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Originally Published: 5/23/2007

HALLIBURTON and KBR

By The Issue Wonk

 

Halliburton, and its subsidiary Kellogg Brown & Root (KBR), is the only company mentioned by Osama bin Laden in his April 2004 tape.  He claimed, “This war brings billions of dollars to big companies, either to those that manufacture weapons or those who reconstruct Iraq, like Halliburton and its sister companies.  And from here it becomes clear who benefits from the outbreak of wars and bloodshed:  war traders and vampires who administer world politics from behind the curtain.”1  This isn’t the first time Halliburton and KBR have come under attack for the billions of dollars they are making from the wars in Iraq and Afghanistan due to the contracts they have been awarded.  It’s time to take a look at the mega-corporation, its history, its ties to Vice President Dick Cheney, its legal entanglements, and allegations of fraud.

 

The Company

 

Halliburton Energy Services is a multinational corporation based in Houston, Texas.  It recently announced that it will establish new headquarters in Dubai in the United Arab Emirates which its CEO and Chair, David J. Lesar, will work and live.2  The corporate offices, however, will remain in Houston and the company will remain incorporated in the United States.  Halliburton Energy Services Group provides technical products and services for oil and gas exploration and production.  KBR, a subsidiary that is in the process of spinning off, is a construction company specializing in refineries, oil fields, pipelines, and chemical plants.

 

In 1998 Halliburton acquired Dresser Industries, and its subsidiary M. W. Kellogg, which brought with it an agreement to honor asbestos claims.  Kellogg was merged with Halliburton’s Brown & Root, to form Kellogg, Brown & Root, or KBR.  Vice President Dick Cheney was the Halliburton CEO who orchestrated the purchase for $7.7 billion.  The asbestos claims cost Halliburton dearly.  In 2001 Halliburton was forced to settle the asbestos lawsuits, “causing the company’s stock price to fall by 80% in just over a year.”3  “Almost from the day it took office, the Bush administration has pushed hard to get Congress to limit asbestos liability.”  All efforts failed and KBR filed for Chapter 11 bankruptcy.  In 2005 KBR negotiated a settlement.

 

According to Allan Sloan:4

 

While Halliburton’s all-stock takeover of Dresser was valued at $7.7 billion when it was announced in February 1998, it was worth only $5.3 billion when it was completed seven months later.  The bankruptcy settlement is costing Halliburton just about that much:  around $2.8 billion in cash, Halliburton stock with a market value of $2.3 billion the day before Dresser’s bankruptcy was resolved and miscellaneous odds and ends and potential payments.  The bankruptcy resolution, which became final on Jan. 3, covered both the Dresser problems and the smaller asbestos problems that Halliburton already had.”

 

So, while Halliburton’s revenues have skyrocketed due to war contracts, it’s bottom line continues to suffer.  Halliburton is now spinning KBR off as a separate entity.

 

Connections to Vice President Dick Cheney

 

In 1995 former Secretary of Defense Dick Cheney became Chair and Chief Executive Officer (CEO) of Halliburton.  Cheney resigned in May 2000 to become the vice presidential running mate of George W. Bush.  At that time he sold his stock holdings in the company worth $5 million and was awarded a retirement package worth $20 million, which included stock options and deferred payments.5  (NOTE:  It has also been reported that Cheney’s retirement package was worth $35 million.6)  Before taking office as vice president in 2001, Cheney bought an annuity that guaranteed a fixed amount of deferred payments from Halliburton each year for five (5) years so that the payments would not depend on the company’s revenues.  He also set up an irrevocable trust, which turns power of attorney over to a trust administrator and sets a future time to sell the options.  It then gives the after-tax profits to three (3) charities:  40% to go to the University of Wyoming (Cheney’s home state), 40% to go to George Washington University’s medical faculty to be used for tax-exempt charitable purposes, and 20% to go to Capital Partners for Education.  The agreement states that it is “irrevocable and may not be terminated, waived, or amended,” preventing Cheney from taking back the options at a later date.  As of 2004 he had received $398,548 in deferred compensation.7

 

War Services Industry

 

The lucrative War Services Industry appears to have begun primarily with Halliburton.  According to Briody:8

 

Military outsourcing was not new.  Private firms had been aiding in war efforts since long before KBR won its first naval shipbuilding contract.  But the nature of military outsourcing has changed dramatically in the last decade.  The trend towards a “downsized” military began because of the “peace dividend” at the end of the cold war, and continued conflict gave rise to an unprecedented new industry of private military firms.  These firms would assist the military in everything from weapons procurement and maintenance to training of troops and logistics.

