ENI and ex-CEO indicted for Saipem FCPA

Saipem, a 30%-owned subsidiary of ENI, is under investigation in the US, in Italy and in Algeria for alleged bribes of $275mn supposedly paid out to various Algerian public figures and other intermediaries to secure some $10Bn of pipeline construction contracts in that country. The main corruption trial starts in Italy on February 6th and another parallel trial is set to start in Algeria shortly ("l'affaire Sonatrach 2").

As stated on Tuesday, ENI itself is under investigation by Nigerian, Italian and US authorities for a major Nigerian bribery case.  The Algerian investigation was started formally in 2011, whilst ENI and Snamprogetti (a subsidiary of Saipem) were still covered by a two year deferred prosecution agreement after paying $365 million in fines for an earlier bribery case in Nigeria. Back in 2011 ENI owned 43% of, and "exercised control over" Saipem: it still does, despite having reduced its stake to 30.5%. The initial indications and internal alerts are said to go back to 2009.

In 2012 the Italian inquiry picked up steam and heads started to roll. In December that year Saipem's CEO resigned and two senior executives were suspended. That same week the CFO of its parent company, ENI, stepped down (he had previously been the CFO of Saipem). Initially the investigation focused on pipeline contracts valued at $580mn with notional bribes of between $180-200mn which sounded somewhat excessive: in time the information has grown to suggest contracts to the tune of $10bn and payments of $275mn.

The role of Farid Bedjaoui

In August 2013 an Algerian blog started to set out details of who paid what amounts and via what corporate structure (another example of why one should monitor the periphery). The name of Farid Bedjaoui had first surfaced in February of that year, but the Algerie-focus article on the Sonatrach-Saipem 'scandal' if true, suggested that his role was far more that a mere intermediary between Saipem and Sonatrach.  It is alleged that Mr Bedjaoui was contracted by Saipem to help the company gain contracts from Sonatrach in return for a commission of 3%.  It is also alleged that of this 3% certain amounts found their way back to senior officers of Saipem.  Mr Bedjaoui is thought to currently reside in Dubai, keeping away from the law: he has an Interpol red notice on him.

The article suggested that Bedjaoui, nephew of a past Algerian Minister of Justice and Ambassador to France and to the UN for Algeria (Mohamed Bedjaoui) in fact had been helping one Chakib Khelil whilst the latter was still CEO of Sonatrach and prior to his elevation to Minster of Energy & Mines.  During this earlier period Sonatrach decided to liquidate key holdings that the State oil company had in Duke Energy and Anadarko and to invest the proceeds with Russell Investments.  The latter had an agreement with a Dubai-based "asset manager" which acted as its agent throughout the Middle-East called Rayan Asset Management.  The co-founder of Rayan Asset Management was a certain Farid Bedjaoui, who can be seen clearly in the attached photograph - bottom right.

Saipem COO turns State's witness

In February 2014 matters took a serious turn for both Saipem and ENI with Saipem's ex-COO, Pietro Varone telling prosecutors that Paolo Scaroni, CEO of ENI not only knew of the scheme but that "he knew everything".  Mr Scaroni states that he had no involvement in any 'agreements' between Saipem and the Algerian Minister or his middleman: yet one email date July 10th 2008 seized by the Italian prosecutors refers specifically to "meeting between Scaroni and F".  Pietro Varone claims he set up the meeting and that "F" was Farid Bedjaoui.

Subsequently the Italian authorities not only increased their focus on the role of ENI's then-CEO Paolo Scaroni, but also investigated the transactions of his family trust. Mr Scaroni subsequently resigned from ENI. In October 2015 both Mr Scaroni and ENI were cleared of any wrongdoing in the Saipem bribery case, whist six Saipem managers and ex-managers were sent for trial.

However in February 2016 a higher court overturned the acquittal and in July of last year Mr Scaroni was once again indicted, this time on the back of a large batch of embarrassing documentation.

Panama Papers happens...

On July 25th 2016 the ICIJ published a major article about the use of hidden offshore companies to pay bribes and "commissions" to key players in major resource contracts across Africa: the cause celebre that the ICIJ used for the cover story was that of Saipem and Sonatrach.  In his work as the apparent middleman, Mr Bedjaoui had used Mossack Fonseca to create twelve of the seventeen offshore companies being investigated by the Italian authorities regarding the Saipem investigation.

"Italian investigators described one of those companies, Minkle Consultants S.A., as a “crossroads of illicit financial flows” that channelled millions of dollars from subcontractors to an array of recipients whose identities are still being untangled."

The Saipem trial is set to begin on February 6th. It will doubtless be closely watched by both the DoJ and the SEC. If Saipem is found to have knowingly broken the law at a time when one of its own subsidiaries was being tried and then sentenced in the US for FCPA offenses, and were the court to find that Mr Scaroni had direct or indirect knowledge of the affair(as per the statement by Saipem's ex-COO), both Saipem and its parent ENI may find that US leniency can run dry.

CEO of ENI to be charged with corruption?

