Keppel facing a scandal

According to the US Department of Justice (DOJ), beginning from at least 2001 and continuing to at least 2014, Keppel Offshore & Marine conspired to violate the Foreign Corrupt Practices Act by paying about US$55 million in bribes to officials at the Brazilian state-owned oil company Petrobras and to the then-governing political party in Brazil, in order to win 13 contracts with Petrobras and another entity.

“Keppel Offshore & Marine effectuated and concealed bribe payments by paying outsized commissions to an intermediary, under the guise of legitimate consulting agreements, who then made payments for the benefit of the Brazilian officials and the Brazilian political party,” the DOJ added. The intermediary was an agent named Zwi Skornicki, who operated through a firm called Eagle do Brasil.

Keppel Offshore & Marine has entered into a deferred prosecution agreement with the US DOJ in relation to a charge of conspiring to violate the anti-bribery provisions of the Foreign Corrupt Practices Act, while its US subsidiary pleaded guilty pursuant to a plea agreement with the DOJ. Keppel Offshore & Marine has also accepted a conditional warning from the Corrupt Practices Investigation Bureau in Singapore, while another subsidiary called Keppel FELS Brasil has reached a leniency agreement with the Public Prosecutor’s Office in Brazil.

The US will credit the amount Keppel Offshore & Marine pays to Brazil and Singapore under their respective agreements. Brazil is to receive 50% of the total penalty, or just over US$211.1 million. Singapore is to receive 25% of the penalty, or almost US$105.6 million.

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Even for a corporate group as large as Keppel, being hit with fines totalling more than US$422.2 million will have an impact on its shareholders. According to the company, had the fines been imposed on Dec 31, 2016, its net tangible assets would have been reduced from the reported $6.34 a share to $6.03 a share; and its net gearing ratio would have increased from about 56.5% to 64%, an increase of about 750 basis points. And, had the fines been imposed on Jan 1, 2016, the company’s earnings for the year would have been reduced from the reported 43.2 cents a share to just 11.7 cents a share.

Shareholders of Keppel could have been burdened with an even larger fine under US sentencing guidelines. According to documents made available by the DOJ, based on the appropriate “offense level” and “culpability score”, the fine would have ranged from just under US$563 million to more than US$1.1 billion. But Keppel received a 25% discount off the bottom of the fine range because of its substantial cooperation with the investigation and for taking extensive remedial measures, according to the DOJ.

Notably, among the remedial measures cited by the DOJ as “relevant considerations” in reaching the deferred prosecution agreement with Keppel Offshore & Marine was the fact that it took disciplinary action against 17 current and former employees. This included “causing seven employees who participated in the misconduct… to separate from the company”. Keppel Offshore & Marine also demoted and issued warnings to seven employees who failed to detect the misconduct or take appropriate action. In addition, 12 former and current employees were hit with “financial sanctions” of about US$8.9 million.

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When did Keppel find out?

While the global resolution Keppel Offshore & Marine has reached with the US, Brazil and Singapore draws a line under the whole episode, it has also surfaced information that casts new light on Keppel’s own efforts to investigate the bribery allegations as they unfolded.

On Dec 23, 2017, Keppel said in a “fact sheet” on the global resolution that when the bribery allegations first emerged in the Brazilian media in 2015, it investigated the facts as part of its zero tolerance approach to such conduct. This was not previously clear. On Feb 9, 2015, when Keppel made its first announcement on the matter, it merely refuted the bribery allegations and laid out the standards of behaviour to which its employees and its agent Skornicki were expected to adhere (see “How Keppel responded to the reports of bribes” on Page 11).

Yet, the investigation that Keppel now says began back in 2015 did not appear to raise any red flags about the involvement of its employees as recently as Aug 3, 2016. That was when Bloomberg reported that Skornicki had told Brazilian judge Sergio Moro that five leading executives at Keppel had authorised him to bribe public officials in exchange for Petrobras contracts that often exceeded a billion dollars. Keppel issued a statement “strongly” denying the allegations on the same day.

Keppel only seemed to discover the involvement of its employees in the scandal over the two months that followed. On Oct 3, 2016, the company said, “Following further internal investigations, Keppel recognises that certain transactions associated with Mr. Skornicki may be suspicious.” It added that it had notified the authorities in the relevant jurisdictions of its intention to cooperate and work towards a resolution.

Interestingly, the US authorities did not credit Keppel Offshore & Marine for this voluntary disclosure among the “relevant considerations” in reaching the deferred prosecution agreement. Although the company notified the authorities about “the publicly-reported allegations in Brazil” prior to being contacted, the authorities were already aware of the allegations. Keppel Offshore & Marine did, however, receive full credit for its “substantial cooperation” with the US authorities. This included conducting a thorough internal investigation and proactively providing the authorities with information.

So, what was it that Keppel discovered during the two-month period from Aug 3, 2016 to Oct 3, 2016? And, were the five leading executives of Keppel named by Skornicki among the 17 executives who were subsequently disciplined? When approached for comment, Keppel said, “As stated in the media release, for legal reasons, Keppel is unable to comment on the agreed statement of facts released by the investigating authorities, or on the identities of any employees.”

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A spokesperson for Singapore Exchange told The Edge Singapore, “We are closely monitoring developments at Keppel Corp. However, we cannot comment further on any specific dealing with the company.” The spokesperson added, “SGX expects disclosures of listed companies to be accurate, complete and timely. Where companies fall short, we will take the necessary action as prescribed by the rules at the time of the breach.”

Reputational damage?

In the meantime, some market watchers have expressed concern about the impact this whole episode will have on Keppel’s reputation as well as Singapore’s standing as a clean business hub. A debate is also emerging about whether it is possible for companies such as Keppel — and Sembcorp Marine, which has denied allegations of having been involved in similar bribery activities in Brazil — to adhere to the standards of a developed market while doing business in emerging markets.

