Posted on 07/29/2003 9:57:34 AM PDT by NativeNewYorker
July 29 (Bloomberg) -- Enron Corp. used World Bank and U.S.
government agency funds to make at least $17 million in
''questionable'' payments to a group of Guatemalan businessmen
who helped win approval for the first power plant in Central
America for what became the world's biggest energy trader, a U.S.
Senate investigation found.
Enron disguised the payments, made from 1992 to 1995, as
fuel costs to reduce the company's U.S. and Guatemalan tax
liability, the Senate Finance Committee says in a 506-page report
obtained by Bloomberg News.
The report shows how Enron avoided scrutiny of its overseas
investments by U.S. officials and government-backed financing
agencies in Washington. The Guatemala project came years before
Enron went bankrupt in 2001 after admitting it hid $1.2 billion
in losses through hundreds of off-the-books partnerships.
Senators who commissioned the report said it illustrated that
more corporate oversight is needed.
''Enron benefited from taxpayer support and multilateral
organization support to extend its international reach, including
the Guatemalan power project with its questionable payments,''
the report said.
The Securities and Exchange Commission failed to respond to
a 1999 request by the Internal Revenue Service to investigate,
the report said. Enron executives, including David Haug, Rebecca
Mark and Thomas White, later named Army secretary by President
George W. Bush, were eligible to get bonuses for lining up
financing for projects whether they were completed or not, the
report said.
Statute of Limitations
Enron spokesman John Ambler said the company hadn't reviewed
the report and had no comment.
In an Oct. 8, 2002, letter to the committee shown in the
report, White, who was chairman of Enron Operations Corp., said
that he did not recall ''any specific meetings or specific
written guidance I received regarding the contract for the
project or related issues.'' In the letter, he said that while he
would have been briefed on the project by Mark, he had no access
to documents that would refresh his memory. Bloomberg News was
unable to reach White, who resigned as Army secretary in April.
Mark, then president of Enron Power Development Corp.,
referred requests for comment to her attorney, Helen Foster, who
didn't return two calls. Haug, then-managing director of Enron
Development Corp., didn't return a call to his company, the Haug
Group in Houston.
'Corporate Abuses'
Enron can't be prosecuted for the alleged payments because
the statute of limitations under the Foreign Corrupt Practices
Act, which prohibits payments to foreign government officials or
third parties, expires after five years, said Peter Clark, deputy
chief of the Justice Department's fraud division. In this case,
that would have been in 2000.
Clark declined to comment on the Enron project.
The top Democrat and Republican on the Finance Committee
said the case illustrated the need for action.
''We have yet to see one piece of legislation enacted which
addresses any of the Enron abuses'' since the company's collapse,
Democrat Max Baucus of Montana said in a statement.
Committee Chairman Charles Grassley, an Iowa Republican,
called on the Justice Department to clamp down on ''abuses in
corporate suites.'' The investigation was done by the finance
committee staff.
The report details one of Enron's early efforts to expand
overseas, a push that helped make the energy trader the seventh-
biggest U.S. company before it sought bankruptcy protection. The
filing followed disclosures it had written off $1 billion in
failed investments and hid $1.2 billion in losses through
hundreds of off-the-books partnerships.
Public Financing
The collapse was then the largest U.S. bankruptcy, with
Enron owing creditors an estimated $67 billion.
The investigation shows that Enron modelled projects in
Italy, Puerto Rico and India after the Guatemalan plant, the
report said.
Enron secured more than $1.4 billion in project financing
and political risk insurance from the U.S. Department of
Transportation, the World Bank, and the Overseas Private
Investment Corp., a U.S. government-backed agency that provides
risk insurance for companies investing overseas.
The Guatemalan power project, a barge-mounted electricity
plant near Puerto Quetzal on the country's southern coast, was
the first privately owned power plant in Central America.
The deal originally was struck in 1992 between Texas Ohio
Power Co. and Empresa Electrica de Guatemala SA, the government-
owned electric utility.
