#24 - JRL 7187
Washington Times
May 17, 2003
Oil scandal hits Kazakhstan
By Christopher Pala

ALMATY, Kazakhstan — An international corruption investigation is sending shock waves through the oil industry here, experts say.

James H. Giffen, an American counselor to President Nursultan Nazarbayev of Kazakhstan, was arrested March 30 and accused of funneling $60 million in oil commissions into his boss' secret Swiss bank accounts and another $17 million into the accounts of the country's then-top oil official. He was released on bail pending trial expected to start next January.

In Kazakhstan, the accusations detailed in the indictment, though published in the opposition press, are being met largely with indifference, while in Switzerland, an investigation into the case's money-laundering aspects is continuing apace.

The investigation, said Scott Horton, a Columbia University law professor who advises oil companies on Central Asia, appears to be the biggest ever undertaken under the 1977 Foreign Corrupt Practices Act (FCPA).

The act, used mostly to prosecute arms deals, forbids U.S. citizens and companies from paying bribes to obtain contracts.

Mr. Horton also called it "one of the most significant criminal investigations of any sort" involving the oil industry. He and other legal experts say the main purpose of the prosecutions is to show companies what the Justice Department considers acceptable under the act and what it does not. They say the line may well be moved as a result of the prosecution.

The investigation began in Belgium — at the request of Mr. Nazarbayev, ironically, who was seeking to tarnish Akezhan Kazhegeldin, a former prime minister and rival who is now in exile. The trail led to Switzerland, where evidence of possible improper payments by oil companies was passed on, starting in June 2000, to U.S. prosecutors in New York.

The investigation, whose targets include Mobil Oil Co., now a unit of Exxon Mobil, is still under way in the U.S. Attorney's Office in New York, a spokesman there said in a telephone interview.

According to the indictment, between 1995 and 2000 Mr. Giffen received $138 million in bonuses and commissions from major oil companies, of which he is accused of having passed on some $60 million to the president and $17 million to Nurlan Balgimbayev, formerly head of the state oil company Kazakhoil, and later the prime minister. Mr. Balgimbayev is now out of politics.

The indictment does not name them, but biographical and other details make it easy to recognize Mr. Nazarbayev as what the indictment calls "Kazakhstan Official 2" and Mr. Balgimbayev as "Kazakhstan Official 1."

Meanwhile, about a dozen accounts controlled by Mr. Giffen, Mr. Nazarbayev and Mr. Balgimbayev — holding an amount of money between $110 million and $150 million — are still frozen as the probe continues, a Swiss source said.

According to the U.S. indictment, the companies paid the bonuses to secure access to Kashagan, the world's fifth-largest oil field; to Tengiz, the sixth-largest; to the Caspian Pipeline Consortium, which carries Tengiz crude to the Russian coast of the Black Sea; and to Karachaganak, a large gas-condensate field.

In all, these companies plan to invest some $30 billion over the next two decades — dwarfing the amounts involved in the purported kickbacks — to triple Kazakhstan's oil pumping from the current 1 million barrels per day. This would make the country, which stretches from Europe to China, one of the world's top four or five exporters. Kazakhstan's oil deposits are thought to be about the size of those in the North Sea.

That the scandal took place in Kazakhstan is not unexpected, experts say. Only here have so many new contracts for so many new oil fields been signed in the past decade.

This country's vast reserves are so difficult to extract that Soviet oilmen ignored them for easier-to-exploit deposits in Siberia. And they were signed with a new government in the midst of multiple economic crises and already riven with corruption.

The companies that negotiated these deals are Mobil; Chevron Corp., now Chevron Texaco; Total, now TotalFinaElf; Royal Dutch Shell; British Gas; Amoco, now BP; and Philips Petroleum, now Conoco Philips.

In a separate indictment resulting from the same investigation, Bryan Williams, a former Mobil executive, has been charged with failing to pay taxes on a purported $2 million kickback.

"The anxiety level at Exxon Mobil is pretty much off the chart," said a source close to the world's largest publicly traded oil company.

Another source observed: "Everybody is keen to know what's going on with the prosecution, but nobody wants to betray the depth of his company's interest."

There is much speculation that Mr. Giffen and Mr. Williams may decide to cooperate with the prosecution and provide information that could lead to more indictments in exchange for lenient sentences.

Mr. Giffen is charged with, among other things, 33 counts of money laundering and eight of violating the FCPA. He faces several 20-year prison sentences and forfeiture of $84 million. Mr. Williams, charged with tax evasion, faces fines and up to three years in prison.

The indictment charges that by making these payments, Mr. Giffen, who served as Mr. Nazarbayev's gatekeeper on oil matters for most of the past decade, not only defrauded Kazakhstan out of millions of dollars, but "defrauded the people of Kazakhstan out of the honest services of its officials."

But in Kazakhstan, there has been little indignation.

Under Mr. Nazarbayev's ambivalent notion of press freedom, which he often proclaims is the law of the land, the mainstream media know that to report on issues involving the corruption of the president or his family is to invite official prosecution — insulting the dignity of the president is a crime — and harassment from government agencies, particularly the tax police.

As a result, the mainstream media have not reported Mr. Giffen's arrest, nor the accusations contained in the indictment.

The opposition press, which includes several weeklies available at newsstands around the country, has reported the story, but with little impact.

"Even when these papers tell the truth, no one fully believes them, because everyone thinks they are just the mouthpieces of fat cats who just want power for themselves," lamented a banker who is sharply critical of the president and asked not to be identified.

Part of the lack of interest is that corruption — which, in contrast with the situation in Russia, does not involve killings — is so pervasive as to be considered normal.

"We are a society of thieves," said Nurbulat Massanov, a historian and prominent dissident.

Besides, life is good and the economy is booming.

The country's economy recorded nearly 10 percent growth per year over the last four years and the percentage of people living below the poverty level has fallen from 42 percent in 2000 to 28 percent in 2003, according to the United Nations.