Halliburton Oil Bribery Scandal

London, 3rd December 2020

Luca Morelli

oil by Zbynek BurivalI always wanted to know more about the oil business and in particular, the effects on local people who live in countries which sell oil. As you can imagine, the number of books on these topics is immense, but one day whilst wondering around with my wife, we entered one of our favourite second hand bookshops and I found the following: “Crude World” by Peter Maass. To be perfectly honest, I didn’t know anything about the author, but briefly reading inside, the book intrigued me and ….I was right; this is a book I’d really recommend if you are interested in the subject.

Oil is everywhere, but as Peter Mass straightforwardly wrote in his excellent book, here is a dilemma:

“What is better, for oil to be in the hands of companies that become immensely powerful or for Governments to own everything and become the center of all things?”

Out of the several examples that Peter Maass explains in his book, in this article, it will be addressed one of the largest bribery scandals in the USA. Under a deal reached with the U.S. Justice Department, Houston-based KBR and Halliburton paid a $402 million fine plus will disgorge $177 million in profits to resolve parallel criminal. Together, the $579 million in sanctions is one of the highest combined settlements ever paid by U.S. companies under the Foreign Corrupt Practises Act (=FCPA)..

Furthermore I will briefly discuss pros and cons of the FCPA, which prohibits U.S. firms and individuals from paying bribes to foreign officials in order to obtain a business deal.

The Facts

KBR, Inc. (formerly Kellogg Brown & Root) is an American engineering and construction company, and it was formerly a subsidiary of Halliburton. Dresser Industries was acquired by Halliburton in 1998, and Dresser’s engineering subsidiary, the M. W. Kellogg Co., was merged with Halliburton’s construction subsidiary, Brown & Root, to form Kellogg Brown & Root.

According to court documents, KBR was part of a four-company joint venture that was awarded four engineering, procurement and construction (=EPC) contracts by Nigeria LNG Ltd (NLNG) between 1995 and 2004 to build LNG facilities on Bonny Island. Interesting to note was that the government-owned Nigerian National Petroleum Corporation (=NNPC) was the largest shareholder of NLNG, owning 49 percent of the company.

The other three partners of KBR were Technip of France, Italy’s Snamprogetti, and Japan Gasoline Corp.

KBR, one of Halliburton’s subsidiaries at the time, paid bribes to high-ranking Nigerian government officials, including officials of the executive branch of the Nigerian government, NNPC officials, and NLNG officials, between 1994 and 2004 to obtain EPC contracts to build liquefied natural gas facilities on Bonny Island, Nigeria, which were valued at more than $6 billion.

To learn more details about these facts, please read this article written by Remi Oyeyemi with a good chronology between the year 1988 and the 22nd September 2006.

The Law – Prosecutions

KBR pleaded guilty to conspiring together with the other three partners to violate the FCPA by authorizing, promising and paying bribes to a variety of Nigerian government officials in order to obtain the EPC contracts. Furthermore KBR also pleaded guilty to four counts of violating the FCPA related to the joint venture’s payment of tens of millions of dollars in “consulting fees” to two agents for use in bribing Nigerian government officials.

After a Justice Department attorney summarized the five counts in the government’s case, U.S. District Judge Keith Ellison asked KBR’s Farley (KBR General Counsel):“Is that true?”. “Yes, your honour” Farley replied, entering a guilty plea on behalf of the company.

Under a deal reached with the U.S. Justice Department:

  • KBR and Halliburton paid $402 million fine (Halliburton has agreed to pay $382 million);
  • In a separate settlement with the U.S. Securities and Exchange Commission, Halliburton will disgorge $177 million in profits to settle parallel criminal charges that its former subsidiary violated the FCPA.

Apparently, Halliburton was not directly charged with any crimes, and had agreed, as a condition for the two firms to separate in 2007, to indemnify KBR against potential fines from the federal probe, which was then launched in 2003.

