Chevron has been under investigation by the Justice Department, the Securities and Exchange Commission and other federal authorities regarding a series of transactions with oil traders believed to have paid $20 million in illicit surcharges to the Iraqi government under the United Nations' Oil-for-Food program.
Investigators did not allege that San Ramon, Calif.-based Chevron paid kickbacks to Saddam's government directly.
Chevron neither admitted nor denied guilt. But it is not disputing the government's claims that it failed to take adequate action to ensure its employees steered clear of oil deals with companies suspected of paying kickbacks.
"The settlement recognizes that certain third-party merchants from which Chevron purchased Iraqi crude oil paid illegal surcharges to the government of Iraq," said Kent Robertson, a spokesman for Chevron.
The U.N.'s Oil-for-Food program was designed to allow Iraq — then under international sanctions imposed after Saddam's 1990 invasion of Kuwait — to sell oil to provide food and medicine to a needy populace.
If the program had operated as intended, all proceeds would have been kept out of the hands of Saddam's regime. But under the program, the U.N. allowed Iraq to select its oil customers.
And starting in 2000, Iraq's State Oil Marketing Organization began insisting all oil buyers pay secret surcharges of 10 cents to 50 cents a barrel.
Hearing reports of Baghdad's surcharge demands, Chevron put safeguards in place that were supposed to ensure the company did no business with entities willing to flout U.N. rules, according to court documents filed by the SEC.
Traders were required to obtain written approval in advance from Chevron's director of global crude trading before purchasing Iraqi oil.
Managers also were supposed to review each proposed Iraqi oil deal to ensure no surcharges would be paid.
The government alleged those internal controls failed.
Between April 2001 and May 2002, Chevron entered into 36 contracts with third parties to purchase 78 million barrels of Iraqi crude on which illegal surcharges were paid, investigators alleged.
The government contends $20 million was funneled to Saddam's regime, and that Chevron earned $25 million in profits on oil purchased in those transactions.
Government investigators say Chevron conducted a credit check on one Swiss-based oil seller, discovering the company had "no experience in the oil business, no real business operations and had no known assets," federal officials alleged.
Employee's bosses
An unnamed Italian firm that sold oil to Chevron said one company trader, as well as that employee's bosses, knew about the surcharges, SEC officials said in their filing.
"At one point the Chevron trader asked the third-party seller to persuade Iraq to reduce the amount of its surcharges," SEC officials said in their filing.
That trader no longer works for Chevron, the company said.
Federal authorities did not identify the third parties involved in the transactions.
The Volcker report
A 2005 report by a special United Nations panel led by former Federal Reserve Chairman Paul Volcker pointed to a Belarus-based company called Belmetalenergo, which purchased 21.6 million barrels of Iraqi crude.
The Volcker report said Belmetalenergo's oil purchases were financed by Chevron and Houston-based BayOil, "which took care of all necessary arrangements and paperwork and subsequently purchased oil from Belmetalenergo."
Chevron financed five "liftings" of Iraqi crude, while BayOil financed three, the report said. Belmetalenergo eventually paid $2.9 million in surcharges to the Iraqi regime in connection with its oil contracts, the Volcker report said.
Asked about Chevron's dealings with Belmetalenergo, Chevron's Robertson referred questions to the U.N.
A U.N. spokeswoman said she could not comment beyond what's in the Volcker report.
In August, BayOil owner David Chalmers, accused of paying surcharges to the regime, pleaded guilty to one count of conspiracy, while fellow BayOil official Ludmil Dionissiev pleaded guilty to a smuggling charge.
Houston oilman Oscar Wyatt also faced charges alleging he paid surcharges to buy Iraqi oil. He pleaded guilty to one count of conspiracy three weeks into his trial in September.
Wyatt, Chalmers and Dionissiev are scheduled to be sentenced later this month.
Chevron is the latest of several companies to reach agreement with federal officials regarding their participation in the Oil-for-Food program.
In February, Houston-based El Paso Corp. agreed to pay more than $7.7 million to settle claims that it indirectly paid surcharges to the Iraqi regime. The company did not admit or deny guilt.