“Keppel is not going to be the first or the last large company caught in an international corruption probe,” says one local analyst, who asked not to be named. “Corporate governance and ethical dealings are hard to enforce because in most emerging markets, foreign companies have to rely on local intermediaries to do business.” The analyst adds that some industries in emerging markets are controlled by a couple of big state-owned players. “This means foreign companies have limited options and have to abide by the rules of the counterparties and intermediaries to secure jobs in those markets.”

To be sure, there is always a risk of things going wrong. And, in the wake of the investigations by the authorities, Keppel has acted in a manner that protected its shareholders, according to the analyst. “It has shown that it is cooperative to the DOJ and has taken swift disciplinary actions. It has also come clean and put in place new corporate governance controls,” the analyst says. “This is unlike Sembcorp Marine, where uncertainties over its next course of action with regard to this issue could be an overhang on the share price.” (See “Will SembMarine go the way of Keppel O&M?” on Page 14.)

Indeed, on Dec 26, 2017, the first trading day after the global resolution was announced, shares in Keppel closed 2.4% lower at $7.29. But the stock has since rebounded and climbed above where it traded just before Christmas.

El’fred Boo Hian Yong, an associate professor at Nanyang Business School, which is part of Nanyang Technological University, agrees that Keppel has taken effective remedial action. “While there were early missteps that had led to the bribery scandal, the firm actions that were taken subsequently are reflective of robust governance and they constitute a good first step towards rebuilding Keppel’s reputation,” he says. But he does not accept the notion that bribery is an acceptable or necessary means of doing business in less-developed countries. “While some argue that we will lose our competitiveness if we do not pay bribes, the ironical fact is that we will certainly lose our competitiveness if we pay bribes.”

The way he sees it, companies ought to focus on developing “unique or unrivalled value propositions” in order to secure their long-term competitiveness and build a sustainable business. “Success and doing well require hard work in finding our niche and competitive edge, not paying bribes. There are many good and clean business opportunities that Singapore companies could find and for which they could command a price premium, precisely because of our clean reputation and reliability.”

Ultimately, emerging-market nations that fail to root out corruption are not likely to be good places to do business in the long term anyway. As it is, many of them are clamping down on bribery and corruption. “Corrupt nations need to wake up to the reality that corruption hinders economic growth by eroding their competitiveness,” Boo says. “It is a fact that the world’s most corrupt countries are those which are the least competitive.”

Culture, ethics are important

So, where does this leave investors? How can they gauge the risks associated with companies that do business in emerging markets?

“I think it’s generally difficult to check for governance issues as a whole unless we have access to the board meetings. Having to rely only on public information means that there are many activities or subsidiaries that there may not be enough information on. Industry practices, and the countries that Keppel operates in, raise the risk of corporate governance transgressions, but it would be hard for analysts to determine if they had actually occurred,” says Lorraine Tan, regional director at Morningstar.

A lot really comes down to investors being confident that a company has the appropriate structures, processes and culture to mitigate the risks of doing business in emerging markets. For investors, making a judgement on this involves close interaction with the companies in question.

“The right people, the right controls and processes, the right training and, most importantly, the right culture will help avoid some of the pitfalls,” says David Smith, head of corporate governance, -Asia-Pacific, Aberdeen Standard Investments. “We expect companies to manage these risks. Along with structures and processes, culture and ethics are tremendously important to us, and are topics we frequently discuss with the management of our portfolio companies. Any lapses of judgement are clearly disappointing, and investors are rightly skittish about these issues.”

Investors can, of course, simply choose to avoid being exposed to sectors in which there is a high risk of corruption. “Oil and gas is notoriously [known] to be an industry where people grease palms to get things done. There has been a lot more corruption in that industry,” says Sat Duhra, -co-manager of Janus Henderson Horizon Asian Dividend Income Fund.

Yet, shares in Keppel as well as SembMarine have done well this past year because a recovery in the sector seems to be underway after a big slump that started in mid-2014. “The stocks have done well in the last 12 months because of better orders — marginally — and better oil prices,” Duhra says. He adds that his fund once owned shares in SembMarine, but avoided it over the last three years. “One of the reasons was the Brazilian issue,” he says. “We didn’t really understand what the risks were, so we were happy to stay away.”

Duhra says he looks closely at the parties that companies choose to partner with when making a decision on whether to invest in their shares. “[In general,] if the companies are dealing with parties we are not familiar with, we usually stay away from them,” he says. “We have very low weightage in the energy [sector].”

Ultimately, investors have a lot of choices, and they should just focus on promising sectors and specific stocks where the odds are in their favour. Markets do eventually reward companies that thrive and treat investors well. “There are plenty of other businesses that do things the right way in Asia and those companies trade at a premium. They have attracted a premium because they have a track record of good corporate governance,” Duhra says.

Now, Keppel is trying to win back the confidence of the market. “The past practices uncovered at Keppel Offshore & Marine do not reflect how the Keppel Group conducts business today. Keppel does not just care about results; we care deeply about how our results are achieved. We have zero tolerance for corruption. Effective compliance controls are now thoroughly embedded across all our businesses, supported by rigorous anti-corruption training and robust compliance and governance regimes,” says Loh Chin Hua, CEO of Keppel, in a statement on Dec 23, 2017. “Given Keppel’s strong track record and capabilities, I am confident that we will emerge as a more disciplined and sustainable company, better able to pursue our growth plans,” he adds.

Keppel has also said that it will “ring-fence the financial penalty” when considering the final dividend to propose for 2017. The final dividend will be announced with the company’s full-year result later this month.

How Keppel responded to the reports of bribes

Keppel Corp initially refuted allegations that its offshore and marine units had any involvement in the bribery scandal surrounding Petrobras. In a statement on Feb 9, 2015, the company emphasised that its employees are required to conduct themselves “with integrity, in an ethical and proper manner, and in compliance with the applicable laws and regulations of the countries in which [it operates], including anti-bribery laws”.

