In May 2008, a unit of Koch Industries Inc., one of the world’s largest privately held companies, sent Ludmila Egorova-Farines, its newly hired compliance officer and ethics manager, to investigate the management of a subsidiary in Arles in southern 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,” Egorova- Farines says. “They were not hidden at all.”
She immediately notified her supervisors in the U.S. A week later, Wichita, Kansas-based 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.
Obsessed with Secrecy
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.
Koch Industries is obsessed with secrecy, to the point that it discloses only an approximation of its annual revenue — $100 billion a year — and says nothing about its profits.
The most visible part of Koch Industries is its consumer brands, including Lycra fiber and Stainmaster carpet. Georgia- Pacific LLC, which Koch owns, makes Dixie cups, Brawny paper towels and Quilted Northern bath tissue.
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.
Abolishing Social Security
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 political ideology has influenced the way they conduct business.
A Bloomberg Markets investigation has found that Koch Industries — in addition to being involved in improper payments to win business in Africa, India and the Middle East — has sold millions of dollars of petrochemical equipment to Iran, a country the U.S. identifies as a sponsor of global terrorism.
The ‘Koch Method’
Internal company documents show that the company made those sales through foreign subsidiaries, thwarting a U.S. trade ban. 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.
Refused to Falsify
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, who’s 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.”
Melissa Cohlmia, Koch’s director of corporate communications, said in an e-mailed 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.
‘Steps to Correct’
“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.
Regarding sales to Iran, she wrote, “During the relevant time frame covered in your article, U.S. law allowed foreign subsidiaries of U.S. multinational companies to engage in trade involving countries subject to U.S. trade sanctions, including Iran, under certain conditions.”
Koch has since stopped all of its units from trading with Iran, she says.
The Koch brothers have vaulted into the American political spotlight in recent years. Koch Industries has spent more than $50 million to lobby in Washington since 2006, according to the Center for Responsive Politics, a nonpartisan group that tracks political donations. The company opposed derivatives regulation and greenhouse gas limits.
The brothers have backed a foundation that has trained thousands of Tea Party activists. The Tea Party, a popular movement whose name stands for Taxed Enough Already, has grown into a potent force in national politics. Sixty representatives of Congress, out of a total of 435, identify themselves as Tea Party members. Virtually every Republican candidate for president — including Texas Governor Rick Perry and Minnesota Congresswoman Michele Bachmann — has solicited the group’s support.
Integrity and Compliance
Koch Industries’ political action committee, KochPAC, donated $50,000 to Texans for Rick Perry last year for his gubernatorial campaign, according to the Texas Ethics Commission. It has also donated to support Bachmann’s congressional campaigns, Federal Election Commission records show.
The company tells all of its employees around the world that its top two values, which it calls Guiding Principles, are integrity and compliance. Koch Industries and its subsidiaries have won 436 awards for safety, environmental excellence, community and customer service and innovation since January 2009, Cohlmia says.
The U.S. Occupational Safety and Health Administration has recognized several of the company’s units for their commitment to the workplace, the company says. Koch Industries has also supported charitable causes in Wichita and beyond, including the Kansas Special Olympics and Big Brothers Big Sisters. The company has also helped enlistees in the U.S. Army Reserve.
Koch Industries has donated millions of dollars to the Nature Conservancy, the Red Cross, the Salvation Army and victims of the March 11 earthquake and tsunami in Japan.
Reputation is Critical
David Koch has contributed more than $135 million to cultural institutions, including Lincoln Center for the Performing Arts in New York and the Smithsonian’s National Museum of Natural History.
Koch Industries zealously guards its public image.
“A company’s reputation is critical to how it will be treated by others and to its long-term success,” Charles Koch wrote in “The Science of Success: How Market-Based Management Built the World’s Largest Private Company” (Wiley, 2007). “We must build a positive reputation based on reality, or others will create one for us based on speculation or animus and we won’t like what they create.”
The illicit payments uncovered by Ludmila Egorova-Farines raised the specter of a new blow to the company’s effort to improve its reputation following criminal convictions and civil penalties.
The company wanted to avoid a bribery scandal similar to that of Siemens AG (SIE), says Ged Horner, a managing director at Koch-Glitsch in the U.K. from 2002 until he retired in 2010.
“The only thing that would seriously impact the profitability and continuity of Koch Industries was a compliance issue,” Horner says.
In November 2006, the U.S. Department of Justice and German prosecutors opened an investigation into bribery by Munich-based Siemens, Europe’s largest engineering company. Siemens and three of its subsidiaries pleaded guilty in December 2008 to charges of violating the U.S. Foreign Corrupt Practices Act from 1998 to 2007.
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.
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 LLP, 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 Blamed Employee
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 e-mail 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.
“It was not Mr. Mausen alone who was giving authorizations,” the court wrote.
Company policy required approval from other Koch-Glitsch managers, including Christoph Ender, the president of Koch- Glitsch for Europe and Asia, the court said.
‘Without Doing Due Diligence’
“Ender, manager of Koch-Glitsch France, as well as the controllers and auditors who were assisting him, allowed such business practices developed with Mr. Mausen to continue without doing due diligence in their reviews concerning the payment of commissions and the final beneficiaries of said commissions,” the labor court wrote.
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, who is 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.”
Initially On Track
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 resume 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 on Feb. 11. She filed an appeal two months later in Paris.