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SEC Files Settled Books and Records and Internal Controls Charges Against El Paso Corporation for Improper Payments to Iraq Under the U.N. Oil for Food Program

Company Agrees to Pay $7.7 Million


Washington, D.C., Feb. 7, 2007 - The Securities and Exchange Commission today filed Foreign Corrupt Practices Act books and records and internal controls charges against El Paso Corporation, alleging that the NYSE-listed Texas energy company indirectly paid nearly $5.5 million in illegal surcharges to Iraq in connection with its purchases of crude oil from third parties under the United Nations Oil for Food Program. Between June 2001 and June 2002, El Paso purchased some 21.4 million barrels of Iraqi crude oil under fifteen contracts from third parties who participated in the Program. The Commission’s complaint alleges that 25 to 30 cents per barrel purchased by El Paso was illegally kicked back to Iraq in the form of a secret oil surcharge and that El Paso knew, or was reckless in not knowing, that illegal surcharges were made.

Linda Chatman Thomsen, Director of the Division of Enforcement, said, “The Oil for Food kickback scheme in which El Paso participated is especially troubling because it systematically diverted millions of dollars from a humanitarian program intended to alleviate the suffering of the Iraqi people, and violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act.”

Cheryl Scarboro, an Associate Director in the Division of Enforcement, said, “The books and records and internal controls provisions of the Foreign Corrupt Practices Act are important tools to combat illicit kickback schemes. Today’s action should emphasize that these activities will not be tolerated.”

Without admitting or denying the Commission’s allegations, El Paso has consented to the entry of a court order permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and ordering it to pay $5,482,363 in disgorgement of profits and a civil penalty of $2,250,000. El Paso will satisfy its disgorgement obligation by forfeiting $5,482,363 pursuant to a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York.

According to the Commission’s complaint:

The Oil for Food Program was created to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions imposed against Iraq. However, beginning in August 2000, officials of Iraq’s State Oil Marketing Organization (SOMO), began demanding illegal kickbacks in the form of surcharges on every barrel of oil sold through the Program. In September 2000, The Coastal Corporation – which merged with an El Paso subsidiary in January 2001 – received its first surcharge demand from a SOMO official. An El Paso consultant and former Coastal official arranged a $201,877 surcharge payment on the company’s behalf.

Although El Paso ceased direct purchases from SOMO afterwards, it continued its purchases through third parties. Between June 2001 and June 2002, El Paso entered into fourteen third party transactions involving fifteen contracts to purchase Iraqi oil. The third parties paid some $5.5 million in kickbacks to acquire the oil. El Paso knew, or was reckless in not knowing, that illegal surcharges were paid on those contracts and passed back to El Paso in premiums. Recorded telephone calls of El Paso officials and oil traders establish El Paso’s knowledge of the illegal surcharge scheme. El Paso failed to maintain an adequate system of internal controls to detect and prevent such payments, and El Paso failed properly to record the nature of the company’s payments.

Since being approached by the Commission’s staff, El Paso has cooperated with the Commission’s investigation, which is continuing. The Commission acknowledges the assistance of the United States Attorney’s Office for the Southern District of New York and the United Nations Independent Inquiry Committee.

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Cheryl Scarboro
Associate Director
SEC Division of Enforcement


Modified: 02/07/2007