Africa's Oil And Gas Corruption In The Spotlight

The NGO Global Witness has published a new report that says governments in Africa are awarding concessions and production contracts to shell companies that may have ties to government officials.

"Rigged: The Scramble for Africa's Oil, Gas and Minerals" describes how joint ventures between international oil and gas firms and shell companies may be hiding corruption and helping fund crooked regimes.

Global Witness said its research revealed two major problems in the allocation of oil contracts:

• Governments aren't making clear the grounds for why a particular company is given a contract. In certain cases, companies with no real asset base or expertice appear to receive special or preferential access to oil licences, leading to doubts about the integrity of the process.

• And governments are awarding production rights to companies whose beneficial owners remain undisclosed. In some cases, there are grounds to suspect the shell companies may be owned or controlled by government officials or their private sector proxies.

Global Witness said oil and gas deals in Angola and Nigeria, among others, are complex and potentially corrupt. In the Democratic Republic of Congo, it expressed 'major concerns over opaque sales of mining assets' to offshore companies.

The 44-page report is available here.

Halliburton Investigating Angola Operations

Houston-based oil and gas services giant Halliburton on Friday disclosed an internal investigation into possible Foreign Corrupt Practices Act violations in Angola.

It said in an SEC filing that an anonymous email it received in December 2010 alleged FCPA violations 'principally through the use of an Angolan vendor.'

Halliburton said it self-reported the investigation to the DOJ and, during the third quarter of this year, 'met with the DOJ and the SEC to brief them on the status of our investigation and provided them documents.'

In February 2009, Halliburton and its former subsidiary KBR settled FCPA violations for $579 million, the second biggest FCPA-related settlement of all time.

In that case, KBR pleaded guilty to a five-count criminal information, with one conspiracy count and four substantive counts of violating the FCPA. KBR agreed to a $402 million criminal fine. It admitted paying Nigerian officials at least $182 million in bribes on behalf of itself and the other TSKJ consortium members for contracts awarded between 1995 and 2004 to build liquefied natural gas facilities on Bonny Island, Nigeria.

In the same settlement, Halliburton Company -- KBR's parent when the offenses occurred -- settled civil FCPA charges with the Securities and Exchange Commission. It agreed to be jointly liable to pay $177 million in disgorgement, the second biggest FCPA disgorgement of all time. The SEC's complaint alleged that Halliburton's internal controls failed to detect or prevent the bribery, and that its records were falsified to cover up the illegal payments.

The SEC's final order permanently enjoined Halliburton from violating the FCPA's record-keeping and internal control provisions and required an independent consultant to review the company's FCPA-related policies and procedures.

Halliburton is one of the world’s biggest oil and gas services companies. It has 60,000 employees in 80 countries. Last year it reported revenue of about $18 billion. According to its website, its services include locating oil and gas, managing geological data, drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.

Halliburton Company shares trade on the NYSE under the symbol HAL.

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The full FCPA disclosure in Halliburton's 10-Q filed on October 21, 2011 for the period ending September 30, 2011 said:

'We are conducting an internal investigation of certain areas of our operations in Angola, focusing on compliance with certain company policies, including our Code of Business Conduct (COBC), and the FCPA and other applicable laws. In December 2010, we received an anonymous email alleging that certain current and former personnel violated our COBC and the FCPA, principally through the use of an Angolan vendor. The email also alleges conflicts of interest, self-dealing and the failure to act on alleged violations of our COBC and the FCPA. We contacted the DOJ to advise them that we were initiating an internal investigation with the assistance of outside counsel and independent forensic accountants.

'During the third quarter of 2011, we met with the DOJ and the SEC to brief them on the status of our investigation and provided them documents. We expect to continue to have discussions with the DOJ and the SEC, and we intend to continue to cooperate with their inquiries and requests as they investigate this matter.

'Because these investigations are at an early stage, we cannot predict their outcome or the consequences thereof.'

