Category Archives: Special Reports

Special Report: Chavez’s oil-fed fund obscures Venezuela money trail

By Brian Ellsworth and Eyanir Chinea
MACAPAIMA, Venezuela | Wed Sep 26, 2012 7:16am EDT

(Reuters) – The site of what may someday be Venezuela’s first newsprint factory today consists of little more than a warehouse, several acres of cleared tropical savannah, and two billboards bearing pictures of President Hugo Chavez.

More than five years after Chavez first hailed state-owned Pulpa y Papel CA as a vanguard “socialist business,” there is little else to show here in rural southeastern Venezuela for the more than half a billion dollars that state investment fund Fonden set aside for the project.

As with many Fonden investments, tracking the money sent to Pulpaca, as the project is known, is difficult. A Pulpaca annual report for 2011 said the project was stalled for lack of funding. A manager at the dusty gates of the compound declined to comment. So did contractors involved. Requests for interviews with the industry ministry, charged with disbursing Fonden money for such projects, went unanswered.

Fonden is the largest of a handful of secretive funds that put decisions on how to spend tens of billions of dollars in the hands of Chavez, who has vowed to turn the OPEC nation’s economy into a model of oil-financed socialism. Since its founding seven years ago, Fonden has been funneling cash into hundreds of projects personally approved by Chavez but not reviewed by Congress — from swimming-pool renovations for soldiers, to purchases of Russian fighter jets, to public housing and other projects with broad popular appeal.

The fund now accounts for nearly a third of all investment in Venezuela and half of public investment, and last year received 25 percent of government revenue from the oil industry. All told, it has taken in close to $100 billion of Venezuela’s oil revenue in the past seven years.

Fonden attracts scant attention beyond policy experts and Wall Street analysts. But it is at the heart of Chavez’s promise to use Venezuela’s bulging oil revenue to build new industries, create jobs and diversify the economy in the service of his self-styled revolution.

Finding out how much of that money Fonden has spent, and on what, is not easy. The most detailed descriptions usually come from Chavez himself, rattling off multimillion-dollar investments on television while chatting with workers and extolling the virtues of socialism. Fonden does not regularly release lists of projects in its portfolio.

Adversaries excoriate it as a piggy bank that lets Chavez arbitrarily spend billions of dollars with little more than the stroke of a pen and perhaps a celebratory Tweet, with accountability to no one. The secrecy also makes it impossible to determine what went wrong – at Fonden, or at the ministry level, or on the ground — when a project like Pulpaca stalls.

“I’m shocked that we don’t know exactly what has happened to $105 billion,” said Carlos Ramos, an opposition legislator who has led a campaign to extract more information about the fund from the finance ministry. “That is not Chavez’s money. That money belongs to 29 million Venezuelans and as such the information should be available to everyone.”

Critics point out that since Fonden’s creation, Venezuela’s economy, rather than becoming more diversified, is even more dependent on its mainstay: In the first half of this year, oil accounted for 96 percent of export earnings, compared with about 80 percent 10 years ago.

The perception of secrecy has left investors unsure how to measure Venezuela’s fiscal strength. Fitch Ratings this year warned it could downgrade the country’s debt, in part because of transparency concerns. Those same concerns are also helping push up borrowing costs. Despite Venezuela’s ample oil wealth, yields on the country’s bonds are nearly equal to those of impoverished Pakistan, and higher than war-ravaged Iraq’s.

“The visible portion that we can compare in Venezuela vis-à-vis other countries has declined considerably,” said Erich Arispe, director in Fitch Ratings Sovereign Group. “I can’t rate what I can’t see.”

CONTROL THE PURSE STRINGS

Chavez’s control over the country’s purse-strings — unprecedented for any Venezuelan president in more than 50 years — will be a key advantage in his bid for re-election on October 7. Projects successfully executed with billions of dollars in Fonden financing — housing, hospitals and public transportation lines — have improved the lot of Venezuela’s poor, many of whom are already fans of Chavez’s leadership.

“It’s magnificent. It means we can have access to health care, education. All of this is for the people,” said Domingo Gonzalez, 58, after being treated for hypertension at a new Caracas hospital funded by Fonden. “People say Chavez is throwing the money away, but that’s obviously a lie, because otherwise we wouldn’t have hospitals like this one,” he said at the hospital gate near the slum of Petare, where middle-class Caracas merges with a chaotic jumble of narrow winding streets and ramshackle homes.

At the same time, Chavez is under growing opposition fire over abandoned or half-built projects, including some that received millions of dollars from Fonden. A fleet of modern busses for a transit project in the city of Barquisimeto, which received $301 million from Fonden, were left sitting idle so long that vines started growing inside them.

Some information about Fonden’s outlays can be found in annual reports of government ministries. The finance ministry last year released a partial list of projects, following pressure by Ramos, the opposition legislator. A link on Fonden’s website apparently dating from 2007 also provided a partial list of projects, but was taken offline in the first week of September. A cryptically worded internal Fonden document leaked to the press provides an outline of its financial investments, though it omits key details, such as losses on holdings.

Other publicly available data is provided at irregular intervals and in formats that often do not allow for comprehensive comparisons. Public officials pressed for additional information are as laconic as Chavez is loquacious. A Reuters reporter at a Fonden event who approached the finance minister — the fund’s president – to ask questions was physically restrained by two security personnel.

CENTURY OF PLUNDER

Venezuela’s public finances have never been particularly transparent, and much of the oil industry’s proceeds have been squandered for more than 100 years.

Early 20th century dictator Juan Vicente Gomez passed out concessions to friends while enriching himself. The country became known as “Saudi Venezuela” during the 1970s oil boom, but corrupt politicians wasted and stole much of the bounty, and Venezuela’s economy was in ruins by the 1980s, after oil prices crashed.

Chavez’s vow to direct oil revenue to the poor was music to the ears of millions and helped propel him to the presidency in a landslide election victory in 1998.

Fulfilling that promise required years of struggle for control of state oil company Petroleos de Venezuela SA, a tussle that would be a major factor in sparking a bungled 2002 coup. A two-month oil industry walkout meant to force Chavez from power gave him the opportunity to sack PDVSA’s opposition-linked management, as well as half the company’s staff, leaving him firmly in control of oil revenue. He also sharply raised royalties and taxes on all producers operating in Venezuela.

In 2005, as oil prices were reaching new highs, Chavez found a way to sidestep bureaucracy and speed up spending.

Rather than creating a new state agency, Chavez founded a corporation: National Development Fund Inc, universally known as Fonden. Its status as a corporation owned by the finance ministry lets it disburse billions of dollars in state money while subject to few of the reporting and disclosure requirements that apply to government entities.

Money funneled through Fonden is ultimately spent by government agencies, similar to funding from Congress. But it doesn’t require congressional approval. Instead, Fonden outlays begin with Chavez’s approval and are viewed by a board of directors made up of his closest allies.

They include Finance Minister Jorge Giordani, a septuagenarian economist considered the brains behind the country’s byzantine price and currency controls, and Oil Minister Rafael Ramirez, who is also president of PDVSA.

Industry Minister Ricardo Menendez, who oversees the Pulpaca pulp and paper project, also has a seat on the board, as does long-time Chavez ally Vice President Elias Jaua.

It is not clear how often the group meets, and it does not publish meeting minutes.

CITY OF ALUMINUM

In one of his many grand plans, Chavez has vowed to turn the geographic center of Venezuela, a sparsely populated savannah where lush vegetation grows out of reddish soil, into a vibrant “City of Aluminum.”

The flagship project for the plan is an aluminum rolling mill called Servicios de Laminacion CA, or Serlaca, in the town of Caicara.

The company’s most recent annual report shows Serlaca had spent at least $312 million on the project by 2011. A subsidiary of Italian company Salico had been tasked with building equipment for the plant, according to an aluminum industry trade publication dated October 2010 posted on Salico’s website. Salico did not respond to a request for comment.

By 2011, construction of the equipment had been stalled for 18 months for lack of funding, and the project had piled up debts with construction contractors, according to Serlaca’s annual report. A visit last month to the site showed only a clearing with a concrete foundation and structural skeleton for the main factory.

Two union leaders and a civil engineer interviewed at the gates of the site said the project was moving at a snail’s pace and contractors were using their own money to keep it from grinding to a halt. They said infighting between unions had killed seven workers since construction began four years ago.

Complaints from the neighboring community grew as the project remained stalled, and Caicara’s mayor accused Serlaca’s president of using company funds to advance his political career. The industry ministry in 2011 named a committee to look into the project, but Serlaca’s president – later sacked by Chavez – blocked the group’s efforts.

