The Agreements with the U.S. Attorney and the SEC
On November 14, 2007, the United States Attorney for the Southern District of New York and the Securities and Exchange Commission (SEC) announced that they had reached agreements with Chevron Corporation with respect to alleged misconduct in its procurement of Iraqi oil under the United Nations Oil-for-Food Program. Both cases stem from allegations that Chevron obtained Iraqi oil under the program from third parties whom Chevron knew or should have known paid secret, illegal surcharges to the former government of Iraq.

Non-prosecution Agreement on Select Criminal Charges: The U.S. Attorney alleged that Chevron’s conduct violated U.S. wire fraud statutes and administrative regulations that prohibited transactions with the former government of Iraq. Under the Non-prosecution Agreement with Chevron, the U.S. Attorney agreed not to prosecute Chevron (except for some possible criminal tax violations) in exchange for Chevron agreeing to payments totaling $27 million. The payments will comprise 1) forfeiture of $20 million (representing the amount of illegal surcharges paid by the third parties to Iraq) to the U.S. Attorney’s Office for the Southern District of New York, which will seek to transfer that money to the Development Fund of Iraq, to be paid as restitution for the benefit of the people of Iraq; 2) $5 million to the New York County District Attorney’s Office, and 3) $2 million to the Department of the Treasury’s Office of Foreign Assets Control.

Civil SEC Charges: In its complaint against Chevron, the SEC alleged that Chevron violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act FCPA). While Chevron has neither admitted nor denied the allegations in the civil complaint filed by the SEC, it consented to the entry of a final judgment permanently enjoining it from future violations of the FCPA and agreed to disgorge $25 million in profits and to pay a civil penalty of $3 million. Chevron’s $25 million disgorgement is satisfied by fulfilling its Agreement with the U.S. Attorney’s office and the New York County District Attorney’s Office.

Alleged Facts of the Case
The SEC alleged that Chevron violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act by failing to maintain adequate internal controls and for failing to properly account for its purchases of Iraqi crude oil. According to the SEC, Chevron had knowledge of the illegal surcharges through notification by the United Nations 661 Committee and in response implemented a policy prohibiting purchases of Iraqi oil from third parties who paid the illegal surcharges. Nonetheless, according to the SEC, Chevron failed to follow its policies and purchased 78 million barrels of Iraqi crude oil from third parties under 36 contracts that included in their purchase price a surcharge payment to Iraq in violation of U.N. regulations and U.S. and international trade sanctions. Because Chevron failed to properly designate the surcharge payments, the SEC claimed that it had failed to accurately record those payments.

Specifically, the SEC claimed that Chevron

• Failed to maintain adequate internal controls when it did not follow its own due diligence requirements beyond relying upon its traders’ representations and certifications from the third parties, which Chevron officials knew or should have known were ineffective; and

• Violated the FCPA books and records requirements when it recorded the surcharge payments to Iraq as premiums.

The policy allegedly implemented by Chevron required, among other things, traders to obtain prior written approval for all proposed Iraqi oil purchases from Chevron’s Director of Global Crude Trading, and charged management with reviewing each proposed Iraqi oil deal to ensure that there was no reason to believe that a surcharge had been or would be paid. As part of the process for reviewing proposed Iraqi oil purchases, Chevron’s management was to consider the identity, experience and reputation of the third party as well as whether the proposed pricing basis or margin deviated from historical practice. Where a third party purchase was approved, the third party had to certify that no illegal payments had been or would be made in connection with its acquisition of Iraqi oil.

The SEC alleged several instances where it believed that Chevron either had knowledge that the third parties were paying this surcharge or that they should have known.

• In one instance, a credit check by Chevron of a proposed third party seller revealed that the seller, located in Switzerland, was a “brass-plate company” that had no experience in the oil business, no real business operations and no assets. Over concerns on the part of Chevron’s management, Chevron purchased oil under two separate transactions with this third party. According to the SEC, each of the purchases included illegal surcharges passed on to Chevron as inflated premiums.

• In another instance alleged by the SEC, at least one trader responsible for a large portion of Chevron’s purchases from Iraq factored the cost of the surcharge payments into price negotiations with third parties.

• Additionally, according to the SEC, one of the third party sellers said that the Chevron trader with whom he worked asked him to persuade Iraq to reduce the amount of its surcharges.

• Finally, the SEC alleged that Chevron should have known it was paying premiums when it approved the Iraqi oil purchases proposed by Chevron’s traders despite obvious increases in premiums.

Factors for Deciding to Enter a Non-Prosecution Agreement
The U.S. Attorney’s Office said that its decision to enter into a Non-Prosecution Agreement with Chevron was guided by the Department of Justice memorandum, “Principles of Federal Prosecution of Business Organizations.” The decision was based on several factors:

1. Chevron’s cooperation with the various US government investigations into the corruption of the Oil-for-Food program;
2. Chevron’s commitment to continue to provide cooperation;
3. Chevron’s implementation of enhanced compliance procedures designed to prevent future violations of law by its employees;
4. Chevron’s confirmation that culpable employees were no longer working for it;
5. Chevron’s settlement with the SEC of its civil enforcement action prior to entering the Non-Prosecution Agreement;
6. Chevron’s agreement to forfeit at least $20 million (the approximate amount of the illegal surcharges paid) to ultimately be transferred to the Iraqi people through the Development Fund for Iraq; and
7. The significant consequences that a criminal indictment would have upon the legitimate operations and innocent employees and shareholders of Chevron.

For further information please feel free to contact the author or any member of the International Practice Team.

Jennifer Fischer
fischer.jennifer@arentfox.com
202.828.3469