Public Sector Governance

Corruption Investigations

In addition to the articles here, please also see other pages at EthicsWorld, including News, and Investigations and Prosecutions in the Corporate Governance section, for more information on corruption investigations.

On this page

• British Media Outlets Praise UK Court Comdemnation of BAE Bribery Probe Decision
• Allegations Made Against EU "Evaluation" Reports
• US Hearing on Anti-Corruption Efforts in Iraq PLUS May 2008 update
• Kenya- Moi's Loot Revealed
• Iraq Corruption Scandals Continue Without Meaningful Action
• SEC Details Major Bribery Case
• Corruption in Iraq
• Western Donors and Kenyan Corruption
• Unfolding Kenyan scandal
• UN Procurement Abuse
• UN Management Reform
• WSJ editorial on Oil-for-Food
  

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Major British Media Outlets Praise UK Court Comdemnation of BAE Bribery Probe Decision

Comments and analysis from leading British newspapers and anti-corruption organizations  

The British High Court ruling to condemn the British government for supporting a halt to the Serious Fraud Office probe into suspect payments being made between British arms supplier BAE Systems and Saudi Arabia dominated British headlines.  The decision, and harsh words from Lord Justice Moses, threatens to damage the reputation Britain seeks to uphold as a key player in the fight against corruption.  The April 10 announcement ends a two-month long British investigation while a U.S. Department of Justice investigation into BAE Systems is still ongoing. 

When the probe was stopped in September 2006, by then British Prime Minister Tony Blair, the justification was made on behalf of “security concerns.”  Many groups have questioned the validity of these concerns, and the latest court ruling has only served to verify their suspicions.  The following are a collection of comments and analysis from leading British newspapers and key anti-corruption organizations regarding the ruling.

The FT editorial forcefully condemns the UK government for caving into Saudi threats and sending a message to its allies that “you will get your way if you scream loudly enough.”  It is also highly suspicious of the claim that national security was at stake.  The FT says that “internal memos show ministers were just as worried about losing the Euro-fighter Typhoon contact.”  The court also deemed these concerns not to be legally valid.  The editorial lets BAE Systems off the hook, as “It is a different company now. Management has commissioned a business practices review.”  However, the Serious Fraud Office reputation still remains in tatters, the article says, and the FT encourages the Gordon Brown government not to pass current legislation which would introduce new statutory powers to shut down investigations on national security grounds.

The Independent

At last, some sound and principled sense has been spoken on the matter of the Serious Fraud Office, BAE Systems and the Saudi arms deal, stated an editorial in The Independent.  It calls the ruling “as disturbing as it is excoriating” and encourages further judicial steps - “the more swinging and authoritative the better.”  The bulk of the blame is placed at the feet of the UK government.  As for Tony Blair, he “looks more and more the escape artist with every month that passes since he left office,” the article states.  Now it will be up to Gordon Brown to clean up the mess.

London Times

A London Times editorial calls the court condemnation “stunning” and the damage done to BAE and the Serious Fraud Office “substantial and humiliating.”  Although these reputations can be repaired, the damage done to Tony Blair’s legacy cannot.  The article acknowledges that a security threat may have been real, but Blair is at fault for exaggerating those claims and failing to assess the potential fallout from supporting a decision to drop the probe.  It also condemns then Attorney-General Lord Goldsmith for “meekly endorsing the Prime Minister, Mr Goldsmith came to embody a shameful blurring of the demands of justice and convenience.”  As with other newspapers, The Times encourages the SFO to reopen the probe, for Gordon Brown to “should defend justice where his predecessor jeopardised it,” and BAE to pledge to institute governance reforms.

Transparency International UK

The 2006 decision raised acute concerns over the United Kingdom’s international obligation to combat corruption. The obvious conclusion was that the UK Government was willing to ignore its commitments for undisclosed and questionable reasons.

TI (UK) particularly welcomes the fact that this long-drawn-out process has thrown important light on an episode that has lacked transparency for too long. Any UK Government ready to submit to inconvenient threats in the interests of covering up illegal business transactions has been given notice that the Courts will not tolerate such conduct.

Laurence Cockcroft, TI (UK) chairman said today “the Courts in the UK have also demonstrated, internationally, what an independent judiciary can and will do where legally required to strengthen poor governance.”

The Court’s decision on whether the Al Yamamah (BAE-Saudi arms deals) investigation should be resumed is not yet known. But the judgment clears the way for immediate actions:

1. The new SFO (Serious Fraud Office) Director has been reminded forcefully that his independence cannot be compromised by government pressure, however intense. He has the power to decide that the investigation should be resumed. TI (UK) believes that he should now do so, bringing to an end the present legal case.
   
2. The Ministry of Justice has failed to respond for 10 months to a proper request from the US Department of Justice for legal assistance with their investigation of the Al Yamamah contract. The Justice Ministry should now provide the assistance requested.
   
3. The UK Government should promptly abandon that part of its Constitutional Renewal Bill that attempts to reinforce the conduct of the Attorney General in this case by providing an unquestionable power to interfere in future investigations in the interests of self-defined “national security”. The Court judgment casts doubt as to whether such a power is constitutional.
   
4. The Government must now make a serious commitment to repair its tattered reputation for combating corruption by engaging constructively with its OECD partners, and correcting its long-standing failings under the Anti-Bribery Convention. A commitment to fast-track this year the recommendations of the Law Commission for a new corruption law would be particularly welcomed.

See TI website for more anti-corruption news and activities.

Statements from The Corner House and Campaign Against Arms Trade, the two organizations who brought the case to court:

Susan Hawley of The Corner House, said:
"This is a great day for British justice. The judges have stood up for the right of independent prosecutors not to be subjected to political pressure. And they have made sure that the Government cannot use national security arguments just because a prosecution is not in their interests."

Symon Hill, spokesperson for Campaign Against Arms Trade (CAAT), said:
"We are delighted. This judgment brings Britain a step closer to the day when BAE is no longer calling the shots. It has been clear from the start that the dropping of the investigation was about neither national security nor jobs. It was due to the influence of BAE and Saudi princes over the UK Government. As we have pursued this case, we have been overwhelmed by the support we have received from people in all walks of life, who do not want BAE to be above the law that the rest of us have to follow."

