El Paso to pay $7.7 million for oil-for-food irregularities

Without admitting any wrongdoing, El Paso Corp. said Feb. 7 it will forfeit $5,482,363 and pay a civil penalty of $2.25 million to the Securities and Exchange Commission in connection with illegal surcharges paid to Saddam Hussein's government for Iraqi oil under the United Nations' oil-for-food program.

Sam Fletcher
Senior Writer

HOUSTON, Feb. 8 -- Without admitting any wrongdoing, El Paso Corp. said Feb. 7 it will forfeit $5,482,363 and pay a civil penalty of $2.25 million to the Securities and Exchange Commission in connection with illegal surcharges paid to Saddam Hussein's government for Iraqi oil under the United Nations' oil-for-food program.

In return, the company faces no federal prosecution, said representatives of the US Department of Justice. The forfeited $5.5 million will be transferred by the US through the UN's Development Fund of Iraq as restitution to the citizens of Iraq.

Coastal Corp. was involved in the oil-for-food program starting in 1996, prior to El Paso's acquisition of it company in 2001, and participated in the program until May 2002. "Following 2000, neither The Coastal Corp. nor El Paso purchased any Iraqi oil directly from the government of Iraq under the program," said El Paso officials. Iraqi government records obtained by the US Justice Department showed nearly $5.5 million in illegal surcharges were paid "by the third parties that purchased the oil directly from the government of Iraq under the program or by other third-party intermediaries" from June 2001 until May 2002. "Although El Paso took steps designed to prevent the purchase of Iraqi oil from third parties on which illegal surcharges had been paid, such procedures proved to be inadequate," said the company.

SEC officials paint a darker picture of the company's activities, however. SEC officials reported: "El Paso failed to maintain an adequate system of internal controls to detect and prevent the payments. Although El Paso inserted a provision in some contracts requiring the third party to represent that it had not paid surcharges, El Paso failed to conduct due diligence to ensure that surcharges were not paid. Recorded conversations reveal El Paso's knowledge that the provision was entirely ineffective. In one conversation, a third party that indicated he was willing to pay illegal surcharges to Iraq indicated that he would be equally willing to sign a false certification denying the payment. El Paso's accounting for its oil-for-food transactions failed properly to record the nature of the company's payments. In at least 15 transactions, a portion of the company's price for oil constituted kickbacks to Iraq. The company failed to so designate those payments, characterizing them instead simply as part of the cost of goods sold."

The UN oil-for-food program was intended to provide humanitarian relief for the Iraqi population under international trade sanctions. In August 2000, however, officials of Iraq's State Oil Marketing Organization (SOMO) began demanding illegal kickbacks on sales of crude through that program. The kickbacks were made in the form of surcharges and were sent to Iraqi-controlled accounts at banks in Jordan and Lebanon.

Coastal received its first surcharge demand in September 2000. According to the SEC, "An El Paso consultant and former Coastal official arranged a $201,877 surcharge payment on the company's behalf, which was made to an Iraqi-controlled account at Ahli Bank in Jordan." That former official was not named in the SEC statement.

Oscar S. Wyatt Jr., former chairman of Coastal Corp., was indicted by the Justice Dept. in 2005 on four counts of wire fraud and engaging in prohibited financial transactions with Iraq.

After being notified by SOMO that all oil contracts would include surcharges, El Paso ceased direct purchases from SOMO but continued purchases through third parties. "Beginning in June 2001, El Paso entered into 14 additional third-party transactions involving 15 contracts to purchase some 21.4 million bbl of oil. Approximately 25-30¢ of every barrel [price] was illegally kicked back to Iraq by third parties. El Paso's oil traders had to factor the surcharge into their oil price, and there are recorded conversations of the company's officials and traders discussing the surcharges," said SEC officials. "El Paso knew, or was reckless in not knowing, that $5.5 million in illegal surcharges were made on those contracts and passed back to El Paso in premiums." The SEC filed Foreign Corrupt Practices Act books and records and internal controls charges against El Paso in the US District Court for the Southern District of New York.

El Paso voluntarily ceased its trade in Iraqi oil under the oil-for-food program in mid-2002 "based, in part, on concerns about the effectiveness of compliance efforts in preventing the payment of illegal surcharges by others to the former government of Iraq," said government officials. That was a factor in the government's decision not to pursue criminal charges against the company. Another factor is that company employees involved in the surcharge activity are no longer employed by El Paso.

As part of the settlement, El Paso agreed to continue to cooperate with federal authorities in their ongoing investigation of illegal activity under the UN program. It also is enjoined from future violations of certain sections of the Securities Exchange Act of 1934.

Contact Sam Fletcher at samf@ogjonline.com.

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