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Koch Industries’ history of bypassing, breaking rules includes sales to Iran

By Asjylyn Loder and David Evans,

In May 2008, a unit of Koch Industries, 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 notified her supervisors in the United States. A week later, Wichita, Kan.-based Koch Industries dispatched an investigative team to look into her findings.

By that September, the researchers had found evidence of improper payments to secure contracts in six countries dating to 2002, authorized by 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.

Egorova-Farines’s 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 for wrongful termination.

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 and refining conglomerate spanning 50 countries.

Koch Industries discloses only an approximation of its revenue — $100 billion a year — and says nothing about its profit.

The most visible part of Koch Industries is its consumer brands, including Lycra fiber and Stainmaster carpet. Georgia-Pacific, 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. Charles and David have supported the tea party, a loosely organized group that aims to shrink the size of government.

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 Energy Department, the FBI and the CIA.

What many people don’t know is how the Kochs’ anti-regulation 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 United States identifies as a sponsor of global terrorism.

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 United States 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 mis-measuring the amount of crude it was extracting. Koch paid a $25 million settlement to the United States.

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.”

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 United States and Europe have testified or told investigators that they’ve witnessed wrongdoing by the company. Sally Barnes-Soliz, now an investigator for the Department of Labor and Industries in Washington state, says that when she worked for Koch, her bosses and a company lawyer at the Koch refinery in Corpus Christi, Tex., 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.

“How much lawless behavior are we going to tolerate from any one company?” says David Uhlmann, who oversaw the prosecution of the Koch refinery division when he was chief of the environmental crimes unit at the Justice Department. “Corporate cultures reflect the priorities of the corporation and its senior officials.”

Koch Industries declined to make Charles, who lives near corporate headquarters in Wichita, or David, who lives in New York, available for interviews.

Melissa Cohlmia, Koch’s director of corporate communications, said the company has developed a good relationship with environmental regulators and complies with all rules.

“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.

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.”

The illicit payments uncovered by ­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, says Ged Horner, a managing director at Koch-Glitsch who retired in 2010. “The only thing that would seriously impact the profitability and continuity of Koch Industries was a compliance issue,” he says.

In November 2006, the U.S. Justice Department 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 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, 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, she says.

The specifics of illicit payments for contracts by Koch-Glitsch can be found in French labor court cases. Complaints were brought separately by Egorova-Farines and Leon Mausen, business director of Koch-Glitsch France until 2008.

Koch-Glitsch fired Mausen on Dec. 8, 2008, sending him a 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 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 payment to secure a contract with a Moroccan government organization, Koch wrote. The company made similar payments to a Nigerian government agency to win contracts, Koch wrote.

Koch-Glitsch inflated its bid price to a private company in India in 2008, the letter said. A Koch employee explained why in an e-mail copied to Mausen 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.

Cohlmia, Koch’s spokeswoman, 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 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.

“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, 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 $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.

Cohlmia says Ender “had no knowledge of Mr. Mausen’s misconduct at the time it occurred, as Mr. Mausen concealed it from him.”

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.

The company fired her on June 16, 2009, saying later in court that she didn’t have the skills she’d listed on her résumé, according to the court record.

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 Feb. 11. She filed an appeal.

She said in court that Koch had harassed her and retaliated against her for uncovering the payment scheme. She asked to be reinstated in her Koch job and paid for the time she was out of work. Egorova-Farines now runs a business-practices consulting firm in Paris.

The payments to win contracts documented by Koch investigators may violate U.S. law, says Sara Sun Beale, a professor at Duke Law School. “It really should get the Justice Department’s attention,” Beale said. “When you have a smoking gun, you launch an investigation.”

Such a probe would fall under the Foreign Corrupt Practices Act, a law that makes it illegal for companies and their subsidiaries to pay bribes to government officials and employees of state-owned companies.

While Koch-Glitsch was conducting its internal probe of illicit payments for contracts, the U.S. government was investigating Koch’s European unit on another front: sales to Iran.