The judgment comes just weeks after Gordon Brown's Government announced that it is planning to give the Attorney General the power to stop criminal investigations and prosecutions by citing "national security" without the decision being subjected to judicial consideration or meaningful Parliamentary oversight. In the light of today's judgment, The Corner House and CAAT insist that this proposed legislation, contained in the Constitutional Renewal Bill, must be abandoned.

Posted 4/11/08

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Questioning Official “Evaluation” Reports:
Allegations Made Against the European Union

Questions about the credibility of official evaluations of financed projects, programs and/or consulting services are constantly raised with regard to major multilateral official institutions.  At times these have led such organizations to establish special independent commissions. Establishing a reputation for instituting independent evaluations is key to establishing good governance – a new set of allegations brought against the European Union’s Commission (EC) and exclusively brought to the attention of EthicsWorld, raises core issues. 

David Lempert, an American lawyer who was hired by the EC as an independent evaluator, alleges in an article sent to EthicsWorld that his efforts failed to urge “the European Ombudsman to assure investigation into a purported scandal in the contracting processes for consultants in evaluations and project approval for European Commission projects, alleging the possible abuse of tens of millions of Euros of public funds and the planned rigging of public oversight procedures.”

Mr. Lempert pointed to regulations on the EC’s own website that, “[t]he evaluator's independence in his/her work must be respected and the evaluation results must not be interfered with.”  He has offered his documentation of an example of a case in which 100 pages of allegations of misconduct were censored out of a report, the evaluator was fired, conclusions and recommendations were reversed or rewritten, and an allegedly falsified report was put on the EC’s website, according to Lempert’s statement.

Mr. Lempert says he has sent a letter to the European Ombusman, Nikiforos Diamandouros, but no formal case has yet been brought against the EC.  He argues that it is particularly important that the European Commission and other lending institutions have rigorous evaluating and auditing processes in place and in the public arena.  Many of these institutions have the same expectations for the countries they are helping so that doing otherwise would appear hypocritical.    

See also EC pages on its evaluation methodology.

Posted 3/10/08

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UPDATE: Former U.S. State Dept. Officials Testify Their Colleagues Complicit in Corruption

Former judge and Director of the Office of Accountability and Transparency in the Iraqi Embassy, Arthur Brennan, told the U.S. Senate Democratic Policy Committee on May 8, 2008 that his office was only a "window dressing" that concealed the U.S. government's unwillingness to demand good governance in the Iraqi government. He and his colleague, James Mattil, senior advisor to the Iraqi Commission on Public Integrity, recount several examples of how their efforts to investigate Iraqi officials were thwarted or undermined by others in the State Department. (Read the full news article.)

The testimony of both former State Department officials can be downloaded below:

Judge Arthur Brennan, Director of the Office of Accountability and Transparency, U.S. Embassy in Baghdad

James Mattil, Chief of Staff at the Office of Accountability and Transparency, U.S. Embassy in Baghdad

US Congressional Testimony on Anti-Corruption Efforts in Iraq Reveals Need for Major Overhaul

The United States House Committee on Oversight and Government Reform held a hearing on October 4, 2007 on “Assessing the State of Iraqi Corruption.” The hearing, headed by Chairman Henry Waxman, focused on the institutional capacity, in both the Iraqi government and the US government, to deal with corruption in Iraq. Representatives from the US Office of Accountability and Transparency (OAT), the US Anticorruption Working Group, and Judge Radhi Hamza al-Radhi, Commissioner of the Iraqi Commission on Public Integrity, all gave disturbing details about the failures of their respective institutions to fight corruption in the Iraqi government.  Representatives from the US Department of State refused to comment on the situation outside a “classified setting.”

Problems Confronted in US Offices

Both OAT and the Anticorruption Working Group were created by the State Department, the former as a liaison to the Iraq Commission on Public Integrity and the later as the coordinator of US anticorruption efforts.  During the testimony of officials from both these entities, they described a lack of coordination between their respective departments, high turnover in key positions, poor attendance at meetings, and a lack of regular reports.  When the Committee asked Michael Richards, the Executive Secretary of the Anticorruption Working Group to describe its meetings, he responded “To be completely embarrassingly honest with you, a lot of these meetings don’t have a lot of people in them, so there’s not a lot of conversation going on.”

The Committee also asked Judge Arthur Brennan, former director of the Office of Accountability and Transparency, whether there was an overall US strategy for combating Iraqi corruption.  Judge Brennan responded, “I think Ambassador Crocker was serious about going forward on this, but I don’t think everybody is serious about it, and if they are serious, then somebody else should have been doing their job.”

It was suggested that one problem causing the lack of coordination was high turnover and staffing problems.  Since OAT was established in 2006, it has had at least three directors.  In August, Suneeta Sahgal took over as acting director, and until this appointment, she had served as a paralegal who performed primarily administrative tasks, according to a House Committee Memorandum.  In October, funding for Ms. Sahgal’s position was eliminated.

The attendance at meetings of the Anticorruption Working Group have been so poorly attended, James Santelle, Rule of Law Coordinator which oversees OAT, advised staff members of OAT to cease attending working group meetings.  Mr. Richards of the Anticorruption Working Group called his decision “very disturbing.”

State Department Keeps Quiet on Iraq

In order to gain a better understanding of the extent of corruption in Iraq, the Committee directed several questions to the State Department. According to its instructions, State Department officials could not discuss: “broad statements/assessments which judge or characterize the quality of Iraqi governance or the ability/determination of the Iraq government to deal with corruption, including allegations that investigations were thwarted/stifled for political reasons.” 

The Associated Press reported Larry Butler, US deputy assistant secretary of state for Near East Affairs, told the House committee that divulging such information could damage U.S. relations. Rep. Henry Waxman, chairman of the Committee, said Secretary of State Condoleezza Rice should know she is on a collision course with Congress over the public disclosure of corruption in Prime Minister Nouri al-Maliki's government.

According to the House Committee memo , the State Department asked Acting Rule of Law Corrdinator, Scott Winne, to do a retroactive classification review of two reports written by OAT about corruption in Iraq, which Mr. Winne then marked “confidential.” Mr. Winne later told the Committee staff that he had never done a classification review before.

Challenges to Anti-Corruption Efforts in the Iraqi Commission

Unable to obtain information from the State Department, the Committee listened to testimony from Judge Radhi Hamza al-Radhi on the serious problems that exist within the Commission on Public Integrity (CPI), which he headed.  Judge al-Radhi came to the US to share this information and also to seek asylum since the situation in Iraq has become too dangerous for him to return to his post. 