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Download Halliburton Company's 10-Q filed October 21, 2011 here.

Cobalt's Blind Date

Oil is big business. And it leads some companies to take big risks with FCPA compliance.

Take Cobalt International Energy, Inc., for example.

In its annual report filed with the SEC on March 1, Cobalt repeated a disclosure, of sorts, about FCPA compliance in an Angolan development project.

The company suggests it was forced by the Angolan government to partner with two local oil and gas exploration and production companies about which Cobalt knew nothing, apparently, beyond the companies' names.

Cobalt said:

In connection with entering into our Risk Services Agreements for Blocks 9 and 21 offshore Angola, two Angolan-based E&P companies were assigned as part of the contractor group by the Angolan government. We had not worked with either of these companies in the past, and, therefore, our familiarity with these companies is limited.

That lack of knowledge about government-nominated intermediaries in a country like Angola (ranked 168 on the Corruption Perception Index), in an industry like oil and gas, should raise enormous compliance concerns.

What's Cobalt doing about it? "We are continuing to look into . . . a connection between senior Angolan government officials" and one of the companies nominated by the Angolan government."

Cobalt's full disclosure in its March 1, 2011 Form 10-K can be found here.

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Last year, the NGO Global Witness had this to say about Cobalt, Goldman Sachs, which is financing Cobalt, and Angolan corruption:

It seems extraordinary that Goldman Sachs would back this kind of deal in Angola, a notoriously corrupt country . . . ." said Diarmid O'Sullivan of Global Witness.

Cobalt will operate the two blocks, meaning it will be in charge of drilling for oil, with Sonangol, Nazaki Oil and Gáz and Alper Oil as its minority partners. Sonangol declined to explain to Global Witness why it chose these two companies. Alper Oil's website provides little detailed information about its activities, not even a contact phone number. Nazaki Oil and Gáz does not have a website.

Nazaki Oil and Gáz is covering its own costs but Alper Oil's upfront costs are being paid by Cobalt, which aims to recoup them out of future revenues. So Alper Oil could make huge profits if oil is found, without investing any capital upfront or taking any risks, and loses nothing if no oil is found.

Transparent management of the oil sector is crucial to the economic future of Angola, a country so poor that the average life expectancy is a mere 46.5 years.5 But Sonangol's actions raise serious concerns about whether it is acting in the public interest or the interests of the ruling elite.

In March 2010, Global Witness revealed that Sonangol nominated a son-in-law of President dos Santos of Angola to the board of a key investment vehicle. In August 2009 we revealed that a private company, pre-qualified by Sonangol to bid for oil rights, had shareholders with the same names as top officials, including Sonangol's chairman.6 Sonangol declined to comment on these cases.

Cobalt replied to written questions from Global Witness on its own behalf and that of its shareholders, including Goldman Sachs. Cobalt's letter said: "Please be assured that we have devoted considerable resources towards mitigating the specific risks identified in the statements that you have included in your letter." Cobalt's letter also said that the company had retained two law firms for the "specific purpose" of addressing these risks and continued to work closely with them.

However Cobalt declined to answer specific questions about the deal, including a request to identify the ultimate beneficial owners of Alper Oil and Nazaki Oil and Gáz, on the grounds that this would "involve selective disclosure of non-public company information and, in some cases, to do so would also be a breach of the confidentiality provisions of agreements by which [Cobalt] are bound."

So it is not clear whether or not Cobalt and its investors know who the ultimate beneficial owners of these companies are. "In the highly corrupt and predatory environment of Angola, the public is being asked to take it on trust that deals with opaque partners are ethical. After the sharp practices of the credit crunch and the fraud charges levelled against Goldman Sachs in the United States, this is a tall order," said O'Sullivan of Global Witness.

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We're grateful to the reader who sent us the links to Cobalt's latest Form 10-K and to the Global Witness release.

