International Law Advisory - Halliburton and KBR Agree to Near-Record Penalties; Additional Indictment Unsealed as US Seeks Extradition of UK Agents

On February 11, 2009, the Justice Department (“DoJ”) and the Securities and Exchange Commission (“SEC”) announced separate settlements with Halliburton and its former affiliate, KBR, Inc., and KBR Inc.’s wholly owned subsidiary, Kellogg Brown & Root LLC (“KBR LLC”), in their long-running investigations into corruption of the award of $6 billion in construction contracts on Bonny Island, Nigeria.  Six days later, two UK nationals, Jeffrey Tesler (“Tesler”) and Wojciech Chodan (“Chodan”), who allegedly served as agents of M.W. Kellogg Company (“M.W. Kellogg”), which Halliburton acquired in 1998, and others in connection with the contracts, were indicted by a grand jury in Texas.[1]  Their indictment was unsealed on March 5, 2009, in connection with a request by the U.S. government for the two individuals’ extradition to the United States.

Under the terms of the DoJ plea agreement, KBR LLC, a global engineering and construction company, and former subsidiary of Halliburton, pleaded guilty to conspiring with its joint venture partners to violate the FCPA by authorizing and promising to pay bribes of approximately $182 million via intermediaries to several Nigerian officials to secure procurement and construction contracts on Bonny Island, Nigeria.  KBR LLC agreed to pay a $402 million criminal fine (comprised of an initial payment of $52 million and seven subsequent installments of $50 million each), retain an independent compliance monitor for a three-year period, and to continue cooperation with the DoJ.   

Separately, the SEC charged KBR, Inc. and Halliburton with books and records and internal control violations in relation to the bribery scheme.  To settle the SEC charges, KBR, Inc. and Halliburton jointly agreed to pay $177 million in disgorgement of profits from the transaction. 

Halliburton had previously agreed to indemnify KBR, Inc. for fines, penalties, damages and disgorgement, in order for KBR, Inc. to separate from Halliburton with increased financial stability and solvency.  With the terms of the settlements with the DoJ and SEC finalized, Halliburton has agreed to pay $382 million of the DoJ penalty against KBR LLC, on behalf of KBR, Inc., in eight installments over the next two years and $177 million in disgorgement to the SEC.[2]  

The settlements with the DoJ and SEC are noteworthy due to the size of the penalties and the time frame covered by the prosecution.  The settlement with the DoJ represents the second largest fine ever in an FCPA prosecution, and the largest for a U.S. company.[3]  The penalty levels signal that enforcement authorities will not refrain from prosecuting politically-connected companies (although some commentators have noted that the settlement post-dated the change in U.S. administrations) and that large-scale, sometimes called “grand”, corruption in the procurement context is likely to attract the largest penalties of any type of FCPA violation.  

The settlements stem from a scheme that began in the early 1990s by M.W. Kellogg, which at the time was not owned by Halliburton.[4]  In 1994, M.W. Kellogg formed a joint venture with three other multi-national companies for the purpose of pursuing liquefied natural gas (“LNG”) projects in Nigeria.  According to the plea documents, the joint venture, operating through three Portuguese special-purpose companies, hired two agents to pay bribes to Nigerian officials, including top-level Nigerian executive branch officials, for the purpose of securing construction contracts on Bonny Island, Nigeria. 

The joint venture paid a UK agent more than $130 million between 1995 and 2004, in exchange for “vaguely described marketing and advisory services,” when the primary purpose of the payments was to facilitate payment of bribes to Nigerian government officials.  This money was then systematically passed by the agent to accounts controlled by one or more unidentified high-ranking Nigerian government officials for the purpose of obtaining LNG contracts.[5] 

The alleged identity of the agents, one of whom had been previously identified in the press, was revealed in the February 17 indictment to be Tesler and Chodan.  The DoJ alleges that they acted as agents of a domestic concern (M.W. Kellogg and its successors), issuers (two of the joint venture companies) and a person neither an issuer nor a domestic concern (the remaining joint venture company), and engaged in a conspiracy to violate the FCPA and violated the FCPA through a series of acts performed between 1994 and 2004.  These acts included causing emails to be sent to Houston and causing foreign payments which were routed through correspondent banking accounts in New York.  There is no allegation that either individual either emailed or acted within the United States.  The indictment seeks forfeiture of approximately $132 million as part of the proceeds allegedly traceable to the violations.  The extradition of Tesler is pending in the U.K. and Chodan is currently a fugitive.