Judge al-Radhi was able to discuss some important accomplishments CPI has made, including the establishment of several directorates within three years.  He also explained that CPI has educated government ministries in the Code of Conduct, worked on financial disclosure, established an INTERPOL liaison office, and organized conferences for Civil Service Reform and NGOs.  Perhaps most importantly, a minister was arrested in accordance with the Rule of Law in a non-political, non-sectarian manner on corruption charges, for the first time in Middle East history, said al-Radhi. 

However, there are serious obstacles that Judge al-Radhi outlined which prevent significant progress.  His main points were:

• Thirty-one employees have been assassinated as well as at least an additional 12 family members.  In a number of cases, many of al-Radhi’s staff and their relatives have been kidnapped or detained and tortured prior to being killed.
  
  
• The Prime Minister and his government have refused to recognize the independence of CPI, even though the Iraqi Constitution sets forth the independence of CPI.
  
  
• Officials and agencies in the Iraqi Government have sent letters forbidding CPI to take any action against the presidency, council of ministers and former ministers.
  
  
• The executive branch often protected corrupt employees and actively attempted to eradicate or control CPI.  The legislative branch did not revise the anticorruption laws, and the judiciary branch succumbed to pressure and did not adjudicate corruption cases.
  
  
• Professional technocrats who were qualified to perform vital government services were not appointed.
  
  
• It has been impossible for CPI to safely and adequately investigate oil corruption where Sunni and Shia militias have control of the metering, transport and distribution of Iraqi oil.  This has resulted in the Ministry of Oil effectively financing terrorism through these militias.   
  
  

The cost of Judge al-Radhi’s testimony appears significant. The Associated Press reported on October 6, 2007 that the government of Iraq will sue him for smuggling documents, libeling the prime minister and corruption, according to a statement released by the prime minister's office. The statement also said al-Maliki urged al-Radhi to investigate corruption allegations regardless of political, religious and ethnic backgrounds.

It was not immediately clear when the suit would be filed, the AP reported.

Posted 10/9/07

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Kenyan President Moi's 'Corruption' Revealed - Secret Report Disclosed

Reactions Lead to New Kenya-UK Disputes. Former Minister Denies Allegations

A new report, which allegedly has been kept secret by the present Kenyan Government of President Kibaki, reveals the massive scale of corruption pursued by former President Moi.  The disclosures have opened a new public war of words between the Kenyan and British governments. The UK has long been a major aid donor to Kenya, but also a harsh critic of corruption in the country.

The report, attributed to the Kroll international investigative company, appeared first on a website called Wikileak (which is modeled on Wikipedia) on August 31, 2007 and was reported in The Guardian in the UK. 

According to The Guardian, the Kroll investigation into the former regime was commissioned by President Mwai Kibaki shortly after he came to power on an anti-corruption platform in 2003. It was meant to be the first step towards recovering some of the money stolen during Mr Moi's 24-year rule, which earned Kenya the reputation as one of the most corrupt countries in the world. But soon after the investigation was launched, President Kibaki's government was caught up in its own scandal, known as Anglo Leasing, which involved awarding huge government contracts to bogus companies. Since then, none of Mr Moi's relatives or close allies has been prosecuted. No money has been recovered. Three of the four ministers who resigned after the Anglo Leasing scandal was exposed have been reinstated into President Kibak’s cabinet and there have been no court cases.

Scale of Moi’s Corruption

The Wikileak story includes the full Kroll report, but Kroll has refused to confirm or deny the authenticity of the report. In its introduction, Wikileak reported that he breathtaking extent of corruption perpetrated by the family of the former Kenyan leader Daniel Arap Moi is revealed in a secret report which lays bare a web of shell companies, secret trusts and frontmen used to steal over two billion dollars worth of state money.

The suppressed U.K auditor's report shows how the wealth was spread across the world from properties and shell companies in London, Newyork and South Africa to a 10,000 hectare ranch in Australia. The countries involved in facilitating the thefts include Australia, Belgium, Brunei, Canada, Dubai, Finland, Germany, Grand, Cayman, Israel, Italy, Japan, Jersey, Liechtenstein, Liberia, Luxembourg, Malawi, Namibia, the Netherlands, Puerto, Rico, Russia, Somalia, South, Africa, Sudan, Switzerland, Uganda, the United Kingdom, the United States and Zaire.

The Guardian’s story under the headline The looting of Kenya, reported by Xan Rice in Nairobi started: “The breathtaking extent of corruption perpetrated by the family of the former Kenyan leader Daniel Arap Moi was exposed last night in a secret report that laid bare a web of shell companies, secret trusts and frontmen that his entourage used to funnel hundreds of millions of pounds into nearly 30 countries including Britain. The 110-page report by the international risk consultancy Kroll, seen by the Guardian, alleges that relatives and associates of Mr Moi siphoned off more than £1bn of government money. If true, it would put the Mois on a par with Africa's other great kleptocrats, Mobutu Sese Seko of Zaire (now Democratic Republic of Congo) and Nigeria's Sani Abacha.”

Argument with the UK

In Nairobi the government’s spokesman, Alfred Mutua, said the Kroll report was incomplete and inaccurate and “We did not find that the report was credible. It was based a lot on hearsay." He said the leaking of the report was politically motivated and insisted Kenya was working with foreign governments to recover the stolen money. "Some of the money is in UK bank accounts. We have asked the British government to help us recover the funds, but so far they have refused."

However, the Associated Press reported on September 1, 2007 that Kenyan authorities have ignored British offers of assistance in an investigation into millions of dollars (euros) allegedly plundered from Kenya's state coffers, Britain's Foreign Office said.

According to The Guardian on September 1, 2007, the U.K. Foreign Office launched an attack on the Kenyan government over its handling of the corruption investigation into the Moi regime and noted that it was "very surprised" to read the claim by Alfred Mutua, the Nairobi government's spokesman, that the British government had been asked for help - but "so far they have refused".  The Foreign Office said: "That is incorrect. We stand ready to assist Kenya with any asset recovery, as we have done successfully with Nigeria. But the Kenyans have not requested assistance despite our offer. Nor have they provided the information we would need to comply with any such request. Last year, when Lord Goldsmith [then attorney general] was in Kenya with Kenya's assistant minister of foreign affairs, Danson Mungatana, they confirmed publicly that we had offered this assistance."