Alcatel-Lucent Settles Bribery Case

In one of the biggest Foreign Corrupt Practices Act settlements of all time, Paris-based Alcatel-Lucent S.A. will pay $137 million for bribing officials in Costa Rica, Honduras, Malaysia, and Taiwan.

The company and three subsidiaries will pay $92 million to resolve criminal charges with the DOJ and $45 million in disgorgement to the SEC.

The settlement places Alcatel-Lucent seventh on the top-ten FCPA list. 

By agreeing to plead guilty, Alcatel-Lucent escaped substantive bribery charges. In a two-count criminal information, the DOJ charged the company with violating the internal controls and books and records provisions of the FCPA.

The DOJ and the company entered into a three-year deferred prosecution agreement. Among other things, Alcatel-Lucent pledged to stop using third-party sales and marketing agents in conducting its worldwide business. The DOJ said the unprecedented pledge was made on the company's "own initiative and at a substantial financial cost."

Three subsidiaries were also charged and each agreed to plead guilty to conspiring to violate the antibribery, books and records, and internal controls provisions of the FCPA.

Alcatel-Lucent -- which provides telecommunications equipment and services -- was formed in 2006 after U.S.-based Lucent Technologies merged with Alcatel, a French company. The new company is headquartered in Paris, France.

The illegal conduct started in the late 1990s and continued through 2006.

Prosecutors said Alcatel-Lucent’s three subsidiaries bribed foreign officials to win business in Costa Rica, Honduras, Malaysia, and Taiwan. The company also hired agents without proper controls in Kenya, Nigeria, Bangladesh, Ecuador, Nicaragua, Angola, Ivory Coast, Uganda, and Mali. Overall, Alcatel-Lucent admitted making $48.1 million in profits as a result of its bribery.

In Costa Rica, a subsidiary wired about $18 million to two consultants. More than half of the money, the DOJ said, was then passed to Costa Rican government officials. The bribes produced contracts worth more than $300 million for Alcatel-Lucent and a profit of more than $23 million.

In Honduras, a company subsidiary hired a "consultant" who was a perfume distributor with no experience in telecommunications. He was personally selected by "the brother of a senior Honduran government official," the DOJ said. Alcatel-Lucent won contracts in Honduras worth $47 million, with profit of $870,000.

In Taiwan, the company and its joint venture there hired two consultants with no telecommunications experience. They passed some of their $950,000 payments to Taiwanese legislators. Alcatel-Lucent received a contract worth $19.2 million and earned $4.3 million.

In September 2008, former Alcatel executive Christian Sapsizian, 62, was sentenced to 30 months in prison, three years of supervised release, and forfeiture of $261,500 for bribing employees of the state-owned telecommunications authority in Costa Rica. He had pleaded guilty in June 2007 to two counts of violating the Foreign Corrupt Practices Act.

Sapsizian, a French citizen, was a 20-year Alcatel employee and served as the company's deputy vice president for Latin America. Before being fired in 2004, he caused Alcatel to wire $14 million in “commission” payments to a consultant, who then transferred $2.5 million to a government official in Costa Rica.

Sapsizian admitted to conspiring with Edgar Valverde Acosta, a citizen of Costa Rica who was Alcatel’s senior country officer there, to arrange the bribes. Acosta was indicted with Sapsizian on June 14, 2007. He's an FCPA fugitive, last known address: Costa Rica.

The U.S. indictments of Sapsizian and Acosta resulted from bribery investigations by Costa Rican authorities. In October 2004, Alcatel learned of the investigations. It fired Sapsizian and Acosta and disclosed to U.S. authorities that it had uncovered payments from employees and consultants to government officials and political parties.

Lucent, meanwhile, settled Foreign Corrupt Practices Act charges of its own in December 2007 with the DOJ and SEC. Its violations occurred before the merger with Alcatel. The settlement included a $1 million criminal fine and $1.5 million in civil penalties. Lucent's offenses involved payment of travel expenses for Chinese government officials from 2000 to 2003.