The CEO of Italian oil giant ENI and his predecessor are likely to be prosecuted under Italy's anti-corruption laws for alleged wrongdoings in the purchase of a Nigerian offshore oil block OPL 245. ENI and Royal Dutch Shell are named in the court documents as having committed "administrative offenses" with regard to the relevant Italian anti-corruption laws . The Nigerian authorities are also moving ahead to prosecute a number of people in the same case for money-laundering offenses.

Just before Christmas Italian prosecutors closed the investigative phase of their inquiry into the dealing of ENI and Shell regarding their joint purchase of the Nigerian offshore block. The issue now moves into the formal prosecution stage, with  eleven individuals set to be charged with "international corruption".  The list includes the past and current CEO's of the Italian oil giant.

The news hit the Italian press on December 23rd and no significant mention of that affair appeared in the international press.  However, a structured search with relevant key words and enforced-term operators reveals  the prosecutors' notice, which can be read in its entirety here.

ENI has stated that it notes the closure of the investigation and "reaffirms the propriety of the transaction" saying that at no time did it make any payments to members of the Nigerian Government. The direction of the prosecutors' investigation appears to suggest that both Messrs Scaroni (as the then CEO) and Descalzi (as head of Exploration) not only knew the terms of the complex transaction but were likely have understood that the Nigerian Government would not benefit from the deal despite the payments for the purchase of the block going into its coffers. The Nigerian authorities have laid charges of money-laundering against nine of the individuals in the Italian case and are expected to include both ENI and Royal Dutch Shell as defendants in time. The diagram below shows the main movements of money in the deal.

Malabu - the story of block OPL 245

As with many OSINT investigations, to get verifiable information you have to start by looking elsewhere. In this case the words ENI and Malabu would deliver a lot of noise, where as a "filetype" search on Malabu Oil & Gas, plus one of ENI's other corporate names (Nigerian AGIP Exploration), delivers us a New York Supreme Court affidavit from 2011, made by a US intermediary in the deal called International Legal Consulting Ltd, in turn owned by Mr Ednan Agaev. Mr Agaev is named as one of the defendants in the Italian prosecutors' findings.  In his affidavit Agaev lays the entire Malabu deal bear for all to see, essentially because he is seriously annoyed at not having been paid his take from the deal.

These court documents from the US Supreme Court, dated June 28th 2011, set out the terms of an operation whereby Shell and ENI bought a key offshore oil block in Nigeria from the Nigerian Government.  What this affidavit claims (see page 20 of the pdf file onwards) is that ENI (and possibly Shell) knowingly structured a back-to-back deal between an ex-Minister of the Nigerian Government (convicted of money-laundering by a French Court) and the Nigerian State whereby the latter sold on the licence to the international oil companies.  This is the document that effectively triggered the current Italian investigation into ENI and several of its past senior executives: this probe has resulted in ENI having to self-report the issue to the US SEC and Department of Justice.

ENI  self-reported (necessarily) to the DoJ and SEC in 2014

ENI has stated that it is under investigation for “alleged international corruption” regarding its acquisition of OPL 245.  Importantly the company goes on to state that it has “reported the matter to the US Department of Justice and the US SEC” – i.e. it has self-reported (see Legal Proceedings note 2.i – page 103).  This is important for two reasons: in the first place ENI has already fallen foul of the US authorities back in 2010, when Snamprogetti was fined along with Technip for FCPA issues in another Nigerian contract.  As part of that settlement ENI ‘consented to the entry of a court order permanently enjoining it from violating the recordkeeping and internal controls provisions’, which is to say that it is obliged to report any possible corruption issues.  Secondly, the US authorities are obliged to investigate the situation regardless of what the Italian authorities might finally decide, given that ENI has a sponsored-ADR traded on the US markets.

A story of multiple amber flags

The history of OPL 245 is tangled, with Royal Dutch Shell and Malabu Oil & Gas having various rights over the block for much of the past eighteen years:

1998 – The Nigerian Petroleum Ministry awards Malabu Oil & Gas the rights over OPL 245 for a price of $2mn.  Malabu is said at that stage to be controlled by Mr Dan Etete, at that time being the Nigerian Minister of Petroleum

1999 – Malabu offers Royal Dutch Shell 40% of the profits on the block in return for carrying all exploration and development costs

2001 – A new Nigerian Government revokes Malabu’s licence to OPL 245 and awards the block to Shell for a signatory fee of US$210mn

2003 – Mr Etete sues Shell in the US courts over ownership of OPL 245

2006 – A different and new government reaffirms Malabu’s rights over OPL 245 and Shell is to be given other assets in compensation

2007 – Mr Etete is convicted and sentenced in absentia by French courts of money-laundering offences (he loses his appeal)

2011 – The Nigerian Government ‘brokers’ a deal whereby Malabu cedes its rights to the Government, which the awards OPL 245 to Shell and ENI for a total price of $1.3bn.  Shell pays a signatory bonus of US$207mn to the Nigerian Government and receives 50% rights to the block, and ENI pays US$1.1bn to the Government, receiving a 50% stake and operatorship.  According to court documents lodged in both New York and London, the ENI payment (US$1.1bn) was transferred by the Nigerian Government to bank accounts controlled by Dan Etete.  