"There is enough information now to blow not just the Mois but most of the Kenyan establishment out of the water," said Sir Edward Clay, the former UK High Commissioner in Nairobi. "The scale and type of the money-laundering is what we were given to understand existed during the time I was in Kenya." As to who leaked the document, Sir Edward said: "The motives for leaking this are probably complex but I suppose have something to do with reminding Mr Moi that his support for the president is quite important because here is the reminder that they have the dirt on him."

Meanwhile, in Kenya, Nicholas Biwott MP scoffed at the report. He was one of President Moi's most powerful ministers and he noted, according to The Nation, that he had neither secreted funds abroad nor looted Kenyan taxpayers’ money. “The allegation that I have invested outside Kenya with commercial interests in Israel and Australia is equally false,” he said.

Posted 9/4/07

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Continued Inaction Evident on Reducing Corruption In Iraq – Scandals Continue to be Revealed in U.S. Press and by U.S. Officials

According to a survey of press reports, nothing appears to have changed on the corruption front in Iraq in recent months.  Indeed, some reports suggest that there is such urgency to get tasks done that monitoring and accountability have gone by the wayside.  A number of  U.S. politicians have been quick to point to the incompetence of Prime Minister Nouri al-Maliki’s government, but there appears to be plenty of room for blame on both sides. 

The US Government Accountability Office (GAO) has encountered difficulty monitoring the Department of Defense’s use of money awarded to contracting companies.  In a July report, the GAO found that “multiple violations of federal acquisition regulations and procedures…placing millions of taxpayers dollars at risk and leaving critical questions unanswered.”  After awarding nearly all of the $221 million to contracting company Kellogg,Brown & Root, the GAO found the DOD had destroyed or lost track of contract documents, failed to submit monitor reports to the award fee board, lacked advanced negotiation of terms and conditions for the company, and failed to submit evaluations on time to the company which could have helped to improve its performance.

Whistleblowers' Rights Not Guaranteed

Corrupt activities are going under the radar because few people are encouraged to come forward to report them. The Associated Press on August 24, 2007 reported that U.S. Navy veteran Donald Vance said he was imprisoned by the American military in a security compound outside Baghdad and subjected to harsh interrogation methods, all for doing what he thought was right – reporting illegal arms sales.  Vance worked for Shield Group Security Co., an Iraqi-owned company he said sold weapons illegally.  He supplied photos, documents, and other intelligence to an FBI agent in his hometown of Chicago because he didn’t know whom to trust in Iraq.  He went to prison anyway.

A lack of guaranteed safety measures for those who report corruption is a major roadblock for curbing the spread of corruption in Iraq.  Beth Daley, from the Project on Government Oversight in the US, said “There is an even greater need for whistleblowers now. But they are made into public martyrs. It’s a disgrace. Their lives get ruined."

Corruption in US Government Contracts

The extent of corruption in government contracting runs deep. The New York Times reported on August 31, 2007 that Lee Dynamics International, an American-owned company based in Kuwait, has been accused by the US Government of paying thousands of dollars in bribes to win $11 million worth of contracts from American contracting officials.  The case is now part of a broader investigation in which the Army has a high-level team reviewing 18,000 contracts valued at more than $3 billion that the Kuwait office has awarded over four years. The article is just one example of the ongoing contract fraud scandals coming out of Iraq.

The Washington Post reported on August 22, 2007 what US officials call the largest bribery case to come out of the Iraq war.  Although few corruption cases actually come out of Iraq, Major John Cockerham, his wife, and his sister were all indicted for receiving $9.6 million from at least eight contractors for giving them favorable contracts.  Investigators have so far identified $415,000 of the $9.6 million, but the rest is still missing.

Few serious moves appear to have been taken by the US government. In a New York Times article on August 28, 2007, General Petraeus, the top commander in Iraq, was reported to have made the decision not to wait for formal tracking systems to be put in place before distributing the weapons.  “We made a decision to arm guys who wanted to fight for their country,” Petraeus said.  The lack of formal tracking systems has cost the US and Iraqi governments at least $40 billion overall, enormous expenditures said to have been the result of weak oversight, poor planning, and seemingly endless security problems.

Moving Forward

The NY Times reported that Senator John Warner, former chairman of the US Senate Armed Services Committee, asked for an investigation into missing weaponry in May of last year.  Warner said the committee’s findings were shocking and “I asked the Secretary of the Army to brief the Armed Services Committee right away, which he did in early August (of this year).”  In a sign of the seriousness of the scandal, the Defense Department Inspector General, Claude Kicklighter, will lead an 18-person team to Iraq early next month to investigate contracting practices, said Geoff Morrell, the Pentagon press secretary.  The Army Secretary is expected to announce later this week the creation of a panel of senior contracting and logistics specialists to address any systemic problems they identify. 

It could be one small step forward in the attempt to correct a sea of problems.   

Posted 8/31/07

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U.S. Securities & Exchange Commission Reports on the Largest Ever Fine Paid by a U.S. Multinational Corporation for Violating the Foreign Corrupt Practices Act

The SEC's press release of April 26, 2007 provides the details and the context of the Baker Hughes case. It provides insights into the ways in which the SEC is approaching major FCPA cases today. It highlights the violations of the FCPA by Baker Hughes, a major U.S. oil services company.

SEC Charges Baker Hughes With Foreign Bribery and With Violating 2001 Commission Cease-and-Desist Order

Baker Hughes Subsidiary Pleads Guilty to Three Felony Charges in Criminal Action Filed by Department of Justice; Criminal Fines, Civil Penalties and Disgorgement of Illicit Profits Total More Than $44 Million

Washington, D.C., April 26, 2007 - The Securities and Exchange Commission today announced the filing of a settled enforcement action charging Baker Hughes Incorporated, a Houston, Texas-based global provider of oil field products and services, with violations of the Foreign Corrupt Practices Act (FCPA). Baker Hughes has agreed to pay more than $23 million in disgorgement and prejudgment interest for these violations and to pay a civil penalty of $10 million for violating a 2001 Commission cease-and-desist Order prohibiting violations of the books and records and internal controls provisions of the FCPA.

