The recent fine imposed on Petrofac by a criminal court in London for corrupt dealings is intended to send a clear message to the business community. But the real punishment suffered by the company has been inflicted by the impact of its conduct on its commercial dealings. Instead of benignly acquiescing in the receipt of exaggerated commission payments, oil and gas engineering companies in the Middle East have signalled a desire to distance themselves from the activities of a company caught up in a corruption scandal. Alignment of business practices with the United Nations’ Global Goals for Sustainable Development is the motivating factor and reflects a significant step-change.
Historically, the oil and gas engineering industry in the Middle East has attracted the payment of large secret commissions, as foreign companies vied to obtain contracts to secure a plentiful supply of fossil fuels to power their economies. Individuals and organisations who controlled access to the extraction of these fuels were perfectly placed to receive financial inducements in return for providing access. Corrupt practices were not exclusively a Middle Eastern issue. Other countries with abundant reserves of non-renewable natural resources, such as Angola, Nigeria, and Venezuela, were similarly placed.
The Petrofac case is a paradigm example of this model. David Lufkin, the company’s global head of sales, made corrupt payments involving around $50 million to obtain oil engineering contracts in Iraq and Saudi Arabia. The value of the contracts in Iraq exceeded $730 million and $3.5 billion in Saudi Arabia. On 1st October this year Lufkin was sentenced in London to 2 years imprisonment, suspended for 18 months. The company was also prosecuted for failing to prevent bribery. It was fined $64 million and a confiscation order of $31 million was made. During the hearing, the judge commented that a key feature of the case was “the complex and deliberately opaque methods used … to pay agents across borders, disguising payments through sub-contractors, creating fake contracts for fictitious services”.
The penalties were less severe than had been expected, and Petrofac’s shares increased by 17% when the sentencing hearing concluded, reaching their highest value since June 2020. The judge was heavily influenced by the fact that Lufkin and the company had co-operated with the Serious Fraud Office during the investigation, and in the case of the company it had instituted significant remedial measures to prevent the payment of bribes in the future. In addition, the judge recognised that the criminal investigation had impacted adversely on the financial state of the company. The judge accepted that the company could not afford to pay a total of more than $110 million in a fine confiscation order and prosecution costs.
This confirms the view that the real punishment inflicted on the company occurred in the Middle East and not in London.
Earlier this year, Petrofac Ltd announced that it had been notified by Abu Dhabi’s National Oil Company (ADNOC) that as a result of the corruption investigation it had been suspended from competing for new awards. This announcement followed a decision by ADNOC a year earlier to terminate $1.65B worth of contracts with Petrofac. These contracts entailed the delivery of offshore platforms and gas processing facilities for the Dalma Gas Development Project. This is a massive project off the Arabian Peninsula targeting a production capacity of more than 1.5 billion cubic feet of gas and 120,000 barrels of oil a day.
One of the problems for Petrofac is that the corruption investigation had been overshadowing the company since May 2017 when the company first appeared in the Serious Fraud Office’s sight. Shortly after the corruption probe began, Saudi Arabia’s Oil Company (Saudi Aramco) declined to award Petrofac any new contracts which would have been worth around $10 billion. In 2019, Petrofac’s total new orders had reduced approximately 70% compared with their level in 2018. To put the figures into perspective, the value of Saudi Aramco’s contracts accounted for 13.5% of Petrofac’s overall revenues in 2018.
From a Middle Eastern perspective, the withdrawal from dealings with a company embroiled in a corruption investigation is interesting and reflects a new sensitivity. Times are changing, as some of the leading countries in the Middle East begin to embrace the United Nations Global Goals for Sustainable Growth. As the name suggests, these goals, which have been developed internationally by governments, businesses, and civil societies, are directed at the promotion of economic growth in a sustainable manner. As an integral element in the delivery of this goal, paragraph 16.5 expressly references the substantial reduction of corruption and bribery in all their forms.
The response to corrupt practices in the oil and gas engineering sector in the Middle East will not change overnight. But the direction of travel is clear. Leading countries in the Middle East will shy away from companies embroiled in corruption investigations. The real punishment suffered by these companies lies in the response of the domestic markets, long before any punishment is imposed on the company by a criminal court sitting in London. Foreign companies operating in the Middle East should be aware.
Jonathan Fisher QC is a practising barrister at Bright Line Law and Red Lion Chambers in London. He is a registered practitioner in the Dubai International Financial Court.