In a televised broadcast in March from Havana, where he was receiving treatment for cancer, Chavez complained the project was moving too slowly and offered a plan to restart it: $500 million from Fonden.

Serlaca’s current president did not respond to calls seeking details about the additional funding.

FINANCIAL ENGINEERING, SOCIALIST STYLE

With cash rushing into Fonden faster than it can build new roads and factories, the fund often has billions of dollars to invest in securities.

But as the leaked internal report shows, Fonden at various times bought risky, high-yield securities in efforts to expand its resources while helping Chavez’s foreign allies. Its unusual portfolio has included bonds issued by ally Ecuador, high-yield derivative securities issued by Lehman Brothers, and Honduran bonds purchased to support then-President Manuel Zelaya.

By 2008, these investments had become problematic: Lehman went bankrupt, and Ecuador declared a partial debt default. In addition, Fonden unloaded the Honduran bonds — purchased at a concessionary rate of 0.75 percent — months after buying them because Zelaya was ousted in a military coup.

Fonden hasn’t revealed whether it lost money in these operations and if so, how much it lost. The fund sold off some of the assets and swapped the remainder for $960 million worth of derivative securities called structured notes, according to the internal Fonden report obtained by Reuters.

But it offers no detail on the market value of those securities. The report does say that Fonden’s auditors pointed out that the fund had not adequately valued some $1.8 billion in complex fixed-income securities. That represented close to a quarter of its liquid assets of $7.9 billion in late 2011, according to the finance ministry’s latest annual report.

CASTING A WIDE NET

Government leaders bristle at the idea that Fonden is Chavez’s slush fund. But Fonden appears to have violated its own internal rules about which investments it does and doesn’t make.

A Fonden 2007 instruction sheet for agencies seeking funding says it does not finance the purchase of buildings, vehicles or shares in companies. But by 2010, it had disbursed nearly $700 million to buy shares in a retailer and two cement-makers — payments generated by several nationalizations ordered by Chavez. It also set aside $46 million to buy an embassy building in Moscow, and $19 million to buy a fleet of busses for use during the 2007 America’s Cup soccer championships.

The president’s office received almost $10 million from Fonden, according to the leaked internal report. The office did not respond to requests for clarification.

Fonden also gave $156 million to a social program called Mothers of the Barrio that provides cash stipends to mothers in extreme poverty, contradicting its stated mission to make “productive investments” that create jobs and spur development.

The national comptroller’s office noted that in 2009 it detected “presumed irregularities” by Mothers of the Barrio, including payments to women who were not registered in the program and did not meet the conditions for participation. The women’s ministry, which oversees the program, did not respond to requests for comment.

Fonden has also become a conduit for financing joint projects with Cuba, bankrolling at least $6.1 billion and disbursing at least $5.1 billion for some of the hundreds of ventures the two allies had signed as of 2010.

Fonden does not say what the projects are.

Press releases from bilateral meetings mention only several of the projects signed at each one, which run the gamut from a software development firm to a scrap-metal recycling operation. An agency overseeing the projects called the Cuba-Venezuela Joint Commission, which reports to the oil ministry, did not respond to requests for information.

For Pulpaca, the two billboards at the site provide details on what has been visibly completed to date: around $43 million to clear land and build the warehouse. Its last annual report says that as of 2011, it had spent nearly $530 million.

On a visit in August, silence hung over the compound. Trucks and bulldozers sat idly parked in rows. There was no sign of activity, or of the football-field-size machines that will be needed to turn Caribbean pine into paper.

Even so, it continues to enjoy financial support from the government. Around the time Pulpaca said it was struggling to move forward, Congress approved an additional $305 million for the project. That, combined with the Fonden outlays, brings total funding to $845 million.

And that’s not all. Pulpaca said in a recent presentation that it will need $1.4 billion to complete the newsprint factory.

(Additional reporting by German Dam and Maria Ramirez in Puerto Ordaz, and Gustavo Palencia in Tegucigalpa; editing by Kieran Murray and John Blanton)

Special Report: Guns used in Mexico for lawyer’s murder traced to ATF operation

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By Diana Washington Valdez \ El Paso Times
Posted:   05/01/2012 12:00:00 AM MDT

Firearms connected to Operation Fast and Furious were used in the 2010 slaying of the brother of the former Chihuahua state attorney general, according to a U.S. congressional report.

The report said the Bureau of Alcohol, Tobacco, Firearms and Explosives traced two of the weapons suspected in the murder of lawyer Mario González Rodríguez, but did not report this fact to the Mexican government until eight months after the tracing.

The joint congressional staff report “The Department of Justice’s Operation Fast and Furious: Fueling Cartel Violence” was prepared for U.S. Sen. Charles Grassley, R-Iowa, and U.S. Rep. Darrell Issa, R-Calif., two lawmakers who are spearheading an ongoing investigation into the ATF’s controversial operation.

“On October 21, 2010, drug cartel members kidnapped Mario González Rodríguez from his office,” according to the 2011 congressional report. “At the time of the kidnapping, his sister Patricia González Rodríguez was the attorney general of the state of Chihuahua.”

Mexican officials said Patricia González Rodríguez was already on her way out because the new governor had been installed and a new state prosecutor was going to be appointed.

“A few days after the kidnapping,” the congressional report said, “a video surfaced on the Internet in which Mario González Rodríguez sat

handcuffed, surrounded by five heavily armed men wearing masks, dressed in camouflage and bullet-proof vest.”

“Apparently, under duress,” the report said, “(González Rodríguez) alleged that his sister had ordered killings at the behest of the Juárez cartel … the video quickly went viral.”

Chihuahua state Attorney General Patricia González Rodríguez denied the allegations of drug corruption and traveled to Mexico City to seek the federal government’s help in investigating her brother’s murder. She is no longer in Chihuahua, and reportedly left Mexico for safety reasons.

A video of Mario González Rodríguez’s “interrogation” by armed men was carried on YouTube. The body of the well-known Chihuahua City lawyer was found Nov. 5, 2010, in a shallow grave.

Then, Mexican federal authorities, following a shootout with drug cartel suspects, seized 16 weapons and arrested eight men in connection with Mario González Rodríguez’s murder.

Mexican officials submitted information about the weapons to the ATF’s e-trace system, and the ATF traced two AK-47s to Operation Fast and Furious.

The congressional report said that an ATF email indicated that ATF officials in Phoenix who knew the two assault rifles came from the controversial operation withheld the information from Mexican officials until June 2011.

In congressional testimony, Carlos Canino, the ATF’s acting U.S. attaché in Mexico, said he’s the one who finally notified Mexican federal Attorney General Marisela Morales about the weapons-tracing and their link to the death of Mario González Rodríguez.

The report said Morales was shocked and remarked, “Hijole!,” which the report said translates into “Oh, my.”

Canino feared an international incident might break out with Mexico if the information leaked out to the news media instead of being sent through government channels. He told U.S. lawmakers that he did not want to undermine the trust that U.S. law enforcement had developed with their Mexican counterparts in the war against the drug cartels.

Ricardo Alday, spokesman for the Mexican Embassy in Washington, D.C., said Saturday in response to the U.S. congressional report’s findings that “the government of Mexico has not granted, nor will grant, under any circumstance, tacit or explicit authorization for the deliberate walking of arms into Mexico.

“As a matter of policy, we do not comment on ongoing investigations, and therefore will await the outcome of both the U.S. and Mexican investigations, and then react accordingly.”

Last week, the ATF released a report that said 68,000 weapons recovered in Mexico between 2007 and 2011 were traced back to U.S. sources. That report does not mention which of the weapons were part of the undercover Operation Fast and Furious.

Weapons traced back to the operation have been recovered in eight Mexican states and in Mexico City, and most of them were destined for the Sinaloa drug cartel led by Joaquin “El Chapo” Guzmán, the congressional report said.

And, at least eight Fast and Furious-connected weapons were recovered at crime scenes in Juárez and four in Chihuahua City between 2010 and 2011.

The Sinaloa cartel has been waging a bloody battle against the Carrillo Fuentes organization that’s killed nearly 9,500 people in Juárez alone since 2008.

On Jan. 13, 2010, the El Paso Police Department seized 40 rifles on the East Side that the congressional report said were connected to Fast and Furious. Weapons connected to the operation also were recovered in Columbus, N.M.

The number of Fast and Furious weapons found at Mexican crime scenes could be higher because the information provided to congressional investigators remains incomplete, the report said.

