Shell unit's involvement in 'corrupt' oil deal raises due-diligence questions

24 November 2017 10:26am
Benin Flag

20 November 2017. By Rodrigo Russo and  Martin Coyle.

A Royal Dutch Shell unit in Benin has come under the spotlight, after the recent conviction for bribery of a former manager at Brazilian state-controlled oil company Petróleo Brasileiro, or Petrobras.

Pedro Augusto Cortes Xavier Bastos was last month jailed in Brazil for 11 years for accepting bribes in a deal between Petrobras and Companie Beninoise des Hydrocarbures, a company owned by Portuguese businessman Idalécio Oliveira. CBH had no history of oil deals and had just one asset — the oilfield that it sold to Petrobras.

Petrobras paid CBH $35 million for a 50 percent share in the rights to explore oil in the Benin field in May 2011. The following year, Shell’s unit Shell Benin Upstream purchased a 35 percent stake in the field, only to leave the joint venture in 2015 after no oil was found in the plot. The Anglo-Dutch company paid $20 million to Petrobras for a 15 percent stake, and paid $70 million to CBH for the other 20 percent.

A court in the Brazilian state of Parana ruled that Bastos had received $4.165 million in bribes via a Swiss bank account for facilitating the sale of CBH’s 50 percent stake to Petrobras. These monies were paid via an intermediary and former banker, João Augusto Rezende Henriques, the court concluded.

While Shell hasn’t been charged for wrongdoing in Brazil, the case calls into question its due-diligence procedures when it became involved in the West African oil deal.

Alarm bells

Swiss prosecutors have also been looking into the oil deal, after it emerged that national banks were used to launder money.

According to a Swiss document dated May 3, 2016, prosecutors suspected that of the $70 million paid by Shell’s unit for the oil rights in Benin, $4.165 million of this was paid as a “kickback” to Bastos, the former Petrobras manager. A further $363,364 was paid to another Petrobras employee Antonio Ricardo Luiz, the document said.

These monies were also paid via Henriques, the Swiss document said.

In Brazil, Bastos was only convicted for monies he received from the deal between CBH and Petrobras, and not for money allegedly received for helping the deal with Shell’s unit go through.

The Office of the Attorney General of Switzerland declined to comment further on its investigations.

Need for due diligence

Companies are expected to carry out appropriate due diligence to mitigate corruption risks. Shell, as a UK-based company, could face exposure to the country’s bribery legislation if it’s unable to prove that it put adequate procedures in place to prevent bribery.

Benin is ranked 95th on Transparency International global perceptions transparency list. Although the campaign group acknowledges the country has taken strides to combat corruption, companies should still tread carefully.

Shell told MLex in a statement that the “events currently under investigation by Brazilian authorities took place before it entered the Benin exploration plot, and no Shell entity is under investigation as part of these proceedings.”

The company also said that “before entering Block 4, Shell Benin Upstream took steps to ensure compliance with national and foreign legislation.”

The UK’s Serious Fraud Office didn’t immediately respond to a request for comment.

A document setting out details of the agreement between Shell and CBH and Petrobras includes a provision that the companies involved have made no payments to officials or companies that would violate Benin’s laws, or those in the company’s parent country. The contract calls on the companies involved to record and report all financial transactions and maintain appropriate systems and controls.

Brazilian prosecutors alleged that Petrobras didn’t respect due-diligence requirements when it signed the agreement for the rights to the oil block.

Additionally, an internal Petrobras audit report from May 2016 found that the company hadn’t conducted proper due diligence before signing the initial deal with CBH, which had no history of providing oil services in the country. The report found that manager Bastos withheld important information from Petrobras that could have been a deal breaker.

“The market intelligence unit of the International department issued a report in 2010 informing that CBH didn’t have any financial data available online, and that it wasn’t possible to guarantee that the company was in adequate financial health. The audit didn’t find evidence that such information was shared with the executive management or with the board of directors,” the internal report said.*

Political ties

According to federal prosecutors in Brazil, intermediary and former banker Henriques operated in close association with leaders of the Party of the Brazilian Democratic Movement, or PMDB — which had the power to appoint Petrobras officials under an informal agreement with the government.

In March this year, Eduardo Cunha, a former speaker of the House of Representatives and leader of the PMDB, was sentenced to 15 years in prison for receiving $1.5 million in bribes related to the Petrobras-CBH transaction.

* MLex’s translation of a document in Portuguese

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