Keppel Offshore and Marine fined an astronomical amount for alleged bribery

By December 26, 2017Current

TL;DR – Damned if you do, damned if you don’t.

Imagine this scenario: Oil prices are high, which result in large state-owned Brazilian businesses paying good money to build oil rigs. That attracts a lot of large companies to compete for those contracts.

In an ideal world, the company that provides the best products and services will get the business and make good profits.

However, the real world doesn’t always work like that. In the real world, there are times when contracts are not awarded based on the quality of your products and services. Sometimes, it depends on how well you treat the person you are negotiating with. Specifically, it depends on how much you are paying that person.

So if you are a large offshore oil and gas company that builds oil rigs,  and you want to win some of the contracts in Brazil, what would you do in a world where money talks louder than competence and experience? If all you have done is a Powerpoint presentation and submitted some proposals, then no matter how great your oil rigs are, you probably won’t land the deal.

What if the only way you stand a chance is if you’re willing to take the risk and grease the palms of the people you are negotiating with?

So, Keppel Offshore & Marine allegedly bribed Brazilian officials

According to US court documents, that’s what Keppel Offshore & Marine (KOM) had done. KOM’s executives created and executed agreements on behalf of the company with consulting firms controlled by a consultant. Through these agreements, money was transferred into bank accounts in the US and elsewhere in the names of shell companies controlled by the consultant. That money was then transferred from those bank accounts in the US to bank accounts outside the US controlled by or for the benefit of Brazilian and party officials.

That’s right.

In essence, KOM was bribing Brazilian and party officials. For example, KOM executives as well as an executive of a KOM unit in Brazil authorised the consultant during several phone calls to pay 1 per cent of the contract value as bribes in response to a demand from a Brazilian official. It was reported that the consultant eventually paid about US$14.4 million (S$19.3 million) in bribes to the Brazilian official and other related parties.

The allegations that KOM was bribing Brazilian officials first arose in 2015. KOM carried out its own investigations. The consultant was arrested in February of 2017.

That was after Mr Pedro Jose Barusco, a former Petrobras executive, gave testimony to Brazil’s federal police in exchange for leniency, and made the allegations against the consultant. An international investigation was then launched by criminal authorities of US, Brazil and Singapore into KOM’s alleged bribery scheme.

Massive fines

The investigations seem to have been completed. KOM has reached a global resolution with the criminal authorities of US, Brazil and Singapore. As part of the resolution, KOM will pay fines amounting to US$422.2 million (S$570 million).

That resolution is unprecedented for a Singaporean company.


 

This case has some implications on Singapore.

There is concern that this case will dent Singapore’s squeaky clean reputation. However, we think that’s less of a concern. KOM is, ultimately, a commercial company. The government isn’t involved in the day-to-day operations and decisions of KOM. We’re pretty certain the government wasn’t consulted on the strategies of winning contracts and getting businesses. So the government wasn’t involved in the decision to bribe Brazilian officials.

Of greater concern is perhaps how the fine will affect the financial position of Singapore. KOM is a subsidiary of Keppel Corporation. The fine will definitely affect Keppel Corporations earnings. Had the fines been imposed on Jan 1, 2016, the earnings per share for the 2016 fiscal year would have dropped from 43.2 cents to 11.7 cents. Will KOM be able to bounce back?

But exactly how badly will the fine affect the dividends of Keppel Corporation?


 

No one really knows for sure yet. Keppel said in a statement that it would make provision for the fines in the current financial year, but that the impact on its profit-and-loss statement is a “one-off” and it will “ringfence” the penalty when considering this year’s final dividend.

That said, because the fine is so large, dividends will definitely be negatively affected. Given that Temasek Holdings has a significant stake in Keppel Corporations, this fine will affect Temasek’s revenue and portfolio. That, in turn would affect the net investment returns contribution that the government can use for our budget. The question is to what extent and how much is the impact?

That’s business for you…

At the end of the day, KOM was caught between a rock and a hard place. And no, we are not saying it’s OK to bribe since everyone’s doing it. We’re acknowledging that in some markets and in some countries, bribery still exists.

While bribery is wrong, if KOM didn’t do it, it won’t get the business, then its revenue and profits would be terrible. Singaporeans might then start complaining about how useless KOM is etc etc. So it had to do whatever it can to get business. But that meant bribing people. It was a risk it decided to take. And it got caught for it. And now it has to pay the price. Dearly.

That is, unfortunately, the reality of doing business. Sometimes being squeaky clean doesn’t win the game. But if you play a little dirty and by the rules of the market you’re operating in, then you run the risk of getting caught.

Perhaps the real question to ask is whether or not to even operate in markets where such practices are common.
 

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Jake Koh

Author Jake Koh

Recovering sushi addict, I'm a man of mystery and power, whose power is exceeded only by his mystery.

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