One Reason Why Sanctions Failed in Iraq

Another in what is getting to be an embarrassingly long list of U.S. companies unmasked as violators of the rules that governed the United Nations "oil for food" program came to light Wednesday when Chevron agreed to pay $30 million to settle charges that it paid illegal kickbacks to purchase crude oil from Iraq.

Chevron settled on settled federal securities charges that it paid about $20 million in illegal kickbacks when it knew or should have known that suppliers paid illegal surcharges that lined corrupt Iraqi pockets through bank accounts in Jordan and Lebanon.

The settlement comes just weeks after the manufacturer Ingersoll-Rand Co., agreed to pay $6.7 million to settle federal charges that it too paid kickbacks—to corrupt Iraqi officials for three years.

Chevron, in a statement issued from its San Ramon, California, headquarters, put the blame on "third-party merchants" who made illicit payments. The oil giant said that when in 2000, "rumors surfaced that illegal surcharge payments were being made by third-party suppliers, Chevron immediately ceased its purchases in the Oil-for-Food program."

Later Chevron re-entered the program, it said, and instructed employees not to participate "if we had reason to believe that illegal surcharge payments were to be made and only after receiving certification, in writing by the third party merchant, that such surcharges were not being paid."

In a civil complaint, the Securities and Exchange Commission contended that illegal kickbacks were paid from about April 2001 through May 2002 when Chevron purchases about 78 million barrels of crude oil in three dozen transactions.

It noted that Chevron officially barred any such payments starting in January 2001, but the company's traders didn't follow the policy—and Chevron violated securities laws by not setting up internal accounting controls to detect and prevent such payments even though its premium payments to third parties rose after Iraq's surcharge demands began.

According to the complaint filed in federal district court in New York, Chevron relied on representations from traders rather than extensively checking their bona fides. Specifically, it cited an instance where Chevron's credit check found that a proposed trader was a "brass plate" company because it had no experience in the oil business, no real business operations and no known assets.

Even so, Chevron entered into two transactions to purchase three million barrels of oil from the trader in January 2002. And illegal surcharges—amounts above the official selling price—were paid in both instances, and passed back to Chevron in inflated premiums.

Chevron's response: "There are no allegations that Chevron paid surcharges and the trader is no longer affiliated with Chevron."

by Elizabeth Olson