Enron bought Texas Ohio's contract rights later that year,
including the obligation to pay 6 percent of the plant's gross
receipts to the Guatemalan businessmen, according to the report.
Sun King
The five men -- Raul Arrondo, Oswaldo Mendez Herbrugher,
Marco Antonio Lara, Roberto Lopez and Henrik Preuss -- did little
more than ''introduce Texas Ohio to President (Jorge) Serrano,
and talked him into signing the contract,'' according to a memo
in the report by Enron's Guatemalan attorney, Jorge Asensio.
They made no investment in the project, the report said.
To finance the project, Enron secured more than $71 million
from the International Finance Corp., a World Bank unit that
lends to private companies, and $98 million from the U.S.
Department of Transportation.
Enron officials soon realized they had inherited Texas
Ohio's commitment to pay the Guatemalan businessmen, which the
power company said would amount to about $63 million during the
life of the contract, or 46 percent of the project's cash flow.
The Guatemalan businessmen insisted Enron make the payments in
U.S. dollars deposited in a Miami bank, according to the report.
Arthur Andersen
Enron discovered the Guatemalan businessmen, whose company
is known as Sun King Trading Co. according to the report, were
incorporated in Panama, which has no income tax.
Arthur Andersen LLP, Enron's accountant, said in 1995 that
making the payment would trigger Guatemalan taxes of more than 28
percent and might not qualify as tax deductible on the company's
U.S. tax returns.
Andersen, which later collapsed, estimated potential tax
liability approaching $2.9 million by 1995.
Enron made the tax-free payments anyway by disguising them
as add-on tax-deductible fuel payments, which the report said was
an arrangement to pay Sun King in U.S. dollars ''and to hide them
from Guatemalan tax authorities,'' the report said.
The committee said Enron was ''unable to locate
documentation for compensation, bonuses and stock options awards
for the Guatemala project.'' The report didn't accuse any
specific executive of profiting from the deal.
Guatemalans
Three of the Guatemalan businessmen -- Arrondo, Herbrugher,
and Preuss -- denied any impropriety. Lara and Lopez couldn't be
located for comment. Foreign nationals are not subject to the
Foreign Corrupt Practices Act and the Guatemalans are not the
target of the congressional probe.
''They're trying to conclude something that is totally
false,'' said Herbrugher, president of the Sun King group. ''I
was controlling all the income. I can guarantee you to whom these
moneys went.''
Enron ultimately engineered a lump-sum $12 million buyout of
the contract, according to the Finance Committee report.
''The stress that we have gone through in trying to pay
abroad, to pay tax free, and to pay in dollars, has put this
company against the wall, and such payments could severely injure
the company in the future,'' Asensio, Enron's attorney, wrote in
one memorandum.
An informant approached Internal Revenue Service auditor
Gerald Richards in 1997 about the payments, according to the
report. Richards then challenged Enron's efforts to deduct some
of the payments on its U.S. tax returns, the report said. It
didn't identify the informant. Richards declined to comment.
IRS Audit
He also urged his boss, District Director Paul Cordova, in
May 1999 to refer the case to the Department of Justice and SEC.
Cordova's referral, a copy of which is in the report, said Enron
''may have violated the Foreign Corrupt Practices Act.''
While the Justice Department and SEC acknowledged the
referrals, they never acted on them, partly believing that
taxpayer confidentiality laws would make it difficult for the IRS
to share information, according to the report.
Spokespeople for the SEC and the Justice Department declined
to comment.
Enron officials at the time were invited to contribute ideas
on energy policy by the Clinton administration in the mid-1990s,
as they later were by the Bush administration. Enron officials
accompanied Clinton Energy Secretary Hazel O'Leary on trade
missions to India, China, Pakistan and South Africa.
The Bush administration went to bat for Enron during its
first year in office, as Vice President Dick Cheney and then-
economic adviser Lawrence Lindsey helped Enron resolve a
multimillion-dollar dispute with Indian officials over the Dabhol
Power Co., an Enron project.
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