In the same complaint, the SEC also charged Roy Fearnley, a former business development manager for Baker Hughes, with violating and aiding and abetting violations of the FCPA. Fearnley has not reached any settlement with the Commission regarding these charges.

Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, said, "Baker Hughes committed widespread and egregious violations of the FCPA while subject to a prior Commission cease-and-desist Order. The $10 million penalty demonstrates that companies must adhere to Commission Orders and that recidivists will be punished."

Christopher R. Conte, an Associate Director in the SEC's Division of Enforcement, added, "Companies like Baker Hughes will be held accountable when they circumvent the rules of fair play and honest competition by making improper payments to win business."

The SEC's complaint alleges that Baker Hughes paid approximately $5.2 million to two agents while knowing that some or all of the money was intended to bribe government officials, specifically officials of State-owned companies, in Kazakhstan. The complaint alleges that one agent was hired in September 2000 on the understanding that Kazakhoil, Kazakhstan's national oil company at that time, had demanded that the agent be hired to influence senior level employees of Kazakhoil to approve the award of business to the company. Baker Hughes retained the agent principally at the urging of Fearnley.

According to the complaint, Fearnley told his bosses that the "agent for Kazakhoil" told him that unless the agent was retained, Baker Hughes could "say goodbye to this and future business." Baker Hughes engaged the agent and was awarded an oil services contract in the Karachaganak oil field in Kazakhstan that generated more than $219 million in gross revenues from 2001 through 2006. Baker Hughes, the complaint alleges, paid the agent $4.1 million to its bank account in London but received no identifiable services from the agent. The complaint also alleges that in 1998 Baker Hughes retained a second agent in connection with the award of a large chemical contract with KazTransOil, the national oil transportation operator of Kazakhstan. Between 1998 and 1999, Baker Hughes paid over $1 million to the agent's Swiss bank account, despite a company employee knowing by December 1998 that the agent's representative was a high-ranking executive of KazTransOil.

The SEC's complaint against Baker Hughes also alleges violations of the books and records and internal controls provisions of the FCPA in Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan. In addition to violating the FCPA, certain of this conduct occurred after September 12, 2001, and consequently violated the Commission's 2001 cease-and-desist Order. Specifically, the complaint alleges that between 1998 and 2005, Baker Hughes made payments in Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan in circumstances that reflected a failure to implement sufficient internal controls to determine whether the payments were for legitimate services, whether the payments would be shared with government officials, or whether these payments would be accurately recorded in Baker Hughes' books and records.

For example, the complaint alleges that

• from 1998 to 2004, Baker Hughes authorized commission payments of nearly $5.3 million to an agent (who worked in Kazakhstan, Russia and Uzbekistan) under circumstances in which the company failed to determine whether such payments were, in part, to be funneled to government officials in violation of the FCPA;
   
• in Indonesia, between 2000 and 2003, Baker Hughes paid certain freight forwarders to import equipment into Indonesia using a "door-to-door" process under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Indonesian customs officials;
   
• in Nigeria, between at least 2001 and 2005, Baker Hughes authorized payments to certain customs brokers to facilitate the resolution of alleged customs deficiencies under circumstances in which the company failed to adequately assure itself that such payments were not being passed on, in part, to Nigerian customs officials; and
   
• in Angola, from 1998 to 2003, Baker Hughes paid an agent more than $10.3 million in commissions under circumstances in which the company failed to adequately assure itself that such payments were not being passed on to employees of Sonangol, Angola's state-owned oil company, to obtain or retain business in Angola.

Without admitting or denying the SEC's allegations, Baker Hughes consented to the entry of a final judgment permanently enjoining it from future violations of the FCPA and ordering it to pay a civil penalty and disgorgement with prejudgment interest; and to retain an independent consultant to review the company's FCPA policies and procedures.

The Commission acknowledges Baker Hughes' cooperation in the investigation.

In a related criminal proceeding announced today, the United States Department of Justice filed criminal FCPA charges against Baker Hughes and its wholly-owned subsidiary Baker Hughes Services International, Inc., with an office in Atyrau, Kazakhstan. Baker Hughes Services International, Inc. entered a guilty plea before the Honorable Gray H. Miller, United States District Judge for the Southern District of Texas, and agreed to plead guilty to one count of violating the anti-bribery provisions of the FCPA, one count of aiding and abetting the falsification of the books and records of Baker Hughes, and one count of conspiracy to violate the FCPA, and to pay a criminal fine of $11 million.

The Department of Justice has also entered into an agreement with Baker Hughes to defer prosecution for two years on charges of violating the anti-bribery and books and records provisions of the FCPA. Under the agreement, the company will retain for a period of three years a monitor to review and assess the company's compliance program and monitor its implementation of and compliance with new internal policies and procedures.

The staff acknowledges the cooperation and assistance of the U.S. Department of Justice, Fraud Section. The staff also acknowledges the help provided, in the form of mutual legal assistance, by the Isle of Man Financial Supervision Commission, HM Procureur (Attorney General) for Guernsey, and by the authorities of the United Kingdom and Switzerland.

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The Scale of Corruption in Iraq Reaches Massive Scale

U.S. Authorities Start To Take Series of Actions – Iraq’s Deputy Health Minister Arrested - New U.S. Inspector General Report -Congress Launches Oversight Hearing - Largest U.S. Gas Company Agrees to Fine

Now, after a period of silence, rumors, but few facts, the truth about the scale of corruption in Iraq is starting to emerge in the United States. There is not yet a clear and coherent story. What has become very evident is that corruption is rampant in many sectors. The scale of the corruption dwarfs that seen in almost any other country in recent times. In the following report, EthicsWorld highlights some of the latest reports, including details of abuse and concrete proposals for anti-corruption reform from the U.S. Inspector General to Iraq.

Below: The Context & Scale
            Enforcement Actions
            Tons of Cash Distributed – Congressional Oversight
            Inspector General Highlights Issues: Overview
            Corruption as Seen by the Inspector General
            Corruption Commissions & Reforms    

The “Iraq Study Group” co-chaired by former U.S. Secretary of State James A. Baker, III, and former Congressman Lee H. Hamilton, presented its report to the Bush Administration and the U.S. Congress on December 6, 2006.