Global Witness had put it very succinctly in 2013:

"In 2011, a deal was signed behind closed doors that involved a former Nigerian oil minister and two of the world’s largest oil companies – Royal Dutch Shell and Eni. It relied on a climate of secrecy in the oil and gas sector, and the clever use of anonymous shell companies that allowed the beneficiaries of the deal to hide their identities and divert huge sums of cash."

Conclusion (for the time being):

ENI has two major FCPA investigations open against it in the US: one relating to this self-reported allegation and the other for allegations of bribery by its subsidiary Saipem, in Algeria. The company's subsidiary Snamprogetti was fined by the DoJ in 2010 (along with Technip) for FCPA offenses also in Nigeria.

By stating that the Italian investigation "reaffirms the propriety of the transaction", ENI is essentially claiming that by making the purchase payment to the Nigerian Government, as stipulated in the terms of the deal, it is essentially off-the-hook when it comes to what the Nigerian Government chose to do with the monies. Under the spirit of the new EU 4th Directive that attitude might be construed as "wilful blindness", which the DoJ finds difficult to accept as a defence.

Whilst both the Italian case and the Nigerian case will take time to rumble through their respective judicial systems, the US authorities might take a more aggressive approach towards a multi-national now in the throws of its third international bribery investigation.

Alstom's global penalties for bribery could exceed $2Bn

At the end of 2014 Alstom agreed to pay a $772mn penalty for criminal charges to the US authorities; Brazilian prosecutors are thought to be seeking $1.3bn in restitution and fines (see below); and the newly confident SFO will doubtless be running its slide rule over Alstom as it weighs up potential fines should it win the three cases that start going through the High Court over the next three months. I note that as of end March 2016 the company has made provisions for €103mn in total to cover current litigation risks (see Note 24, page 87, here).

Brazilian prosecutors in Sao Paolo claim to have evidence that Alstom paid bribes to win metro contracts in the city (Siemens, Alstom’s erstwhile cartel partner, "self-reported", but only after a Brazilian whistle-blower finally got his message to the right people); other prosecutors in Brazil are indicting the company for bribes paid to federal and state employees for power-plant contracts in the states of Sao Paolo, Rio de Janeiro and of Santa Catarina (and more evidence is coming through from other states); and finally federal prosecutors are chasing Alstom regarding corruption allegations at the state oil company Petrobras.

Brazil's new anti-bribery law is far more aggressive than its US counterpart, the FCPA.  The biggest difference is that for a company to be liable there is no need to prove that the senior management had either "intent" or "knowledge": the fact that a company has benefitted by the actions of an employee or a third-party (consultant) makes the company liable.  Hence for Alstom, the implications are potentially devastating given that a core partner in the transport contracts (Siemens) has turned state's evidence and has confirmed the details of corruption in return for a plea bargain. 

Sao Paolo I: Penalties can be of up to 20% of annual revenue (see paragraph two), which in this case would be calculated on the period over which the corruption had taken place on the first five lines investigated (1998-2008).  The Brazilian prosecutors says that the level of overpricing involved was US$834mn on US$2.7bn of contracts.  Initially the prosecutors were pushing for fines of  BRL1.7Bn (US$765mn) on the back of an estimated US$850mn of over-charging. Prosecutors have now added three more metro-line contracts to the investigation list, and thus it is probably that the scale of potential penalties will also rise.

Sao Paolo II:  The second major on-going action against Alstom is the scandal around commissions paid to state politicians for power-generation contracts.  For just one of these contracts (and at this stage there are four contracts being investigated in various states) the prosecutors are seeking penalties BRL 1.129bn (US$500mn) or four times the estimated overcharging.  In this case most of the prosecutor's evidence comes from the Swiss authorities, who have frozen various accounts in Swiss banks on the back of evidence collected in the investigation cited above (Amber Flag #2).  But as a 2008 article in the WSJ highlights, Alstom had been awarded 139 different power contracts in the state of Sao Paolo alone, worth some US$4.6bn. 

In the sale of the power business to GE the terms underlined that Alstom will remain liable for legacy FCPA issues.

At this stage the Brazilian press is also highlighting state level investigations regarding power contracts in the states of Rio de Janeiro and Santa Catarina.  Alstom is also being mention as involved in the various bribery investigations (internal and external) that are ongoing at Petrobras, the national oil company.  Under the terms of Brazil’s new anti-bribery law, cases are heard at a state level and fines are levied at the state level: hence what happens in one state essentially creates precedent for the other states to follow.

Open Source Intel = Think outside the box

The Office of the Director of National Intelligence in Washington defines Open Source Intelligence as being “publicly available information that appears in print or electronic format, including radio, television, newspapers, magazines, Internet, commercial databases, and video, graphics and drawings.” The important term here is “publically available”, given that banks operate in a highly regulated environment.

The amount of digitalised content that can be captured on the surface web and the deep-web is growing exponentially.  Just as importantly, the amount of information on past events is also exploding. This is to say that if one imagines an investigation on a client that was carried out in 2011 and the amount of relevant information that was “openly” available for analysts to capture at that time; today there will be a multiple of that amount that is information of that year. Not only is current information being digitised, but importantly for the investigator, past information is also being digitalised making discovery all the more interesting. Yet most commentators cite the data deluge and information overload as a massive problem: not if you know how to build your filters!

