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Global Witness: Corruption allegations at Shell and Eni raise the stakes on Descalzi AGM vote

Forthcoming AGM is a litmus test, says NGO

On 13 April Eni CEO Claudio Descalzi will stand for reappointment at the company’s 2017 AGM. What might have once been a routine vote has, because of recent legal developments, been transformed into a test of both shareholder attitudes to corruption and to the Italian major’s questionable handling of boardroom intrigue. For just one week later, Descalzi along with his predecessor, Eni’s current COO Roberto Casula, and the company itself, will face a preliminary hearing to determine whether they should stand trial for corruption.

On 8 February, Italian prosecutors requested that Shell, Eni and several Eni senior executives including Descalzi, be sent to trial for alleged international corruption offences over the 2011 purchase of the Nigerian OPL 245 oil block. Shell, Eni and Descalzi have all denied the charges. The prosecutor claims that $1.1bn of the money paid by Shell and Eni to a Nigerian government escrow account was, with the knowledge of those charged, transferred to a company controlled by a former oil minister who had previously awarded the block to his own company and then used the money to pay bribes to Nigerian government officials (i). The prosecutor further alleges that money was also channelled to Eni and Shell executives in the form of kickbacks, with $50 million in cash delivered to Casula’s home. In addition Nigerian law enforcement recently added charges of ”official corruption” against both Eni and a Shell subsidiary for their payments in the deal (ii) .

Eni’s board is standing firmly behind its CEO confirming in February its “total confidence” in his innocence and their “upmost support for him as CEO” (iii). But will shareholders reappoint a CEO with so many questions over his alleged involvement in corruption outstanding? And, will they question why the same rules don’t seem to apply to the CEO as to other directors facing unrelated allegations who have been suspended from certain board positions pending completion of investigations?

Regardless of the shareholder vote result, the corruption allegations carry material risks for Eni and Shell. The companies face the permanent loss of an oil block (already temporarily seized by Nigerian authorities pending its own investigation) (iv) which, if estimates prove accurate, would increase Shell’s proven global oil reserves by a third, and add two thirds to Eni’s. Shareholders should also challenge the companies on what steps have been taken to improve anti-corruption policies to prevent similar problems in future. In the case of Eni, the company’s treatment of Descalzi stands in sharp contrast to actions taken against the independent director Karina Litvack. This raises questions regarding the consistency of the board’s approach to allegations of director misconduct.

The alleged corrupt purchase of OPL 245
In 2011, Nigerian subsidiaries of Shell and Eni paid US$1.3bn for OPL 245. Only around $200m, paid as a “signature bonus” went to the Government of Nigeria though. $1.1bn was paid by the companies to an account created at JP Morgan by Nigerian government officials who, together with Shell and Eni had arranged a separate agreement to transfer the money to Malabu Oil and Gas (Malabu), a company widely believed at the time of the payments to be controlled by convicted money-launderer and former oil minister Chief Dan Etete. In July 2013, a British High Court ruled that Etete was indeed the owner of Malabu (v). As Etete had awarded the oil block to Malabu whilst oil minister, he had effectively given himself one of the most lucrative oil blocks in Nigeria.Shell and Eni deny paying any money to Malabu. However, court proceedings in London, leaked Shell and Eni emails including minutes of their negotiating meetings and other evidence seen by Global Witness reveal that in reality Shell and Eni were aware and in agreement that the deal was for the benefit of Malabu (vi), knew that Etete was likely the owner of Malabu, and their executives had even met with him face-to-face on several occasions.

Due diligence reports commissioned by Eni during the negotiation process prove that the company knew about Etete’s involvement from the early stages. A 2007 report states that Malabu is “controlled by the former petroleum minister, Dan Etete. The company was awarded OPL 245 by the Abacha administration, while Etete was still petroleum minister”, while the 2010 report is even more explicit: “whatever the formal ownership structure of Malabu, all of the sources to whom we have spoken are united in the opinion that Dan Etete is the owner of the company” (vii).

