Red FlagsAs the Petrobras corruption scandal seems to be going strong, we turn our attention to what may be the most corrupt of all the national energy companies, the Venezuelan state oil company Petroleos de Venezuela SA (PDVSA). Business Insider ran a Reuters article, entitled “Red Flags everywhere: A sweetheart deal in Venezuela has gone too far”, by Alexandra Ulmer and Girish Gupta.

The crux of the piece was that a $4.5bn contract to develop over 600 producing wells was awarded to a little known Colombian trucking and trading firm which had no experience in oil and gas development. The company was called Trenaco and was headquartered in Switzerland (no doubt for tax purposes). Even more amazingly Trenaco was so certain that it would win the open, public bidding process that it began hiring staff and purchasing the necessary equipment some six months before the contract was even publicly tendered.

However, the clearly corrupt deal was squelched “In an unprecedented rebellion” by the foreign services companies, such as Halliburton, Weatherford and Schlumberger, “which would have had to work with Trenaco as PDVSA’s joint venture partners” and who “protested that the company was vastly underqualified and undercapitalized”. The same companies also “feared that getting involved in a massive public project anchored by a small and obscure contractor would expose themselves to regulatory scrutiny back home.” There were red flags everywhere, “said one foreign joint venture partner in Caracas.”

The article noted what has been long known in the international energy industry, that PDVSA is one of the most corrupt national energy companies around, “Reuters reviewed company documents and interviewed dozens of foreign and local oil executives, current and former PDVSA employees, union leaders, lawyers and politicians. The sources described a culture of corruption that ranges from the trivial – giving a gift to a secretary to land a meeting with a top PDVSA executive – to the systemic, such as funneling kickbacks in return for large contracts.”

This report is yet one more example of the Foreign Corrupt Practices Act (FCPA) issues that have arisen for companies doing business with PDVSA. In October 2015 both the Wall Street Journal (WSJ) and New York Times (NYT) ran articles that focused on the US government’s investigation into the corrupt goings on of PDVSA and its senior management. The WSJ article, by José De Córdoba and Juan Forero, was entitled “U.S. Investigates Venezuelan Oil Giant”, and the NYT article, by William Neuman, was entitled “U.S. Graft Inquiries Turn to Venezuelan Oil Industry”. Interestingly, the articles focused on different aspects of the investigation but both articles together send a very strong message to the Chief Compliance Officer (CCO) or compliance practitioner who might have business with PDVSA or even with the Venezuelan government or other state owned enterprise in the country.

The WSJ article focused on the conduct of Rafael Ramírez, the former President of PDVSA, and that of his cousin Diego Salazar in facilitating a worldwide and decade long scheme to have companies do business with PDVSA. Ramírez is now the Venezuelan ambassador to the United Nations (UN) and did not comment on the article.

The WSJ article reported that “directors of one of Spain’s leading construction companies were delighted to land an appointment with Rafael Ramírez”, but when they arrived they were met by Salazar. The article stated, “Mr. Salazar got right to the point, they say: The Spaniards would have to pay at least $150 million in kickbacks to be in the running. “If not,” Mr. Salazar told the businessmen, according to one person, “you should return to the airport.”” This and other conduct led the US government to launch “a series of wide-ranging investigations into whether Venezuela’s leaders used PDVSA to loot billions of dollars from the country through kickbacks and other schemes, say people familiar with the matter. The probes, carried out by federal law enforcement in multiple jurisdictions around the U.S., are also attempting to determine whether PDVSA and its foreign bank accounts were used for other illegal purposes, including black-market currency schemes and laundering drug money, these people say.”

To demonstrate how corrupt PDVSA is alleged to have become and how pervasively the bribery was instilled in the DNA of the company, the article said, “A former official from an Asian oil services company says he routinely paid hundreds of dollars in cash in recent years or provided gifts like watches just to secure meetings with midlevel PDVSA officials.” When you have to give a Rolex as a gratuity just to get a meeting, you are dealing with one corrupt institution. Corruption in the company was so systemic that “The result was that up to $3 billion of the $15 billion in services and equipment that PDVSA contracted for annually represented overcharges that flowed back to top company executives, government officials and businessmen as kickbacks, say people knowledgeable about the alleged crimes.”

The NYT article focused on the US government investigation of PDVSA as part of a worldwide investigation into illegal drug trade and money laundering. The article reported that the investigation gained speed in March when US Treasury Department officials accused a bank in the small European country of Andorra as a conduit for the money laundering schemes of PDVSA as well as organized crime groups. Government sources reported that more than $4bn in corrupt funds passed through the Andorran bank as a part of the bribery schemes. The article also said, “the money launderers used shell companies, fake contracts, mischaracterized loans and over-invoiced imports and exports to camouflage their actions.”

Rather amazingly not only did some of this money have a US nexus but the NYT article reported on a US based hedge fund which “paid at least $30MM in bribes to PDVSA officials to steer at least $100MM in pension money into his hedge fund and to give him access to profitable bond and currency transactions from 2006 to 2010.” Moreover, there is another direct US connection to PDVSA. It owns the US entity Citgo. Neither article mentioned the US Company and there is no evidence at this point that Citgo is under investigation. However this US situs for Citgo could well provide an additional basis for US based conduct.

Of course there was also the indictments and guilty pleas here in Houston of two individuals for FCPA violations around their corrupt dealings with PDVSA. According the a Department of Justice (DOJ) Press Release, in March 2016 Abraham Jose Shiera Bastidas (Shiera) pled guilty to violating the FCPA and in June 2016 Roberto Enrique Rincon Fernandez (Rincon) pled guilty to one count of conspiracy to violate the FCPA. Both men “worked together to submit bids to provide equipment and services to PDVSA through their various companies. Rincon admitted that beginning in 2009, he [Rincon] and Shiera agreed to pay bribes and other things of value to PDVSA purchasing analysts to ensure that his and Shiera’s companies were placed on PDVSA bidding panels, which enabled the companies to win lucrative energy contracts with PDVSA. Rincon also admitted to making bribe payments to other PDVSA officials in order to ensure that his companies were placed on PDVSA-approved vendor lists and given payment priority so that they would get paid ahead of other PDVSA vendors with outstanding invoices.” The Press Release also stated, “Rincon is the sixth individual to plead guilty as part of a larger, ongoing investigation by the U.S. government into bribery at PDVSA.”

If you are the CCO of a US company that did business with PDVSA or Citgo over the past 10 years or so; now might be a very propitious time to review all of your business dealings with those entities.


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© Thomas R. Fox, 2016