Last November, the El Paso County Sheriff’s Office confirmed that it was among local law enforcement agencies asked to assist with Operation Fast and Furious.

El Paso County Sheriff Richard Wiles said then that his department helped a Drug Enforcement Administration regional task force with surveillance but that he was not told it was for Fast and Furious.

ATF officials launched Operation Fast and Furious in 2009 in Phoenix in an attempt to identify high-level arms traffickers who were supplying the Mexican drug cartels with weapons. The operation allowed weapons purchased in the United States to cross the border into Mexico.

ATF shut down the operation about a month after Border Patrol Agent Brian Terry was found murdered in the Arizona desert in December 2010. Two AK-47s, originally purchased as semiautomatics and connected to Fast and Furious, were found near Terry’s body.

The latest ATF report does not break down the 68,000 weapons traced to U.S. sources by states.

ATF spokesman Tom Crowley said the agency previously reported that most of the guns recovered in Mexico came from Texas, the border state that has the most gun stores.

Statistics in the recent ATF report mirror the trends in Mexico’s drug cartel violence.

For example, in 2008 Mexican officials submitted 31,111 serial numbers to the ATF for tracing, the same year that the Mexican cartels intensified their battles in Mexico.

The number of weapons submitted for e-trace was 17,352 in 2007; 21,555 in 2009; 8,338 in 2010; and 20,335 in 2011.

Diana Washington Valdez may be reached at dvaldez@elpasotimes.com; 546-6140.

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Russell: Obama’s Energy Strategy of Contradiction

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By Barry Russell
Special to Roll Call
April 23, 2012, Midnight

Right now, voters across the country are mobilizing around an issue that could determine who wins the 2012 presidential election: energy.

The rising cost of gasoline has influenced the American people to do a double-take on President Barack Obama’s overall energy policy. In light of this election-year scrutiny, it’s no surprise that Obama has tried to defend and define his administration’s energy policy.

But under the public’s watchful eye, the president is continually contradicting himself inside the Beltway and on the campaign trail. Obama calls to expedite infrastructure projects, but in the wake of rejecting the Keystone XL pipeline. Obama claims increased oil and natural gas production on his watch, but then follows up with accusations that oil companies are profiting at the expense of the American people. Obama repeatedly calls for an “all of the above” energy strategy, but then singles out the oil and natural gas industry for new regulations and targeted tax attacks.

Something doesn’t add up. To discover Obama’s real feelings and policies toward American-made energy, we must look to areas that the administration actually has jurisdiction over: public lands, federal agencies and his own calls for legislative action.

Responsible, common-sense regulations on development are a foundation of the oil and natural gas industry’s operations — and rightly so. Protecting the environment and developing our resources must go hand in hand. But right now, under the Obama administration, there are not two, not three, but 11 federal agencies seeking to regulate, study and reassess oil and natural gas production in the United States.

The Environmental Protection Agency, for its part, has been acting like an all-around bully; doing everything it can to smother the industry with one-size-fits-all regulations from Washington, D.C. It disregards the states’ impressive history of successful regulation of hydraulic fracturing. Also, the EPA has been using American tax dollars to conduct studies that distort scientific results to accuse the oil and natural gas industry of harming the environment. These studies have ignored the industry’s incredibly safe record and serve as a rallying cry for the president’s environmental base.

Obama’s State Department rejected the Keystone XL pipeline, which would transport oil from our neighbor Canada and alleviate the oil bottleneck that is causing problems for U.S. producers in Cushing, Okla., and refiners on the Gulf Coast.

And the American people are not amused. A recent Gallup poll revealed that Americans favor the Keystone XL pipeline by a ratio of 2-to-1. On the campaign trail recently, the president tried to backtrack, urging expedited work on the southern leg of Keystone. No matter that his administration has no jurisdiction on this issue: The southern portion of the pipeline could and would have continued without his approval.

Do his federal agencies’ brakes on development mean that Obama is fundamentally hostile to oil and natural gas as fuel sources? The president’s major rebuttal to this claim involves pointing to increased production under his administration. It’s true that the United States is experiencing an impressive increase in oil and natural gas development. But these huge gains are happening because of the advanced technologies U.S. producers utilize on private and state lands, where his federal agencies have limited jurisdiction.

On the other hand, Obama’s record on public lands — where his administration does have control — is far from stellar. Oil and natural gas production on public lands has decreased significantly under his watch. The Interior Department institutes duplicative and expensive regulations that make it impossible for many independent oil and natural gas producers, small American businesses that employ 12 people on average, to conduct business on public lands.

The president’s own punitive legislative proposals offer a stark contrast to his pro-development rhetoric. Obama repeatedly calls on Congress to repeal the “subsidies” that oil companies receive. However, these are neither subsidies nor government handouts. These are typical business deductions, such as labor and construction costs, which many industries have. These provisions, namely intangible drilling costs and percentage depletion, encourage new development of American energy. Eliminating them is a sure way to decrease energy supply and stunt job creation. Singling out the most productive, creative energy industry for targeted tax attacks certainly does not sound like an “all of the above” strategy for U.S. energy.

A recent poll revealed 68 percent of Americans disagree with the way Obama is handling gasoline prices. The public may be taking note of Obama’s energy policy contradictions. The 2012 election may rest upon the question: Can Obama have his energy cake and eat it, too?

Barry Russell is president and CEO of the Independent Petroleum Association of America.

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Special Report: Chesapeake CEO took $1.1 billion in shrouded personal loans

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By Anna Driver and Brian Grow
Wed Apr 18, 2012 8:04am EDT

(Reuters) – Aubrey K. McClendon is one of the most successful energy entrepreneurs of recent decades. But he hasn’t always proved popular with shareholders of the company he co-founded, Chesapeake Energy Corp., the second-largest natural gas producer in the United States.

McClendon, 52, helped cause Chesapeake shares to plummet amid the financial crisis when he sold hundreds of millions of dollars in stock to raise cash for himself. Later, to settle a lawsuit by shareholders, he agreed to buy back a $12 million map collection that he’d sold to Chesapeake.

His approach to running his company also is renowned: Among other employee perks, on-site Botox treatments are available at its headquarters in Oklahoma City, Oklahoma.

Now, a series of previously undisclosed loans to McClendon could once again put Chesapeake’s CEO and shareholders at odds.

McClendon has borrowed as much as $1.1 billion in the last three years by pledging his stake in the company’s oil and natural gas wells as collateral, documents reviewed by Reuters show.

The loans were made through three companies controlled by McClendon that list Chesapeake’s headquarters as their address. The money is being used to help finance what could be a lucrative perk of his job – the opportunity to buy into the very same well stakes that he is using as collateral for the borrowings.

The size and nature of the loans raise concerns about whether McClendon’s personal financial deals could compromise his fiduciary duty to Chesapeake investors, according to more than a dozen academics, analysts and attorneys who reviewed the loan agreements for Reuters.

“If Mr. McClendon has $1 billion in debt through his own companies — companies operating in the same industry as Chesapeake — he has or could have a high degree of risk for conflicts of interest. As in, whose interest will he look out for, his own or Chesapeake’s?” said Joshua Fershee, an associate professor of energy and corporate law at the University of North Dakota.

The revelation of McClendon’s bout of borrowing comes as he is scrambling to help Chesapeake avert a multi-billion-dollar cash shortfall amid a plunge in natural gas prices.

It also exposes a potentially serious gap in how U.S. regulators scrutinize corporate executives, a decade after those rules were tightened in the wake of major accounting scandals.

The loans portend a number of possible problems, the analysts said. McClendon’s biggest lender is simultaneously a major investor in two units of Chesapeake. That connection raises questions about whether Chesapeake’s own financing terms could be influenced by its CEO’s personal borrowing.

Another concern: A clause in the deals requires McClendon “to take all commercially reasonable action” to ensure that other owners and operators of the wells – including Chesapeake – “comply with…covenants and agreements” of the loans. Such clauses are common in energy-finance deals. But it is rare for the CEO of a major energy company to be personally subject to one involving the corporation that he runs. That means McClendon could have an incentive to influence Chesapeake to act in the interest of his lenders, rather than of his shareholders.

“Basically what you have here is a private transaction that could potentially impact a public company, depending on the manner in which the clause is interpreted and applied,” says Thomas O. Gorman, a partner at law firm Dorsey & Whitney in Washington, D.C., and a former special trial counsel at the Securities and Exchange Commission (SEC). “That may create a conflict of interest.”

As a result, the loans should have been fully disclosed to Chesapeake shareholders, the academics, attorneys and analysts said.

