Aramco: End of a fairy tale?

I write this article from the United States, where the US Justice Department has announced that penalties have been imposed in connection with reported bribes paid to Saudi Aramco officials, among others, to secure contracts.
To Saudis, these allegations come as a great shock, since Aramco has for long enjoyed an immaculate reputation in everything it did. The company earned that decades-old patina since it was established in the 1930s to provide then-exotic know-how to dig for oil and turn it into gold that was used to transform Saudi Arabia into a modern country. In addition to its core oil business, Aramco built roads, schools, hospitals, railroads, and ports. It was the ultimate Santa Claus in those days. It combined a reputation of “generosity” with efficiency and clean hands.
Times have changed, of course, but Aramco’s clean reputation and supernatural powers have endured. Despite doubts raised now and then, Saudis seemed willing to believe in that fairy tale indefinitely.
Doubts will now be difficult to ignore, after the US Justice Department’s announcement. It says that Tyco International Ltd. — together with a subsidiary pleaded guilty (on Sept. 24, 2012) to a criminal charge for conspiracy to violate the Foreign Corrupt Practices Act (FCPA), and agreed to pay over $ 26 million to resolve the conspiracy charge with the Department of Justice and charges with the US Securities and Exchange Commission (SEC).
According to the announcement, Tyco — a company based in Switzerland that manufactures and sells products related to security, fire protection and energy — agreed to pay penalties for falsifying books and records in connection with payments by its subsidiaries to government officials in various countries in order to obtain and retain business.
Tyco Valves & Controls Middle East Inc. (TVC ME) — an indirect, wholly owned subsidiary of Tyco that sold and marketed valves and other industrial equipment throughout the Middle East for the oil, gas, petrochemical, commercial construction, water treatment and desalination industries — pleaded guilty, on Sept. 24, 2012, before a US judge for conspiring to violate the anti-bribery provisions of the FCPA. The company pleaded guilty to paying bribes to officials employed by Saudi Aramco to obtain contracts with the company, as it did in other countries.
According to US officials, “For more than 10 years, various Tyco entities bribed foreign officials and cooked the books to hide the payments.” As part of the settlement, the US Justice Department entered into a non-prosecution agreement (NPA) with Tyco, in which it admitted that a number of its subsidiaries made payments, both directly and indirectly, to officials, in order to obtain and retain business with private and state-owned entities, and falsely described the payments in corporate accounts as legitimate charges, and from 1999 to 2009, Tyco knowingly conspired to falsify its books and records in connection with these payments.
In addition to the monetary penalty, Tyco and TVC ME agreed with the SEC, in the civil proceedings that took place parallel to the criminal proceedings, to pay compensation worth $ 13 million (total for both civil and criminal proceedings reached over $ 26 million). They also agreed to report periodically concerning their compliance efforts, and to continue to implement an enhanced compliance program and internal controls designed to prevent and detect FCPA violations.
FCPA, passed in 1977, served as the main basis for the case against Tyco. It represents the cornerstone of US legislation to fight corruption committed abroad by US companies. I was in the US when it was passed by the Congress and remember how hard big corporations lobbied then against its passage. After it was enacted, they lobbied more to dilute it on the grounds that that “Every body does it” and that US would lose grounds to companies from other countries that were not bound by such rules.
FCPA made it unlawful to make payments to foreign officials to assist in obtaining or retaining business. It prohibits the payment or promise of money or gifts, directly or indirectly, to foreign officials to influence their decisions.
FCPA was strengthened in 1998. At the same time, the US convinced its OECD partners to move along similar lines, to preserve its companies’ competitiveness compared to European and Asian companies which continued to pay bribes abroad.
FCPA enactment came as a result of SEC investigations in the mid-1970s of foreign practices of American companies. Over 400 US companies admitted then making illegal or questionable payments to foreign officials, politicians, and organizations to influence their decisions. FCPA was meant to bring a halt to those practices and restore confidence in the integrity of American businesses.
In Latin America in particular, US companies were notorious for manipulating local officials, and in some cases replacing them or overthrowing governments altogether. The phrase “banana republic,” for example, was coined to describe such relationships.
Of course, FCPA has not ended bribery of foreign officials by US companies, as Tyco’s case has made clear, but it has given law enforcement tools to fight it.
A word of caution: In the case of Aramco’s officials referred to in the US judgment, they should be presumed innocent until proven guilty according to Saudi law.
However, this case highlights the need to enhance cooperation between Saudi regulatory and justice agencies and their counterparts in other counties to detect and eventually weed out corrupt practices wherever they exist.
Whatever the outcome may be of this particular case, Aramco will need to disclose the full results of its own investigation, to restore faith in the integrity of its internal processes.

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