It went on to say that Zwi Skornicki was an employee of Eagle do Brasil, which was acting as an agent for Keppel FELS in Brazil. “Keppel FELS had conducted due diligence review of Eagle do Brasil and Zwi Skornicki. Further, the Agency Agreement with Eagle do Brasil categorically states that Eagle do Brasil and Zwi Skornicki ‘shall not make, either directly or indirectly, any improper payment of money or anything of value to an Official in connection with the Contract’. In addition, Eagle do Brasil’s services are not exclusive to Keppel FELS, and it is also an agent to other reputable multi-national companies,” Keppel said in the statement of Feb 9, 2015.

Over the following months, however, more uncomfortable revelations emerged. In February 2016, a former Petrobras executive named Pedro Jose Barusco reportedly implicated Skornicki in the scandal. Skornicki was reportedly arrested around that time.

According to a report by The Straits Times dated June 14, 2016, which cited plea statements, Barusco alleged that Skornicki paid at least US$4.5 million in bribes on behalf of a unit of Keppel for six contracts from Sete Brasil.

Subsequently, on Aug 3, 2016, Bloomberg reported that Skornicki had told Brazilian judge Sergio Moro that five leading executives at Keppel had authorised him to bribe public officials in exchange for Petrobras contracts that often exceeded a billion dollars. According to the report, Skornicki also said he had his own firm, located inside Keppel’s office in Brazil, and a formal contract to represent the company, with enough autonomy to sign contracts with Petrobras on behalf of Keppel.

Keppel issued a number of statements in the wake of these developments. On Feb 23, 2016, it noted that allegations were made by Barusco that Skornicki had made illegal payments, and that Skornicki had reportedly been arrested. It also said that Keppel had since put its agency relationship with Skornicki on hold. On April 29, 2016, Keppel made another statement, noting that Skornicki had been charged with corruption.

However, Keppel did not immediately admit that it had done anything wrong. In fact, in a statement on July 24, 2016, the company refuted testimony by Skornicki that it was involved in the illegal payments he made. On Aug 3, 2016, Keppel also “strongly” denied allegations by Skornicki reported by Bloomberg that Keppel officials had authorised the bribes he paid.

Then, two months later, Keppel’s tone changed. On Oct 3, 2016, the company said: “Following further internal investigations, Keppel recognises that certain transactions associated with Mr. Skornicki may be suspicious. Keppel has notified the authorities in the relevant jurisdictions of its intention to cooperate and work towards the resolution of the underlying issues arising from or in connection with the transactions.”

Finally, on Dec 23, 2017, Keppel said it had reached a global resolution with authorities in the US, Brazil and Singapore in relation to corrupt payments made by Skornicki, and would pay fines of more than US$422.2 million ($561.1 million).

What Keppel did in Brazil

1. The following Statement of Facts is incorporated by reference as part of the Deferred Prosecution Agreement (the “Agreement”) between the United States Department of Justice, Criminal Division, Fraud Section (the “Fraud Section”), the United States Attorney’s Office for the Eastern District of New York (the “Office”) (collectively, the “United States”), and the defendant Keppel Offshore & Marine Ltd. Certain of the facts herein are based on information obtained from third parties by the Fraud Section and the Office through their investigation and described to Keppel Offshore & Marine Ltd. Keppel Offshore & Marine Ltd. hereby agrees and stipulates that the following facts and conclusions of law are true and accurate. Keppel Offshore & Marine Ltd. admits, accepts, and acknowledges that it is responsible for the acts of its officers, directors, employees, and agents as set forth below.

Relevant Entities and Individuals

2. The defendant Keppel Offshore & Marine Ltd. (“KOM” or the “Company”), a Singapore-based corporation, operated shipyards in Asia, the Americas, and Europe. KOM’s business consisted primarily of building mobile offshore drilling rigs and handling repairs, conversions, and upgrades of shipping vessels.

3. Keppel Offshore & Marine USA, Inc. (“KOM USA”) was a wholly-owned subsidiary of KOM based in Houston, Texas and incorporated in Delaware, and whose executives supervised operations in, among other locations, Brazil. KOM USA was a “domestic concern,” as that term is defined in the Foreign Corrupt Practices Act (“FCPA”), Title 15, United States Code, Section 78dd-2(h)(1).

4. Petroleo Brasileiro S.A. (“Petrobras”) was a Brazilian state-controlled oil company headquartered in Rio de Janeiro, Brazil, that operated to refine, produce and distribute oil, oil products, gas, biofuels and energy. The Brazilian government directly owned more than 50 percent of Petrobras’s common shares with voting rights. Petrobras was controlled by Brazil and performed government functions, and thus was an “agency” and “instrumentality” of a foreign government, as those terms are used in the FCPA, Title 15, United States Code, Sections 78dd-2 and 78dd-3.

5. Sete Brasil Participacoes S.A. (“Sete Brasil”) was a privately held corporation headquartered in Rio de Janeiro, Brazil, that specialized in portfolio management of assets related to the offshore oil and gas sector.

6. The Workers’ Party of Brazil (“Workers’ Party”) was a political party in Brazil that formed part of the federal government of Brazil in or about and between 2003 and 2016. The Workers’ Party was a “political party” as that term is used in the FCPA, Title 15, United States Code, Sections 78dd-2(a)(2) and 78dd-3(a)(2).

7. Consultant, a citizen of Brazil whose identity is known to the United States and KOM, was an agent of KOM in or about and between 2000 and 2016 who facilitated bribe payments from KOM to public officials of Brazil and the Workers’ Party.

8. KOM Executive 1, a citizen of Singapore whose identity is known to the United States and KOM, was a senior executive of KOM in or about and between 2002 and 2014.

9. KOM Executive 2, a citizen of Singapore whose identity is known to the United States and KOM, was a senior executive of a wholly-owned, Singapore-based subsidiary of KOM in or about and between 1989 and 2009 and a senior executive of KOM in or about and between 2013 and 2017.