NO CONFLICT

Both McClendon and Chesapeake say the loans are purely private transactions that the company has no responsibility to disclose or even to vet. And they disputed the view that the deals could create a conflict of interest.

“I do not believe this is material to Chesapeake,” McClendon said in an email response to questions. “There are no covenants or obligations in my loan documents or mortgages that bind Chesapeake in any way.”

Chesapeake general counsel Henry Hood said in a statement that the clause in the loan agreements questioned by analysts – called “Compliance by Operator” – is “typical boilerplate language” used in oil and gas mortgages. It requires borrowers to exercise their rights with operators of wells, such as Chesapeake, on behalf of the lender.

Neither the existence of McClendon’s loans nor their terms create the possibility of a conflict of interest, Hood said, in part because the company has a first lien on McClendon’s share of company wells. That would mean Chesapeake gets paid before all other creditors in the event that McClendon defaults on his debt.

“Any loans are Mr. McClendon’s personal business and not appropriate for review or monitoring by the company or public comment,” Hood said.

The company has many checks to protect against conflicts, Hood said. Among them: Some of the world’s largest energy companies own a share of Chesapeake wells and “monitor the actions of the Company” via well audits, government filings and participation in development plans, Hood said.

He added that Chesapeake now employs more than 13,000 people and drills more than 2,000 wells per year, “all of which minimizes the ability of any one person” – McClendon included – “to influence actions on any single well.”

Less than four years ago, a personal transaction by McClendon did negatively influence the company.

To buy more Chesapeake stock, McClendon borrowed money from his brokers – what’s called “buying on margin.” In October 2008, just after the financial crisis erupted with the bankruptcy of Lehman Brothers, he was forced to sell more than 31 million Chesapeake shares for $569 million to cover margin calls from those brokers. The company’s stock fell nearly 40 percent the week of McClendon’s share sales. McClendon issued an apology but the company’s credibility with many shareholders suffered significantly.

Chesapeake’s board of directors is aware that McClendon has borrowed against his share of company wells, Hood said, but “the board did not review or approve the transactions.” Nor did the company vet the loan terms for possible conflicts. “If there were any conflicts of interest,” Hood said, “they would have surfaced by now.”

Chesapeake board members contacted declined to comment. Marc Rome, Chesapeake’s vice president for corporate governance, did not respond to requests for comment.

WELL INVESTMENT PLAN

The loans reveal how McClendon is using an unusual corporate incentive as collateral. The perk, known as the Founder Well Participation Plan, grants Chesapeake’s billionaire co-founder a 2.5 percent stake in the profits – and makes him pay 2.5 percent of the costs – of every well drilled during each year he decides to participate.

Today, Chesapeake is the only large publicly traded energy company to grant its CEO the opportunity to take a direct stake in wells it drills. Chesapeake says the well plan is a uniquely powerful incentive because it aligns McClendon’s personal interests with those of the company’s.

The well plan does not allow McClendon to select the wells in which to invest; Chesapeake says the program is an all-or-nothing proposition so that McClendon can’t cherry-pick only the most profitable wells.

“He has to eat his own cooking here,” said company spokesman Michael Kehs.

But because McClendon is using the loans to finance his participation in the well plan, he defrays his risks. Two of McClendon’s lenders, both private equity firms, in turn spread the loan risks to other investors by raising money from state pension funds and other investors to fund them. Those insights emerge from a February 2011 document detailing a meeting between McClendon’s largest personal lender and a prospective investor.

“If he hasn’t had to put up any of his own money, how is that alignment” of McClendon and Chesapeake’s interests, asked Mark Hanson, an analyst with Morningstar in Chicago.

Chesapeake said McClendon’s loans are “well disclosed” to company shareholders. General Counsel Hood cited two references in the company’s 2011 proxy. In them, the firm refers to McClendon’s personal “financing transactions,” including one in a section entitled “Engineering Support” that discusses McClendon’s use of Chesapeake engineers to assess well reserves.

Nowhere in Chesapeake proxy statements or SEC filings does the company disclose the number, amounts, or terms of McClendon’s loans. Veteran analysts of the company said they were never aware of the loans until contacted for this article.

“We believe the disclosures made by the company have been appropriate under the circumstances, particularly since the disclosure of the loans is not required in any event,” Hood said in a statement.

THROUGH THE CRACKS

Legal experts say the size and terms of McClendon’s borrowing are unusual – and highlight a gap in regulatory scrutiny of American corporate executives.

In the past, major Wall Street banks formed separate companies – or special purpose vehicles, just as McClendon has – to allow select employees to borrow from the employer and make investments. The WorldCom accounting scandal was, in part, fueled by more than $1 billion in loans taken out by former chief executive Bernard Ebbers that were secured by his shares of company stock. And energy giant Enron used off-balance-sheet entities to hide debt from investors. New accounting and corporate governance laws and regulations banned such transactions or required their disclosure.

In September 2006, the SEC revised its related-party transaction rules to require companies to disclose when executives pledged corporate stock as collateral for loans. “These circumstances have the potential to influence management’s performance and decisions,” the SEC wrote.

McClendon’s loans – backed not by stock but by stakes in company wells – aren’t covered by the SEC rule. “Because they have decided to compensate him with a business interest, it kind of falls through the cracks,” says Francine McKenna, an accounting expert and author of the accounting-related blog re: The Auditors.

As a result, no SEC regulation precludes McClendon from using his well plan stake as loan collateral. The SEC declined to comment on the McClendon loans.

TEETH WHITENING

Tall and thin, McClendon is a tireless booster for the oil and gas industry – and of his company. At an energy conference in November in Houston, he sported a tie printed with tiny drilling rigs. His daring deals and stirring speeches to investors have attracted some adoring followers.

During one speech last September, McClendon said opponents of a controversial drilling technique called hydraulic fracturing were interested in “turning the clock back to the Dark Ages.”

“What a great vision of the future!” he said sarcastically. “We’re cold, it’s dark, and we’re hungry!”

McClendon’s investor presentations are standing-room-only. But he often bristles when his business model is questioned by analysts, frequently arguing that Wall Street does not understand the company.

That tension has intensified as Chesapeake scrambles to shed more than $10 billion in debt through the rapid-fire sale of assets amid the lowest natural gas prices in a decade. This year, it has done a series of deals to try to close a cash shortage estimated by analysts to be as high as $6 billion.

McClendon continues to treat his employees well. In recent years, he built a 50-acre red-brick campus in Oklahoma City as Chesapeake headquarters. It boasts a 72,000 square-foot state-of-the art gym, visiting doctors who provide lunchtime Botox treatments for employees, and dentists to whiten teeth.

A part owner of the NBA’s Oklahoma City Thunder and supporter of charitable causes in the state capital, McClendon holds considerable sway in Oklahoma. Former U.S. Senator Don Nickles and former Oklahoma Governor Frank Keating, both Republicans, are members of the Chesapeake board.

McClendon’s close relationship with the board hasn’t left him immune to tensions with stockholders.

After Chesapeake’s board agreed to buy McClendon’s map collection in 2008 for $12.1 million, shareholders sued. The lawsuit was settled in November 2011, when McClendon agreed to refund the $12.1 million, plus interest, and hold stock worth 500 percent of his annual salary and bonus. Chesapeake also agreed to hire Rome, the vice president of corporate governance, and an executive compensation consultant to evaluate corporate pay packages.

The well participation plan, which was approved by shareholders in 2005 and cannot be discontinued until 2015, has remained unaffected.

Disgruntled investors continue to launch challenges. On March 13, New York Comptroller John C. Liu and the $113 billion New York Pension Funds called on Chesapeake to let large long-term shareholders put up their own nominees for the board of directors.

UNTANGLED

Key aspects of McClendon’s loans remain hidden from shareholders. Because promissory notes underpinning the loan agreements are private, the interest rate, the exact amount borrowed and other terms of the transactions are not publicly known.

But the loan agreements demonstrate the extent to which McClendon has leveraged his interests: He has pledged as collateral almost every asset associated with his share of Chesapeake wells. Oil, gas and land interests, platforms, wells and pipelines, hedging contracts, geological and business data, and intellectual property are among scores of well-related assets that can be seized should McClendon default.

Chesapeake said it would be “unaffected by any dispute” between McClendon and a lender in the event of a default because of its first lien on oil and gas production, equipment and land leases.

The company also said that McClendon’s share of “related assets” pledged as collateral – such as business data and hedging contracts associated with wells – is completely separate from similar assets owned by Chesapeake. That means Chesapeake would not become entangled should McClendon default, the company said.

