Soon after arriving in Equatorial Guinea in 1991, the U.S. ambassador discovered an unusual arrangement involving the country's despotic president and the first successful oil company operating in the poor, West African nation.
Walter International Inc. was paying to send the president's son to study at Pepperdine University in Malibu, Calif., company employees told the ambassador, John E. Bennett. The staff of the Houston company told Bennett about the arrangement, grousing that the son was "spending at will," bringing the tab for a year in Southern California to at least $50,000, the former ambassador said.
After Walter became successful with its business -- and government relations -- some of the biggest names in oil rushed to drill off the shore of a country the size of Maryland. They expanded on the type of arrangement Walter had with President Teodoro Obiang Nguema Mbasago, but on a much larger scale.
Their business activities provide a picture of how oil companies have operated in a developing country with a history of corruption. The companies paid for scholarships for children of the country's leaders, formed business ventures with government officials, hired companies linked to Obiang and rented property from government officials and their relatives, according to a U.S. Senate report released in July that reveals the companies' operations in striking detail. The report, which described the relationship between Riggs Bank of Washington and the oil firms operating in Equatorial Guinea, said the companies' actions raised "concerns related to corruption and profiteering."
A Securities and Exchange Commission investigation includes the three companies with the largest presence in the country -- Exxon Mobil Corp., Amerada Hess Corp. and Marathon Oil Corp. -- along with ChevronTexaco Corp., Devon Energy Corp. and CMS Energy Corp., the companies have said. The Senate report also cited activities of a private company, Vanco Energy Co.
Some of the companies' annual reports show their broadening investment in Equatorial Guinea. Since 1997, the amount of oil produced in Equatorial Guinea has increased seven times, to about 360,000 barrels a day. The country has emerged as the third-largest producer in sub-Saharan Africa and derives most of its revenue from oil.
Oil companies have a history of supplying cash and lavish gifts to leaders of countries whose oil reserves they want to exploit. Bribery of foreign officials was outlawed in 1977 under the U.S. Foreign Corrupt Practices Act, after SEC investigations led more than 400 U.S. companies to admit that they had made questionable or illegal payments in other countries. The act outlaws payments to foreign officials for the purpose of obtaining or keeping business.
Officials at the Justice Department and SEC, both of which are responsible for enforcing the act, could not provide statistics on the number of oil companies that have been accused of violations. A Justice Department spokesman said no officials wanted to discuss enforcement of the act. Paul R. Berger, associate director of the SEC's enforcement division , cited several cases in recent years that his agency had brought against oil companies, but he added that violations can be hard to discover and prove.
Two subsidiaries of ABB Ltd. -- ABB Vetco Gray of Houston and ABB Vetco Gray UK of Scotland -- pleaded guilty in the United States in July to violating the corrupt practices act. Federal regulators said they made more than $1.1 million in illicit payments to Nigerian government officials to gain advantage on oil and gas projects.
Halliburton Co., a Houston oil field services company, said in SEC filings last month that federal regulators were investigating possible improper payments under the corrupt practices act involving a project in Nigeria in which the company had participated.
In Equatorial Guinea, a former Spanish colony, human rights activists said the oil companies' payments there have helped prop up Obiang, who has ruled since seizing power in a military coup in 1979. State department reports have for years cited the regime for human rights violations, including torture, beatings and abuse of prisoners and suspects, sometimes resulting in death.
A State Department report published this year concluded that most of the money generated by the oil companies' presence has not benefited average residents in the country of 500,000. Most of the country's oil wealth "appears to be concentrated in the hands of top government officials while the majority of the population remained poor," the report said.
Sarah Wykes, who has studied the situation in Equatorial Guinea for Global Witness of London, said oil companies ignored red flags about how their money was being spent.
"At the very least, there's an appearance of the complicity with corruption," said Wykes, whose group advocates the public disclosure of payments by oil companies to countries where they operate. "It's reinforcing the culture of corruption."
Equatorial Guinea's ambassador to Washington, Teodoro Biyogo Nsue, Obiang's brother-in-law, did not return repeated phone calls for this story. Embassy personnel said Obiang could not be reached for comment. A Washington firm that handles press issues for the country, C/R International LLC, was unable to arrange interviews for this story.
While oil revenue has filled government coffers, most of the citizens still survive on about $1 a day. Three of four residents suffer malnutrition, but only 1 percent of the budget was spent on health care between 1997 and 2002.
Obiang, his family and members of his government live lavishly. Obiang owns two houses in Potomac, valued at $1.3 million and $2.5 million, property records show. One of his sons, Teodoro Nguema Obiang, owns a $6.9 million house in Los Angeles.
The payments by the oil companies came to light as part of a Senate permanent subcommittee on investigations probe of Riggs, which handled Equatorial Guinea's accounts. The Los Angeles Times reported last year on concerns about diversion of oil proceeds to Equatorial Guinea's ruler and on the country's oil funds being held by Riggs.
Federal regulators are investigating the bank for long-standing violations of laws designed to prevent money laundering.
In the course of tracing money through Riggs accounts, Senate investigators found numerous questionable transactions involving oil companies.
The oil companies made payments of more than $4 million to support more than 100 students from Equatorial Guinea studying abroad, most of whom were relatives of wealthy or powerful officials, the report said.
The report said three companies -- Exxon Mobil, Hess and Marathon -- have made large payments to officials, their family members or businesses controlled by them.
A subsidiary of Exxon Mobil leased buildings and land from the president's wife, according to a letter from the company to the Senate subcommittee. The leases were later changed to name a company controlled by Obiang.