 

In the decade after the first Gulf war, the number of private contractors used in and around the battlefield increased tenfold.  It has been estimated that there is now one private contractor for every 10 soldiers in Iraq.  Companies such as Halliburton, which became the fifth largest defense contractor in the nation during the 1990s, have played a critical role in this trend.

 

Shortly after the Persian Gulf War ended, the Pentagon, then headed by Secretary of Defense Dick Cheney, paid Halliburton subsidiary Brown & Root nearly $9 million to study how private military companies could provide support for American soldiers in combat zones.9  What followed were a series of lucrative contracts, which continue to this day.

 

Halliburton’s Legal Problems

 

In the early 1990s Halliburton was found to be in violation of federal trade barriers by shipping oil drilling equipment and that could be used to detonate nuclear weapons to Libya via Italy.  The sale was made through its former subsidiary, Halliburton Logging Services.  After having pleaded guilty, the company was fined $1.2 million, with another $2.61 in penalties.5

 

In 2002 the Securities and Exchange Commission (SEC) began an investigation into Halliburton’s booking of cost overruns on construction jobs.  The practice inflated Halliburton’s profits by almost $100 million in 1998 alone.  The accounting change was done by Halliburton’s auditor, Arthur Andersen. Judicial Watch filed a lawsuit on behalf of shareholders against Halliburton, Cheney, 13 directors, and Arthur Anderson, saying that the revenues were overstated by $445 million from 1999 through 2001.5  That’s a total of $548 million in overstated revenues from 1998 through 2001.  Though Cheney stated publicly that he was unaware of Halliburton’s accounting procedures, Halliburton’s current CEO, David Lesar, said that he was very much aware.  Cheney cooperated with the investigation and, therefore, wasn’t penalized for his role.6

 

In May 2003 Halliburton revealed in SEC filings that its subsidiary, KBR, had paid a Nigerian official $2.4 million in bribes in order to receive favorable tax treatment.10

 

Allegations of Profiteering

 

Allegations of profiteering by Halliburton and KBR, specifically with regard to its operations in Iraq, have persisted primarily because of the association with Vice President Cheney.  On June 27, 2005 the Democratic Party held its fifth hearing on instances of waste, fraud, and abuse by contractors in Iraq, at which former civilian employees based in or administering operations in Iraq testified.  Byron Dorgan (D, ND) presided.  In introductory statements, Senator Dorgan said:  “In the past, the hearings we have held have disclosed numerous stories of waste, fraud and abuse involving a good many contractors, including and especially Halliburton, the major U.S. contractor in Iraq.”11

 

One of those testifying was Bunnatine (Bunny) Greenhouse, former Chief Contracting Officer of the U.S. Army Corps of Engineers (USACE).  She spoke about her involvement in the evaluation and crafting of government Army contracts and explained how her superiors undermined and dismissed her concerns of illegal business practices.  She said:11

 

On June 9th, 1997, I was sworn in as the principal assistant responsible for contracting the park for the USACE.  Bank then, the commander of the corps asked me to do what I could to end what could be called casual and clubby contracting practices.  To curb these practices, I required commanders to strictly follow the Federal Acquisition Regulations and began to institutionalize the contracting practices the corps had to follow.  However, as the command structure at the corps changed, there was ever increasing pressure to return to the old ways.  My determination to ensure that the corps strictly adhere to contracting regulations was no longer viewed as an asset and I began to experience an increasingly hostile environment.  The hostility peaked as the USACE was preparing contracts related to the Iraq War.  At this juncture, the interference was primarily focused on contracting activity related to a single contract, Halliburton subsidiary, Kellogg Brown & Root, KBR.  The abuse I observed called into question the independence of the USACE contracting process.  I can unequivocally state that the abuse related to contracts awarded to KBR represents the most blatant and improper contract abuse I have witnessed during the course of my professional career.  The independence of the USACE contracting process was unquestionably compromised with respect to the issuance of the Restore Iraqi Oil contract, known as RIO.  I observed firsthand that essentially every aspect of the RIO contract remained under the control of the Office of the Secretary of Defense, OSD.  This troubled me and was wrong.  However, once the OSD delegated responsibility for the RIO contract to the Department of the Army, control over the contracting process by the OSD should have ceased.  However, the OSD remained in control over the contracting process.  In reality, the OSD ultimately controlled the award of the RIO contract to KBR and controlled the terms of the contract that was to be awarded even over my objection to specific terms that were ultimately included in the contract.

