Chevron Corp.: The Surcharge Was Banned, the Premium Was Approved

In the Chevron Corp. FCPA case, Chevron agreed in 2007 to give up $25 million in profits to settle allegations that its Iraqi oil purchases funded illegal surcharges through third-party premiums. The Securities and Exchange Commission alleged that the oil company prohibited the surcharges, then approved purchases whose inflated premiums paid for them. For someone who knows why a price changed, what a seller actually did or what management approved, the case shows how a kickback can travel through an ordinary purchase.

The Securities and Exchange Commission brought books-and-records and internal accounting controls charges under the Foreign Corrupt Practices Act against Chevron Corporation, a California-based oil company, on November 14, 2007. Its account of the complaint connects the trading desk, seller reviews, price negotiations and accounting entries.

How the Oil Premium Funded the Surcharge

The Securities and Exchange Commission alleged that Chevron’s third-party sellers used portions of the premiums Chevron paid them to fund approximately $20 million in illegal kickbacks to Iraq. According to the complaint, the payments bypassed the United Nations Oil for Food escrow account and went to Iraqi-controlled bank accounts in Jordan and Lebanon.

Chevron bought approximately 78 million barrels of Iraqi crude through 36 contracts with third parties between April 2001 and May 2002, according to the SEC. The complaint describes Chevron paying the seller a premium and the seller paying the Iraqi surcharge. The Commission alleged that Chevron knew or should have known that part of what it paid the seller financed the prohibited charge.

That is the commercial connection an oil buyer or finance employee may recognize. The purchase contract shows the price Chevron agreed to pay, while the seller’s onward payment explains where part of that price went. The payment trail from buyer through intermediary to beneficiary puts those records together. In the Commission’s account, the inflated premium carried the surcharge while the books failed to record the payment’s true nature.

We see the wrong in that route plainly. A program intended to provide humanitarian relief during international trade sanctions became, in the Commission’s allegations, a way to move money into separate Iraqi-controlled accounts. The account the money bypassed matters as much as the one that received it.

A Written Ban With Approvals Behind It

The Securities and Exchange Commission alleged that Chevron had already adopted a company-wide policy against the surcharges before the purchases at issue. According to its complaint, in January 2001, after learning of demands from Iraq’s State Oil Marketing Organization, the company required traders to obtain prior written approval for proposed Iraqi oil purchases, with management responsible for reviewing each proposed deal.

The complaint describes a policy that also required management to consider a seller’s identity, experience and reputation. According to the Commission, traders failed to follow the policy, management failed to ensure compliance, and reviewers relied on the traders’ representations. That gives an insider a specific comparison: what the seller review showed, what the trader said and what the approving manager accepted.

A written prohibition can look decisive from outside a company. Here, the SEC alleged that purchases kept receiving approval despite information that called the sellers and premiums into question. The question is what reached the approver and why the purchase went ahead.

A Seller With No Oil Business

The Securities and Exchange Commission said Chevron’s credit check identified one proposed seller as a “brass plate company”: no experience in the oil business, no real business operations and no known assets. The complaint alleged that management had concerns but nevertheless entered into two transactions to buy three million barrels from that seller in January 2002. Both transactions allegedly carried illegal surcharges passed back to Chevron in inflated premiums.

In the Commission’s account, the seller review had already exposed the problem. The company asking Chevron to buy its oil lacked the operating history and resources a reviewer would expect to find, according to the complaint. The unanswered question inside the approval process was what justified proceeding after that credit check.

The Trader Who Allegedly Asked for a Cheaper Surcharge

At least one Chevron trader factored surcharge payments into price negotiations with sellers, the SEC alleged. The complaint recounted a seller’s statement that the trader and the trader’s bosses knew about Iraq’s surcharge demands. The SEC’s release described a particularly revealing request:

The allegation puts the surcharge inside the price negotiation. We see the contradiction: the company policy prohibited the charge, while the trader allegedly tried to get it discounted. For a person who heard the negotiation, that conversation could explain a premium that the accounting entry alone would leave unexplained.

What the SEC Said the Books Missed

The Securities and Exchange Commission alleged that Chevron’s accounting failed to record the true nature of its payments to third parties. It also alleged that the company failed to maintain controls capable of detecting and preventing those payments. Its announcement of the charges linked the two failures to the same oil transactions.

The Commission said Chevron’s premium payments increased after Iraq began demanding surcharges, yet management routinely approved the purchases. That sequence connects the price increase to what the company knew about the demand. A person responsible for pricing could understand the reason for the increase, while the person posting the purchase might see only the approved amount.

A 2022 review in the Journal of Forensic and Investigative Accounting, How to Avoid Inadvertently Violating the Foreign Corrupt Business Practices Act Abroad, describes third-party payments as the basis of the vast majority of Foreign Corrupt Practices Act compliance proceedings. It identifies abnormal credit terms and unusual payments to holding organizations as warning signs that transaction reviews can uncover. The seller’s terms and the reason for paying it belong beside the final accounting description.

For an insider, the useful knowledge may be how the explanation changed between the trading desk and finance. We connect that explanation with the seller’s qualifications, the approval and the payment.

What Chevron Agreed to Pay

Alongside the profit repayment, Chevron agreed to a $3 million civil penalty in the Securities and Exchange Commission settlement. The announcement separately identified a $2 million penalty payable to Treasury’s Office of Foreign Assets Control.

What an Oil or Finance Insider Can Connect

A trader may know why the premium rose, a credit reviewer why a seller failed scrutiny, and a manager what concerns accompanied an approval request. Finance and accounting personnel may see the payment instructions and the description carried into the books. Our work connects those views to the same purchase.

The oil-trading parallel in Gunvor makes the role of a commercial fee concrete. In the statement of facts accompanying its guilty plea, Gunvor admitted that an intermediary agreement tied most compensation to per-barrel volume fees on oil purchased under an oil-backed loan arrangement. Intermediaries used portions of those fees to bribe Ecuadorian officials on Gunvor’s behalf. A fee tied to real oil purchases supplied the money for the bribes.

Gunvor also admitted that it continued making corrupt payments despite intermediaries repeatedly failing to provide complete documentation or attend a requested meeting. The comparison with Chevron concerns the decision to keep doing business after problems surfaced in the seller or intermediary review. The person who knows why management proceeded can explain something the signed contract does not.

Contracts, invoices, seller qualifications, approvals, transfer records and accounting entries each tell part of that story. Evidence connecting the payment to the decision gives those documents their meaning. We build on your knowledge of the transaction, including the explanation that made an unusual charge acceptable inside the business.

Whistleblower Rewards Depend on the Case

The Securities and Exchange Commission’s whistleblower program can pay whistleblowers a share of the money collected through its enforcement actions. We assess how your information supports an action and what that means for SEC whistleblower awards for foreign bribery. Your knowledge of an approval, a seller or the purpose of a payment is where that conversation starts.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. That is a separate law from the Foreign Corrupt Practices Act at issue in Chevron’s case. We identify the program that fits the conduct you know and bring in foreign bribery whistleblower lawyers when your information concerns foreign bribery and issuer accounting.

You Know Why the Premium Was Approved

If you know what an oil premium covered or why a questionable seller kept getting approved, tell our whistleblower experts what happened inside the deal. We turn that commercial knowledge into a focused case with foreign bribery whistleblower lawyers who understand trading contracts, intermediary payments and accounting controls. Our experts stay with you from the first conversation about that premium through the case we build together.