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US: Alcoa Faces Allegation By Bahrain of Bribery


by GLENN R. SIMPSONThe Wall Street Journal
February 28th, 2008

A company controlled by the Persian Gulf state of Bahrain accused Alcoa Corp. of a 15-year conspiracy involving overcharging, fraud and bribery.

A suit in federal court in Pittsburgh by Aluminum Bahrain BSC alleged that Alcoa steered payments for an aluminum precursor ingredient to a group of tiny companies abroad, in order to pay kickbacks to a Bahraini "senior government official." The Bahraini firm, known as Alba, alleged that Alcoa had overcharged it for the precursor material, alumina.

Bank records and invoices show that more than $2 billion in Alba's payments for alumina passed from Bahrain to tiny companies in Singapore, Switzerland and the Isle of Guernsey. The suit alleged that some of the money found its way back to officials involved in granting the contracts.

"Defendants...furthered their fraud through bribes paid to one or more officials of the Government of Bahrain," said the suit, which didn't name the officials and didn't cite any direct evidence of such payments.

Alcoa said it will look into the matter. "We have not had the opportunity to review these allegations and are not in a position to comment," spokesman Kevin Lowery said. "However, we are completely unaware of any wrongdoing by the company or its employees." Alcoa, based in Pittsburgh, is one of the world's largest metals companies, with more than $30 billion in annual sales.

Under the Microscope

The allegations from Bahrain, a staunch U.S. ally in the Gulf area, represent an unusually sweeping assertion by a foreign government of improper behavior by a U.S. corporation. It is highly unusual for a country to use U.S. courts to accuse an American company of bribery. The dispute is likely to put Alcoa under the microscope of the Justice Department, which has been cracking down on questionable dealings between U.S. companies and foreign officials.

The case also shines a light on U.S. companies' use of non-U.S. intermediaries to conduct business in unfamiliar countries that may have looser business practices. Alcoa's contracts with Bahrain are negotiated by a Canadian businessman who receives the payments from Bahrain and passes them along to Alcoa. The small firms into which Bahrain's payments for alumina were channeled had been set up by the Canadian, who is a longtime Alcoa agent, and two former Alcoa employees, corporate records show.

Account records show most of the funds for alumina bought by Alba are currently paid into the Royal Bank of Canada, which also helped set up some of the offshore firms. A spokeswoman for the bank couldn't immediately be reached.

Critics say the use of non-U.S. intermediaries to conduct business abroad can permit U.S. companies to benefit from influence-buying without exposure to the U.S. Foreign Corrupt Practices Act, a 1977 law making it a crime for U.S. companies to pay bribes or kickbacks abroad.

The allegations in the suit emerged through an effort by Bahrain itself to root out misbehavior. Under a contract signed late last year with Kroll Associates, a U.S. investigative firm, Bahrain has uncovered cases of corruption in its state-owned enterprises, and numerous individuals have been arrested.

Alcoa's dispute with one of its best customers comes at a delicate time for the firm, which faces competition from rivals such as Rio Tinto after losing a battle for the assets of Alcan Inc. last year. Alcoa has been seeking to obtain access to cheaper energy supplies, possibly through acquisitions in areas such as the Persian Gulf. Aluminum makers, amid surging demand, have been jockeying to corner supplies of natural gas in the Mideast to fuel new metals plants. That's a strategic shift after years of building plants close to consumers in Europe and the U.S.

Bahrain, meanwhile, has long sought to diversify its economy away from oil and toward manufacturing businesses that can use the region's plentiful energy. Bahrain's 77%-owned Alba now runs one of the world's largest smelters. The United Arab Emirates and Saudi Arabia are following suit with plants of their own. If Bahrain's claims against Alcoa give the Pittsburgh company a black eye in the region, that could hobble its strategic repositioning effort.

At the center of the controversy is a Canadian businessman of Jordanian origin named Victor Dahdaleh, who helped bring Alba and Alcoa together. The 68-year-old Mr. Dahdaleh, whose holdings are known as the Dadco Group, is a longtime partner of Alcoa in its Australian mining operations. He is also a part-owner with Alcoa of the national bauxite company of Guinea, a poor African nation that consistently ranks as one of the world's most corrupt.

Beginning in 1990, the suit alleges, Alcoa began assigning its supply contracts to a series of companies set up by Mr. Dahdaleh. "...These assignments served no legitimate business purpose and were used as a means to secretly pay bribes and unlawful commissions as part of a scheme to defraud Alba," the Bahraini suit asserts.

"This [lawsuit] is without merit, and we will contest it vigorously," said a spokeswoman for AA Alumina & Chemicals, a Swiss firm that was a conduit for some alumina payments and was affiliated with Mr. Dahdaleh.

Offshore Companies

Invoices seen by The Wall Street Journal show that more than $2 billion went through such offshore companies. Much of it passed through Chase Manhattan bank in New York and ended up in accounts at the Royal Bank of Canada, account records show.

The first such entity was a Singapore firm called Alumet Asia PTE, which records indicate was controlled by Mr. Dahdaleh through Royal Bank of Canada trust companies in Guernsey and Jersey -- sovereign islands in the English Channel known for their financial secrecy.

Aluminum-industry executives say the use of brokers, traders and other intermediaries is common in the field. Such middlemen assume risks that producers would prefer to lay off, they said.

One internal Alba memo cited a possible innocent explanation for routing payments through small firms -- namely, to keep information from competitors. Alcoa will "assign this [alumina purchase] contract to an associated company in Singapore to avoid prices being known through statistics released by the Australian Government," said a Dec. 2, 1996, Alba memo.

The Alba lawsuit asserts, however, that this explanation was false. "Alumet Asia existed solely as a front for the sales of alumina to Alba and a vehicle for defrauding Alba," it says. Alumet Asia was dissolved 11 days after its last invoice to Bahrain in 2002.

The payments from Alba were redirected to AA Alumina, which Swiss records show was owned and run by a former Alcoa executive named David Dabney, who had gone to work for Mr. Dahdaleh. But invoices show that the payments continued to flow into the same account at the Royal Bank of Canada used by Alumet Asia. Mr. Dabney, who now lives in the U.S., couldn't be reached for comment. He is not a defendant.

Alba alleged that its 2005 contract was inflated by around 10%, which works out to some $65 million a year. The company has already made 80 payments to the offshore firms, most for more than $15 million.

The reason it's rare for governments to accuse U.S. companies of corruption in American courts, said attorney Dan Newcomb of Shearman & Sterling, is that "once you raise a question of corruption, the sovereign runs the risk they will be embarrassed by the requests of discovery from the private party." In this case, he added, "They have to be prepared to withstand Alcoa coming back to them and saying, 'We want to look at every other corrupt transaction you have been involved in.' " Mr. Newcomb called Bahrain's move an indication of the level of concern in the region that oil wealth will be lost to fraud and waste.

Attorney Mark J. MacDougall of Akin, Gump, Strauss, Hauer & Feld, which represents the Bahraini manufacturing firm, said, "This is obviously an important case for Alba and the people of Bahrain. Our client is confident of a full and fair adjudication of this case in the United States."

Write to Glenn R. Simpson at glenn.simpson@wsj.com





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