In the example of Total’s near-disaster on the Elgin Platform the content was being delivered as text; hence easily processed and searchable.  By definition “open source” means any format of information that can be imagined. This causes problems for investigators who are more used to thinking (and investigating) within a predefined concept: they think within the box and need to be shown how to “think outside of the box” and sometimes how to think without any box being present.

Today it is not about wondering in a certain item of information exists, but rather in what format is does exist, or where one can find collateral information that would point towards it.

Apologies for using another example from the energy industry, but it fits perfectly. A few years ago a hedge-fund client asked if it was possible to build an alert system that would track new oil or gas discoveries being made by companies that had shares quoted on the stock market, getting that information before any formal (regulated) announcement by the company. After a couple of days of thinking and investigating, we informed the client that a monitoring system could be put together than would alert him within 24 hours of any discovery anywhere in the world – possibly before the company’s own head office might receive the news. The client’s immediate assumption was that we planned to hack the internal communication systems of the relevant companies: living and working in a highly regulated industry, that obviously was not the case. The next assumption was that we knew how to put a large number of people on rubber dinghies or camels, close by the drilling rigs.

The reality was far simpler and infinitely more elegant. Whenever a drilling rig hits hydrocarbons, i.e. makes a discovery, there is what is called “associated gas”. It doesn’t matter whether it is an oil discovery or a gas discovery; there will always be gas present, and this gas needs to be burnt off in a controlled manner. That action of burning off the associated gas would generate considerable heat, and that heat could be picked up by any commercial satellite that was trained on a specific position looking for a heat signature with its infra-red cameras. Thus in answer to the clients query; with the geographic coordinates of every drilling rig or drill-ship (Lloyds shipping register) and by hiring capacity on a number of commercial satellites, one could set up a very simple tracking system that would deliver the required intelligence within the suggested 24 hours.  Notionally the initial request would have been impossible to answer using legal methods; but by “thinking outside of the box” and thinking through how such information might be generated, it was possible to deliver a solution – albeit overly costly for that client.

Alstom and its alleged "How to Bribe Guide"

One of the more alarming items to have been dug up by the Brazilian press as it investigated the price fixing scandal which pointed the finger Alstom's transport and power divisions, was a three-page document that apparently acted as in-house guide to the company's employees and third-party agents on "how to bribe". [Note for users: use Google Chrome with the Google-translate extension enable - that way the Portuguese article will automatically appear in English. Kind of helps! Sorry IE users - Bing translator is decidedly inferior].  One of Alstom's commercial team in Brazil, André Botto told one of the investigating judges that the commission rate (bribe rate) was 15%, with half going to the decision makers (politicians and senior executives of the purchaser) and half to the agent.

The internal document, which soon became known as the "how to bribe guide", was apparently was created in 1997 when another key Alstom character was in charge of corporate ethics.   Bruno Kaelin was the group's head of compliance (see para 16 in the WSJ article of 2008) immediately prior to Jean-Daniel Lainé, who I mentioned in the last Alstom entry. Mr Kaelin was in residence, as it were, when the "How to Bribe" document was initially circulated. Mr Kaelin was also a director of Alstom Network UK (or Alstom International Ltd) as it was then known, between January of 2001 and his group resignation in December 2005. In both the Swiss and the UK companies he was replaced upon resignation by Jean-Daniel Lainé as the new global head of Compliance and Ethics.

According to the Swiss Punishment Order, Alstom restructured its global network of third-party agents and the corporate structure via which they were remunerated (see clauses 2 and 3). It is important to understand that this is not some journalistic conjecture; it is a Swiss judicial finding, which is to say that it is verified information. Two companies were "founded to centralize the execution of compliance procedure and payments": Alstom Network Schweiz AG and Alstom Network UK Ltd. To be accurate, two existing Alstom group companies were re-named and their responsibilities amplified to make them respectively the payment hubs for power and transport. Whilst Kaelin left Alstom in 2005, it should be noted that Lainé was in charge of compliance for the power group (2003-05) prior to taking on the global role on Jan 1st 2006.

The "how to bribe guide" had five sections (see paragraph 2 here) that covered the basic objective (practical guide to paying third-party commissions, the need to keep the information from being discovered, to keep it off the tax-books, to ensure that the work undertaken was "consulting and support" and to have the papers signed by the contracted company's CFO.

Times of India Sept 2014

So how did this document come to light, and how did the Brazilian press get hold of it? It was part of a package of information sent by the Swiss prosecutors to the Brazilian authorities (and hence on the front pages of the local Press.  Having initially thrown a mild tantrum when their evidence turned up in the press, the Swiss authorities eventually sent the relevant bank account proof on various of the "commissions" paid for Brazilian power and transport contracts.

Indian press reports that extradition orders had been sent by the UK authorities to Switzerland for Bruno Kaelin and France for Graham Hill: both are thought to be in poor health, and I note that Mr Kaelin's name has been dropped from the SFO's suit.

Whilst the SFO's case against Alstom Transport UK focussed on issues in Poland, Tunisia, India and Hungary, the implication of the Swiss sentencing ties the company to all of the Brazilian transport corruption cases.