10. KOM Executive 3, a citizen of Singapore and legal permanent resident of the United States in or about and between 2002 and 2013, whose identity is known to the United States and KOM, was a senior executive of KOM USA in or about and between 2002 and 2011 and a senior executive of KOM in or about and between 2011 and 2017. Thus, in or about and between 2002 and 2011, KOM Executive 3 was an “employee” and “agent” of a domestic concern, as those terms are used in the FCPA, Title 15, United States Code, Section 78dd-2.

11. KOM Executive 4, a citizen of Singapore whose identity is known to the United States and KOM, was an executive at KOM in or about and between 2002 and 2017. He was an executive at KOM USA in or about and between 2011 and 2017. Thus, in or about and between 2011 and 2017, KOM Executive 4 was an “employee” and “agent” of a domestic concern, as those terms are used in the FCPA, Title 15, United States Code, Section 78dd-2.

12. KOM Executive 5, a legal permanent resident of the United States since 2015, whose identity is known to the United States and KOM, held executive positions at multiple KOM subsidiaries in Brazil in or about and between 2003 and 2017. He also held an executive position at KOM and at KOM USA in or about and between 2012 and 2017. Thus, in or about and between 2012 and 2017, KOM Executive 5 was an “employee” and “agent” of a domestic concern, as those terms are used in the FCPA, Title 15, United States Code, Section 78dd-2.

13. KOM Executive 6, a United States citizen whose identity is known to the United States and KOM, held various senior positions in the legal department of KOM in or about and between 1990 and 2017. KOM Executive 6 was a “domestic concern,” as that term is defined in the FCPA, Title 15, United States Code, Section 78dd-(h)(l).

14. KOM Sub Executive, a citizen of Singapore whose identity is known to the United States and KOM, was a senior executive of a wholly-owned, Brazil-based subsidiary of KOM in or about and between 2000 and 2007.

15. Brazilian Official 1, a citizen of Brazil whose identity is known to the United States and KOM, was an employee of Petrobras in or about and between 2003 and April 2011. During that time, Brazilian Official 1 was a “foreign official,” as that term is defined in the FCPA, Title 15, United States Code, Sections 78dd-2(h)(2)(A) and 78dd-3(f)(2)(A). Brazilian Official 1 had responsibility for, among other things, the bidding process organized by a division of Petrobras. In or about and between April 2011 and August 2013, Brazilian Official 1 was an employee of Sete Brasil with responsibility for overseeing operations, during which time Brazilian Official 1 was not a “foreign official,” as that term is defined in the FCPA, Title 15, United States Code, Sections 78dd-2(h)(2)(A) and 78dd-3(f)(2)(A).

16. Brazilian Official 2, a citizen of Brazil whose identity is known to the United States and KOM, was an employee of Petrobras with responsibility over the bidding process of certain projects in or about and between 2003 and April 2012. During that time, Brazilian Official 2 was a “foreign official,” as that term is defined in the FCPA, Title 15, United States Code, Sections 78dd-2(h)(2)(A) and 78dd-3(f)(2)(A).

17. Party Official, a citizen of Brazil whose identity is known to the United States and KOM, was a senior official in the Workers’ Party. Party Official was a “foreign official,” as that term is defined in the FCPA, Title 15, United States Code, Sections 78dd-2(h)(2)(A) and 78dd-3(f)(2)(A).

Overview of the Bribery Scheme

18. For a number of years, executives and employees of Petrobras with responsibility over the bidding of certain large projects, including Brazilian Official 1 and Brazilian Official 2, and politicians and political parties in Brazil, including the Workers’ Party, administered a scheme to secure corrupt payments equal to a percentage of a contract’s value from the companies awarded those projects. In or around 2011, this scheme was extended to projects awarded by Sete Brasil, which commissioned a large fleet of rigs for Petrobras’s end use.

19. In or about and between 2001 and 2014, KOM, together with others, including executives of KOM USA, knowingly and willfully conspired to pay, and paid, bribes in connection with thirteen projects in Brazil tendered by Petrobras and Sete Brasil.

20. These bribes amounted to approximately $55 million paid corruptly for the benefit of foreign officials, including Brazilian Official 1 and Brazilian Official 2, and the Workers’ Party to secure improper advantages and to influence those foreign officials and the Workers’ Party to obtain and retain business in Brazil. KOM and its related entities, including KOM USA, earned profits totaling approximately $351.8 million from business in Brazil obtained through the bribery scheme.

21. In or about and between 2001 and 2011, KOM and KOM USA executives created and executed agreements on behalf of KOM with consulting companies controlled by Consultant that were intended to facilitate bribe payment to obtain business from Petrobras and Sete Brasil and to conceal their purpose.

22. In or about and between 2004 and 2014, under the guise of these consulting agreements, KOM effectuated bribes by making payments to bank accounts in the United States and elsewhere in the names of shell companies controlled by Consultant. Consultant then transferred money from those bank accounts in the United States to bank accounts outside the United States controlled by or for the benefit of Brazilian Official 1, Brazilian Official 2, Party Official, and the Workers’ Party to further the bribery scheme.

Details of the Bribery Conspiracy

The P-48 Project

23. In or about 2001, KOM, through a joint venture, won a subcontract to convert a floating platform for Petrobras (“P-48”).

24. In or about and between June 2001 and April 2002, pursuant to instructions and authorization from KOM Executive 2 and KOM Sub Executive, KOM made $300,000 in bribe payments to government officials in Brazil’s capital in connection with the P-48 contract.

25. On or about June 7, 2001, KOM Executive 2 sent an email to the financial controller of a KOM subsidiary, copying KOM Sub Executive, stating: [T]here is a commitment to pay US$300k for some governmental guy(s) to help us put pressure for the [P-48 project] to be carried out in Brazil. [KOM Sub Executive] and myself have discussed this and decided to keep to the commitment. Pls make arrangement for the first US$50k to be paid accordingly ….”¹

26. On or about August 3, 2001, KOM Executive 2 sent an email to the financial controller, copying KOM Sub Executive, stating, “[KOM’s joint venture partner on the P-48 project] cannot get [the follow-up payments] deferred, as the ‘friends’ are saying that it was definitely with their help that the conversion landed up in Brazil [...]. Pls made payment for US$100k asap ….”

