El Paso Corp: The Oil Price Included the Kickback

El Paso agreed to a $2,250,000 civil penalty in the El Paso Corp FCPA case over allegations that Iraqi oil kickbacks passed through third-party purchases and entered its books as ordinary costs. The Securities and Exchange Commission alleged that the company stopped buying directly from Iraq’s oil marketing organization but kept buying through intermediaries who paid the surcharges. For someone who knows oil pricing, the telling detail is what followed: a contract could deny the payment while the price still included it.

The SEC announced the settlement on February 7, 2007. Its Foreign Corrupt Practices Act case concerned the Texas energy company’s books and records and internal accounting controls.

The Oil for Food Surcharge Was Built Into the Price

The SEC alleged that El Paso indirectly paid approximately $5.5 million in illegal surcharges on Iraqi crude purchased under the United Nations Oil for Food Program. The civil penalty was smaller than the alleged kickbacks. That program was intended to provide humanitarian relief to Iraq’s population during international trade sanctions. According to the agency, officials of Iraq’s State Oil Marketing Organization began demanding kickbacks in August 2000, with the money going to Iraqi-controlled bank accounts in Jordan and Lebanon.

The SEC’s litigation release traces the demand back to The Coastal Corporation, which received its first surcharge demand the following month. Coastal merged with an El Paso subsidiary in January 2001. The agency alleged that an El Paso consultant who had been a Coastal official arranged a surcharge payment to an Iraqi-controlled bank account in Jordan.

El Paso then stopped purchasing directly from the Iraqi oil marketing organization after receiving notice that all its oil contracts would include surcharges, according to the SEC. The purchases continued through third parties. Between June 2001 and June 2002, El Paso bought approximately 21.4 million barrels from participants in the program.

The alleged surcharge was tied to each barrel. The SEC said El Paso’s traders factored it into the oil price, and that the third parties passed the cost back to El Paso through premiums. In the SEC’s account, buying through another seller changed the immediate counterparty while preserving the cost of the Iraqi demand inside the purchase price.

That is why the pricing records matter alongside the bank transfer. The agency’s account connects the cost borne by the buyer to the payment made further along the chain. A trader who understood the premium could explain a part of the transaction that an invoice naming only the intermediary would leave out.

A Certification the Seller Was Willing to Falsify

El Paso required some third-party contracts to include a representation that the seller had not paid surcharges, according to the SEC. The agency alleged that El Paso did not check whether that representation was true. Recorded conversations allegedly showed that company officials knew the provision was ineffective.

The SEC described one of those conversations this way:

In the SEC’s account, the seller willing to pay the kickback would also sign the paper denying it. Convenient. We see a contract file made to look reassuring by the very seller whose word needed checking.

The SEC tied that untested promise to what El Paso knew about the purchases. It alleged that El Paso knew, or was reckless in not knowing, that surcharges had been paid on the contracts. It also alleged that the company’s internal controls failed to detect and prevent those payments.

A contract reviewer may see the certification while a trader knows what the seller said about the surcharge. We connect those accounts because the same contract can carry a denial on paper and a different commercial understanding between the people arranging it. In El Paso, the agency pointed to recorded conversations of company officials and traders discussing the surcharges themselves.

The Books Called It Cost of Goods Sold

The SEC alleged that El Paso recorded the kickback portion of its oil purchases as cost of goods sold. In at least fifteen transactions, part of the price allegedly represented payments to Iraq that the company failed to identify for what they were. The ledger, the SEC alleged, absorbed the surcharge into the cost of buying oil.

The books-and-records and internal-controls allegations reached different parts of that arrangement. One concerned the description of the payment in the accounts. The other concerned the checks that should have detected and prevented it, including the failure to investigate the sellers’ representations.

For an accounting employee, the important connection is between the entry and the reason for the premium. A cost entry can accurately carry the amount paid while concealing what the payment bought. Here, the SEC’s allegation was that the oil price included money for Iraq and the accounts described it simply as an ordinary purchase cost.

We follow the transaction across those separate records: the contract, the price decision, the payment beneficiary and the accounting entry. Someone who knows why the premium was approved can give meaning to a number that otherwise looks like another cost of acquiring inventory.

What El Paso Agreed to Pay in the Civil Case

El Paso also consented to an order requiring it to surrender $5,482,363 in profits, according to the SEC’s settlement announcement. That obligation was separate from the civil penalty. The SEC brought the case and investigated the accounting and controls allegations.

The Pattern Beyond El Paso’s Oil Purchases

Other Oil for Food cases involved benefits hidden in different commercial transactions. The SEC’s enforcement account describes allegations against General Electric involving cash, computer equipment, medical supplies and services provided to the Iraqi government to obtain program contracts. The comparison widens what an insider might recognize: the extra benefit can be goods or services as well as money embedded in a price.

A later oil-trading case shows how closely a concealed payment can track an ordinary trade. In the statement of facts accompanying its guilty plea, Trafigura admitted that an executive and a Brazilian official agreed prices and bribe amounts before traders conducted sham negotiations with Petrobras. Trafigura also admitted linking commissions to particular trades to facilitate bribes and conceal them as legitimate transactions in its books. An employee familiar with the negotiations or trade references could explain how the commercial paperwork served the payment.

What an Insider Adds to the Price and Payment

An oil trader, contract reviewer or accounting employee may recognize a different part of the same arrangement. The trader may know what the premium covered, the reviewer may know whether anyone tested the seller’s certification, and the accountant may know how the payment was described. We bring that knowledge together with the records connecting the decision, payment and accounting.

The useful detail may be a conversation that explains why a contract changed or why a particular cost was accepted. El Paso’s case shows the value of connecting that explanation to the transaction itself: the agency relied on discussions of surcharges alongside contracts, premiums and ledger treatment. You may understand the purpose of an entry because you were part of the business process that produced it.

There is evidence that the prospect of an insider speaking up can affect accounting behavior. The 2019 working paper Do Corporate Whistleblower Laws Deter Accounting Fraud?, hosted by MIT Sloan, studied companies exposed to state False Claims Acts through state pension-fund ownership. It estimated that exposure reduced the likelihood of accounting fraud by 5% to 9%.

The SEC whistleblower program can pay eligible whistleblowers a combined 10% to 30% of the money collected in qualifying enforcement actions. In cases involving false claims for U.S. government money, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We work with you to understand what your information shows and which kind of case it can support.

You Know Why the Oil Price Changed

If you know what an oil premium funded or why a seller’s certification contradicted the deal, speak with our whistleblower experts about the transaction you saw. We build the case around your knowledge and bring in FCPA whistleblower lawyers who understand oil trading, intermediary payments and accounting. We stay beside you as the price, the payment and the decisions behind them become a case.