduce risk would benefit clients as well as contractors. Some client contracts are extremely prescriptive and use a tick-box approach, which may not be the most effective. Contractors may have a better understanding of more effective controls and due diligence, but clients tend not to engage in this discussion, preferring to impose their own rules and requirements irrespective of the contractor’s experience.

Liability for sub-contractors: Can a contractor really be expected to guarantee compliance from all its sub-contractors?  Liability should be placed with those best able to manage the risk. Contractors should consider refusing to accept clauses over which they have no real control but rather identify what they can be held responsible for and what they cannot. Contractors can carry out due diligence checks and require suppliers to enter into a compliance agreement, but they cannot always control behaviour. Contractors should be given the freedom to undertake their own risk-based due diligence applying their understanding and experience on the ground. Many clients do not allow such an approach, which could be counter productive.

Contract termination: The fact that clients are increasingly looking to terminate an agreement on the strength of an allegation of misconduct is very worrying, creating a good deal of uncertainty between clients and contractors. Even if every effort has been made to prevent misconduct, can a contractor really be expected to guarantee that a sub-contractor will never face an allegation of some sort of malpractice? It should not be about being perfect, but about taking a risk-based approach that can in fact prevent corruption more effectively.

Who bears the cost of compliance? If the burden of implementing and policing compliance is increasingly being placed on contractors, can and should the cost be passed back to the project owner? How can compliance be achieved without the process becoming burdensome and inefficient? This problem needs to be addressed. In a market where prices are constantly being squeezed, these costs need to be managed and the responsibility shared. Prices have gone up to cover the cost of health and safety measures – the same needs to happen in ABC compliance. However, this needs to be done in such a way that the playing field remains level.

Best practice and training: Those in the industry need to look at the implementation of best practice to identify how the large number of disparate suppliers across the sectors can be made to comply and accept liability for their own activities.  This needs to be done on a collaborative basis and through dialogue.

Partnership and transparency:  The partnership that exists between client and contractor over health and safety issues should be replicated with ABC compliance in EPC.  Problems and potential problems should be discussed more openly without fear of exposure/termination of contracts. The current situation creates suspicion and potentially hostile relations between client and contractor.

The industry needs to stop “beating the lowest companies in the supply chain” and work together to ensure compliance.  Where clients are prepared to enter into a dialogue to resolve a difficult issue, the issue is more likely to move forward and be resolved.

An International issue: Collective action on an international basis would be cost efficient and more effective. It would ensure that standards of best practice had been agreed, providing greater reassurance to business.

A more international approach to legislation would also be beneficial, ensuring a level playing field. This should be matched with an international standard of anti-bribery compliance with regulated certification. This would obviate the need for multiple contracts with varying standards and ensure a universal set of agreed behaviours. It would decrease the time and costs currently spent on due diligence exercises and would ensure that only those with appropriate certification would be contracted.

Conflicts: Some clients set contradictory goals, claiming a zero tolerance approach to corruption but requiring that contractors work with suppliers who are not ABC compliant and present a real risk. Other examples included penalising a contractor for late delivery, when the delay was caused as a result of refusing to make a facilitation payment.

Risk management: The cost of not complying is expensive. Contractors need a thorough understanding of their business to be able to identify the high risks and put mitigation procedures in place. Clients need to recognise who has the greatest understanding of the risk and that a proportionate risk-based approach might be more effective than rigid contracts and procedures.

Conduct and behaviour: This is not just a contractual issue as it also comes down to behaviour – this needs to be acknowledged by all in the supply chain and steps put in place to influence and manage behaviours accordingly.  A greater understanding of what is and isn’t right can have a more profound effect on behaviour and ethical conduct than contracts alone. This should be part of ABC training.

The GoodCorporation view: Ethical behaviour and profitable behaviour should be aligned in EPC contracts. Clients are right to set and expect high standards and contractors are right to uphold these standards, not least for their own protection as well as the clients. The costs of ethical behaviour will drive up the cost of bids and these costs need to be stated explicitly to the client. Clients wishing to select lower cost bids do so then with a clear understanding of the risks they are taking on. However EPC contractors need to work collectively to raise standards so these ethics/compliance costs are identified and presented as a benefit of working with the best EPC contractors. A collective approach could establish an agreed standard of anti-bribery compliance that would be far more effective in reducing malpractice than rigid contracts with strict but unmanageable liabilities.