The reality behind the Rolls Royce DPA

Good on you, Dick Taylor: eleven years after you began your stint as whistleblower, your work has finally been vindicated and Rolls Royce hopes to sort out its "issues" by paying some $800mn through a Deferred Prosecution Agreement with the SFO and jointly the US Department of Justice and the MFP of Brazil. I sincerely hope that you get some form of recognition for what you have had to go through: if not a back-payment of the salary and benefits that you lost because you are an honorable man, perhaps an OBE for "services rendered" - if not a CB.

Good on you, the Serious Fraud Office, you have finally caught a very big fish and will now get the undivided attention of Corporate UK: and thank you Lord Rose for being the great lord that finally slayed the dragon.

Life in 'corporate UK' has now changed; as the Americans would add - period. This is a great moment.

But there are a few details and definitions that cause concern. 

1. Just how have the authorities managed to define this as being a legitimate DPA?  Be in no doubt, this is a fudge. Rolls Royce say that the matter is a self-reported issue brought up by the comapny themselves in 2012.  That is being somewhat economical with the truth. Mr. Taylor started banging the drum in 2006: don't take my word for it; here he is in 2009 saying for all to hear, in a comment attached to a press article regarding the company, that the company had paid Tommy Suharto $20mn in cash plus a sparkling blue Rolls Royce in the mid-90's (scroll down to the "reader's comments" at the end of the article) to aid Indonesian airline Garuda in its decision of which aircraft engines to buy.  The whole concept of a DPA is that the company "self-reports".  In the case of Rolls Royce it is more likely that the subject was brought kicking and screaming to the bench, rather than approaching cap in hand.
2. The company initially stated that it had uncovered issues in Asia; yet $26mn of the fines are being paid to the MPF in Brazil relating to bribes paid to Petrobras officials. This issue was not self-reported but came directly from the testimony of Pedro Barusco, who gave evidence to a Brazilian judge that he had been paid $200,000 by Rolls Royce to help secure a gas turbine contract with Petrobras. The going rate for bribing Petrobras in those days is well-documented as having been 3% hence RR will likely have shelled out $3mn for this one contract; not $200,000 - hence the scale of the $26mn payment to the Brazilian regulators. It was not the company's only business in Brazil.
3. China: oh dear. June 25th 2011. That was the day the whole sad affair of how Rolls Royce had broken into the Chinese market (and of who had been their accomplices) was publically aired. Here is the link to the bulletin board explaining the role of Chen Qin and his master Ma Xulun. Whilst Mr Chen is doing life for corruption, Mr Ma remains Chairman of China Eastern.

The truth of today's DPA is that Rolls Royce was in a corner. Judicial processes has gone against the company in China (perhaps "judicial" is an exaggeration) and in Brazil.  In India the finding were clear, and the DOJ has been collecting considerable information on Petrobras payments that implicated RR through its own investigation. So Rolls Royce had nowhere to hide and if Dick Taylor is to be believed, the Suharto case was but the tip of the iceberg.

Should that be the case then Rolls Royce has gotten off lightly; but in so doing they will have helped to ensure a better breed of British corporate: one that finally fears the law.  After all, $800 million  is no mean amount of money.

SBM Offshore: COO shredded evidence, got promotion

The reaction: internal investigation, "containment" and "shredding of evidence"

The inside story on the corporate reaction to news of evidence of bribery by the company is carried in the second section of the whistle-blower's exposé. Senior management launched a defined-scope internal investigation that specifically put Brazil off-limits. (The recordings supposedly made by the whistle-blower cover this - see Key recordings 3: “We have not asked them [Paul Hastings - the US attorneys] to go there [Brazil] yet. We need to clarify this point. I did not give the go-ahead with Brazil!”).  Before that cranked up, one of the company's most senior managers was found in the act of disposing of relevant documents. Hence not only was the internal investigation skewed from the start, but a large amount of documentation had been tampered with. The investigation would take two years eventually and conclude that there was no wrong-doing in Brazil (50% of the company's revenues).

As set out in the above interview and in the Wiki exposé, the company's Chief Operating Officer, Jean-Philippe Laures,  shut himself into his office on or before February 7th and proceeded to start shredding documents: 12 black-sacks worth of documents (see Wiki Section B - Key Recordings). The first reaction of the management committee was to promote Mr Laures to being Chairman of SBM Atlantia Inc in April. Six months later the company sacked Mr Laures without giving any reason, and the CEO took over his role temporarily. Meanwhile the CEO, who admittedly had only taken up his post on Jan 1st of that year, allegedly admitted to having undeclared documents in the safe in his office that essentially defined many of the "commercial" agreements.

The company's external lawyers advised that it needed to make a full disclosure, not least in the legal Offering Memorandum it was about to publish in the USA regarding the financing of one of the Brazilian FPSO's - the Anchieta Bond Financing ($500m). Despite the ongoing internal investigation turning up clear evidence of wrong doing, no mention of any issues made it way into the Offering Memorandum; a fact that the DOJ will likely want to investigate.

From the whistle-blower's log:

BC (Bruno Chabas - CEO) acknowledges the need to disclose the Brazil bribes re the Anchieta Bond Financing ($500m), otherwise SBM would be “misleading the market” – BUT no mention is made in the offering memorandum! BC stresses that he did not give the go-ahead to PH with disclosure about Brazil, thus setting a trend that continues to this day. FE (the whistleblower) is already protesting at the lack of action against JPL (JP Laures - the COO) BUT the CEO’s explanation is that he is needed because he is the only one “with access to Sonangol”!!

