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4. Making illicit payments

Any significant off-the-book financial transactions may create legal liabilities under laws against corruption or bribery. Charges may be brought outside the country where the transaction takes place. Even where corruption is a common occurrence, a liability risk remains.

Any significant suspicious financial transactions with government officials or their agents may create legal liabilities under laws against corruption or bribery. Charges may be brought against an individual in the country of which s/he is a national and outside the country where the illegal payment or transaction takes place. A liability risk exists even for transactions which take place in a country where corruption is a common occurrence.

Illicit Payment Due Diligence


Case 4.1 United State of America v James H. Giffen

In 2003, an American oil executive was indicted in the US for allegedly arranging for $78 million in kickbacks to Kazakh officials in order to obtain oil and gas contracts in Kazakhstan.

A Grand Jury issued an indictment against James Giffen, head of the merchant bank Mercator, charging him with making more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan. The payments were allegedly in connection with six separate oil transactions involving six American oil companies seeking to acquire valuable oil and gas rights in Kazakhstan.

The Grand Jury charged Giffen with “conspiring to violate the Foreign Corrupt Practices Act (“FCPA”) and to commit mail and wire fraud” as well as “13 counts of violating the FCPA; 8 counts of wire fraud, 1 count of mail fraud, 1 count of conspiring to commit money laundering, 33 counts of money laundering, and 3 counts of filing false personal income tax returns.”

The indictment charges that Giffen and Mercator were advisors to the Kazakh government on strategic planning, development of foreign investment and the negotiation of priority investment projects relating to the exploration, development, production, transportation, and processing of oil and gas. According to the indictment, a US oil company is alleged to have agreed to pay consultancy fees owed by Kazakhstan to Giffen and Mercator, and out of those fees, Giffen allegedly made unlawful payments of $22 million dollars to secret Swiss accounts controlled by two high level Kazakh officials.

In addition, according to the indictment, between 1995 and 2000, Giffen, with the help of two Swiss banks, allegedly diverted approximately $70 Million paid by various oil companies (in connection with the purchase of oil and gas rights in Kazakhstan) to secret Swiss bank accounts under his control. Giffen is then allegeded to have used this money to make additional unlawful payments of approximately $55 million to the two senior officials.


Status

As of late 2006, the case was scheduled to go to court in February 2007. However, as of June 2007 there was no news about next steps in the case.

Source for this summary

The Grand Jury indictment

An in depth journalistic account was published in 2006 by the New York Times

In addition, the FCPA digest prepared by Shearman and Sterling LLP has a summary of the Giffen case and a number of other cases.


Other Relevant Cases

U.S. v. Baker Huges in Kazakhstan

In April 207, the Texas-based oil-services company Baker Hughes agreed to pay a fine of US$ 11 million after pleading guilty in a U.S. federal court to violating the U.S. Foreign Corrupt Practices act (FCPA). The fine covers activities in developing the huge Karachaganak natural-gas field in northern Kazakhstan, including the alleged payment by officials of a Baker Hughes subsidiary of $4.1 million in bribes from 2001-03 to an intermediary, who in turn transferred money to a high-level executive of KazakhOil, the state oil company at the time. The Securities and Exchange Commission (SEC), the U.S. agency that regulates financial markets and which cooperated in the investigation, issued a statement that “in addition to Kazakhstan, Baker Hughes admitted to bribing officials in oil-related industries in Russia, Uzbekistan, Angola, Indonesia, and Nigeria.”

U.S. Assistant Attorney General Alice Fisher said of the decision “Today's announcement demonstrates that the Department of Justice will continue to hold U.S. companies and their subsidiaries accountable for foreign bribery.” In addition to the fine, Baker Hughes agreed to a deferred prosecution arrangement under which the company must fully cooperate with the Department of Justice in ongoing investigations and hire an independent consultant to monitor the company’s internal procedures for the next three years.

Security and Exchange Commission press release

Department of Justice press release

France v. Elf Aquitaine in Africa

A French court imprisoned three French executives working for a French oil company for offering bribes and accepting illegal payments in connection with a large operation in Africa. In 2003, Loik Le Floch-Prigent, Elf Aquitaine's former chief executive, was sentenced to five years in prison. Alfred Sirven, the oil giant's former general affairs manager, received the same sentence. In addition, 35 other defendants stood trial. Alfred Tarallo, the company's "Mr. Africa," was sentenced to four years in prison.

The Elf scandal became one of the most extensive legal proceedings in France's history. Investigators spent eight years researching for the trial, generating more than 45,000 pages of documents. The court found that the defendants stole a total of €300 million ($346.8 million) from Elf Aquitaine, still a state-owned enterprise at the time, to use as bribes to secure Elf business contracts in Africa, South America, Russia, Spain and Germany between 1989 and 1993. The case has been summarised by David Ignatus in Legal Affairs, May-June 2002.
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