 

At that same hearing, a videotaped deposition of Rory Mayberry was played.  He was a former Food Program manager for KBR from February through April 2004 at Cape Anaconda in Iraq.  “He left KBR after being punished when he reported overcharges and other problems to government auditors.”  At the time that he testified he was still in Iraq as a medical supervisor for Emerging Services.  He testified that KBR “routinely sold expired food rations to the Army,” and that KBR deliberately falsified the number of meals they prepared and then submitted false claims for reimbursement.  He also said they systematically overcharged for the number of meals, saying “they were charging for 20,000 meals and they were only serving 10,000 meals.”  Mayberry also claimed that employees were threatened “to be sent to Fallujah” and other “places under fire” if they talked to media or governmental oversight officials.  Since he had spoken to government auditors, he was sent to Fallujah for three (3) weeks.  “The manager told me that I was being sent away until the auditors were gone . . .”11

 

Also testifying was Allan Waller, CEO of British-based Lloyd-Owen International, a security and operations firm, and Gary Butters, chair of Lloyd-Owen, which has a direct contract with the Iraqi government to provide fuel to various parts of the country.  He testified to specific examples of how KBR officials had conspired in blocking Lloyd-Owen transports and using other coercive means against its competitor and how Halliburton overcharged for oil deliveries.11

 

The allegations of no-bid contracts, fraud in executing the contracts, and dirty dealings goes on and on.  Books could, and have, been written about Halliburton, KBR, and Dick Cheney’s connections.  I have listed here only a few of the more well-known issues.

 

__________

 

1  NBC News Service.  Alleged bin Laden tape offers ‘truce’ to Europe nations.  CIA says voice ‘likely’ that of fugitive Saudi.  MSNBC, April 15, 2004.

 

2  Davidson, Adam.  Halliburton to Move Headquarters to Dubais.  National Public Radio, All Things Considered, March 12, 2007.

 

3  Dresser Industries was founded by Solomon Robert Dresser in the late 1800s.  It manufactured a product that kept oil and water separated underground in order to facilitate oil drilling.  In 1928 Dresser was sold to the Wall Street investment banking firm of W. A. Harriman and Company who took the company public.  Prescott Bush, the father of former President George H.W. Bush, was a Harriman executive who was involved in the conversion and served on the board of directors for 22 years.  H. Neil Mallon, a Yale graduate, became President and CEO of Dresser and held that position until 1962.  He began acquiring various companies that manufactured various products for oil drilling.  George H.W. Bush worked for Dresser in several positions from 1948 to 1951.  In 1988 Dresser acquired M. W. Kellogg.  In 1993 it spun off some of its manufacturing divisions, one of which manufactured asbestos and sold asbestos byproducts.  Lawsuits for asbestos conditions were pending but Dresser agreed to retain some of the asbestos claims at the time of sale.  See Wikipedia and Halliburton Press Release February 14, 2002.

 

4  Sloan, Allan.  Halliburton Pays Dearly but Finally Escapes Cheney’s Asbestos Mess.  The Washington Post, January 11, 2005.

 

5  Washington Post, July 11, 2002.  A Halliburton Primer.

 

6  Leopold, Jason.  How Dick Cheney Got Away With $35 Million Right Before the Govt Launched a Probe Into Halliburton.  The Free Press, August 19, 2004, preserved at CommonDreams.org.

 

7  Annenberg Political Fact Check.  Kerry Ad Falsely Accuses Cheney on Halliburton.  FactCheck.org, September 30, 2004.

 

8  Briody, Dan.  The Halliburton Agenda:  The Politics of Oil and Money.  Excerpt printed in The Guardian, July 22, 2004.

 

9  Yeoman, Barry.  Soldiers of Good Fortune.  Mother Jones, May/June 2003 Issue.

 

10  The Age.  Halliburton Firm Bribed Nigeria.  theage.com.au, May 10, 2003

 

11 Senate Democratic Policy Committee Hearing.  An Oversight Hearing on Waste, Fraud and Abuse in U.S. Government Contracting in Iraq.  June 27, 2005.  See transcript.  For more information on the battle waged by and against Bunny Greenhouse, see Truthout, The Spoils of War, by Michael Shnayerson, March 7, 2005.  See also, Erik Eckholm, Army Contract Official Critical of Halliburton Pact is Demoted.  The New York Times, August 29, 2005, preserved CommonDreams.org.

 

 

© The Issue Wonk, 2007

 

 

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