Chesapeake “does not have an interest in the (McClendon’s) related assets … and Mr. McClendon does not have an interest in the company’s related assets,” general counsel Hood said in a statement.

In explaining why Chesapeake’s board isn’t obligated to monitor McClendon’s personal loans, Hood cited a September 2003 decision by a Delaware Chancery Court. The ruling in Beam v. Stewart found the board of Martha Stewart Living Omnimedia did not breach its fiduciary duty to shareholders by failing to monitor her personal investments. (Stewart served five months in prison in 2004 following her conviction for obstruction of justice in an unrelated insider-trading case.)

Given the size, scope and complicated terms of the loans, their particulars constitute important stockholder information and therefore should be more fully disclosed, said David F. Larcker, a professor of accounting at Stanford University’s Graduate School of Business.

Some shareholders agree. “While recognizing (McClendon’s) right to privacy, the more information the company releases to shareholders the better – particularly when it’s such a large amount of money and related to the oil and gas business,” said Mike Breard, oil and gas research analyst at Hodges Capital Management in Dallas, which owns Chesapeake shares.

LOAN TRAIL

As with a mortgage on a residential home, state law requires that ownership rights to physical property be recorded with county clerks.

Reuters found McClendon’s loan agreements by following the trail of well and land lease transfers from Chesapeake to three companies that list McClendon as their corporate representative, according to state deed records.

In county courts in Louisiana, Texas, Arkansas, Pennsylvania and Oklahoma, where Chesapeake operates thousands of wells, the company regularly files a form called a conveyance. In keeping with the corporation’s well participation program, the conveyance grants McClendon a 2.5 percent share of each well and of the leased land on which it is drilled.

For years, Chesapeake has distributed 2.5 percent shares in wells and land to three McClendon-controlled companies – Chesapeake Investments LP, Larchmont Resources LLC and Jamestown Resources LLC.

Since he co-founded Chesapeake in 1989, McClendon has frequently borrowed money on a smaller scale by pledging his share of company wells as collateral. Records filed in Oklahoma in 1992 show a $2.9 million loan taken out by Chesapeake Investments, a company that McClendon runs. And in a statement, Chesapeake said McClendon’s securing of such loans has been “commonplace” during the past 20 years.

But in the last three years, the terms and size of the loans have changed substantially. During that period, he has borrowed as much as $1.1 billion – an amount that coincidentally matches Forbes magazine’s estimate of McClendon’s net worth.

The $1.1 billion in loans during the past three years breaks down this way:

In June 2009, McClendon agreed to borrow up to $225 million from Union Bank, a California lender, pledging his share of wells as collateral.

In December 2010, he borrowed $375 million from TCW Asset Management, a private equity firm.

And in January 2012, McClendon borrowed $500 million from a unit of EIG Global Energy Partners, a private equity firm formed by former TCW executives.

It is unclear how much, if any, of those loans have been repaid.

Randall Osterberg, a senior vice president at Union Bank who signed the loan agreement, declined to comment. TCW and EIG also declined to respond to questions.

REAL LOSS?

At first blush, what the company tells shareholders suggests the well plan is a money-loser for McClendon.

In its proxy statements, Chesapeake says McClendon lost $116 million in 2009, and $141.9 million in 2010.

It’s unclear whether McClendon has suffered any real losses, however. Asked about the calculations, Hood said McClendon’s net loss is a byproduct of his drilling costs being “front end loaded,” while his revenues accrue over many years.

“If they are showing that kind of negative cash flow, the wells don’t have value,” said Phil Weiss, oil analyst at Argus Research who has a sell rating on the company’s shares. But given that McClendon has borrowed more than $1 billion based on the value of his well stakes, “I really don’t think (the company’s disclosures) tell me much,” Weiss said.

Chesapeake has resisted attempts by regulators to get more information on McClendon’s well-participation plan before. In 2008, the SEC requested more information about McClendon’s benefits from the well plan as part of a review of the company’s 2007 annual report.

From May to October that year, Chesapeake and SEC officials exchanged at least eight letters and held negotiations on the issue. After first refusing to provide more information, Chesapeake ultimately agreed to provide shareholders a chart detailing well plan revenues and costs, a review of the letters shows.

Chesapeake’s Hood said in a statement that the company’s disclosures are “fully compliant with all legal and regulatory requirements.” The chart and other SEC filings contain “all material facts that Chesapeake was required to disclose,” he said.

A spokesman for the SEC declined to comment.

BIG LENDER

McClendon’s biggest personal lender, EIG, has been a big financer for Chesapeake, too.

In November, Chesapeake raised $1.25 billion from a group of investors including EIG through the sale of “perpetual preferred shares” in a newly formed entity, Chesapeake Utica LLC, which controls about 800,000 acres of oil and gas-rich land in Ohio. The sale offers lucrative terms to EIG investors, paying an annual dividend of 7 percent and royalty interests from oil and gas wells, according to analysts.

On April 9, the company announced a nearly identical deal to raise another $1.25 billion from EIG and other investors, in another new subsidiary called CHK Cleveland Tonkawa.

Dividends on preferred shares are controversial because they are paid before regular dividends owed to common shareholders. “Basically it’s a form of more expensive debt,” Morningstar’s Hanson said. “It makes it appear that it’s not debt, but it sits on top of obligations to the common shareholder.”

The fact that McClendon’s largest personal lender received favorable terms on its Chesapeake investments caused some Wall Street analysts to call for more information about McClendon’s loans.

“I think the company should disclose this information. One reason is that the CEO is taking out loans from at least one entity, EIG, which recently provided financing to Chesapeake,” said Joseph Allman, oil and gas industry analyst at JPMorgan in New York, who reviewed the loan agreements. “In the same way that investors want to know the counterparty to significant Chesapeake transactions, they would want to know if one of those firms has significant private dealings with the CEO.”

Chesapeake’s Hood acknowledged there could be “some theoretical possibility of a conflict of interest” with the company and its CEO borrowing from the same lender. But because Chesapeake does not believe there is “an actual conflict of interest,” more disclosure is not required, Hood said.

CLOSING A GAP

McClendon’s personal loans highlight a gap in current SEC rules governing disclosures of related-party transactions, say accounting experts. The SEC requires disclosure of any transaction over $120,000 involving a company and a related party, such as the CEO, directors and certain family members, “with direct or indirect material interest.”

Chesapeake said the SEC’s related-party rule doesn’t apply to McClendon’s loans – only to his participation in the well plan. That’s because Chesapeake believes the loans “do not constitute a material transaction with Chesapeake or even involve Chesapeake,” Hood said.

That disclosure gap may be closing. A proposed new standard, released for public comment by the Public Company Accounting Oversight Board on February 28, would require auditors to identify and evaluate “significant unusual transactions” with executives connected to publicly traded firms. The board defined such transactions as those “outside the normal course of business or that otherwise appear to be unusual due to their timing, size or nature.”

Board chairman James R. Doty described the proposal as a way to scrutinize transactions that have played “a recurring role in financial failures.” The oversight board declined to comment on McClendon’s loans.

For now, said analyst Weiss, Chesapeake and McClendon are pushing the limits. “If Chesapeake were trying to make things muddy and unclear without breaking the law, this would be a good way to do it.”

(Reporting by Anna Driver in Houston and Brian Grow in Atlanta; additional reporting by Joshua Schneyer in New York; editing by Blake Morrison and Michael Williams)

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MODU Market Spending to Reach USD 48.1bn in 2012

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A large amount of undeveloped offshore oil and gas fields as well as new offshore discoveries will help drive the Mobile Offshore Drilling Units (MODU) market, especially in deepwater.

With strong oil prices persisting, major energy companies are increasingly reinvesting their earnings in exploration and development of offshore oil and gas basins. Visiongain calculates capital expenditure in the MODU market will total $48.1bn in 2012.

According to the International Energy Agency, global oil demand will rise from 88 million barrels today to around 99 million barrels in 25 years time. Over this period the cost of extracting oil will be higher and production from offshore resources will not be as expensive as it was relative to development of onshore hydrocarbons.

Although new technological improvements mean fewer people will be needed on offshore oil and gas drilling rigs, the construction industry behind MODUs and assembly of related technologies is providing employment for thousands of people. For example, the Brazilian marine construction industry has emerged on a vast scale to enable its offshore industry to provide MODUs and technologies for Petrobras to meet its vast oil production targets from its offshore resources.