It noted: “…Iraqi police cannot control crime, and they routinely engage in sectarian violence, including the unnecessary detention, torture, and targeted execution of Sunni Arab civilians. The police are organized under the Ministry of the Interior, which is confronted by corruption and militia infiltration and lacks control over police in the provinces…

Corruption is rampant. One senior Iraqi official estimated that official corruption costs Iraq $5–7 billion per year. Notable steps have been taken: Iraq has a functioning audit board and inspectors general in the ministries, and senior leaders including the Prime Minister have identified rooting out corruption as a national priority. But too many political leaders still pursue their personal, sectarian, or party interests. There are still no examples of senior officials who have been brought before a court of law and convicted on corruption charges…”

The report added: “…There has been some economic progress in Iraq, and Iraq has tremendous potential for growth. But economic development is hobbled by insecurity, corruption, lack of investment, dilapidated infrastructure, and uncertainty. As one U.S. official observed to us, Iraq’s economy has been badly shocked and is dysfunctional after suffering decades of problems: Iraq had a police state economy in the 1970s, a war economy in the 1980s, and a sanctions economy in the 1990s…(oil sector) Corruption is also debilitating. Experts estimate that 150,000 to 200,000—and perhaps as many as 500,000—barrels of oil per day are being stolen. Controlled prices for refined products result in shortages within Iraq, which drive consumers to the thriving black market. One senior U.S. official told us that corruption is more responsible than insurgents for breakdowns in the oil sector…To combat corruption, the U.S. government should urge the Iraqi government to post all oil contracts, volumes, and prices on the Web so that Iraqis and outside observers can track exports and export revenues.”

Enforcement Actions

Enforcement is increasing, for example:

Deputy Health Minister Arrested.  On February 7, 2007 U.S. and Iraqi authorities jointly moved to arrest Iraq's deputy health minister at his ministry building in central Baghdad. Hakim Zamili is a senior member of the political group loyal to Shia cleric Moqtada al-Sadr. He is accused of grand corruption and of using his office, and its funds, to directly support killings and the supply of weapons to insurgent groups. This is the highest ranking Iraqi Government official to have been arrested on such serious charges (see report on RTE News).

Major U.S. Firm Agrees to Fines. The AP reported on February 7, 2007, that the U.S.’s largest natural gas pipeline company agreed to pay the federal government $7.7 million to settle corruption allegations related to the U.N. oil-for-food scandal over aid to Iraq. El Paso Corp. will forfeit $5.48 million to the United States, which will seek to transfer the money to the Development Fund of Iraq to be paid as restitution for the benefit of the people of Iraq. It also agreed to a deal with the U.S. Securities and Exchange Commission to pay an additional $2.25 million. Government officials said the $5.48 million represents the amount of illegal surcharges paid to Saddam Hussein's government by third parties from whom El Paso purchased Iraqi oil between mid-2000 and March 2003.

Three U.S. Miltary Officers Charged with Corruption. RTE News also reported on February 8, 2007 that three senior US military officers who have been supervising funds for reconstruction in Iraq have been charged with corruption. The Reserve officers and two US civilians are accused of steering contracts for reconstruction work towards certain companies in return for bribes. The bribes included cash, sports cars and jewellery. The US special Inspector General for Iraq, Stuart Bowen, has vowed to root out waste, fraud and abuse in Iraq.

Tons of Cash Distributed – Congressional Oversight

With the Democratic Party having won the majority of seats in the U.S. House of Representatives in last November’s elections, new chairmen of House oversight committees are turning their attention to the War in the Iraq. 

The report was released by the House Oversight and Government Reform Committee at a hearing when Democrats sharply questioned the former American civilian administrator in Iraq,  L. Paul Bremer III, about lax management of the nearly $12 billion in cash shipped to Iraq between May 2003 and June 2004.

As The Washington Post noted that same day, the funds were provided to the Iraqis in cash, often in shrink-wrapped packages of $100 bills. The committee's chairman, Rep. Henry A. Waxman (Democrat, California.), said the U.S. government flew nearly all the cash into Baghdad on military cargo planes from May 2003 to June 2004. "Who in their right mind would send 363 tons of cash into a war zone? But that's exactly what our government did," Waxman said. Because of the way the CPA kept track of the payments, Waxman said, "we have no way of knowing whether the cash shipped into the Green Zone ended up in enemy hands."

Congressman Waxman is planning many more hearings. One topic to be discussed is the operation of the Haliburton Company and its affiliates – questions have been raised over the effectiveness of its systems for controlling and monitoring service funds – services that are financed by U.S. Government programs.

On January 30, 2007 the U.S. Inspector General filed his latest report to the United States Congress on Activities in Iraq in the 4th Quarter of 2006. In his cover letter Inspector General  Stuart W. Bowen, Jr. noted that virtually all of the $21 billion in U.S. Government funds for Iraq’s reconstruction (IRRF funds) are now under contract  (approximately 80% of which is already spent). The end of the IRRF marks the beginning of a new phase in aid to Iraq, which will entail a broader multilateral component and an increase in the Iraqi government’s responsibility for the overall economic recovery effort.

He said that, “This new phase, however, does not mark the end of oversight. To the contrary, more remains to be done to account for past U.S. investment and to promote the highest and best use of future U.S funding for Iraq. Recognizing the need for continuing oversight, Congress passed, and the President signed, the Iraq Reconstruction Accountability Act in December 2006. This Act extended SIGIR’s jurisdiction to include all FY 2006 appropriations for Iraq reconstruction, including the Iraq Security Forces Fund, the Economic Support Fund, and the Commander’s Emergency Response Program. The Act requires SIGIR to conduct a forensic audit to account for the use of the IRRF and effectively extends SIGIR’s organizational life through 2008.”

The Inspector General’s office reported that it, “completed 82 audit products, including reviews of U.S. efforts to support the capacity development of Iraq’s ministries, an examination of the Department of State’s management of funding for Iraqi police training and training support, a report on medical equipment purchased to support the primary healthcare centers, and a statistical summary of security costs for major U.S. contractors in Iraq. SIGIR investigators continued work this quarter on 78 open investigations, including 23 cases under direct Department of Justice (DoJ) supervision. SIGIR also facilitated the formation of the International Contract Corruption Task Force to coordinate fraud investigations by its several members, including the Federal Bureau of Investigation, the U.S Army’s Criminal Investigation Command, and the Defense Criminal Investigative Service. In addition, SIGIR continued its participation on DoJ’s National Procurement Fraud Task Force.”