27. On or about October 18, 2001, KOM Executive 2 sent an email to the financial controller, in which he stated: “[t]ime has come for making another 2 payment [] for friends … similar to previous 3 payments. Pls proceed to make payment for US$100k …. After this we will have only one payment of US$50k left.”

28. On or about April 4, 2002, KOM’s joint venture partner on the P-48 project sent KOM Executive 2 an email stating, “[o]ur friend in Brasilia called me again requesting the last installment of US$50K. This situation leaves us in a very delicate position. What do you suggest me to answer? Please settle this pending subject as quickly as possible; it is much more cheaper than you can imagine.”

29. On or about April 4, 2002, KOM Executive 2 sent an email to the KOM financial controller stating, “Pls see note from [joint venture partner on the P-48 project]. Pls check if we still outstand this payment to ‘friends.’”

30. Also on or about April 4, 2002, the financial controller responded affirmatively to the email referenced in Paragraph 29, after which KOM Executive 2 instructed him to make the remaining payment of $50,000.

The P-51 and P-52 Projects

31. In or about 2003, Consultant told KOM Sub Executive and a different joint venture partner of KOM about a way to pay bribes to Petrobras officials to win two Petrobras projects (“P-51” and “P-52”) with the help of a third-party agent.

32. In or about 2003, in connection with the P-51 and P-52 projects, Consultant received authorization from KOM Executive 1, KOM Sub Executive, and the joint venture partner to pay bribes equal to a percentage of the contracts’ value, which amounted to approximately $13.3 million. Consultant paid the bribes through an intermediary to Brazilian Official 1, who kept some of the money for himself and shared the rest with Brazilian Official 2 and the Workers’ Party.

33. On or about September 10, 2003, an employee of a KOM subsidiary sent an email to KOM Executive 2 and KOM Sub Executive, copying KOM Executive 1, with the subject line “P52 — Consortium Mgt Meeting,” stating, “[s]o far [Brazilian Official 2] has delivered through [Consultant]. Guess we have to trust in our relationship and go with it.”

34. On or about October 3, 2003, KOM Executive 6 sent an email to an executive of KOM and KOM Executive 1, copying KOM Sub Executive, about negotiations for the P-52 project, stating: [KOM Sub Executive], [the joint venture partner] and Consultant will be meeting with [Brazilian Official 2] and [Brazilian Official 1] this evening at 6:00p.m. The purpose of the meeting is for [Brazilian Official 2] to openly emphasize the need for significant movement from [the joint venture] on the price (all a show for [Brazilian Official 1’s] benefit).

35. That same day, on or about October 3, 2003, Consultant sent an email to KOM Sub Executive with the subject line, “Big Brother meeting,” stating, “[a]fter your meeting with the above people, I call him to understand how was his feeling: Very good, was his comment.”

36. On or about October 31, 2003, KOM Sub Executive sent an email to KOM Executive 2, copying KOM Executive 1, KOM Executive 6, and other KOM employees, stating that he had informed KOM’s joint venture partner on the P-52 and P-51 projects that a KOM subsidiary had an interest in obtaining the P-51 contract and that “Big brother is with us on P-51.”

37. In or about December 2003, Petrobras awarded the P-52 project to the relevant KOM joint venture.

38. On or about February 12, 2004, Consultant sent an email to KOM Sub Executive and a KOM joint venture employee, advising them that Brazilian Official 2 told him how KOM would need to alter its bid in order for Brazilian Official 2 to ensure that KOM won the contract for the P-51 project. Consultant stated that KOM should, in part: Drop our today price in US$ 2 Million … with help again to compensate during the term of the contract.

Reduce our delivery time in 2 months … and looking in my face, he promised me the two months will be give us back before the first year of the contract (we need to believe in him). This agreement will be straight with him, jointly with Brazilian Official 1 [and] [another Brazilian official], but we cannot ask them officially, please believe him and me.

39. In the same email referenced in Paragraph 38, Consultant explained, “[i]f we go in the above line and provide them with above conditions, he will be able to convince [others], to stop all negotiations and award the contract to us.” Consultant warned, however, that KOM needed to act fast because Brazilian Official 2 was “expecting very soon some one from Brasilia will request him to reopen the negotiations with [a competitor], and he will not be able work on our favor and against the power from Brasilia.”

40. On or about April l, 2004, Consultant sent an email to KOM Executive 5, copying KOM Sub Executive, urging that the consulting agreement needed to be signed and commissions be paid because “our friends already lost patience, special after knowing, two payments was made and nothing to them or to us.”

41. In or about June 2004, Petrobras awarded the P-51 project to the KOM joint venture.

The P-56 Project

42. In or about 2007, Consultant learned from Brazilian Official that KOM and its joint venture partner on the P-56 project would need to pay bribes in an amount equal to 1 percent of the contract value to obtain the P-56 project, of which half would go to Brazilian Official 1’s group and the other half to the Workers’ Party in the form of corrupt political donations.

43. In or about 2007, during a meeting with KOM Sub Executive and an executive at KOM’s joint venture partner on the P-56 project, Consultant received authorization to pay bribes equal to a percentage of the P-56 contract value to Brazilian Official 1 and the Workers’ Party to obtain the P-56 project, which resulted in approximately $14.2 million in bribes.