The indictment provides the most detailed glimpse yet into the government’s view of how the conspiracy was carried out.  Through press reports, the role of Tesler and his company, Tri-Star Investments of Gibraltar, in making the payments at issue has been set out in some detail; the indictment amplifies this. Chodan is alleged to have played more of a supporting role.[6]  Although Chodan ostensibly worked for a UK company majority-owned by M.W. Kellogg (and later by its successors), the indictment alleges that in reality, he reported to Stanley and other employees of M.W. Kellogg and its successors.  The long list of alleged overt acts in furtherance of the conspiracy, spanning the period from 1994 to 2004, include “cultural meetings” where conspirators discussed bribes, delivery through a subcontractor of a briefcase containing USD $1 million to an NNPC official at a hotel in Abuja for the benefit of a Nigerian political party, delivery of a vehicle containing about $500,000 in Nigerian currency to an NNPC official for the benefit of a Nigerian political party, and assisting in payments to another consultant who served as a conduit for bribes, among other acts.

The indictment and KBR LLC settlement documents indicate that the joint venture paid a Japanese consultant (identified as a major trading company) more than $50 million between 1996 and 2004, also purportedly in exchange for marketing and advisory services.  However, in reality, the documents indicate, the money was passed by the consultant to lower-level Nigerian officials (also unidentified) for the improper purpose of assisting in obtaining LNG contracts. 

As we previously reported, Jack Stanley, the former head of M.W. Kellogg and its successors, pleaded guilty in September 2008 to conspiring to violate the FCPA for his part in the above bribery scheme.  Under his plea agreement, Stanley faces a sentence of seven years in prison and the payment of $10.8 million in restitution (the amount of kickbacks he took) to his former employer.  His sentencing is scheduled for August 27, 2009.[7]

It has been reported that French, Swiss and Nigerian authorities are also looking into allegations of improper payments made in relation to the Bonny Island Project.  The DoJ press release with respect to the indictment acknowledges the assistance provided by the authorities in France, Italy, Switzerland, and the United Kingdom, including the Anti-Corruption Unit of the Serious Fraud Office, the London Metropolitan Police and the City of London Police.  It is not yet known what other prosecutions of entities or individuals by the US or other authorities may result, although it is unlikely the latest indictment represents the end of the case. 

We will continue to keep you apprised of developments related to FCPA enforcement. If you have any questions or for further information, please feel free to contact Lucinda Low at 202.429.8051; Ed Krauland at 202.429.8083; Pat Norton at 202.429.8034; Erik Kitchen at 202.429.8132; Matt Herrington at 202.429.8164; Philip Khinda at 202.429.8189; Andrew Irwin at 202.429.8177; Julia Court Ryan at 202.429.6418; David Lorello at 44(0)20.7367.8007; Alexandra Baj at 202.429.6478; Tom Best at 202.429.8079; Owen Bonheimer at 202.429.6266; Michael Pass at 202.429.8101; Brittany Prelogar at 202.429.5518; Sarah Lamoree at 202.429.6488; William Gordon at 202.429.8013; Vincenza Rabenn at 202.429.1305.

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[1] In September 1998, Halliburton acquired Dresser Industries, Inc, including Dresser’s subsidiary, The M.W. Kellogg Company.  After this acquisition, M.W. Kellogg was combined with Halliburton’s subsidiary, Brown & Root, Inc., to form Kellogg, Brown & Root, Inc, which later became Kellogg, Brown & Root, LLC, now a wholly owned subsidiary of KBR, Inc.

[2] Halliburton 8-K (January 26, 2009).

[3] Department of Justice Press Release, Kellogg Brown & Root LLC Pleads Guilty to Foreign Bribery Charges and Agrees to Pay $402 Million Criminal Fine, Feb. 11, 2009.

[4] The SEC alleged that at the time of Halliburton’s acquisition of M.W. Kellogg in 1998, Halliburton conducted a due diligence investigation in regard to M.W. Kellogg, but failed to follow-up on key information that likely would have raised red flags in regards to the U.K. agent.  Further, the SEC alleged that Halliburton failed to conduct appropriate due diligence when the joint venture entered into new contracts with U.K agent.  And the Complaint also alleged that Halliburton conducted no due diligence in regard to the Japanese agent.  SEC v. Halliburton, Case No. 4:09-399 (S.D. Tex. 2008)(complaint).

[5] United States v. Kellogg Brown & Root, Case No. H-09-071 (S.D. Tex. 2008) (information).   [6] We find it interesting and possibly precedent-setting that the indictment accused Chodan of “furtherance of the scheme to bribe Nigerian officials” by e-mailing KBR executives in Houston denying aspects of the Bonny Island bribery scheme.  The government here suggests that Chodan could have violated the anti-bribery provisions of the FCPA by simply denying the existence of the scheme itself.   [7] United States v. Stanley, Case No. 4:08-cr-00597 (S.D. Tex. 2008) (criminal docket); US  v. Stanley, Case No. 4:08-cr-00597 (S.D. Tex. 2008) (plea agreement).  See Steptoe’s prior alert on Albert Stanley, available at http://www.steptoe.com/publications-5615.html.