978-0077862213 Chapter 6 Case Halliburton and KBR

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Case 6-1

SEC v. Halliburton Company and KBR, Inc.

On February 11, 2009, the SEC announced settlements with KBR, Inc., and Halliburton Company to

resolve SEC charges that KBR subsidiary Kellogg Brown & Root LLC bribed Nigerian government

officials over a 10-year period, in violation of the Foreign Corrupt Practices Act, in order to obtain

construction contracts. The SEC also charged that KBR and Halliburton engaged in books and records

violations and internal controls violations related to the bribery.

The SEC had alleged that beginning as early as 1994, members of the joint venture determined that it

was necessary to pay bribes to officials within the Nigerian government in order to obtain the construction

contracts. The former CEO of the predecessor entities, Albert “Jack” Stanley, and others involved in the

joint venture met with high-ranking Nigerian government officials and their representatives on at least four

occasions to arrange the bribe payments. To conceal the illicit payments, the joint venture entered into sham

contracts with two agents, one based in the United Kingdom and one based in Japan, to funnel money to

Nigerian officials.

The SEC complaint describes a “cultural committee” to decide how to carry out the bribery scheme. The

committee decided to use the United Kingdom agent to make payments to high-ranking Nigerian officials

and to use the Japanese agent to make payments to lower-ranking Nigerian officials. The joint venture took

payments on a construction project and, in turn, made payments to the Japanese agent and to the Swiss and

Monaco bank accounts of the United Kingdom agent. The total payments to the two agents exceeded

$180 million. After receiving the money, the United Kingdom agent made substantial payments to accounts

controlled by Nigerian government officials, and beginning in 2002 paid $5 million in cash to a Nigerian

political party.

The SEC’s complaint also alleged that the internal controls of Halliburton, the parent company of the

KBR predecessor entities from 1998 to 2006, failed to detect or prevent the bribery, and that Halliburton

records were falsified as a result of the bribery scheme. In September 2008, Stanley pleaded guilty to

bribery and related charges and entered into a settlement with the SEC. Stanley’s high profile and –

punishment—he faces a potential seven-year sentence, the longest in the history of the federal statute

outlawing the bribing of foreign officials—also signal the federal government’s willingness to seek long

prison terms rather than fines and court injunctions.

Without admitting or denying the SEC’s allegations, KBR and Halliburton consented to be permanently

enjoined from violating the antibribery, records, and internal control provisions in SEC laws. The SEC also

imposed an independent consultant for Halliburton to review its policies and procedures as they relate to

compliance with the FCPA.

As a result of the indemnity and the KBR subsidiary’s criminal plea, Halliburton has agreed to pay $ 559

(including $177 million in disgorgement) of $ 579 million in criminal fines payable by KBR, with KBR

consenting to pay the remaining $20 million.

Questions

1. The mission of a global group called Transparency International is to stop corruption and promote

transparency, accountability and integrity at all levels and across all sectors of society. The

organization’s “Core Values” are: transparency, accountability, integrity, solidarity, courage, justice

and democracy. Each year the organization evaluates business corruption in each country and

produces a Corruptions Perception Index (CPI), The 2012 CPI ranks Nigeria 139 of 174 nations.

Exhibit 1 provides a complete set of rankings.

Writing for Transparency International Chinyere Nwafor states that “One of the reasons why there

are so many foreign bribery cases going on related to Nigeria is basically that corruption in Nigeria is

deeply entrenched in almost every area of the public sector.” In Nigeria, facilitating payments called

“dash” are a way of life and necessity to get things done.

Given the apparent corrupt culture in Nigeria, why shouldn’t U.S. businesses just consider payoffs to

Nigerian officials as a cost of doing business in that country and not a payment in violation of the

FCPA?

If bribery is considered a cost of doing business in Nigeria, given the corrupt culture in Nigeria, it is giving

in to a fallacy or rationalization. It would not be an ethical argument. In fact, if bribery was okay in Nigeria,

there would be no grounds to say that it was not okay in the rest of the world. If using bribery in Nigeria is

defended on the grounds that companies that do not bribe there lose business to other companies who do

Using the argument, “Nigeria has a corrupt culture so bribery there is a cost of doing business

there” is an informal fallacy or argumentum ad populum. An informal fallacy or argumentum ad populum

is based on deceptive or misleading facts; it is based on perceptions of a majority of a population. It is using

2. Comment on the following statement from a values perspective: “Ethics Must be Global, Not

Local.”

Ethics are based on values. If the values of honesty and integrity are important, they are important no

matter where in the world you are. Instead of “what happens in Vegas stays in Vegas,” it should be “what

happens in Vegas should be fair to happen on any main street, anywhere.” In the discussion questions in

An interesting article in Business Week on this issue is contends that to build a truly great, global business,

business leaders need to adopt a global standard of ethical practices. Students might be asked to read the

3. Use ethical reasoning to respond to the following statement by a U.S. executive:

Bribery is bad for business. Bribery is inefficient; it’s wasteful. It often doesn’t

accomplish what its original purpose was. You may be competing with another

company that may ultimately out-bribe you. And then at the end of the day, of course,

there is a huge risk that the bribery is uncovered, that you are the subject of a

protracted investigation. And the costs can be quite, quite high at the end of the day.

The statements: “Bribery is bad for business” and “Bribery is inefficient” come from a PBS

interview with Mark Mendelsohn, who was the U.S. Justice Department main prosecutor for

Bribery is bad for business because it subjects the company to potential legal liability. It also

puts the audit at risk and reputation of the company hangs in the balance. Bribery is inefficient

Let’s look at the Foreign Corrupt Practices Act (FCPA). The potential

consequences of a FCPA violation for an individual are easy to explain and

understand. Personal tragedies result from the losses of freedom, jobs and

reputations, and there’s often “nancial ruin and damage to families. But the

We’ve deleted a few KBR-specific references and broken the disclosure into smaller chunks for readability.

Otherwise, it’s straight from the annual report.

Here it is:

A person or entity found in violation of the FCPA could be subject to fines, civil penalties of up to $500,000

per violation, equitable remedies, including disgorgement (if applicable) generally of profits, including

It is possible that both the SEC and the DOJ could assert that there have been multiple violations, which

could lead to multiple fines. The amount of any fines or monetary penalties which could be assessed would

Agreed dispositions of these types of violations also frequently result in an acknowledgement of

wrongdoing by the entity and the appointment of a monitor on terms negotiated with the SEC and the DOJ

Other potential consequences could be significant and include suspension or debarment of our ability to

contract with governmental agencies of the United States and of foreign countries. . . . Suspension or

These investigations could also result in (1) third-party claims against us, which may include claims for

special, indirect, derivative or consequential damages, (2) damage to our business or reputation, (3) loss of,

or adverse effect on, cash flow, assets, goodwill, results of operations, business, prospects, profits or

In addition, our compliance procedures or having a monitor required or agreed to be appointed at our cost

Continuing negative publicity arising out of these investigations could also result in our inability to bid

successfully for governmental contracts and adversely affect our prospects in the commercial marketplace.

The investigations by the SEC and DOJ and foreign governmental authorities are continuing. We do not

expect these investigations to be concluded in the immediate future. The various governmental authorities