44. On or about September 19, 2007, KOM Sub Executive sent an email to and copying multiple KOM executives, including KOM Executive 1, KOM Executive 2, KOM Executive 5, KOM Executive 6, and an executive of a KOM subsidiary in Singapore, stating: Petrobras … found a loop-hole in the Brazilian Law that they could invite [the KOM joint venture] for direct negotiation if it were to be a “clone” of an existing unit. … [T]he Project Manager … met [the joint venture partner] and me on 20 March on her action plan to launch direct negotiation with [the KOM joint venture] for the P-56, as a “clone” of P-51. She told us that her budget was US$950m.

45. In or about October 2007, Petrobras awarded the P-56 project to the KOM joint venture.

46. On or about May 11, 2010, a KOM employee sent an email to an employee in the financial and accounting office of the KOM joint venture, stating, “remember there was a donation to [the Workers’ Party] as part of election in 2008 of R$1,942k and R$483k[.] I was told that these are reimbursable from [the joint venture]-do [yo]u know the exact arrangement?”

47. On or about May 12, 2010, the joint venture finance employee responded to the email referenced in Paragraph 46, copying others, including KOM Executive 5, stating: “1,942 KBRL have already been reimbursed by [the joint venture] …. Do not know about the 483 KBRL.”

48. Also on or about May 12, 2010, the same joint venture finance employee replied to the emails referenced in Paragraphs 46 and 47, stating, “[s]eems that equivalent amount of 250,000 USD have been paid to [KOM entity] to cover this 483 KBRL.”

49. Also on or about May 12, 2010, KOM Executive 5 responded to the emails referenced in Paragraphs 46 through 48 above, stating, “[l]et’s not communica[te] such confidential thing over email.”

The P-53 and P-58 Projects

50. In or about 2005 and in or about 2009, a KOM subsidiary was awarded portions of two floating platform hull conversion projects from Petrobras (“P-53” and “P-58”).

51. In or about 2005 and in or about 2009, executives of KOM and a KOM subsidiary in Singapore, including KOM Executive 1, authorized Consultant to pay bribes equal to a percentage of the P-53 contract value and the P-58 contract value to Brazilian Official 1 and the Workers’ Party, which amounted to approximately $4.4 million in bribes.

52. On or about August 11, 2005, Consultant sent an email to an executive of a KOM subsidiary in Singapore asking that he not disclose that the KOM subsidiary was paying above the regular commission to Consultant “because this portion just [KOM Sub Executive], you, [another executive of a KOM subsidiary in Singapore] and I knows, and also, is to protect ours friends (you known what I mean) …. We need be very careful on this issue.”

53. In connection with a discussion about whether Consultant would represent KOM on the P-58 project, Consultant wrote to an executive of a KOM subsidiary in Singapore on or about April 26, 2009 that “[y]ou known my commitments and with whom. Please advise asap your decision, because if you decide to go with [the other consultant], I need to advise my partners to cancel the commitments.”

54. On or about October 27, 2010, Consultant sent an email to an executive of a KOM subsidiary in Singapore with the subject line “Contracts,” stating, “Any news about [m]y commission contract and when do you expect to pay me? I need to answer to my partners!!!”

55. KOM ultimately utilized Consultant’s services and secured both the P-53 and P-58 conversion projects.

P-61 Project

56. Starting in or about 2007, KOM and KOM USA, as part of a joint venture with an engineering company, began work to obtain a large platform construction contract from Petrobras (the “P-61 project”).

57. On or about March 3, 2007, a KOM employee sent an email to KOM Executive 2, copying KOM Executive 1, KOM Executive 3 and others, stating that a joint venture manager had expressed concerns that Consultant would be retained for the P-61 project because under the joint venture partner’s corporate governance rules it “cannot pay [Consultant] to pay government officials - Petrobras ???”

58. On or about March 28, 2007, KOM Executive 2 sent an email to KOM Executive 4 and KOM Executive 6, copying KOM Executive 3, with the subject line “Vetting process for [Consultant]- Brazil,” in which he stated:

I spoke to [Consultant] .... he does not want to be tied in with any agency for US company (can understand why), He suggests way forward is that he is working on behalf of [a KOM subsidiary in Brazil] for these projects and any fees be built into [the KOM subsidiary’s] price to the joint venture on the subcontract fabrication. In this way, in every meeting [the KOM subsidiary] is also present, so he can be present.

59. On or about April 6, 2007, KOM Executive 2 sent an email to KOM Executive 1, KOM Executive 4, KOM Executive 6, and another KOM employee, explaining that if the joint venture partner and the joint venture are “so hand tied to the US Code of Business Conduct, it would not be possible to involve [Consultant] which in reality diminishes our chances in the project. How we go?”

60. In or about 2008, the KOM joint venture was invited to bid on the P-61 project along with at least two other companies.

61. In or about 2008, the KOM joint venture submitted the first technical proposal to Petrobras for the P-61 project.

62. In or about 2008, after the invitation to bid, Consultant met with Brazilian Official 1, who told him that KOM would need to pay a percentage of the contract value in bribes to Brazilian Official 1 and the Workers’ Party to win the contract.

63. On or about November 25, 2008, Consultant sent an email to KOM Executive 2, KOM Executive 3, KOM Executive 4, KOM Executive 5 and KOM Executive 6, copying KOM Executive 1, seeking confirmation, “based on our telecom, some days ago,” that for his work on the P-61 project Consultant would be paid his regular commission, referred to as “rates actually used in the existing contract,” plus an additional two percent comprised of 0.5 percent for “the party,” 0.5 percent for “Group A” and one percent for “Group B.” “The party” referred to the Workers’ Party, “Group A” referred to Brazilian Official 1 and affiliated persons, and “Group B” referred to Consultant himself.

64. On or about November 25, 2008, KOM Executive 4 wrote to KOM Executive 2, KOM Executive 3, KOM Executive 5, and KOM Executive 6 in regards to Consultant’s email referenced in Paragraph 63: “The problem is that when broken down the parts look reasonable, but the whole is something else ... how to deal with this? We have to get this past our partner somehow, else it will remain a matter of we stand alone (too risky) or no bid???”

