Key Energy Settles with SEC Regarding Alleged FCPA Violations
15 September 2016
On August 11, Key Energy Services, Inc. (“Key Energy” or the “Company”) agreed to pay $5 million to settle alleged violations of the FCPA. According to the SEC, Key Energy’s Mexican subsidiary made improper payments to an employee of Petróleos Mexicanos (“Pemex”) to induce him to provide inside information and assistance on contracts with Pemex.
According to the SEC’s order, Key Mexico—the Mexican subsidiary of Key Energy—entered into a contract with Pemex in 2007. Over the following years, Pemex awarded Key Mexico additional contracts and contract extensions.
The SEC alleged that in or around August 2010, Key Mexico’s country manager hired a consulting firm to provide expert advice on contracting with Pemex. The country manager knew that payments to the consulting firm were used to bribe a Pemex employee for assistance in obtaining Pemex business--such as providing non-public information and lobbying internally at Pemex for lucrative amendments to Key Mexico contracts--but did not disclose the nature of the relationship to Key Energy. From 2010 through 2013, Key Mexico paid the consulting firm at least $229,000 for purported consulting services.
The SEC also alleged that Key Mexico improperly recorded the payments to the consulting firm as legitimate business expenses, which were eventually consolidated into Key Energy’s books and records. According to the SEC, Key Energy failed to devise and maintain internal accounting controls that were sufficient to ensure that transactions were executed with management’s authorization and recorded as necessary to maintain accountability of assets. For example, in 2012, Key Energy approved gifts of approximately $118,000 for Pemex’s annual Christmas celebration. In this instance, Key Mexico employees did not disclose that Key Mexico planned to give at least $55,000 of these gifts to specific Pemex officials.
In addition, according to the SEC’s order, while Key Energy had written compliance policies, it failed to effectively implement these policies and related accounting controls. For instance, although Key Energy learned that Key Mexico was doing business with the consulting firm as early as 2011, the Company allowed Key Mexico to continue this relationship even though there was no written contract in place until 2013. Because Key Mexico did not have a written contract with the consulting firm, the Company did not engage in due diligence on the consulting firm and did not uncover the firm’s relationship with a Pemex employee until 2014. Key Energy also allowed Key Mexico’s relationship with the consulting firm to continue despite the lack of sufficient documentation supporting the purported services offered by the firm.
In or around January 2014, SEC staff contacted Key Energy regarding potential FCPA violations. In April 2014, Key Energy learned that the country manager had promised bribes to one or more Pemex employees during his employment, and Key Energy reported these allegations to the SEC. Key Energy then conducted a broad internal investigation and risk assessment of their international operations. Key Energy also undertook significant remedial measures, including: hiring a new Chief Compliance Officer, the suspension of payments to all vendors and third parties in Mexico, the engagement of a manual review of over 600 vendors in Mexico, and a commitment to exit Mexico by the end of 2016. The SEC noted that Key Energy was cooperative with the staff, including reporting the FCPA allegations to the staff and providing investigation updates and translations of important documents.
The SEC ordered that Key Energy cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The SEC also ordered that Key Energy pay a disgorgement of $5 million. The SEC did not impose a civil penalty, noting that it considered the company’s cooperation and current financial condition in making this decision. The SEC noted that if Key Energy knowingly provided materially false or misleading information or materials to the Commission, the Division of Enforcement could reopen the matter and seek a civil money penalty.