Corruption as Seen by the Inspector General

In an early part of the report on general observations, the very first point made related to corruption…

Corruption continues to plague Iraq. Anticorruption institutions in Iraq are fragmented, and there does not appear to be an internal Iraqi consensus about how these institutions should interact. SIGIR’s 2006 audit of U.S. support to anticorruption efforts in Iraq presented a series of recommendations, some of which remain
unresolved.

The report noted on Investigations -

“This quarter (final quarter 2006), SIGIR investigations opened 27 cases and closed 43 preliminary and open cases. Currently, 78 investigations are open, including 23 cases awaiting action under prosecutorial control at the U.S. Department of Justice. Also this quarter, the International Contract Corruption Task Force identified 36 cases. SIGIR, one of five agencies working jointly on the taskforce, contributed nine cases to this effort. Since December 2005, SIGIR has worked closely with a range of agencies to suspend and debar contractors for fraud or corrupt practices involving Iraq reconstruction and Army support contracts in Iraq. These cases arise both from criminal indictments filed in federal district courts and allegations of contractor irresponsibility requiring fact-based examination by the Army’s Suspension and Debarment Official. To date, 14 individuals and companies have been suspended based on allegations of fraud and misconduct connected to Iraqi reconstruction and Army support contracts. As of January 30, 2007, a total of eight have been debarred, and four others have been proposed for debarment.

The report stated that, “Corruption continues to limit the ability of the GOI to manage reconstruction efforts and key areas of economic policy. The Iraqi Ministry of Oil estimates that Iraq loses $700 million of revenue each month because of oil smuggling. Transparency International ranks Iraq 161st of 163 countries measured. This ranking, 1.9 on the Corruption Perceptions Index, indicates high levels of perceived corruption. SIGIR’s October 2006 Report discussed ways that Iraq, the United States, and international donors were helping to combat corruption, including new commitments and benchmarks for key actions that the Iraqis would agree to as part of the Compact. The U.S. Mission interagency Anticorruption Working Group helped the GOI identify anticorruption initiatives for the Compact and will help Iraq implement some of the key anticorruption priorities outlined in the Compact. The U.S. Mission is providing an advisor for each of the three Iraqi anticorruption institutions—the Commission on Public Integrity (CPI), the Board of Supreme Audit (BSA), and the ministry Inspectors General (IGs).”

Corruption Commissions & Reforms
From the Inspector General’s Report

Commission on Public Integrity
The future of the CPI is uncertain. It was created by the Coalition Provisional Authority, but never written into Iraqi law. Iraqi legislators have stalled a vote on whether to give the commission permanent status or to dissolve it and let the ministry IGs audit their own agencies. Meanwhile, the head of the CPI has been the subject of corruption investigations by the Parliamentary Anticorruption Committee. The CPI has nonetheless pushed for the prosecution of several former ministers and uncovered corruption in the Interior Ministry; 3,000 employees were dismissed in October for corruption and sectarianism. Targets have included former Ministers of Defense and Electricity.

CPI’s current investigations include the quality of food purchased by the Ministry of Trade for monthly rations, the disappearance of petroleum products under the supervision of the Ministry of Oil, the lack of progress refurbishing the railroad system, and misconduct by police officers in the Ministry of Interior.

Board of Supreme Audit
The UN is coordinating with international audit boards to train BSA staff according to modern audit systems. Members of the Arab Organization of Supreme Audit Institutions (ARABOSAI) would contribute to training the BSA Iraqi staff as part of a plan created by the ARABOSAI training committee when it met in Tunisia in January 2007.

International Compact for Iraq
As part of the Compact, Iraq will commit to specific steps to improve transparency and inhibit corruption in exchange for pledges of aid and other international support. The current Compact language outlines a process to develop a legal framework and build institutional capacity to deter corruption at all levels of government.

Key priorities and benchmarks include:

• strengthening the rule of law and the capacities of law-enforcement agencies

• developing anticorruption plans for institutions with substantial revenue and expenditures

• fully implementing the public income and asset disclosure law and legislation to enable asset seizure and forfeiture

• strengthening capacity for internal audit and the BSA

• reviewing the mandates of the CPI and the inspectors general to ensure that they work as independent, professional, technical, and non-political bodies

• developing a comprehensive system of internal and external controls within government, including conflict of interest policies, audit, and evaluation

• ratifying the UN Convention Against Corruption

• launching a public education campaign on anticorruption.

Posted 2/9/07

“The Donors Who Turn a Blind Eye to Kenyan Sleaze”
A Financial Times Editorial by Michael Holman
February 16, 2006

In his article (available for subscribers to the FT or FT.com), Michael Holman, former FT Africa Editor (and author of the new novel, Last orders at Harrods) castigates aid donors for repeatedly providing funds to corrupt regimes, the most recent being the current Kenyan government. Tracing past aid flows to Zaire and to Kenya, Holman shows how political factors, business ties and old habits all combine to convince donors to support corrupt governments.

Holman, who served as the FT’s Africa Editor for more than two decades, has expertise on Kenya and he details the courage of former Kenyan ethics and corruption Minister John Githongo in providing exceptionally detailed accounts of current Kenyan corruption to a special meeting of Kenya’s parliamentary public accounts committee in London last weekend

Allegedly, around $700 million has been stolen by top officials. But, stressed Holman, it is important to note that the United Nations, the World Bank and the British Government continue to pour aid funds into Kenya. While these donors suggest that their money bypasses the corruption and serves the poor, Holman reports that every social indicator in Kenya points in one direction - downwards.

Holman concludes: “By insisting on maintaining aid, Paul Wolfowitz, World Bank president, and Hilary Benn, Britain’s aid minister, are not only forgetting the past. They are arrogantly insisting that they know what is best for Kenya. Had they bothered to ask Mr. Githongo what they should be doing, the answer, I suspect, would have been very different.” 

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Kenya: Major Scandal Likely As Former Top Official Prepares To Go Public

John Githongo's Actions May Set Important International Precedent

Former Kenyan Ethics and Governance Permanent Secretary John Githongo, who has resided in the UK for the last year on resigning his office, is reported in the Kenyan media to have prepared a 90 page dossier, which it is said he plans to make public, which detailed major corruption involving some of the most senior officials in the Government.

Mr. Githongo, the former head of Transparency International Kenya, has not been intimidated by threats and his revelations may set an important precedent - very few public officials have ever quit office and gone public to provide precise details on alleged corruption by a current government.