Yet incredibly Eni has previously denied any knowledge of Etete’s involvement when asked. In response to a question from Global Witness at its 2014 AGM the company, in its written answer, replied that “no clear evidence was found during the preliminary audits conducted by the Eni legal department under the anti-corruption procedures, particularly in relation to his [Etete’s] connection with the company”. Given the due diligence reports’ explicit references to Etete, it was put to Eni that they had lied to their investors about their knowledge of Etete’s involvement in Malabu. Eni did not respond (viii).

Shell is also squarely in the frame. There is strong evidence (in the form of email correspondence read out in 2013 court proceedings in London) that Shell managers were in direct contact with Etete during the negotiation of the deal and worked with others at Shell’s Hague headquarters to decide how much to offer him in order to get this lucrative deal (ix). Shell continues to deny any wrongdoing and stated that it doesn’t “believe a request for indictment is justified,”

Inconsistent treatment of directors

In 2015 Eni commissioned an external audit of the OPL245 deal from U.S. law firm Pepper Hamilton which it has shared with investigators and which it claims did not find evidence of illegal conduct. However, Eni has not released the investigation’s terms of reference nor its detailed findings, and originally even refused to confirm the name of the law firm. But the company has admitted that none of the Eni staff under investigation – including Descalzi and Casula – were even interviewed, which begs questions around the validity of the audit (x). Eni has not disclosed what steps (if any) it has taken to examine the executives’ involvement in the OPL 245 deal. At no time – during its own or the Milan prosecutor’s investigation – has the board seen fit to suspend or restrict the role of the relevant executives.

This approach stands in marked contrast to steps taken by the board against one of its independent directors – shareholder appointee and anti-corruption expert, Karina Litvack. In July 2016, Litvack was removed from Eni’s board-level Control and Risk Committee following media reports that she was the subject of a preliminary investigation by prosecutors for defamation of Descalzi. In a statement at the time, the company said “The board has taken this decision only to safeguard the company from the risks of possible conflicts of interest until the closing of the investigation, remaining the presumption that Director Litvack has not been involved in the facts under investigations,” (xi).
The same week it was reported that the company had made changes to its risk management functions, including placing the department under the direct control of Descalzi (xii).

The board’s refusal to even interview senior executives now facing criminal charges for corruption while removing an independent director from a key board committee ostensibly to avoid any possible conflicts of interest, is at best inexcusably inconsistent and at worst could arguably be perceived as the company attempting to remove any dissenting voices.

The need for mandatory transparency

The purchase of OPL 245 also highlights the risks to companies and shareholders more broadly from a lack of transparency around company payments to governments on a project level basis and the ultimate beneficial ownership of companies.

The corrupt money trail only came to light because a middleman who had acted for Malabu in negotiations with Eni, sued Malabu through the UK commercial court for fees he claimed he was owed for his cut of the sale of OPL 245.

Global Witness and others – including investors with over $9.8 trillion in assets under management (xiii) – have long called for laws requiring extractive companies to disclose their payments to governments on a project level basis. Had such laws been in place at the time, the OPL 245 scandal would almost certainly not have happened.

The laws enacted since then to prevent opaque money trails from companies to governments and onwards to corrupt officials are now under threat. Investors should be troubled by the voiding on 14 February, following intense and prolonged oil industry lobbying led by Exxon and Chevron, of an SEC rule (known as the Cardin-Lugar rule). This rule would have required oil, gas and mining companies to disclose in detail the payments they make to foreign governments at the individual project level such as in the OPL deal.Investors should expect and counter extractive industry lobbying to attempt to undermine the corresponding EU, Norwegian and Canadian legislation following the US reversal. The European Commission has however indicated that Europe has no plans to weaken its own rules.

Given the risks highlighted by Shell’s and Eni’s current predicaments, investors should continue to demand company disclosures of payments to governments on a project level basis, push-back on industry efforts to dismantle such risk-mitigation laws, and voice their support for such measures.

For shareholders in Shell and Eni, many crucial questions remain unanswered in relation to what the companies knew and when they knew it about the money trail for their purchase of OPL 245.