Most super-major oil and gas companies as well as independent oil and gas companies have each secured a share in the hydrocarbon-rich offshore regions across the globe and demand for MODUs is strong. Meanwhile, health and safety standards and technology have both improved across the industry, leading to a backlog of orders for new-build MODU.

The Mobile Offshore Drilling Units (MODU) Market 2012-2022 report includes 144 tables, charts and graphs that analyse quantify and forecast the MODU market in detail from 2012-2022 at the global level, four submarkets and for 7 regional markets. The analysis and forecasting ahs been reinforced by extensive consultation with industry experts. Two full transcripts of exclusive interviews are included from Friede & Goldman and Maxeler Technologies. The report also profiles 55 leading companies involved in the MODU market.

More Info

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Breaking News: Congress Files to Impeach Obama

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112th Congress has filed an impeachment motion against President Obama for his abuse of power regarding his military offensive on Libya leader Gaddafi without an act of congress.

The filing reads as below:
112th Congress
2d Session
H. CON. RES. 107

Expressing the sense of Congress that the use of offensive military force by a President without prior and clear authorization of an Act of Congress constitutes an impeachable high crime and misdemeanor under article II, section 4 of the Constitution.

IN THE HOUSE OF REPRESENTATIVES

Mr. JONES submitted the following concurrent resolution; which was referred to the Committee on the Judiciary

CONCURRENT RESOLUTION

Expressing the sense of Congress that the use of offensive military force by a President without prior and clear authorization of an Act of Congress constitutes an impeachable high crime and misdemeanor under article II, section 4 of the Constitution.

Whereas the cornerstone of the Republic is honoring Congress’s exclusive power to declare war under article I, section 8, clause 11 of the Constitution: Now, therefore, be it

Resolved by the House of Representatives (the Senate concurring), That it is the sense of Congress that, except in response to an actual or imminent attack against the territory of the United States, the use of offensive military force by a President without prior and clear authorization of an Act of Congress violates Congress’s exclusive power to declare war under article I, section 8, clause 11 of the Constitution and therefore constitutes an impeachable high crime and misdemeanor under article II, section 4 of the Constitution.

Library of Congress Direct Link >> HERE

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  3. Obama Should Have Obtained Congress’ Approval on Libya
  4. Breaking News: Iran Shoots Down U.S Aircraft
  5. Constitution, Anyone? Obama Promises to Rule… Without Congress

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Special Report: Iran’s cat-and-mouse game on sanctions

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By Rachel Armstrong, Stephen Grey and Himanshu Ojha
SINGAPORE | Wed Feb 15, 2012 8:30am EST

(Reuters) – Just before noon on a sticky, overcast Saturday morning earlier this month a truck carrying two white containers waited at an electronic checkpoint to leave Singapore’s main port. The containers bore the bright red letters IRISL, the initials of Iran‘s cargo line, which has been blacklisted by the United Nations, United States and European Union.

Anchored just off Singapore’s playground island of Sentosa that same day, the container ship Valili was also stacked high with IRISL boxes. A couple of miles to the east the Parmis, another container ship, also carried IRISL crates. Shipping movements data tracked by Reuters shows the Parmis had pulled into Singapore waters from the northern Chinese port of Tianjin early that morning.

The ships and containers are key parts in an international cat-and-mouse game, as Iran attempts to evade the trade sanctions tightening around it. Washington and European capitals want to stop or slow Iran’s nuclear program. They believe Iran Shipping Lines(IRISL), which moves nearly a third of Iran’s exports and imports and is central to the country’s trade, plays a critical role in evading sanctions designed to stop the movement of controlled weapons, missiles and nuclear technology to and from Iran.

IRISL would not comment for this story. Last June the company said in an interview that there was no evidence it had been involved in arms trafficking. Iran says its nuclear program is peaceful and that IRISL has no links with any weapons program. Tehran complained vigorously last June when the European Union followed the United States with beefed-up sanctions that banned new contracts with IRISL. A United Nations resolution forces all states to inspect IRISL’s cargo.

But many in the West hold up IRISL as exhibit A for Iran’s ability to evade sanctions because the shipping line regularly reflags its ships and changes their official owners.

An analysis of shipping data sheds new light on that deception. Using data from IHS Fairplay, a ship tracking group that uses ship registration documents from various sources, and Reuters Freight Fundamentals Database, which compiles location data from every ship’s Automatic Identification System, shows that despite the sanctions 130 of the 144 banned ships in IRISL’s fleet continue to call at many of the world’s major ports hidden behind a web of shell companies and diverse ownership.

Dozens of Iranian ships have used Singapore several hundred times in the past two years, for instance, as a stop-off on their way to other destinations such as China.

The data shows that in the 48 months before U.S. sanctions began in September 2008, IRISL made 345 changes to its fleet including names, the flags ships sailed under, operators, managers and registered owners. In the 40 months since sanctions began there have been at least 878, including 157 name changes, 94 changes of flag, 122 changes of operator, and 127 changes of registered ownership.

Hugh Griffiths, head of Countering Illicit Trafficking-Mechanism Assessment Projects at the Stockholm International Peace Research Institute, says what’s unique about those changes is their pace and scale. Normally a ship’s name or flag changes when its owner sells it after a decade or so.

“In the Iranian case, none of these apply because it’s not based on the normal commercial reasons you’d expect,” he said. “Nothing on this scale has ever been seen before in recent history.”

John Dalby, a former oil tanker captain and chief executive of Marine Risk Management, a global consultancy and maritime security company, agrees. “When you add name changes, flag changes, changes of operators and then changes of registered owners – especially if it is, to all intents and purposes, the same owner – it means they are trying to hide. Especially so many in such a relatively short space of time.”

NO DISGUISE

The Parmis and Valili operate under the flag not of Iran but of Barbados and Malta, respectively. On paper they are no longer part of IRISL, having both changed owners, operators and flag in the past couple of years. But a unique seven-figure “IMO number” issued to each known ship in the world for its entire lifespan reveals the identity of each ship as a sanctioned vessel ultimately owned by the Iranian cargo line. The brightly painted IRISL containers sitting on the ships’ decks add to the impression that the ships are still Iranian.

“They certainly don’t work too hard to disguise themselves here,” said the owner of a tanker management company in Singapore.

The Iranian government has a knack for survival. Sanctions may be hurting ordinary Iranians – grain ships to the Islamic republic have been diverted as Tehran struggled to find credit to finance its food supplies – but Tehran often figures out a way around such blockages.

As far back as late 2010, according to a report from a Middle Eastern intelligence agency, which was confirmed by European diplomats with access to their own intelligence, an Iranian committee boasted that the West had only discovered half of the shell companies and front individuals it used to hide its trading empire; the sanctions were seen as “harmless in Asian countries.”

A WEB OF OWNERS

When the Singapore checkpoint light turned green earlier this month, the truck driver turned onto an expressway and headed towards the crossing to Malaysia. Just shy of the border he turned into an industrial estate. Within 10 minutes another three trucks with IRISL containers had arrived.

In every port a ship visits, it needs someone on the ground to sort out its paperwork and organize its cargo. In Singapore that used to be done for Iranian vessels by IRISL’s regional office, Asia Marine Network, which was placed under financial sanctions by the United States in 2008.

A June 2011 indictment by the Manhattan District Attorney, Cyrus Vance, alleges that IRISL’s Singapore head, Alireza Ghezelayagh, and Singaporean businessman Cheong Kheng Guan tried to get round those sanctions, in particular a ban on any U.S. dollar transfers by IRISL.

The two men were among five people and 11 companies in three countries named in the 317-count indictment that charged IRISL and its agents with illegal use of banks in Manhattan. The companies were said to have “deceived Manhattan banks into processing more than $60 million worth of payments using aliases or corporate alter egos to hide their conduct.”

The indictment says that one of Cheong’s eight shipping agencies in Singapore, Sinose Maritime, entered into a joint venture with Iran’s Asia Marine Network. Sinose Maritime then became the exclusive agent for IRISL in the city-state, the indictment says. Cheong and Ghezelayagh also established a new company, Leading Maritime, just eight days after Asia Marine was placed under sanctions.

The Manhattan DA’s office, which declined to comment because its investigations are continuing, alleges that bank records it has obtained show that two of the Singapore companies, Sinose and Leading Maritime, channeled a total of around $41.8 million through the American financial system on behalf of IRISL.

The money moved in 120 different wire payments that the DA’s office claims went via the New York branches of HSBC, Bank of New York Mellon, Standard Chartered and Deutsche Bank, causing them to inadvertently breach their sanction obligations. None of those banks were said to have any knowledge of the IRISL connection and none have been charged by the DA’s office.