On January 20, 2006, The Guardian in the UK, which has been in touch with Mr. Githongo, carried the following story which we excerpt:

Top ministers face inquiry into corruption allegations in Kenya

Government Under Threat As Claims Threaten to Have Knock-On Effect for Donors Across Africa

Michela Wrong and Duncan Campbell
Friday January 20, 2006

The vast scope of the allegations is likely to have serious ramifications for the government and could affect how Britain and international organisations deal with African nations that are suspected of similar activities. Kenya's vice-president and two cabinet ministers are among more than 30 people summoned by the Kenyan anti-corruption commission (KACC). The former internal security minister Chris Murungaru had already been summoned to appear over the weekend to explain his personal wealth. The commission said those would "not be the last notices to be issued".
Shortly after news of the summons broke, Mwai Kibaki, Kenya's president, warned his cabinet: "You are required not only to be on guard against corruption, abuse of office, and influence peddling in all forms, but also to actively participate in the fight against the vice by being alert."

The high-level investigation, on which will hang the credibility of President Kibaki's government of three years, has been prompted by a report from John Githongo, the former permanent secretary for governance and ethics, who sought exile in Britain last year.

From Oxford, Mr Githongo compiled the 36-page critique, which was sent to Mr Kibaki and the anti-corruption chief, Aaron Ringera. Mr Githongo told the Guardian that he welcomed Mr Ringera's actions. "I am pleased to see things seem to be moving on these issues. I am determined that Kenyans get to know the whole truth as soon as possible."

Media reports suggest that the focal point of Mr. Githongo's allegations is a company called Anglo Leasing and Finance that the government had planned to pay £20m for a sophisticated passport equipment system and another £29m for forensic science laboratories, which were never provided.
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New disclosures of widespread abuse in the use of official United Nations funds are now adding to pressures for far-reaching management and governance reforms at the organization. These new allegations, which relate to fraud and abuse in U.N. peacekeeping operations, follow the totally separate report, published in late October 2005 by the Volcker Commission on the UN-Iraq oil-for-food scandal (please see stories below on this page). A core concern of the Volcker Commission was management failure at the helm of the United Nations. The evidence made public by the Commission provided the United States delegation to the United Nations, as well as some other national delegations, with a solid basis for calling for far-reaching reforms of the governance systems of the organization. The new disclosures on peacekeeping operations will now add formidably to the pressures for reform at the United Nations.

A central issue in this context relates to the moral authority of the United Nations to counter corruption and call on its member governments to improve their own governance when the U.N. itself is found to have serious shortcomings.  This not only applies to governments, but also to corporations as a key principle of the U.N. Global Compact relates to corruption (please see our page on CSR Standards and Principles)

Judy Aita, United Nations Correspondent of the Bureau of International Information Programs, U.S. Department of State, reported on January 24, 2006 that internal U.N. investigations have uncovered 200 instances of alleged procurement mismanagement and fraud in peacekeeping operations and at U.N. headquarters. Eight staff members have been placed on special leave and investigations could involve tens of millions of dollars. A U.N. report on the abuse noted that "substantial evidence of abuse in procurement for peacekeeping operations leading to financial losses and significant inaccuracies in planning assumptions" had been uncovered. The report also said "the design and maintenance of controls needed to ensure that U.N. procurement complies with financial rules and regulations were insufficient.  Important controls were lacking while existing ones were often bypassed,"

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Reform of United Nations' Approaches to Management Seen As Critical

Paul Volcker issued a final UN oil-for-food Iraq report on October 27, 2005 with allegations that over 2,200 companies were engaged in illegal schemes with the former Iraq regime involving over $1.7 billion of illicit payments. The former US Federal Reserve Chairman stressed that his prime concern at the end of his investigation is management in the United Nations and the vital need for reform here. He underscored that bribery is all too frequently made possible when official oversight is inadequate.
According to the final report, DaimlerChrysler AG, Siemens AG, and Volvo AB are among 2,253 companies that allegedly paid illegal kickbacks to Iraq to win business from an aid program designed to allow Saddam Hussein to sell oil to buy food and medicine. Much of the information is based on records kept in Iraq and Volcker stressed that allegations need to be viewed with caution. It also appears that a good deal of the illicit payments were made through agents.

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The United Nations – Oil-for-Food Scandal

Editorial by the Wall Street Journal, September 9, 2005

Before the publication of the final Volcker Report in November, 2005, the focus of attention has been on U.N. management and Volcker was to stress this again in his final November press conference. The Wall Street Journal editorializes about the “largest fraud ever recorded in history.” The editorial writers at The Wall Street Journal have never taken a gentle view of management at the United Nations. But, they have spared no punches in an editorial on September 9, 2005. Their central focus is on the management of the United Nations under Secretary General Kofi Anan. The basic text is the report by the Paul Volcker Commission on the Iraq oil-for-food program and the basic issue is corruption. The Journal noted that this was “the largest fraud ever.’ It continued; “press reports often cite the overall size of Oil for Food at $60 billion, but Mr. Volcker's report makes clear that the real figure was in excess of $100 billion. From this, Saddam was able to derive $10.2 billion from illicit transactions. But the important point is that he was able to steer 10 times that sum toward his preferred clients in the service of his political aims.

“None of this happened by accident. Mr. Volcker's report is replete with examples of incompetent U.N. oversight and tales of political wrangling among the permanent members of the Security Council. But the abiding fact is that it was the Western powers, not Saddam, who wanted Oil for Food at virtually any cost, because it offered the appearance of a meaningful policy in the absence of a real one, namely regime change. And it was the political convenience of this chimera that led the U.S. and the U.K. to tolerate, and the rest of the Security Council to feast on, the opportunities for corruption that were inscribed in the very nature of the program.

“As for the U.N., it proved its worth to Saddam as the one hall of mirrors in which such shenanigans could take place. Yet even now we are told that "at least" Oil for Food fed the Iraqi people when they were on the edge of starvation, and this is accounted a U.N. success. That is false. Oil for Food offered a lifeline of cash and influence to a regime that was starving its people. The program did not corrupt the U.N. so much as exploit its essential nature. Now Mr. Annan wants to use this report as an endorsement of his "reform" proposals. Only at the U.N. could he dare to think he could get away with this.”

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