So far, Shell’s response has been to deny all allegations while avoiding providing any detail on the individual allegations in their answers.

The company has not acknowledged a problem, telling shareholders that their involvement in the deal did not represent a risk at one AGM, a statement that now stands in sharp contrast to the criminal charges they now face at the hands of Italian prosecutors. Shell shareholders must ask what it would take for the company to account for its behaviour rather than appear to bury its head in the sand. Until Shell re-evaluates its actions it cannot appreciate the risks the company faces from other deals in a similar mould the company may have done. At Eni the consequences of the deal are now palpable and immediate, with investors facing a looming decision over the company’s leadership.

With criminal charges being pursued, the upcoming vote on Descalzi’s reappointment represents a litmus test of institutional investors’ commitment to the highest standards of corporate governance. As such they should take a strong stand in favour of transparency and vote ‘against’ Descalzi’s reappointment.

Barnaby Pace is an Oil Campaigner at Global Witness. Please see overleaf for footnotes:
Footnotes:

(i) Public Prosecutor of Milan, Notification of completion of preliminary investigations, http://www.ilfattoquotidiano.it/2016/12/22/tangenti-eni-nigeria-latto-daccusa-della-procura-50-milioni-consegnati-in-contanti-per-amministratori-e-dirigenti/3277349/
(ii) High Court of Federal Capital Territory, 2 March 2017, Federal Republic of Nigeria and SNEPCO, Charge Sheet
(iii) Eni Press Release, 8 February 2017, https://www.eni.com/en_IT/media/2017/02/enis-board-of-directors
(iv) EFCC Statement, 26 January, 2017, https://efccnigeria.org/efcc/news/2287-court-orders-forfeiture-of-malabu-oil-block
(v) Approved Judgement, Case 2011 FOLIO-792, 17 July 2013.Energy Venture Partners vs Malabu Oil and Gas Limited.

(vi) Global Witness, Leaked emails show how shell and Eni conspired to hide payment to former oil minister’s company in corrupt OPL 245 deal, 18 December 2015 https://www.globalwitness.org/en/press-releases/leaked-emails-show-how-shell-and-eni-conspired-hide-payment-former-oil-ministers-company-corrupt-opl-245-deal/
(vii) Risk Advisory Group, March 2007, Due diligence report for Eni, p2, Risk Advisory Group, April 2010, Due diligence report for Eni, p5

(viii) Global Witness, 13 May 2015, “Eni appears to have misled shareholders over Nigeria corruption scandal at 2014 AGM”, https://www.globalwitness.org/en/blog/eni-appears-have-misled-shareholders-over-nigeria-corruption-scandal-2014-agm/(ix) Email from John Copleston of Shell to Ednan Ageav read out in court. UK High Court, Queen’s Bench Division, Commercial Court, Case 2011 FOLIO-792 , Energy Venture Partners Versus Malabu Oil and Gas, Transcript of Hearing 28/11/2012
(x) Global Witness, 13 May 2016, Eni’s board accused of misleading investors at AGM over “smash and grab” Nigeria deal under investigation in Nigeria, Italy, Netherlands and USA, https://www.globalwitness.org/en/press-releases/enis-board-accused-misleading-investors-agm-over-smash-and-grab-nigeria-deal-under-investigation-nigeria-italy-netherlands-and-usa/ ; Eni, Minutes of Ordinary Shareholders meeting 12 May 2016, https://www.eni.com/docs/en_IT/enicom/company/governance/minutes-of-the-shareholders-meeting-with-questions-and-answers-before-the-2016-shareholders-meeting.pdf
(xi) Eni, 29 July 2016, “Eni: the Board of Director approves the replacement of a Director in the Control and Risk Committee”, https://www.eni.com/docs/en_IT/enicom/media/press-release/2016/07/PR_Eni_29_07.pdf
(xii) Upstream, 29 July 2016, “Eni makes corporate changes”, http://www.upstreamonline.com/live/1180429/eni-makes-corporate-changes
(xiii) Publish What you Pay, 8 March 2016, https://www.sec.gov/comments/s7-25-15/s72515-61.pdf