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Originally published Saturday, October 8, 2011 at 10:01 PM

Koch Industries has pattern of violating ethics, environmental laws

Two brothers who own Koch Industries are prominent financial backers of groups that believe that excessive regulation is sapping the competitiveness of American business.

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In May 2008, a unit of Koch Industries sent its newly hired compliance officer and ethics manager to investigate the management of a subsidiary in France. In less than a week, she discovered that the company had paid bribes to win contracts.

"I uncovered the practices within a few days," says Ludmila Egorova-Farines. "They were not hidden at all."

She immediately notified her supervisors in the U.S. A week later, Koch Industries dispatched an investigative team to look into her findings, Bloomberg Markets magazine reports in its November issue.

By September of that year, the researchers had found evidence of improper payments to secure contracts in six countries dating back to 2002, authorized by the business director of the company's Koch-Glitsch affiliate in France.

"Those activities constitute violations of criminal law," Koch Industries wrote in a Dec. 8, 2008, letter giving details of its findings. The letter was made public in a civil court ruling in France in September 2010; the document has never before been reported by the media.

Egorova-Farines wasn't rewarded for bringing the illicit payments to the company's attention. Her superiors removed her from the inquiry in August 2008 and fired her in June 2009, calling her incompetent, even after Koch's investigators substantiated her findings. She sued Koch-Glitsch in France for wrongful termination.

Koch-Glitsch is part of a global empire run by billionaire brothers Charles and David Koch, who have taken a small oil company they inherited from their father, Fred, after his death in 1967, and built it into a chemical, textile, trading and refining conglomerate spanning more than 50 countries.

Privately held Koch Industries, based in Wichita, Kan., is so obsessed with secrecy that it discloses only an approximation of its annual revenue — $100 billion a year — and says nothing about its profits.

Charles, 75, and David, 71, each worth about $20 billion, are prominent financial backers of groups that believe that excessive regulation is sapping the competitiveness of American business. They inherited their anti-government leanings from their father.

Fred was an early adviser to the founder of the anti-communist John Birch Society, which fought against the civil-rights movement and the United Nations. Charles and David have supported the tea party, a loosely organized group that aims to shrink the size of government and cut federal spending.

These are long-standing tenets for the Kochs. In 1980, David Koch ran for vice president on the Libertarian ticket, pledging to abolish Social Security, the Federal Reserve System, welfare, minimum wage laws and federal agencies, including the Department of Energy, the Federal Bureau of Investigation and the Central Intelligence Agency.

What many people don't know is how the Kochs' anti-regulation ideology has influenced the way they conduct business.

Long history

A Bloomberg Markets investigation has found that Koch Industries has a long history of being involved in improper payments to win business in Africa, India and the Middle East. Koch Industries units have also rigged prices with competitors, lied to regulators and repeatedly run afoul of environmental regulations, resulting in five criminal convictions since 1999 in the U.S. and Canada.

From 1999 through 2003, Koch Industries was assessed more than $400 million in fines, penalties and judgments. In December 1999, a civil jury found that Koch Industries had taken oil it didn't pay for from federal land by mismeasuring the amount of crude it was extracting. Koch paid a $25 million settlement to the U.S.

Phil Dubose, a Koch employee who testified against the company, said he and his colleagues were shown by their managers how to steal and cheat, using techniques they called the Koch Method.

In 1999, a Texas jury imposed a $296 million verdict on a Koch pipeline unit — the largest compensatory-damages judgment in a wrongful-death case against a corporation in U.S. history. The jury found that the company's negligence had led to a butane-pipeline rupture that fueled an explosion that killed two teenagers.

Former Koch employees in the U.S. and Europe have testified or told investigators that they've witnessed wrongdoing by the company or have been asked by Koch managers to take what they saw as improper actions.

Sally Barnes-Soliz, now an investigator for the state Department of Labor and Industries in Washington, says that when she worked for Koch, her bosses and a company lawyer at the Koch refinery in Corpus Christi, Texas, asked her to falsify data for a report to the state on uncontrolled emissions of benzene, a known cause of cancer. Barnes-Soliz, who testified to a federal grand jury, says she refused to alter the numbers.

"They didn't know what to do with me," she says. "They were really kind of baffled that I had ethics."

Koch's refinery unit pleaded guilty in 2001 to a federal felony charge of lying to regulators and paid $20 million in fines and penalties.

"How much lawless behavior are we going to tolerate from any one company?" asks David Uhlmann, who oversaw the prosecution of the Koch refinery division when he was chief of the environmental crimes unit at the U.S. Department of Justice. "Corporate cultures reflect the priorities of the corporation and its senior officials."

Koch Industries declined to make either Charles Koch, who lives near corporate headquarters in Wichita, or David Koch, who lives in New York, available for interviews.

Melissa Cohlmia, Koch's director of corporate communications, said in an emailed statement that the company has developed a good relationship with environmental regulators and now complies with all rules. Cohlmia says the company has learned lessons from past mistakes, including the improper payment scheme that Koch outlined in its letter filed in French court.

"We are proud to be a major American employer and manufacturing company with about 50,000 U.S. employees," she wrote. "Given the regulatory complexity of our business, we will, like any business, have issues that arise. When we fall short of our goals, we take steps to correct and address the issues in order to ensure compliance."

Cohlmia says Koch fired the employees and sales agents involved in the illicit payments and strengthened internal controls.

The illicit payments uncovered by Ludmila Egorova-Farines raised the specter of a new blow to the company's effort to improve its reputation after criminal convictions and civil penalties.