65. On or about November 29, 2008, KOM Executive 4 responded to the emails referenced in Paragraphs 63 and 64, including to KOM Executive 2, KOM Executive 3, KOM Executive 5, and KOM Executive 6, stating:

[I]f the fees are not reasonably close to what is expected by the various interested parties, there is little incentive for anyone to push our offer. So what is ‘expected’?? If we are not willing or able to offer similar to previous projects, we need to make a very unambiguous statement to those parties.

66. After discussions about limiting the scope of Consultant’s services on the P-61 project in light of FCPA and bribery concerns expressed by the joint venture partner, on or about November 30, 2008, KOM Executive 5 emailed KOM Executive 2, KOM Executive 3, KOM Executive 4, and KOM Executive 6, stating that “[Consultant] also mentioned that [the joint venture] was originally not invited for this project until much lobbying with his friends help. And the fees were told to us sometime ago. If they perceive us as not honoring our commitment, it may be bad for future business.”

67. In or about 2009, Consultant received authorization from KOM Executive 3 and an executive at a KOM subsidiary in Brazil to pay bribes equal to a percentage of the P-61 contract value to Brazilian Official 1 and the Workers’ Party, which amounted to approximately $8.8 million. Brazilian Official 1 shared some of the bribe money with Brazilian Official 2.

68. On or about November 1, 2009, a KOM subsidiary entered into a Marketing and Sales Representation Agreement with Consultant (the “November 2009 contract”) in connection with the contemplated P-61 project, in which KOM USA was a shareholder of one of the sub­contracting joint venture entities. While knowing that Consultant would pay bribes on behalf of KOM from commissions paid to him under the November 2009 contract, KOM Executive 2 signed and KOM Executive 3 witnessed the agreement in Houston, Texas.

69. In or about 2010, Petrobras awarded the P-61 contract to the KOM joint venture.

The Sete Brasil Projects

70. Between in or about 2011 and 2012, Sete Brasil contracted with five companies to commission the construction of a fleet of ultra-deepwater rigs for which Petrobras would be the end user. The construction contracts were split among the companies, with a KOM subsidiary successfully bidding for contracts for construction of six semi-submersible units.

71. Participating companies, including KOM, negotiated bribes with Brazilian Official 1 (who was employed by Sete Brasil at the time the agreements were finalized) equal to 0.9 to one percent of the value of their respective contracts. Two thirds of the payments were designated to the Workers’ Party and one third was to be divided equally between the relevant Petrobras and Sete Brasil executives. That split was agreed and administered by Brazilian Official 1, Brazilian Official 2, and Party Official.

72. During the negotiation period, KOM executives, including KOM Executive 1, KOM Executive 3, and an executive of a KOM subsidiary in Brazil, authorized Consultant during several telephone calls to pay one percent of the contract value as bribes in response to the demand of Brazilian Official 1. Accordingly, Consultant paid approximately $14.4 million in bribes to Brazilian Official 1, Brazilian Official 2, and the Workers’ Party.

73. On or about September 19, 2011, KOM Executive 6 sent a chat to his secretary asking her to type a message to KOM Executive 3 explaining, “[w]ill need to prepare Commission Agreement with [Consultant’s company] for the 1.5 [percent]. Is this okay, as he will have to show that this is all he is getting?”

74. On or about September 19, 2011, KOM Executive 6 sent an email to his secretary, stating: Put this in a plain paper and pass to [KOM Executive 1 / KOM Executive 3], then delete email: Further to our t/c, made the suggestion to have one of us go to explain the situation. However, the problem is that we will not be brought to all involved to explain. As such, need to execute the standard Commission Agreement with [Consultant’s company], with the 1.5%, as a copy of this will be showed up the line to convey that this is all. Nothing more. We’ve signed before for other jobs and have seen other agreements with [Consultant’s company] for even larger amounts. Would prefer not to, but the Comm. Agreement, may be the only thing that will satisfy people. Other than reverting to original plan, wherein proof would not be required then. At a loss as to alternatives.

75. On or about March 30, 2012, Consultant emailed KOM Executive 6, copying KOM Executive 5, stating that he was “having pressure from my partners about my contract …”

76. On or about April 12, 2012, KOM Executive 5 emailed KOM Executive 6 informing him that “[Consultant] was asked by his ‘friends’ to call KOM Executive 1 tonight about the contract. Fyi[.]”

77. On or about July 18, 2012, KOM Executive 6 sent an email to KOM Executive 3 in which he mentioned dividing payments to Consultant into two agreements. KOM Executive 3 responded the following day, “What do [you] mean by 2 agreements?,” to which KOM Executive 6 responded, “[o]ne for 0.5% and one for 1.5% for different parties, totaling the 2%.”

78. Additionally, in or about September 2013 to November 2014, at the instruction of a Workers’ Party official, Consultant made nine payments of $500,000 to a bank account in Switzerland to settle payments owed to the Workers’ Party as bribes.²

¹ Unless bracketed, all quotations appear as in the original document, without corrections or indications of misspellings or typographical errors.
² It is not clear that all nine bribe payments related to the Sete Brasil projects. At least some of the payments may have been outstanding bribes owed on earlier KOM projects described above.

Will SembMarine go the way of Keppel O&M?

On Dec 26, 2017, the first trading day after Keppel Corp said its offshore and marine arm had reached a global resolution with authorities in the US, Brazil and Singapore that will see it pay fines totalling more than US$422.2 million ($561.1 million), its shares closed 2.4% lower. However, shares in Sembcorp Marine sank 3.6%. And, while shares in Keppel began recovering the following day, shares in SembMarine continued falling until Dec 29, 2017.

Why was SembMarine hit harder than Keppel? One obvious reason is that SembMarine is much smaller and less diversified than Keppel. Another reason is that SembMarine has not admitted to having done anything wrong, leaving the market to assume the worst.

