On February 11, 2009, Kellogg, Brown and Root LLC, a global engineering and construction firm based in Houston, Texas, and its corporate parent, KBR, Inc. (collectively "KBR") pleaded guilty to a five-count Criminal Information alleging violations of the FCPA and will pay a $402 million criminal fine and $177 million in disgorgement. The combined $579 million penalty against KBR is the second-largest combined penalty ever paid to resolve an FCPA investigation and is the largest-ever paid by a US company. The magnitude of the proposed penalty is a stark reminder to businesses of the potential costs of failing to manage FCPA risk or to adequately oversee the actions of subsidiaries.
According to the Information, KBR, a domestic concern under the FCPA and a US agent and former subsidiary of a US issuer, the Halliburton Company ("Halliburton"), participated in a joint venture that bribed Nigerian government officials over a period of 10 years in exchange for contracts to design and build a liquefied natural gas plant and expansions worth more than $6 billion. In addition to one count of criminal conspiracy, four bribery counts were brought under the anti-bribery provisions of the FCPA applicable to domestic concerns, 15 USC. § 78dd-2. Concurrent with KBR's criminal plea, both Halliburton and KBR entered into civil settlements with the SEC requiring the companies to disgorge an additional $177 million in ill-gotten profits.
The Information describes KBR's unsuccessful attempts to insulate itself from the corrupt payments at issue. The joint venture operated through three corporations based in Madeira, Portugal. One of these three corporations entered into consulting agreements with agents who made the corrupt payments on behalf of the joint venture. KBR only had an indirect ownership interest in this corporation and did not place any US citizens on the corporation's board. Nevertheless, the FCPA prohibits both direct and indirect corrupt payments to foreign government officials for the purposes of obtaining and retaining business; therefore, KBR's actions violated the FCPA despite KBR's lack of a direct relationship with the agents making the payments.
The SEC's civil complaint against Halliburton alleged that the company committed numerous violations of the FCPA's books and records and internal controls provisions, 15 USC. §§ 78m(b)(2)(A) and (B). Halliburton violated the books and records provisions, the SEC alleged, by adopting KBR's faulty documents, which characterized the bribes as "consulting" or "service" fees, which caused its own records to be "falsified as a result of the bribery scheme." As to internal controls, the SEC's complaint highlights Halliburton's inadequate due diligence into the joint venture when KBR was Halliburton's wholly-owned subsidiary. When Halliburton's in-house counsel conducted due diligence on the joint venture in 1998, Halliburton's internal controls failed to require that the attorneys specifically describe the agent's duties or that the agent grant Halliburton audit rights. Halliburton failed to check one agent's references — some of which were false — and failed to have controls in place to test KBR's assertion that the joint venture had entered into a "services" contract with another agent, thereby preventing a thorough review of the agent under Halliburton's controls. Senior Halliburton officers failed to conduct any independent verification of certain facts provided by KBR, and a senior Halliburton attorney who knew that the due diligence had failed to uncover significant information about the joint venture did not prevent the approval of the project.
Under the agreement, KBR will retain an independent compliance monitor for three years to review, and report on, the design and implementation of KBR's compliance program. Before KBR separated from Halliburton in November 2006, Halliburton agreed to indemnify KBR from fines or other monetary penalties or damages in connection with this FCPA investigation. As a result, Halliburton has agreed to pay $382 million of the $402 million fine. Halliburton will retain an independent consultant for a period of two years to conduct a review and evaluation of Halliburton's internal controls, record-keeping, and financial reporting as these relate to Halliburton's compliance with the FCPA.
In September 2008, a former chairman and CEO of KBR, Albert "Jack" Stanley, pleaded guilty to a two-count Criminal Information charging him with conspiracy to violate the FCPA and conspiracy to commit mail and wire fraud. Stanley admitted to funneling $182 million in bribes to government officials in Nigeria in exchange for contracts to build liquefied natural gas facilities. Stanley faces seven years' imprisonment and $10.8 million in restitution.
More recently, on March 5, 2009, two UK citizens were charged with conspiracy and 10 counts of violating the FCPA for their involvement in the same Nigerian liquefied natural gas bribery scheme. Wojciech Chodan, a former salesperson and consultant of a KBR subsidiary in the UK, participated in so-called "cultural meetings" in which Chodan and the other co-conspirators discussed the use of Jeffrey Tesler and others to pay bribes to Nigerian government officials to secure the liquefied natural gas contracts. Ultimately, a Gibraltar corporation controlled by Tesler received approximately $132 million from KBR and its joint venture partners, which Tesler then used to bribe Nigerian government officials on their behalf. Tesler and Chodan face arrest, extradition, and a maximum of 55 years' imprisonment each and $130 million in restitution at sentencing.
Follow these links for additional information:
- The DOJ's press release can be found here
- Joint Motion to Waive Presentence Investigation can be downloaded here (PDF)
- KBR's Criminal Information can be downloaded here (PDF)
- KBR's Plea Agreement can be downloaded here (PDF)
- The SEC's Litigation Release can be found here
- The SEC's Civil Complaint can be downloaded here (PDF)
- Halliburton's press release can be found here