After Cheong’s indictment last June, he stood down as a director and shareholder from eight of the 10 companies he was listed as holding, according to the Singapore Accounting and Corporate Regulatory Authority registry.

But his companies and employees remained active, and there is evidence to indicate that not all ties to IRISL were severed.

One of Cheong’s former companies, Global Maritime Investments, is listed as the manager of a newly built ship called the Adelina. Commissioned by IRISL and completed in 2010, the Adelina, a container ship, obtained a Singapore flag last December. But Thomson Reuters-owned due-diligence database Accelus lists the “Group Beneficial Owner” of Adelina as Iran Shipping Lines. The latest data from ship consultancy Alphaliner also shows the Adelina is still operated by IRISL.

The Adelina last left Singapore on January 18. Reuters tracked the ship as it steamed up the Red Sea, through the Suez Canal and the Aegean Sea. After stopping at Istanbul it sailed to the Russian port of Novorossiysk on the Black Sea where it moored yesterday.

“TOO MUCH POLITICS”

The day before Cheong stepped down last June, Global Maritime got a new director: Danny Yau, also the director of a further six companies owned or directed by Cheong. As well as now running Global Maritime, Yau has set up a new shipping agency, Hardsea Agencies Pte Ltd. Sitting in his new office overlooking Singapore’s Tanjog Pagar port, Yau said Hardsea is a simple shipping agency, unattached to IRISL.

“Not directly, we don’t deal with them, we’re just agents for certain ships to carry cargo, general cargo,” he said when asked of his firm’s relationship with the Iranian line. “It doesn’t break UN rules or sanctions.”

Yau declined to elaborate when contacted later about Global Maritime Investments and the Adelina’s links to IRISL. “I don’t say anything; it’s too much politics,” he said.

Another of Cheong’s employees at Sinose Maritime, Ling Chong Yung, is listed as the director of Adelina’s official owner, Pride Shipping Oriental Pte. Reuters visited Ling at the offices of Damilang Maritime, a newly established shipping agency two streets away from Yau’s new office.

Office staff said Ling had left for China on a business trip the day before, but all inquiries related to Pride Shipping had to go through Yau at Hardsea Agencies, who they referred to as “the boss”.

Cheong, meanwhile, is still at work in the shipping business.

Visited at a drab office block on an industrial estate in the Buona Vista area of Singapore, Cheong declined to speak. He later responded to questions via email. He said none of the companies he is involved in do any work on behalf of IRISL. Sinose Maritime, he said, is in the course of being liquidated.

“In so far as the indictment against me is concerned, it is entirely unjustified. I have instructed solicitors in the U.S. to defend the case vigorously and to defeat the charges which are totally without any foundation,” he said.

HIGH COURT SHERIFF

Not everyone agrees with Washington’s claims that IRISL is still in charge of ships that visit Singapore. When Singapore’s High Court Sheriff seized three IRISL ships in September 2010 for failing to meet their credit arrangements, the court considered whether Singapore should, under UN sanctions, continue to hold the ships even after the payments were made.

The city-state is clear on its attitude to sanctions: it will implement those agreed on by the United Nations, but will not take any unilateral action or subscribe to those issued unilaterally by the United States or European Union.

The UN embargo orders IRISL assets be frozen, including those of “any person or entity acting on their behalf or at their direction, and to entities owned or controlled by them.”

But the judge in the 2010 case, Justice Quentin Loh, decided that the UN sanctions target specific IRISL entities such as IRISL Benelux, and not the three companies listed as the owners of the ships. He also ruled that even if UN sanctions did apply, they did not imply that commercial assets such as ships should be seized. Singapore released the vessels.

Loh concluded: “Links to IRISL itself are, by themselves, neither here nor there.”

Reuters Freight Fundamentals shows that Singapore has received at least 150 visits by 83 ships believed to be IRISL-linked over the past two years.

A spokesman for the Singapore Ministry of Foreign Affairs said that “Singapore enforces all United Nations Security Council (UNSC) sanctions against Iran. We do not enforce the unilateral sanctions by any jurisdiction which go beyond the UNSC sanctions. In this regard, Singapore understands that IRISL in itself is not a UN-designated entity.”

The foreign affairs spokesman said Cheong Kheng Guan “faces proceedings under U.S. law for engaging in business dealings with and having facilitated the activities of U.S.-designated entities. Based on what we know, there has been no violation of UNSC sanctions or Singapore law in this particular case.”

U.S. diplomatic sources privately say that they wish Singapore would take a harder line.

SUNNY MALTA, IRANIAN HIDEOUT

And it’s not just Singapore. Twenty three sanctioned Iranian ships have visited 12 EU ports since July 2010, when the EU imposed its own first sanctions on IRISL, including 96 stop-offs in Malta, 14 visits to Antwerp and 10 to Rotterdam.

As well, 48 Iran-linked ships sail under the flag of Malta and 12 under that of Cyprus.

In the Mediterranean island of Malta, authorities say trade with Iran has been declining steeply, with exports down to 144,996 euros ($191,000) in 2010 from more than 2 million euros in 2008 and 2009. Joseph Cole, the chairman of the Maltese sanctions monitoring board, said a contract between IRISL and Malta Freeport will not expire until November 2013, but an intensive program of customs inspections had already driven the shipping line away.

“We have made it so difficult for IRISL ships that they have reduced their operation to Malta to almost nil – even though technically they can still come,” said Cole.

Movement data for IRISL’s fleet, however, show that 18 ships have visited Malta’s Freeport over the last two years, three of them as recently as November.

IRISL containers could be seen stacked on the concrete yards of the Freeport last week. Despite being a member of the European Union, Malta not only supplies flagging services to IRISL ships, but is also home to 24 shell companies that help conceal Iran’s ownership of vessels.

In the Grand Harbour of Malta, below the sandstone ramparts of the capital Valletta, a grey-painted building houses Transport Malta. The agency earns around 300,000 euros annually from registering IRISL ships, according to an estimate by Reuters based on a table of tariffs on the agency’s website. It declined to comment, citing commercial sensitivity.

It is also home to the country’s public shipping register where – recorded in longhand in large paper volumes – is the paper trail of Iran’s shell games, as well as evidence of those who have worked for the country.

As sanctions have tightened, the Maltese register shows, Iran’s ships have regularly switched not just flags, but names, registered owners, registered agents, and the addresses of owners and agents. The Alva, for instance, a 66,500-deadweight tonnes (DWT) container vessel, has had three different owners since it was built in Germany in 2008 and acquired by IRISL that year. It originally flew a German flag. IRISL switched that to a Maltese flag, then back to a German one in 2010, then again to Maltese last year.

READY TO SACRIFICE

Most Maltese lawyers and agents now refuse to act for IRISL. Not only are new commercial contracts with the Iranian line banned under EU sanctions, existing ties have been scrapped by most agents to avoid damage to their reputation, according to two Maltese lawyers. That has pushed most business into the hands of a small Maltese outfit, the Royal-Med Shipping Agency, which has an office on the sea front in the tourist resort of Sliema. The agency is now under direct U.S. sanctions as an alleged cover operation for IRISL.

The Royal-Med agency’s steel shutters were drawn shut one day last week. A phone call later to Royal-Med’s listed number was answered by an employee who said the agency “was in the process of closing down. We have no activity.”

The employee, who declined to give his name, said Royal-Med had previously acted as agents at the Freeport for IRISL and then for HDS Lines, a company named by the U.S. government and the EU as a subsidiary of IRISL. He said HDS had decided to end visits to the island last November, leaving Royal-Med with no business.

Dr Tonio Borg, Malta’s foreign minister, says IRISL has such a large Maltese fleet because the country has such a large shipping register. Malta’s role as Europe’s biggest registry was not the result of lax regulation. “We see it as a flag of confidence, not of convenience,” he said.

Asked about Malta’s connections to IRISL, he revealed that Malta was prepared to de-register Iran’s entire sanctioned fleet. “We’re moving in that direction,” he said. But Iran should not be allowed simply to relocate its ships to other European countries, he said.

“We believe that all services to IRISL should be prohibited,” said Borg. “We are ready to make that sacrifice – provided that all countries also make the sacrifice� Otherwise it would be masochistic.”