Pedro Jose Barusco, the Petrobras executive who reportedly alleged that Keppel Offshore & Marine’s former agent, Zwi Skornicki, had paid millions of dollars in bribes to Brazilian officials, had made similar allegations against Guilherme Esteves de Jesus, an agent of Jurong Aracruz shipyard, which is owned by SembMarine’s Jurong Shipyard.

On Feb 8, 2015, after Barusco’s allegations were first reported, SembMarine issued a statement saying it did not make any illegal payments, and that the group’s policies and contracts prohibit bribery and unethical behaviour. Then, on March 30, SembMarine said in a statement that it had received a copy of a plea bargain between the Brazilian authorities and Barusco, in which Barusco made the allegations about de Jesus. SembMarine also said that de Jesus had been arrested on March 27, 2015. “The company is unable to comment on the truth or otherwise of these allegations as its internal (legally privileged) investigations are continuing,” Semb­Marine added in the statement.

The following year, SembMarine and its subsidiary Jurong Shipyard were named as defendants along with other shipyards and entities — including Keppel Corp — in a complaint filed by EIG Management against Petrobras. EIG alleged that Petrobras concealed a wide-ranging bribery and kickback scheme.

On May 24, 2016, SembMarine issued a statement acknowledging a news report on the complaint, and said that its subsidiaries had entered into contracts with the subsidiaries of Sete Brasil for the construction of seven drillships in 2012. It added that the allegations against it were “entirely without merit and baseless”. On June 2, 2016, SembMarine said summons in the suit filed by EIG had been served on itself and Jurong Shipyard. And, on April 3, 2017, SembMarine said the US District Court for Columbia had dismissed the claims made by EIG Management.

Keppel O&M had also refuted allegations in 2015 and in the earlier part of 2016. However, in October 2016, it said certain transactions associated with its agent Skornicki might be suspicious, and that it had notified authorities of its intention to cooperate.

Now, some analysts are handicapping the risk of shareholders of SembMarine facing a similar financial penalty. According to OCBC Investment Research lead analyst Low Pei Han, the penalty imposed on Keppel accounts for some 4.5% of its net asset value as at end-3Q2017. “We are in no position to comment on whether [SembMarine] will be impacted, but based on a back-of-the-envelope calculation, $570 million would represent about 22.6% of [SembMarine’s] 3Q2017 net asset value,” Low said in a report on Dec 26.

OCBC currently has a “hold” recommendation on SembMarine, with a fair-value target of $1.78, down from $2.26 before Keppel’s fine was announced.

Petrobras to pay US$2.95 bil to settle US corruption lawsuit

Brazil’s state-controlled oil company Petroleo Brasileiro on Jan 3 agreed to pay US$2.95 billion ($3.92 billion) to settle a US class-action corruption lawsuit, in what was said to be the biggest such payout in the US by a foreign entity.

Petrobras denied any wrongdoing in the deal, which was one of the largest securities class-action settlements in US history. With the settlement, it will pay out more than six times what it has received so far under a Brazilian probe into bribery schemes that involved company executives and government officials.

The settlement, smaller than many analysts anticipated, was an important milestone for the oil firm as it tries to emerge from the scandal that has entangled two former Brazilian presidents and dozens of the country’s corporate executives.

But the deal reduces chances the world’s most indebted oil company will pay a dividend for 2017, much anticipated by investors who have not seen such a payment since 2014 when the scandal came to light, a source familiar with the matter said.

For the last four years, Brazil has been rocked by the so-called Car Wash investigation into kickbacks from contractors to executives of state-run companies and politicians in return for public projects.

The settlement put an end to “extremely high uncertainty” about the company’s potential liability, JPMorgan said in a client note, adding that it had expected a figure above US$5 billion. Analysts at Brazilian bank BTG Pactual said the market had expected a settlement of US$5 billion to US$10 billion.

Petrobras preferred shares closed up nearly 0.91% to BRL16.70. US-traded shares rose 2.52% to US$10.97.

Moody’s brushed off concerns about the impact of the fine on the company’s balance sheet, noting it was expected to generate about US$30 billion in cash this year and make capital investments of around US$15 billion.

“Petrobras’ liquidity position is adequate and the payment of the agreed class-action settlement amount is not a material concern,” it said.

Jeremy Lieberman, an attorney for the investors, called the deal an “excellent result” and said it was the largest ever involving a foreign securities issuer in the US.

The deal came as the US Supreme Court was set to consider on Jan 5 whether to hear Petrobras’ appeal of a lower court decision certifying the case as a class action. Petrobras said it and the investors would ask the Supreme Court to put off considering the case while the settlement awaits approval.

If the Supreme Court does take the case, it could delay its resolution for years.

US District Judge Jed Rakoff in Manhattan must still approve the accord.

Investors had sued Petrobras after prosecutors in Brazil accused executives of accepting more than US$2 billion in bribes over a decade, mainly from construction and engineering companies.

In a securities filing on Jan 3, Petrobras claimed it was a victim and denied wrongdoing, adding that it has only recovered BRL1.475 billion ($606.8 million) for itself from the Car Wash investigation.

But its market value has plunged as its central role in the scheme continues to be unwound by investigators.

Petrobras said it hoped the settlement would resolve all investor claims in the US where 13 individual lawsuits remain open, following settlements in 20 other cases.

Some claims involving non-US-based Petrobras securities purchased outside the US also still remain.

The deal came days after Brazil’s securities regulator CVM formally accused eight former Petrobras executives of corruption.

The accusations relate to possible irregularities in the contracting process for three drilling ships, according to a legal filing by the regulator on Dec 29.

Among the accused in CVM’s filing are former Petrobras CEOs Maria das Gracas Foster and Jose Sergio Gabrielli. Neither could be reached for comment.

The largest securities fraud settlements in US history include US$7.2 billion stemming from the collapse of Enron, US$6.2 billion over an accounting scandal at WorldCom and US$3.2 billion over an accounting scandal at Tyco International, according to Stanford Law School’s Securities Class Action Clearinghouse. — Reuters