How the bribes were discovered

What intrigued me in this story it was how accidentally, the bribe was discovered. Peter Mass explains this very well in his book:

“In 2003, French regulators looked into an irregular series of payments totalling $132 million by a consortium of international firms that was bidding on a multibillion-dollar natural gas project in Nigeria. The consortium was led by M. W. Kellogg, which was then owned by Halliburton…French prosecutors heard of the scheme only after filing embezzlement charges in an unrelated case against an employee of a French company in Halliburton consortium. The employee upset that his firm refused to defend him in embezzlement case, took his revenge by telling French authorities about the payment to Tesler – and that is how the scandal unravel”.

Therefore, the bribes were not discovered by a compliance officer working for one of the consortium members. Compliance officers are lawyers employed by corporations to comply with laws like FCPA, but in this case none of the compliance officers in any of the four-company joint venture spotted the payments.

It is hard to believe that one of the largest bribery scandals in America corporate history, it was uncovered only by chance or better due to the revenge of a single employee.

Foreign Corrupt Practises Act

The FCPA begun following the Watergate scandal, during which several corporations confessed to maintaining funds in order to bribe foreign officials. The Congress of the United States passed the FCPA in 1977:

  • It prohibits U.S. firms and individuals from paying bribes to foreign officials in order to obtain a business deal;
  • It also outlines the required accounting transparency guidelines;
  • There is no minimum amount for a punishment of a bribery payment; the settlements can range from thousands to billions of dollars. For example, in 2008 Siemens agreed to pay $1.6 billion to American and German authorities as a result of systematic bribery of officials to win international government contracts.

FCPA has two primary components:

  1. Prohibiting bribes from American companies and companies that do business in America;
  2. Mandating adequate accounting provisions for corporations to prevent such bribes from taking place.

The FCPA has two government agencies tasked with enforcing:

  1. The Department of Justice;
  2. The Securities and Exchange Commission.

Benefits and Criticisms of the FCPA

  • Benefits:
    • The FCPA was the first anti-bribery statute of its kind in the world, although initially it was largely symbolic as there were very few cases (in recent years the situation is different thanks to an increased in the number of FCPA enforcement actions and the penalties imposed);
    • Although the investigations can be extremely costly, they can act as deterrent.
  • Criticisms:
    • The FCPA can decrease the corruption, but it can be seen as a deterrent of encouraging American business growth in foreign countries;
    • The Institute for Legal Reform (ILR), which is part of the U.S. Chamber of Commerce, views the FCPA as overly vague, penalizing honest businesses, because they will conduct unnecessary investigations;
    • Harvard Professor Jeffrey Miron has argued for abolishing the FCPA. In an article published on the 26th April 2012, he argued that: “The act is difficult to enforce on a consistent basis, since companies that wish to pay bribes can circumvent the law in numerous ways, mainly with minimal risk of exposure. So, most violations go undetected. The act therefore hurts companies that break the law clumsily and get caught, thereby creating a competitive advantage for companies that break the law cleverly and get away with it.” And also “..The most likely outcome is therefore that the Foreign Corrupt Practices Act has minimal impact on bribes but enriches the least honest companies…..The act is also harmful, especially when it reduces bribes, because much bribery is an attempt to get around laws that make little sense in the first place. Such laws include barriers to entry, union protections that make firing or plant closures all but impossible, and excessive environmental, health and safety regulation.“

Conclusions

It is difficult to answer to Peter Mass’s dilemma, but I would like to conclude this article with a sentence expressed by Ida Tarbell (November 5, 1857 – January 6, 1944) who was an American writer, pioneered investigative journalist, biographer and lecturer. Among her books, she wrote “The History of the Standard Oil Company” in 1904 where she disclosed several stories about the Standard Oil Company, run at the time by oil tycoon John D. Rockefeller, the richest figure in American history.

“When the business man who fights to secure special privileges, to crowd his competitor off the track by other than fair competitive methods, receives the same summary disdainful ostracism by his fellows that the doctor or lawyer who is ‘unprofessional,’ the athlete who abuses the rules, receives, we shall have gone a long way toward making commerce a fit pursuit for our young men.”

What I hope is that these sorts of bribes will stop; I know I am naïve in saying this, but I really hope there will be a day when companies will win oil contracts due to their acumen and ethical way of conducting their business and not with bribes. And of course when local people will benefit from selling the oil in the countries where they live.

References

Books

  • Maass, P. (2009) “Crude World”, Allen Lane.

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