Semion Mogilevich, a top Russian crime boss, was arrested in Moscow in January for his alleged connection to a tax evasion scheme involving a Russian cosmetics company. He is wanted in the US for masterminding a money laundering stock fraud in the late 1990s with a Pennsylvania-based company that traded on stock exchanges in Canada. But the Mogilevich dealings that make law enforcement agencies most nervous have to do with the trading of natural gas in Eastern Europe.
The US Justice Department pointed to Mogilevich's "influence over large portions of the natural gas industry in parts of the former Soviet Union." Mogilevich has been linked to RosUkrEnergo, a trading company set up by Gazprom, Russia's biggest oil and gas company, and two Ukrainian investors. RosUkrEnergo, a Swiss company and Gazprom's monopoly supplier of gas to Ukraine, has denied any connections to Mogilevich.
Critics believe RosUkrEnergo and companies connected to it serve primarily to skim off profits from the gas trade. "We are talking about the gas supply of Ukraine," says Tom Mayne, a researcher for Global Witness, a London-based non-governmental organization that tracks corruption. "Eighty percent of Russian gas that goes to Europe goes through Ukraine, so it's vital that we know who is controlling the gas, else we could find ourselves at the whim of potentially undesirable elements."
Criminals have profited from the increasing demand for energy and the rising price of oil. The energy boom has given bad guys the opportunity to seek new profit centers and has encouraged corrupt behavior in countries that produce oil and gas.
This is making life tricky for international oil companies trying to do business in rough and tumble places while complying with US or other domestic laws. It has also raised serious concerns from law enforcement agencies.
"International organized criminals control significant positions in the global energy and strategic materials markets," said Attorney General Michael Mukasey in April when announcing a new Justice Department strategy to combat organised crime. "They are expanding their holdings in these sectors, which corrupts the normal functioning of these markets and may have a destabilising effect on US geopolitical interests."
This is certainly the case in Iraq, where five years of American blood and treasure have been undermined partially by widespread criminality in the oil sector. US State Department officials say that as much as 30 per cent of refined fuels in Iraq are diverted to the black market or smuggled out of the country.
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Millions of dollars of government revenues are lost each year to such oil smuggling, according to the World Bank. It has been easy to skim oil from Iraqi refineries and pipelines since most meters in place are not in working order.
"Corruption and smuggling have diverted government revenues potentially available for rebuilding efforts," the Government Accountability Office said in a report last year. More troubling is that the Iraqi insurgency has been partly funded by oil-sector corruption.
Insurgent and militia groups in Iraq have profited from the theft and illicit sale of oil to fund their activities, says the US Defense Department. It claims that as much as $2 billion a year in fuel processed at Iraq's biggest refinery is lost to the black market.
For international oil companies it has become even more difficult to stay on the right side of the Foreign Corrupt Practices Act, the US law forbidding bribery of foreign officials. The US Justice Department has become much more aggressive investigating such bribery cases while oil companies are scavenging the world for reserves, often ending up in the most unruly and corrupt places.
Baker Hughes, a Houston oil services company, pleaded guilty last year to making improper payments to secure work in Kazakhstan. The company also admitted to making illegal payments in Angola, Indonesia, Nigeria, Russia and Uzbekistan. Baker Hughes paid $44 million in fines and forfeitures, the biggest FCPA penalty ever.
Just about every major oil services company and at least one major integrated oil company have been swept up in an ongoing U.S. government investigation Swiss freight-forwarding company Panalpina World Transport Holding. Companies like Schlumberger, Tidewater, Noble Corp, GlobalSantaFe, Pride International and Ensco International rely on freight-forwarding companies to get their equipment past customs officials in countries like Nigeria, sub-Sahara Africa's biggest oil producer.
The Justice Department is investigating whether Panalpina bribed customs officials in Nigeria and other countries and has requested documents from the oil service companies and Royal Dutch Shell, according to securities filings.
This kind of behavior has already cost at least one oil service company. Oil contractor Vetco International paid $26 million in a settlement with the U.S government last year and admitted to paying about $2 million in bribes to Nigeria customs officials through a freight-forwarding company. Three Vetco units pleaded guilty to criminal violations in the case.
In April, watchdog group Transparency International concluded in a report that revenue transparency for the international oil business is possible but not yet a common practice. "It was $10 a barrel and now it's $140, so the risk has multiplied 14 times," says Juanita Olaya, a researcher at Transparency International. "The income is now quite huge and difficult to manage, and if there are not enough accountability structures from both the company and government side, who is going to track the money?"
In America the surging price of gasoline has led to increasing efforts by thieves to steal gasoline by siphoning or tank puncturing. Insurance company AAA Mid-Atlantic recently cited a case involving a thief in Bethesda, Md., who punctured a fuel line under a car to grab five gallons of gas. A nearby bus got relieved of 30 gallons of diesel.
Timothy Emert was accused in May of using a pump wired to a 12-volt battery to steal gasoline from an underground storage tank at a BP station in St. Paul, Minn. Emert told police who arrested him that he got the idea when he heard about a similar case on the TV news.
Others have caught onto the scam: The National Association of Convenience Stores estimates thieves siphoned some $134 million of gasoline in 2007. "It's a rising price that leads to theft," says Jeff Lenard, NACS spokesman. "When prices increase you see more of it."