(Rachel Armstrong reported from Singapore, Stephen Grey from London and Valletta, and Himanshu Ojha from New York; with additional reporting by Jonathan Saul and Philip Baillie in London, Christopher Scicluna in Malta, and Mitra Amiri in Tehran; writing by Stephen Grey; edited by Simon Robinson and Sara Ledwith)

Special Report: Before We Thank Iran’s Tanker Fleet…

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1/31/2012 @ 4:02PM

With sanctions currently the U.S. tool of choice for thwarting Iran’s terror networks and nuclear ambitions, the good news is that U.S. lawmakers are crafting new measures to cast a wider net. Let’s hope that this time they don’t leave a hole big enough for an Iranian oil tanker to sail right through.

Make that a fleet of oil tankers. Despite the many sanctions now targeting Iran’s regime,  and bedeviling Iran’s national merchant fleet, the Islamic Republic of Iran Shipping Lines (IRISL), Iran’s main tanker fleet has so far remained exempt.

If the aim is to contain and pressure Iran’s regime, this is no small omission. Iran’s main tanker fleet is owned by a company called NITC, formerly the National Iranian Tanker Company. Headquartered in Tehran, NITC ranks as the world’s fourth largest operator of very large crude carriers, according to a leading London-based shipping information service, Lloyd’s List, which reports that last year NITC was responsible for transporting 53 million tons of crude oil.

Currently, NITC’s web site lists a fleet of 39 tankers, which it uses to carry Iranian oil, and also charters out on the international market. NITC serves Iran not only as a vehicle for moving petroleum, but for enjoying business access and networking opportunities. In its chartering activities, NITC says it aims, among other things, to “build close relationships with reputable charters and shipbroking firms,” and call at “a wide variety of global ports and terminals.” NITC describes itself on its web site as employing more than 3,000 staff, including 2,500 seafaring personnel, of whom about 85% are Iranian nationals.

NITC tankers call freely at ports from Europe to the Far East. Within the past five weeks, for instance, an NITC tanker, the Sepid, has called at the Greek port of Piraeus; two more NITC tankers, the Saveh and the Sarvestan, have called at the Dutch port of Rotterdam, where NITC keeps an office.

This week, NITC top management appears to be going through an upheaval. On Tuesday, news broke that NITC’s longtime chairman and managing director, Mohammad Souri, had suddenly stepped down after 26 years at the helm. Reuters reports that he sent out a letter, saying he has retired, but he will continue to serve NITC as an “adviser and supporter.” The new head of NITC will be a former Iranian transportation minister, Hamid Behbahani, who has recently been serving as a transportation adviser to Iran’s President Mahmoud Ahmadinejad.

There is speculation in the shipping press that this shuffle at NITC may be related to the looming possibility of U.S. sanctions on the company. The Senate Banking Committee has been considering whether to include NITC in new sanctions legislation due for a vote this Thursday.

NITC officials have been protesting that it makes no sense for the U.S. to sanction them. They say that while NITC was once owned by Iran’s state oil company, NITC was privatized 12 years ago and is “not a state company,” as NITC’s commercial director, Habibolah Seyedan told Reuters last week. He also said that NITC has no links to Iran’s Islamic Revolutionary Guard Corps, the IRGC. Since the U.S. blacklisted the IRGC in 2007 for its role in Iran’s proliferation activities, both U.S. and European Union sanctions authorities have targeted a growing number of IRGC-related entities linked to Iran’s terror and proliferation networks.

NITC officials have been talking up their professionalism, good safety record, multi-billion dollar investments in their fleet and ties within the global oil and shipping industries. NITC’s newly retired chairman, Mohammad Souri, has for years been racking up international shipping awards. Last December, at a ceremony in Dubai, Lloyd’s List named Souri its Tanker Operator of the Year, for the Middle East and Indian Subcontinent. In 2010, a U.K.-based maritime networking firm, Seatrade, honored Souri in London as its Personality of the Year. After that ceremony, Souri gave an interview to a shipping information service, IHS Fairplay, in which he said, “We are a tanker company, transporting energy for people around the world; we should be thanked, rather than having sanctions.”

Before U.S. lawmakers rush to thank NITC, however, they might want to ask just how many degrees of separation actually distance NITC and its officials from Iran’s regime and the IRGC.

Congressional investigators could start with a closer look at NITC’s ex-chairman, now slated to be its supporter and adviser, Mohammad Souri. Fluent in English, well-traveled and familiar with America and its ways, Souri for more than a quarter of a century has been the human face of NITC. But however great his official distance from the Tehran regime and IRGC, Souri has long occupied a position of trust within the system they have created. In transporting Iran’s oil, NITC plays an important part in the oil supply chain that sustains the Tehran regime and fuels an Iranian economic-political-military complex in which the IRGC plays an increasingly pervasive part.

Educated initially in Iran, Souri then studied in the U.S. in the late 1970s, during the final years of the Shah. While running an international freight company registered in 1976 in New York, he earned a Batchelor’s of Science degree from Howard University, in Washington, D.C., graduating in 1979. That was the year Ayatollah Khomeini took power with Iran’s Islamic revolution. That same year, Souri returned to Iran, and before the year was over he had landed a post as a deputy minister in the new Islamic government’s Ministry of Commerce. Exact dates vary from one version of Souri’s biography to the next, but within a mere three years, he had become chairman and managing director of Iran’s  IRISL merchant fleet.

By 1986, the Islamic government had moved Souri to what was arguably an even more important job, as chairman and managing director of NITC, then a subsidiary of the state-owned National Iranian Oil Company (NIOC). That was during the 1984-1988 Iran-Iraq tanker war, in which Iran’s tanker fleet operated in close coordination with both Iran’s regular navy and the IRGC’s parallel navy — which was then developing the kind of speedboat guerrilla tactics Iran uses today to harass U.S. naval ships in the Gulf.

In 2000, Iran’s government “privatized” the NITC, transferring its ownership from the state oil company, NIOC, to a number of Iranian pension funds. Congressional investigators might want to explore the extent to which that arrangement actually qualifies as a private sector deal. In a 2008 confidential U.S. diplomatic cable released last year by WikiLeaks, an American official writing about NITC noted that “67% of the company’s equity is controlled by the Iranian state employee and oil industry employee retirement funds.”

Souri stayed on as head of NITC, resigning a directorship he had held for years on the NIOC board. But under his chairmanship, the NITC board has looked a lot like a NIOC alumni club. Two of the other six directors listed on the NITC web site are former senior officials of NIOC. A third is a former official of the London office of a Tehran-based entity called Kala Naft, which the U.S. government identified in 2010 as wholly owned by NIOC. Last year, when NITC was less shy about its relationship with state-owned NIOC, its web site included a list of its “missions.” Among them were: “Providing marine services to NIOC oil rigs and offshore platforms…Hire of required vessels to International Markets for NIOC…Chartering new vessels on behalf of NIOC affiliated companies.”

NIOC itself, which U.S. lawmakers have also been considering as a sanctions target, is supervised by Iran’s Ministry of Petroleum. Since last summer, the man heading that ministry has been Rostam Qasemi, an IRGC general. Qasemi was blacklisted in 2010 by both the U.S. Treasury and the European Union for serving as head of a huge  IRGC business conglomerate, Khatam al-Anbiya.

Then there’s the issue of banking. In an interview last January with Bloomberg news service,  NITC’s area manager in the United Arab Emirates, Rahmat Ghareh, mentioned that in the UAE, NITC for its financial transactions was using a branch of Iran’s Bank Saderat. That might be of interest to U.S. lawmakers, because in 2007 the U.S, government blacklisted Bank Saderat “for providing services to terrorist organizations, including Hezbollah.”

If, as reported, former transportation minister Behbahani is now taking the NIOC helm, is this picture likely to improve? Behbahani is a longtime ally of Ahmadinejad, and by some accounts served years ago as Ahmadinejad’s thesis adviser. In 2009, following the Iranian government’s brutal crackdown on demonstrators protesting Ahmadinejad’s rigged reelection, Ahmadinejad appointed Behbahani as transportation minister. On Behbahani’s watch, the transportation ministry awarded a road-building contract worth billions to the IRGC’s Khatam al-Anbiya, the same outfit that has been headed by current oil minister Qasemi.

A year ago, Iran’s parliament impeached Behbahani as transportation minister, amid charges of inefficiency, and following major airplane and train accidents on his watch. Ahmadinejad denounced the impeachment as “illegal,” and made Behbahani his transportation adviser. In that role, Behbahani accompanied Ahmadinejad on a trip this January to see Iran’s pals in Nicaragua, Ecuador, Cuba and Venezuela –  an excursion that Rep. Ileana Ros-Lehtinen dubbed a “Tour of Tyrants.”

Is there anything in all this that might warrant sanctions on NITC? Maybe lawmakers can take their pick.

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