Hess paid officials of the country nearly $1 million for building leases. In one case, a lease was negotiated by Triton Energy, a company Hess acquired in 2001, and was continued by Hess; the two companies paid $445,800 to lease property from a 14-year-old relative of the president, who was represented by his mother, according to Senate investigators.
At one point, Hess stopped paying on the lease after a judge ruled that the property belonged to someone else. A government minister called Hess officials and asked why the payments had stopped. Hess informed the minister of the judge's order. The minister got the judge on the phone and he immediately rescinded the order, Hess told Senate investigators.
Two companies -- Hess and a subsidiary of Exxon Mobil -- paid a total of nearly $1 million for security services from a company owned by the president's brother, Armengol Ondo Nguema, who has been accused of human rights abuses in his job overseeing security forces. Through a subsidiary, Triton transferred $250,000 to a Riggs account to send Ondo's children to school, according to the Senate report.
In a report released in 1999, the State Department said that at Ondo's direction, security forces "urinated on prisoners, kicked them in the ribs, sliced their ears with knives, and smeared oil over their naked bodies in order to attract stinging ants."
Ondo owns a house in Arlington valued at $463,000, according to property records.
In several instances, oil companies formed joint ventures with high-ranking officials in the country, the companies have said. Exxon Mobil entered into a business venture with a construction and real estate company controlled by Obiang, resulting in dividend payments to the president totaling $31,500 over three years.
Senate staff members would not say whether they referred any possible violations of the Foreign Corrupt Practices Act to the Justice Department for investigation, citing policy not to disclose such information.
The oil companies named in the Senate report declined to answer specific questions about operations in Equatorial Guinea or did not return phone calls.
"We take pride in the way we do business," said Jay R. Wilson, a spokesman for Hess. "We think we do business very ethically."
At a Senate hearing in July , Albert Marchetti, an official with Hess, said his company paid for scholarships for students from Equatorial Guinea but did not select which students received the awards. He said the company did not "have anything to do with where that money is spent and who it's spent on."
Also at the hearing, Steven Guidry, an official with Marathon, said that the company recognized the concerns about human rights abuses. "Our presence in the country, we think, goes a great distance toward improving conditions in Equatorial Guinea, and . . . we think we have a positive affect on the conditions that exist in Equatorial Guinea," Guidry said.
Andrew Swiger, an executive vice president at Exxon Mobil, said at the hearing that in Equatorial Guinea, there is "a small community of government officials and business owners."
"Virtually all government officials have some business interests of their own, or through a close relative," Swinger said. "In such countries, it is sometimes necessary to do business with a government official or a close relative of a government official. But it is still expected that we do business ethically and comply with all U.S. and local laws."
Former oil company executives said in interviews that government officials in developing countries would occasionally approach them seeking bribes or other unusual payments.
"Anything in West Africa you have to be careful," said Nicholas De'Ath, a former executive with Triton who worked in Equatorial Guinea in the late 1990s. "You have to have very clear standards, policies and procedures within your organization, and you have to make damn sure everybody follows it."
De'Ath said his company made no improper payments during the time he was in Equatorial Guinea. Company executives who were in charge at the time of the payments described in the Senate report did not return phone calls.
Because of concern that money paid by oil and other natural resource companies has been misappropriated by leaders of some countries, an international coalition of groups has been lobbying for the disclosure of fees the companies pay to do business. Billionaire financier George Soros, who is among those pushing the initiative, said in an interview that doing so would pressure the oil companies and make it "more difficult to engage in those practices."
But while some have agreed to voluntarily disclose the amount of payments, efforts to enact laws making reporting mandatory have not been successful. The Senate report said the corrupt practices act should be changed to require U.S. companies to disclose substantial payments to a country's officials, family members or businesses they control.
The payments from the oil companies to the government were facilitated by Riggs.
From 1995 until 2004, Riggs administered more than 60 accounts for the government of Equatorial Guinea, top officials and their family members. The aggregate deposits -- which ranged from $400 million to $700 million at a time -- collectively made the country the bank's biggest customer, prompting jubilation among Riggs officials.
"Where is this money coming from? Oil -- black gold -- Texas tea!" a Riggs executive vice president, Raymond M. Lund, gushed to colleagues in a 2001 e-mail.
But the Senate report concluded that in processing the oil money, Riggs "turned a blind eye to evidence suggesting the bank was handling the proceeds of foreign corruption." Riggs accepted oil companies' payments into a government account from which money could be withdrawn with the signature of Obiang and a second person: either his son, the country's minister of mines; or his nephew, the secretary of state for treasury and budget.
At one point, Riggs allowed more than $35 million from the government account to be wired into the accounts of two companies in countries with bank secrecy laws. Senate investigators think at least one of the companies is controlled partly or wholly by Obiang.
In May, the bank agreed to pay $25 million in civil penalties to settle charges by regulators that the bank was "willful" and "systemic" in its violation of anti-money laundering laws.
At the time Bennett served as U.S. ambassador to Equatorial Guinea -- 1991 to 1994 -- he said Walter was the only oil company with an office there, though other companies came to assess the country.
When Walter officials told Bennett of the scholarship money, he said he thought the practice "seemed an unusual way for a company to do business," but he was more focused on dealing with a government that was terrorizing the population using "intimidation, arbitrary arrests, widespread torture, total corruption of government services."
A former official of Walter, which was later purchased by another company, declined to comment, and its founder died. The company was not named in the Senate report.
Bennett said that when he raised concern about human rights abuses under Obiang, Walter officials grew uncomfortable. Bennett said the company was especially displeased after he went to Washington and delivered a detailed report on the Obiang regime's record of abuses.
Bennett said a Walter official "was really ticked off and just read me the riot act very forcefully." He said the official was "accusing me of making it difficult for his company to do business."