The company wanted to avoid a bribery scandal similar to that of Siemens AG, says Ged Horner, a managing director at Koch-Glitsch in the U.K. from 2002 until he retired in 2010.

Siemens paid $1.6 billion in penalties, admitting it had paid bribes to companies in Argentina, Bangladesh, Iraq and Venezuela.

"Koch decided that if it could happen to Siemens, it could happen to them," Horner says.

Subsidiary's problems

Koch Chemical Technology Group, a Koch Industries subsidiary run by David Koch, hired Egorova-Farines in April 2008 for the newly created position of compliance and ethics manager for Europe and Asia.

The division, which makes distillation, pollution control and water-filtration equipment, recruited her from accounting firm PricewaterhouseCoopers, where she was a consultant for four years on integrating corporate cultures after mergers. As soon as she joined Koch, the company flew her to Wichita to attend an internal compliance conference, she says.

The company then asked her to investigate Koch-Glitsch in France because it had heard that managers were awarding salary increases inappropriately, Egorova-Farines says. The company never mentioned anything about improper payments for contracts when it gave her that assignment, she says. She declines to discuss the details of her findings, saying it would be unprofessional.

The specifics of illicit payments for contracts by Koch-Glitsch can be found in two French labor court cases. The complaints were brought separately by Egorova-Farines and Leon Mausen, business director of Koch-Glitsch France from 1998 to 2008.

Koch-Glitsch fired Mausen on Dec. 8, 2008, sending him a termination letter that described illicit payments from 2002 to 2008 in Algeria, Egypt, India, Morocco, Nigeria and Saudi Arabia. In the Middle East, Koch-Glitsch paid what the termination letter describes as an exceptionally high commission of 23 percent to one of its sales agents.

"A portion of that money was intended to pay a customer's employee in order to secure the contract," Koch wrote.

The customer was an unnamed Egyptian company that was partially owned by the state. Koch-Glitsch made similar payments to win other contracts with public and private companies in Egypt and Saudi Arabia, Koch wrote in its letter to Mausen.

Koch-Glitsch gave envelopes stuffed with cash to a Moroccan company, Koch wrote in its letter. Koch-Glitsch also made an improper payment to secure a contract with a Moroccan government organization, Koch wrote. The company made similar payments to an unnamed Nigerian government agency to win contracts, Koch wrote.

Koch-Glitsch inflated its bid price to a private company in India in 2008, the letter said. A Koch employee explained the reason in an email copied to Mausen and dated Feb. 6, 2008: "Add an extra 2 percent for a third person whose name I would rather give you only on the phone at this time."

A Koch-Glitsch agent increased the commission paid to an Algerian agent in 2007 and 2008 to cover what Koch described as an unlawful payment to secure a deal with an unnamed French company.

Koch's spokeswoman Cohlmia says Koch Industries acted firmly and decisively in response to what it had learned.

In its Dec. 8, 2008, termination letter to Mausen, Koch blamed him for the illegal payments. In July 2009, Mausen sued Koch for severance and performance pay in the Arles Labor Court in southern France.

On Sept. 27, 2010, the court said Mausen hadn't acted on his own.

An appeals court in Aix-en-Provence issued a second ruling on June 14, 2011, saying the company couldn't justify terminating Mausen for the payment scheme because his managers had been aware of the practices for more than 60 days before he was fired. The court ordered Koch-Glitsch to pay Mausen 150,808 euros ($206,170).

Mausen declined to comment, beyond saying he disputed Koch's arguments in court. Ender, now a Koch-Glitsch executive in Wichita, didn't respond to requests for comment.

Koch's Cohlmia says Ender "had no knowledge of Mr. Mausen's misconduct at the time it occurred, as Mr. Mausen concealed it from him."

Lost case

As for Egorova-Farines, her career was initially on track after she exposed bribery. Koch Chemical promoted her to a permanent position after her trial period expired in mid-2008, court records show. She was dispatched to offices in Germany, Russia and Switzerland, she says.

"I worked hard to drive cultural change to make these units compliant," she says.

Egorova-Farines was hospitalized for seven weeks starting in February 2009, according to the decision in her lawsuit against Koch-Glitsch for wrongful termination.

The company fired her on June 16, 2009, saying later in court that she didn't have the skills she'd listed on her résumé and that she had failed to share documents with others at the company, according to the court record. She contested Koch's arguments.

Neither Egorova-Farines nor the labor court knew at the time that Koch had cited the company's six-year pattern of improper payments in its termination letter to Mausen, she says. The court ruled against her Feb. 11. She filed an appeal two months later in Paris.

She said in court that Koch had harassed her and retaliated against her for uncovering the payment scheme. She asked to be reinstated in her Koch job and paid for the time she was out of work. Egorova-Farines now runs a business-practices consulting firm in Paris.

Koch's Cohlmia says the labor court found that the company treated Egorova-Farines fairly and provided her with chances to perform adequately.

The payments to win contracts documented by Koch investigators may violate U.S. law, says Sara Sun Beale, a professor at Duke Law School in Durham, N.C. She says Koch's termination letter to Mausen gives clear guidance to federal prosecutors.

"It sounds like a smoking gun," says Beale, who co-authored "Federal criminal law and its enforcement." "It really should get the Justice Department's attention. When you have a smoking gun, you launch an investigation."

Such a probe would fall under the Foreign Corrupt Practices Act, a 1977 law that makes it illegal for companies and their subsidiaries to pay bribes to government officials and employees of state-owned companies.

Justice Department spokeswoman Laura Sweeney says the agency won't confirm or deny the existence of any investigation.

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