Standard Chartered Faces U.S. Probe Over Indonesian Investment
The Justice Department is investigating Standard Chartered PLC over allegations that an Indonesian power company controlled by the London-based bank paid bribes to win contracts.
An internal audit at Maxpower Group Pte. Ltd., a power-plant builder in Southeast Asia, found evidence of possible bribery and other misconduct, findings that were echoed in a separate review by a law firm hired by Maxpower, according to copies of those reports reviewed by The Wall Street Journal. U.S. prosecutors are looking into whether Standard Chartered is culpable for not stopping the alleged misconduct, people with knowledge of the investigation said.
Maxpower’s chief executive worked at Standard Chartered until last year, and the bank holds three seats on the power company’s board.
The investigation compounds the legal concerns of the Asia-focused bank and its chief executive, Bill Winters, who was hired last year to clean up the bank’s balance sheet, governance and culture. The bank struck a deferred-prosecution agreement with the Justice Department in 2012 over alleged Iranian sanctions breaches, under which it could be prosecuted if it commits a federal crime. It admitted wrongdoing and has tripled spending on compliance.
Standard Chartered is one of the world’s biggest banks for financing global trade, and it is dependent on access to the U.S. financial system. Its private-equity unit profited for years by investing directly in Asian companies, but now is facing underperforming commodities investments and higher costs from regulation. The unit lost $167 million in this year’s first half and Standard Chartered is considering ways to exit the business, people familiar with the plans said.
Standard Chartered bought a stake in Maxpower in 2012 and became majority shareholder last year through a cash infusion of $60 million, bringing its total investment to $143 million. It holds some of those shares on behalf of co-investors.
The Justice Department probe is focusing on whether U.S. anticorruption rules were broken when Maxpower executives allegedly facilitated bribes to win power contracts and smooth relations with Indonesian energy officials, according to the people with knowledge of the investigation. The Justice Department is investigating whether Standard Chartered executives on the Maxpower board knew about or approved alleged bribes, and if the bank’s controls around its investment in Maxpower were adequate, these people said.
Standard Chartered said it “proactively referred this matter to the appropriate authorities and have conducted our own review.” Maxpower said it is working with “professional advisory firms to fully investigate,” and it has enhanced internal controls and shaken up management since the audit. A Justice Department spokesman declined to comment.
The internal audit at Maxpower last year indicated that more than $750,000 in outstanding cash advances in 2014 and early 2015 needed to be examined as possible bribes, according to the copy reviewed by the Journal. In December, lawyers at Sidley Austin LLP hired to review the audit found what they described as strong indications that Maxpower employees made inappropriate payments to Indonesian government officials and others from at least 2012 to late 2015, often to get power contracts in Indonesia and sometimes just to get paid on time, according to the review. It found that some of the payments were funded by cash advances requested by three founders and two employees.
The head of the Justice Department’s Foreign Corrupt Practices Act unit reached out to Maxpower’s lawyers to ask about the bribery allegations, according to the review. News of the allegations was reported earlier this year by MLex, a global-regulatory-risk news service.
Maxpower’s founders either declined to comment or didn’t respond to requests. Maxpower terminated their employment last year, which it described as part of an effort to address compliance matters.
The Foreign Corrupt Practices Act prohibits U.S. companies or those doing business in the U.S. from making payments or giving gifts to foreign officials in exchange for business, whether directly or through intermediaries. Violators can face both criminal and civil penalties.
Maxpower is facing lower-than-expected demand for its power plants, and is seeking to restructure more than $180 million in loans, people with knowledge of the matter said.
Greg Karpinski, an American who was co-head of energy, resources and infrastructure in Standard Chartered’s principal-finance business, became Maxpower’s CEO in June 2015. Not long after, he and six then-members of Maxpower’s board met at a wine bar in a downtown Jakarta mall, according to the legal review. The discussions turned to how to continue making illicit payments, according to the legal review and a recording of the conversation heard by The Journal. One participant on the recording jokingly suggested handing out soccer balls stuffed with cash to government officials.
Another person is heard on the recording saying the company would stop making payments for the purposes of getting partners to pay their bills, but kept open the possibility to continue paying to get contract extensions.
“I kind of feel like extensions are really critical stuff, we use an adviser. But for like getting paid on a regular basis, f— it. Enough is enough,” this person said. “We’ll find some other way. I mean, take them to karaoke, take them golfing, take them to Singapore, I don’t care.”
The law firm in its review said it believed “this was surreptitiously recorded” by one of the founders. Mr. Karpinski declined to comment.
The company says it “believes the allegations and attributions provide a one-sided and partial view of the operations and events at Maxpower.”
Standard Chartered has disclosed at least some of the allegedly inappropriate payments to the Justice Department, the Bank of England and the Monetary Authority of Singapore, according to people familiar with the matter. The Bank of England and Monetary Authority of Singapore declined to comment.
The Standard Chartered executives who sat on the board of Maxpower as of August were Nainesh Jaisingh, Kanad Virk and Benjamin Soemartopo. Mr. Virk left the bank in August and didn’t respond to requests for comment. Mr. Soemartopo said his job will end in November because of downsizing, not because of Maxpower. Mr. Jaisingh, the only one of the three who wasn’t present at the wine-bar meeting, remains at the bank. He declined to comment.
Mr. Karpinski took over at Maxpower weeks before the internal audit was completed. He shook up management and took steps to cease abuse of the cash-advance system, according to disclosures made to lenders.
In the legal review that followed the audit, lawyers said inappropriate payments continued until at least last October 2015. They also flagged as “a cause for concern” the recording of the wine-bar discussion.
At the same time, Standard Chartered was dealing with the fallout of a decade of overexpansion in Asia. Mr. Winters, a former J.P. Morgan Chase & Co. executive, joined as CEO in June 2015 with a pledge to simplify the bank.
He started scaling back businesses that were unprofitable or hobbled by higher-capital requirements, and the principal finance division was an obvious target, people familiar with the matter said. Joe Stevens, the unit’s head, is exploring a management buyout with other team members, these people said.