In April 2009, Alcatel-Lucent signed agreements in Washington, D.C. worth $1.7 billion with China Mobile and China Telecom to help the Chinese companies roll out 3G technology.

In February this year, Alcatel-Lucent said in its consolidated financial statements that it had reached agreement in principle with the Justice Department and the Securities and Exchange Commission to settle Foreign Corrupt Practices Act offenses. 

Alcatel-Lucent also paid $10 million in January to settle corruption charges brought by the government of Costa Rica.

The SEC's civil complaint said all of Alcatel-Lucent's bribes were "undocumented or improperly recorded as consulting fees in the books of Alcatel’s subsidiaries and then consolidated into Alcatel’s financial statements. The leaders of several Alcatel subsidiaries and geographical regions, including some who reported directly to Alcatel’s executive committee, either knew or were severely reckless in not knowing about the misconduct."

Alcatel-Lucent's common stock trades on the NYSE under the symbol ALU.

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View the DOJ's December 27, 2010 release here.

Download the criminal information in US v. Alcatel-Lucent, S.A. here.

Download the deferred prosecution agreement in US v. Alcatel-Lucent, S.A. here.

Download the criminal information in US v. Alcatel-Lucent France, S.A. et al here.

Download the plea agreement in US v. Alcatel Centroamerica, S.A. (Costa Rica) here.

View the SEC's Litigation Release No. 21795 (dated December 27, 2010) in SEC v. Alcatel-Lucent, S.A., Civil Action No. 1:10-CV-24620-GRAHAM (S.D. FL.) here.

Download the SEC's civil complaint here.

SEC Charges Second Pride Exec

The former country manager in Venezuela for Pride International, Inc. last week settled civil FCPA charges with the SEC.

Joe Summers, a U.S. citizen who lives in John Day, Oregon, agreed to pay a civil penalty of $25,000.

From 2003 to 2005, Summers arranged payments of about $384,000 to third-party companies, "believing that all or a portion of the funds would be given to an official of Venezuela's state-owned oil company in order to secure extensions of three drilling contracts." Summers also approved a $30,000 payment through an intermediary to an employee of Venezuela's state-owned oil company to obtain the payment of receivables.

Summers' former employer, Pride International, said in February this year it has set aside $56.2 million for an expected settlement with the DOJ and SEC of FCPA offenses. The Houston-based oil-rig operator first disclosed potential compliance problems in 2006.

In December last year, the SEC accused a former Pride vice president, Bobby Benton, of violating the FCPA. The civil complaint against Benton alleged among other things that he deleted references in Pride's audits to about $384,000 in payments made by “the manager of the Venezuelan branch of a French subsidiary of Pride” to third-party companies. Pride self-disclosed the payments and cover-up after it learned about them through its internal investigation. The SEC's complaint against Summers included details about the Venezuelan bribes.

Pride has also disclosed that it found evidence of illegal payments from 2001 through 2006 directly or indirectly to government officials in Saudi Arabia, Kazakhstan, Brazil, India, Nigeria, Libya, Angola, and the Republic of the Congo. The payments related to clearing rigs and equipment through customs, resolving customs disputes, immigration, tax, licensing, and merchant marine issues.

The SEC's complaint against Summers charged him with violating Sections 13(b)(5) and 30A of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(5) and 78dd-1] and Rule 13b2-1 [17 C.F.R. § 240.13b2-1], and aiding and abetting Pride's violations of Sections 13(b)(2)(A), 13(b)(2)(B), and 30A of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(B), and 78dd-1].

Pride International, Inc. trades on the NYSE under the symbol PDE.

View the SEC's Litigation Release No. 21617 and Accounting and Auditing Enforcement Release No. 3169 (both dated August 5, 2010) in SEC v. Joe Summers, Civil Action No. 4:10-cv-02786 (S.D. Texas, August 5, 2010) here.

Download the SEC's civil complaint against Summers here.