The Securities and Exchange Commission today charged Chevron Corporation for its role in illegal kickback payments that were made to Iraq in 2001 and 2002 in connection with the company's purchases of crude oil under the U.N. Oil for Food Program.
Chevron, based in San Ramon, Calif., agreed to pay $30 million to settle the charges brought under the Foreign Corrupt Practices Act (FCPA) without admitting or denying the SEC's allegations.
The U.N. Oil for Food Program was intended to provide humanitarian relief to the Iraqi people while Iraq was subject to international trade sanctions. According to the Commission's complaint, third parties under contract with Chevron made approximately $20 million in illicit payments that bypassed the Oil for Food escrow account and were paid directly to Iraqi-controlled bank accounts in Jordan and Lebanon. The SEC alleged that Chevron knew, or should have known, that third parties were using portions of the premiums they received from Chevron's oil purchases to pay illegal surcharges to Iraq. The SEC also alleged that Chevron failed to devise and maintain a system of internal accounting controls to detect and prevent such illicit payments, and Chevron's accounting for its Oil for Food transactions failed to properly record the true nature of the company's payments to third parties.
"This is the Commission's fifth action against a company for participating in the Oil for Food kickback scheme and demonstrates our continuing commitment to combating violations of the Foreign Corrupt Practices Act," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement.
Cheryl Scarboro, an Associate Director in the Division of Enforcement, added, "The Commission will continue to vigorously enforce the books and records and internal controls provisions of the Foreign Corrupt Practices Act to combat illicit kickbacks."
According to the Commission's complaint, filed in the U.S. District Court for the Southern District of New York, Chevron learned of surcharge demands by Iraq's State Oil Marketing Organization (SOMO) in January 2001 and adopted a company-wide policy prohibiting their payment. The policy required traders to obtain prior written approval for all proposed Iraqi oil purchases and charged management with reviewing each proposed Iraqi oil deal.
Chevron subsequently purchased approximately 78 million barrels of crude oil from Iraq pursuant to 36 contracts with third parties from April 17, 2001, through May 6, 2002. In doing so, the Commission alleges, Chevron's traders failed to follow the company-wide policy and Chevron's management did not ensure compliance. Despite being required to consider the identity, experience and reputation of a third-party seller prior to approving a proposed Iraqi oil purchase, Chevron's management relied on its traders' representations.
In one instance, a credit check by Chevron of a proposed third-party seller revealed that the seller was a "brass plate company." This meant that the company had no experience in the oil business, no real business operations, and no known assets. Despite concerns on the part of Chevron's management, Chevron entered into two transactions to purchase three million barrels of oil from the third party in January 2002. Illegal surcharges were paid on both of these transactions and passed back to Chevron in inflated premiums that Chevron paid to the third party.
Also according to the SEC's complaint, a third-party seller whose company occasionally sold oil to Chevron stated that the trader he dealt with at Chevron and the trader's bosses always knew about the illegal surcharge demands by Iraq. The Chevron trader asked the third-party seller to persuade Iraq to reduce the amount of its surcharges. Despite Chevron's premium payments to third parties increasing after Iraq's surcharge demands began, Chevron's management routinely approved the Iraqi oil purchases proposed by its traders.
Chevron consented to the entry of a final judgment permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and ordering it to disgorge $25 million in profits and pay a $3 million civil penalty. Chevron also will pay the Office of Foreign Asset Controls of the U.S. Department of Treasury a penalty of $2 million. Chevron will satisfy its disgorgement obligation by forfeiting $20 million pursuant to an agreement with the U.S. Attorney's Office for the Southern District of New York and paying disgorgement of $5 million pursuant to an agreement with the Manhattan District Attorney's Office.
The Commission acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York, the Manhattan District Attorney's Office, the Office of Foreign Asset Controls at the U.S. Department of Treasury, and the United Nations Independent Inquiry Committee. The Commission also acknowledges Chevron's cooperation in the investigation. The SEC's Oil for Food investigation is continuing.
The Nasdaq Stock Market, Inc. ("NASDAQ(r)") (Nasdaq:NDAQ) announced it fully supports the Securities and Exchange Commission's (SEC) decision today to allow non-U.S. companies to file their financial statements with the SEC using International Financial Reporting Standards (IFRS). The SEC's new rules eliminate the need for non-U.S. companies to reconcile their financial statements prepared under IFRS with U.S. Generally Accepted Accounting Principles (U.S. GAAP).