As stated in last week's post, the management's initial "public position" as of April 2nd 2012 was that its internal investigation had uncovered evidence that agents may have bribed Government officials in Africa, adding specifically that  "it found no evidence of such practices in Brazil".  It should be noted that just days prior to this statement the company had published two regulatory documents (its 2011 Annual Report and the Offering Memorandum), with no mention of any of these issues being made. Under US Securities law that would amount to a serious offence and one has to question whether the SEC will join the DOJ investigation.

As stated last week: SBM's leniency deal with the Brazilian judiciary has been stalled at the Federal level, and the US Department of Justice has re-opened its FCPA investigation having received further information via its own investigation of Brazil's Petrobras. It will be an interesting year for SBM Offshore.

Banco Espirito Santo: chronicle of a death foretold

What follows is a real example of the power of forward-looking OSINT monitoring: in this case it helped to save one global bank the tidy sum of $100mn. 

• In early August 2014 a leading Portuguese bank collapsed, leaving shareholders, depositors, counterparties and creditors nursing their wounds. Banco Espirito Santo was subsequently rescued by the State and broken up into a “good bank” and a “bad bank”. The shareholders lost everything.
• Using our “early warning” system, clients were first alerted to problems during the fourth quarter of 2013, when the Portuguese press carried stories of a major rift between the two principal figures of the Espirito Santo family that controlled the bank: two cousins, the CEO and the head of the investment banking arm.

In March 2014 we published our first “amber flag” citing an unexpected provision of €700 million being made by the bank’s direct parent company: this was a massive provision relative to the size of the bank, and little explanation was given as to the need for the provision. Ten days later, adding insult to injury, the bank postponed its AGM for the third time – with no explanation.

As part of the overall early warning system, I actively monitor some 300 investigative journalists world-wide. Having built an initial search algorithm that included the bank’s name and its various acronyms, plus a plethora of key words in Portuguese, Spanish, French and English, an alert was triggered by an article in Portuguese by a blogger from Luanda, Angola. I don’t know Rafael Marques de Morais (the human rights activist and blogger), but it was fairly easy to verify the quality of his content: simply put, he gets beaten up and shoved into jail by the Angolan authorities on a fairly regular basis – so clearly some of his words must hit a chord.

On April 30th 2014, just a month after news of the massive provision being made by the bank’s parent, Mr Marques wrote in is MakaAngola blog that the Angolan subsidiary of Banco Espirito Santo (BES Angola) had a $6.5 billion dollar hole in its balance sheet reprinting the story in English the following day.  If this was true, the Angolan subsidiary was bust and the Portuguese parent would need to write-off the value of its capital invested in the subsidiary; that would equate to the entirety of the bank’s CET1 cushion and mean that the parent bank would need a capital increase. The size of the supposed hole ($5bn of toxic loans and $1.5bn of unpaid interest) raised the question as to just how much BES Angola had in deposits, and data from the Central Bank of Angola’s web-site suggested that it had but $2 billion of deposits. So just how had it managed to lend out $5 billion with just $2 billion of deposits? If the story was true, the most likely answer was that the Portuguese parent had passed $3 billion down to the Angola business in the shape of interbank loans. The Angolan bank had then "lent" these funds, without any collateral or guarantee, to various members of the Angolan elite: all $5bn of it!

One might imagine that this would be a big story in the Portuguese press, for if the lending gap had been covered by Banco Espirito Santo (parent) then then resulting $3bn hole in the parent's balance sheet could mean that it was also bust. Needless to say there was not a mention of the issue in the Portuguese press; indeed the story only emerged after the bank had collapsed four month later on July 29th, with no less a source than the New York Times discussing the Angolan issue. So as of early May 2014, with the news of a potential black-hole out there on the internet, the market value of the bank was still around the €5bn level.

Subsequent to the MakaAngola article matters at the bank deteriorated, but in mid-May, just two weeks after the above article was published, the bank made a capital increase for €1bn, which was fully underwritten by a banking syndicate that included many of the leading global names in investment banking. For anyone following the amber flags this would not have been a surprise. In parallel to this announcement, on the 15th May the bank stated that its long-term co-owner, Credit Agricole, would not be taking up their rights, and furthermore were terminating their shareholder agreement. That didn't seem to worry anyone either.

One week later a formal audit of the bank ordered by the Portuguese regulator “uncovered significant irregularities” at the bank’s Espirito Santo International affiliate, and from then on things got worse. Yet despite the falling share price and poor news, a very well-known US global investment bank decided to help lend $800mn to one of the group’s holding companies. The message to the market was clear: "if that bank thinks that this is a good bet, then it is". Soon after that reprieve the Portuguese regulator threw out the new management team that had been proposed by the family, and a few weeks later, on the back of yet further negative surprises, the Bank of Portugal stepped in and nationalised the bank. The shareholders lost everything.

