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Dow Jones: Russia: Sakhalin II and Bribery: article from October 2005

A Sakhalin Mayor Says Shell Unit Offered Cash Payment
October 27, 2005 – from the Dow Jones newswire (Read Dutch version here).

By Benoit Faucon

LONDON (Dow Jones)–A senior executive of a Royal Dutch Shell PLC (RDSB.LN)-led joint venture on Russia’s Sakhalin Island offered $50,000 in cash payment as part of land rental negotiations, a local mayor told Dow Jones Newswires.

Sakhalin Energy Investment Co. Ltd., the company involved, denied the allegation. And the mayor himself withdrew it shortly after Sakhalin Energy denied it.

Gennadiy Zlivko, the mayor of Korsakov, said David Greer, deputy chief executive of Sakhalin Energy Investment, offered the unusual form of payment in a meeting in May. The Shell-led project is based in Korsakov.

“Even with my poor English I could understand what he meant,” Zlivko said in a telephone interview. “I was shocked.”

Sakhalin Energy denied Zlivko’s allegation.

“The company categorically refutes any allegation or suggestion that cash payments were ever discussed or proposed by Mr. David Greer or any other representative of Sakhalin Energy at any time in the meetings and negotiations held with Mayor Zlivko and the Korsakov administration,” a spokesman said.

Zlivko, who made the allegation twice in the interview with Dow Jones on Oct. 12, withdrew it in a fax to Dow Jones from Korsakov an hour after Sakhalin Energy denied it to Dow Jones on Oct. 19.

Sakhalin Energy called Dow Jones later that day to check whether the mayor had sent a fax.

A spokesman for Shell, which owns 55% of Sakhalin Energy and leads the oil and gas venture, said the company’s internal guidelines “exclude the use of cash payments except in exceptional circumstances such as communities without a banking economy. But any payment would have to be made with the appropriate audit control.”

He said he didn’t know whether Sakhalin Energy follows the same guidelines.

Corporate governance experts said large cash payments, although not necessarily illegal, are generally frowned upon in business transactions.

Sakhalin Energy’s oil terminal and gas plant occupies a 490-hectare site in Korsakov, in the south of Sakhalin, in Russia’s Far East.

As part of an agreement dating to the 1990s, Sakhalin Energy paid a $50,000 in annual rent to Korsakov in two payments. After being elected mayor in October 2004, Zlivko started to demand a higher rent.

In a telephone interview, Zlivko said that in May, as the two sides negotiated the rental agreement, as a short-term compromise, he asked for the current $50,000 rent to be paid in 12 monthly installments, a request Greer refused.

Greer made the cash proposal during a discussion in early May, in which Zlivko threatened to sue if he didn’t obtain a monthly payment, Zlivko said.

Zlivko alleged that Greer said he could give the mayor the full annual rent if he didn’t take Sakhalin Energy to court.

“I can give you the cash, right now, in this office,” Greer told Zlivko, according to the mayor. When the mayor asked Greer to confirm what he had said, the executive repeated three times that he was ready to pay “in cash right now,” Zlivko said.

“Are you proposing to me a bribe?” Zlivko said he asked. He said Greer didn’t reply. Instead, Greer asked to be left alone with Zlivko, and he discussed the difficulties of dealing with various stakeholders in the oil and gas projects.

The mayor said the exchange took place in his office. It was witnessed by his deputy, Lada Mudrova, two other city staff, Sakhalin Energy representatives and a company translator, he said.

In his faxed withdrawal of the comments, Zlivko said, “I meant to say that there was an offer from Sakhalin Energy to pay immediately the rent on signing of the agreement. None of Sakhalin Energy representatives ever made any intimation to offer a bribe or cash.”

The mayor said he sent the fax to clarify the conversation with Greer after his deputy advised him that Dow Jones intended to publish an article about it.

Korsakovsued Sakhalin Energy in a local court to obtain a rent increase. The two sides agreed last month to a $2.5 million annual rent for the landfor four years.

Although there was no indication that Greer was proposing a personal payment to the mayor, cash payments are generally frowned upon.

Ben Summers, a lawyer with U.K. firm Peters and Peters, said that, in general, a company proposing a large cash payment “wouldn’t be committing anything illegal under British law if there’s no deliberate intent to make an illegitimate payment, if it properly records the sum in its books and if it makes sure the money won’t disappear.”

But if the company doesn’t get such guarantees and the money is stolen, there’s a risk it may be committing an offense, said Summers.

He also said the payment would “be a matter of concern for U.K. regulatory authorities because one object of the money-laundering legislation is to restrict cash payment, and from a commercial perspective in the absence of other information, there would appear to be no good reason for making the payment in cash.”

Proposing a large cash payment “isn’t appropriate … It would raise questions,” said David Nussbaum, chief executive of anti-corruption organization Transparency International. “Electronic or paper payment was more appropriate.”

A spokeswoman for the European Bank for Reconstruction and Development, which is part of a group of public lenders considering offering $5 billion in financing for the project, said the bank would preclude cash payments on any deals it makes.

“We are not engaged with the company as a client and have no way of verifying this story ourselves so can’t comment,” she said.

Company Web site:

-By Benoit Faucon, Dow Jones Newswires; +44 207 842 9266; [email protected]

(Katie Martin also contributed to this report.) and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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