On Aug. 14, 2008, investigators from the Department of Homeland Security met with George Bentu, who had worked as a sales engineer from 2001 to 2007 for Koch-Glitsch in Germany, Bentu says. In a four-hour interview at the U.S. consulate in Frankfurt, the officials asked about documents showing details of the company’s trades with Iran, he says.

Homeland Security spokeswoman Barbara Gonzalez declined to comment.

Internal company records show that Koch Industries used its foreign subsidiary to sidestep a U.S. trade ban barring American companies from selling materials to Iran. Koch-Glitsch offices in Germany and Italy continued selling to Iran until as recently as 2007, the records show.

The company’s products helped build a methanol plant for Zagros Petrochemical, a unit of Iran’s state-owned National Iranian Petrochemical, the documents show. The facility, in the coastal city of Bandar Assaluyeh, is the largest methanol plant in the world, according to IHS, a provider of chemical, energy and economic data.

“Every single chance they had to do business with Iran, or anyone else, they did,” says Bentu, 46.

Bentu, a German engineer who earned his master’s degree in chemical engineering from Montana State University in Bozeman in 1990, joined Koch-Glitsch in 2001. His duties included drawing up bids for potential buyers of the company’s distillation equipment, which is used in making fuels, fertilizers and detergents.

Bentu says he had been working at Koch-Glitsch in Germany, for two months when he first saw an order destined for Iran. Concerned that the transaction might run afoul of U.S. law, Bentu asked his manager about it, he says. Bentu says his boss told him not to worry, that the company’s U.S. lawyers made sure the deals with Iran were legal.

U.S. companies have been banned from trading with Iran since 1995, when President Bill Clinton declared it a threat to national security. Iran supports Iraqi militants and Taliban fighters as well as terrorist groups, including Hamas and Hezbollah, according to the State Department.

Koch Industries took elaborate steps to ensure that its U.S.-based employees weren’t involved in the sales to Iran, internal documents show.

Koch Industries may not have violated the law if no U.S. people or company divisions facilitated trades with Iran, says Avi Jorisch, a Treasury Department policy adviser from 2005 to 2008. That’s impossible to determine without a complete investigation, Jorisch says.

Internal Koch-Glitsch correspondence shows that the company coordinated with Koch Industries lawyers in the United States to make sure that American employees didn’t work on sales to Iran. Elena Rigon, now Koch-Glitsch compliance manager for Europe, based in Italy, in December 2000 addressed a memo outlining compliance guidelines to company managers.

In another e-mail, Rigon said offices had to go through a checklist for each estimate for materials headed to Iran.

“Your staff shall send this form to me since I have to send it to the lawyers in the USA as part of the compliance program,” Rigon wrote. “If somebody happens to find out that any U.S. persons are involved in this project or U.S. material is delivered to Iran you CANNOT quote.”

Rigon declined to comment.

“Koch-Glitsch had protocols in place that were consistent with applicable U.S. laws allowing such sales at the foreign subsidiary level,” Koch’s Cohlmia says.

In his State of the Union address on Jan. 29, 2002, President George W. Bush described Iran as part of the “Axis of Evil.”

A year later, Bush said, “In Iran, we continue to see a government that represses its people, pursues weapons of mass destruction and supports terror.”

The next day, Koch-Glitsch was sent a purchase order to supply petrochemical equipment for the Zagros plant, being designed and built by two engineering firms, Pidec in Iran and Lurgi in Germany.

On May 31, 2004, Koch-Glitsch secured another contract for 1.2 million euros, to help expand the Zagros facility. The plant helped Iran turn its vast natural gas reserves into methanol, which is used for making plastics, paints and chemicals.

The Italian office of Koch-Glitsch sought work on other projects in Iran — the expansion of the Abadan refinery, the country’s largest, and the development of South Pars, part of the world’s largest natural gas field, the documents show.

Koch-Glitsch told employees in 2006 that the company was winding down business in Iran, Bentu says. At that point, he says, his bosses still asked him to work on Iran bids. Bentu says he felt dismayed because Koch Industries clearly tells all of its employees around the world that integrity is the company’s No. 1 value.

“You feel totally betrayed,” Bentu says. “Everything Koch stood for was a lie.”

The full version of this Bloomberg Magazine article appears in the November issue.

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