 Yet between March and August we had posted thirteen different amber flag warnings regarding the bank. The search algorithms were not massively complex, they were just in four or five languages and capable of searching the periphery rather than just the mainstream news. Yet neither the underwriters of the rights issue, nor the lenders of $800mn to the parent company seem to have bothered making the most simple of checks.  The truth of the matter is that in the case of Banco Espirito Santo everything was in plain sight, but no-one wanted to notice. The one bank that did take notice pulled $100mn loan just days before the final dénouement: it had been following the amber flags: おめでとう.

FIU issues #2: filtering for Amber Flags

• In last week’s post I discussed how massive scale, multi-lingual content capture can be achieved, enabling investigators to use OSINT techniques and methodologies to discover relevant content from the periphery. 
• This week I look at how to create effective search algo’s and filters that will cut out the white noise and deliver a refined flow of actionable intelligence.  
• Financial intelligence is not just about transactional intel and by definition cannot be delivered by backward-looking systems (i.e. red flags)
• What follows in an example of how to set up an effective forward-looking monitoring system for amber flags and the benefits that such systems can deliver. 

In the world of finance, events tend to repeat themselves time and time again: bombs, earthquakes, oil leaks, fires, court cases, frauds etc. Everything repeats at some time or other (hence my assertion that black swan events are an urban myth). The fact that events repeat means that one can build search algorithms that will effectively monitor for a pre-defined future event with relative ease.

Take the example of BP’s tragedy in the Gulf of Mexico, with the Deepwater Horizon.  Such an event is an ongoing operational risk for any company exploring for hydrocarbons. By building a data-set with the names of all the offshore rigs in the world (available by subscription from RigData.com) and by adding to that the list the names of companies involved in producing or exploring for oil and gas, you can create the base for a highly effective alert system.  Then you build an ontology (list of keywords) around the possible types of accidents that can occur on offshore rigs, in various languages and put the two lists together using some basic Boolean logic.  Plugging the resulting search algorithm into Moreover’s Newsdesk should thereby ensure that you will be one of the first people to know of such an event occurring; furthermore the system’s alerting function will ensure that you are alerted as soon as the first piece of relevant content triggers a capture.

This is exactly what happened on Sunday 25st March 2012. At about 5:30pm the alarms on Total’s Elgin gas platform in the North Sea were triggered on the back of the detection of a gas leak. The platform immediately “went dark”, meaning that all power was shut down to reduce the risk of any sparks igniting the escaping gas, and an orderly evacuation of the platform began. The first alert of this potentially catastrophic situation was captured by the search algorithm on Moreover within the hour, as local Scottish press reported the arrival to Aberdeen of helicopters from the platform evacuating the workers. At 6:21 pm Sunday 25th March BBC Radio Shetland carried a report of a major evacuation being carried out from the Elgin platform, citing a gas leak. The Shetland Isles might be about as peripheral as one can find; but as a source, the BBC is a global leader. The radio report was transposed from voice to text by Moreover and hence captured on its systems. (Note the technological feat of translating an Aberdeen accent into printed English!).

Just three words had triggered the news alert: the word Total (which has by itself numerous meanings); that word was tied to the term “Elgin Platform” and to the keyword “leak”. Separately each one of these would generate a massive amount of noise, but brought together in a structured format within a dedicated search algorithm, meant that an alert was immediately triggered when the three words appeared together in a single news report. Searching on Google with the word “total” would generate 3.5 billion instances; the word “Elgin” another 57 million; and “leak” about 147 million. However by searching for instances of those three words locked together (Total AND “Elgin Platform” AND leak) delivers just 383 pieces of content: a volume that can be easily filtered further. 

The point is this: a structured search of global content, using Boolean logic to create the search strings and filters, will deliver relevant news even from the periphery to the end-user real-time.

A gas leak is far more dangerous that an oil leak: one spark and the whole platform is at risk. Consequently it was likely that as soon as the news went mainstream the share price of Total would react negatively, especially given that the BP disaster will still then fresh in peoples’ minds. Yet whilst the Moreover system captured over 120 instances of the news the following day (Monday) there was no reaction in Total’s share-price; in fact the shares went up. One of those reports came via BBC Radio Shetland again, quoting a local union representative as saying that workers coming off the rig talked of a major subsea leak that was visible from the support vessels present, mentioning that “that the sea was seen to be boiling gas below the rig”. That is not a minor event by any means. Why was there no reaction in the share-price? Because as far as traders were concerned, there was no such news: as it wasn’t carried on either Bloomberg or Reuters, it “wasn’t news”.

This changed the following day and minutes after Total started an emergency executive meeting (some 42 hours after the first public reports emerged), the share price of Total fell by €7bn. The French press started talking about a major evacuation on one of the company’s North Sea platforms, and both Reuters and Bloomberg finally picked up the story, which was then elevated to being “breaking news”. Finally, when the stock market closed (at 5:30pm Paris time), Total announced that the platform had been evacuated and whilst the situation was ongoing, that there was no risk to human life.  A few days later the leak was plugged and the story over. Three years later Total was fined a record £1.125mn for the shortcomings that lead to that leak.

In this example, there were multiple examples of amber flags over a 60-hour period that were not picked up by the market, despite them being easy to capture for anyone with the foresight to put an early warning system in place. On Monday 26th March Moreover had processed over 2 million articles; just 120 of those were relevant to the event (0.006% of the day’s throughput); yet effective filtering ensured that they were all picked up and that not one mention “fell through the floorboards”.

Now take that example and relate it across to money-laundering, financial crime or to KYC and it quickly becomes apparent that:

1. Relying on third-party vendors selling red-flag data is hopelessly out-of-date

2. That creating relevant search algorithms to act as early warning signals for potential risks is increasingly straight-forward

End…/

SBM Offshore: Anatomy of a cover-up - Part 2

"What the butler saw (and heard and then recorded)"

Agatha Christie's whodunits invariably rotate around what someone (often the butler) had seen , and so it is with the SBM Offshore bribery case. As I said yesterday the whistleblower,  Jonathan Taylor (aka "FE") was the number two in-house lawyer at the company and his original exposé can still be found on the DeepWeb. In that post not only does he detail the countries and bribes paid, but he sets out in detail the reaction and planning of the senior management. Mr Taylor also refers to various recordings: he had recorded a number of key meetings on his telephone, something which under Monaco's laws is permitted in certain circumstances.

Effective use of Open Source Intelligence techniques enables one to put together a fairly clear picture of who did what, who paid what, and who was at the receiving end of the company's generosity - I use Angola as an example below. Verification is a key issue, hence independent evidence or proof is important. Whilst press articles and governance blogs are good sources, the real meat tends to come from sites accessed within the DeepWeb, where a simple Google search will not reveal anything. 

Issue #1: Who was the company paying?

The initial section of the post ("Section A - Documents") sets out who was being "paid". I note that in Angola the recipient was a Panamanian company Mardrill Inc. which is said to have been "controlled by 3 Sonangol executives: Messrs. Sumbe, Benge and Dos Santos".  Sumbe will probably refer to Baptista Sumbe the Chairman of Sonangol Holdings and non-exec director of GALP; as a side note I would point to a recent MakaAngola article on Mr Sumbe alleging money-laundering in the USA. Next up is Benge; the is probably José Pedro Benge, director of Sonangol USA, of Sonangol Shipping Holding and various other positions.

As to which member of the Dos Santos family the post refers to, one has to turn to Open Corporates, a wonderful site that documents what public information there is on millions of "secret" offshore companies. Mardrill Inc. of Panama is listed on the site and is still operational. Fernando Dos Santos (aka "Nando") is listed as a director. Nando Dos Santos, a cousin of the country's President, is currently the President of the National Assembly and previously was the country's Prime Minister and then Vice President. A useful contact for SBM Offshore given its business interests.

In terms of verification, the company that Mr Taylor named in his "allegations" exists; the surnames he mentioned also exist and would seem to relate to senior members of the Angolan establishment; and finally, external data-sources show these three men as being directors of that Panamanian company. So whilst SBM cast aspersions about Mr Taylor, his character and his motives, the data he has made public is looking pretty firm.

The seniority of the contacts being paid was the same in other countries: in Equatorial Guinea it was mainly  cash for Gabriel Obiang - youngest son of the President and the current Minister of Mines, Industry and Energy (some call him the "Lord and Master" of EG's oil). Then in Brazil, as we know, and as the company has admitted, two-thirds of all payments went to senior Petrobras executives and from there supposedly  to the coffers of the Workers Party. So SBM Offshore was well used to greasing the wheels.

The fines and settlements reached to date cover "wrongdoings" by SBM's agents in three countries: Angola, Equatorial Guinea, and Brazil. Yet recent court documentation from the Netherlands sets out a history of bribes being paid in other countries. This is a copy of the defence document of Jonathan Taylor against SBM Offshore, who are now trying to sue him for (amongst other things) 'lying' - so one has to read the content with that in mind.  Clause 2.21 on page 10 reads: "In addition, under the Moswen Resources Sales Consultancy Agreement, Tagher was contracted to pay bribes on behalf of SBM in Tanzania, Congo, Ghana, Gabon, Greece, Bulgaria, Nigeria, India, Vietnam, Equatorial Guinea and Angola."  Further to these other countries the Wiki page refers to Unaoil being used to pay bribes in Iraq, Kazakhstan and Italy. Unaoil is being investigated by the UK's Serious Fraud Office.

Issue #2: what triggered the alleged cover-up?

In an interview given in 2015 to the Dutch magazine Vrij Nederland  Jonathan Taylor tells that on Tuesday 31st January 2012 the company received a call from a US-based lawyer calling on behalf of Noble Energy (a large US oil services company). The lawyer said the his client has discovered information on a company laptop incriminating SBM Offshore in the payment of bribes. The company immediately launched an internal investigation (see section "Absolute Chaos"): or some of the company did, whilst other senior managers took a different approach.

As stated one of the types of evidence Mr Taylor uses in his defence against SBM is transcripts of meetings within the company that he attended. Clearly this content cannot be verified, but given his record for accuracy to date, the transcripts are at the very least "embarrassing" to the company. Very little was known publicly about this content until the company made yet another attempt to silence Mr Taylor. Now much of the juicier content has been posted on the web, making the company's position all the more uncomfortable.

In future posts we will deal with the allegations of a physical cover-up...