Weatherford’s Sudan ops come back to haunt it

December 2, 2013, 10:19 PM UTC

FORTUNE — It is easy to miss business news on the eve of Thanksgiving, when Americans have more urgent matters on their minds, like football and turkeys. So it is no surprise that many people overlooked last week’s announcement by the Securities and Exchange Commission charging that oil-services giant Weatherford International Ltd. (WFT) had bribed foreign governments and that it violated U.S. sanctions by operating in Iran, Sudan, Cuba, and Syria between 2003 and 2007. Swiss-based Weatherford had agreed to pay fines of $253 million to settle the SEC’s charges and similar actions by other federal entities.

The SEC complaint makes for colorful reading, providing a rare insight into the shenanigans involved when U.S. companies compete for multibillion dollar contracts in countries with lax anti-corruption standards. According to the complaint, Weatherford’s campaign to sign new business in Algeria in 2006, for example, included paying for the honeymoon of the daughter of an official at Sonatrach, the national oil company, as well as for two Sonatrach officials to fly to the World Cup in Germany that year. And in the run-up to the Iraq War in 2003, the SEC charged, Weatherford paid kickbacks to the Saddam Hussein regime (standard m.o. for companies doing business with Saddam) in violation of the U.N. Oil for Food program, making millions off the contracts.

But it was the second part of Weatherford’s settlement last week — sanctions violations — that especially caught our eye. That’s because it was Fortune that first revealed, in 2007, that Weatherford was operating in Sudan, despite the fact that the U.S. had imposed sanctions on the Khartoum regime for its massacres in the war-torn province of Darfur. Weatherford last week agreed to $91 million in fines for operating in the four sanctioned countries of Sudan, Cuba, Iran, and Syria, the largest sanctions-violation fine ever imposed on a non-banking company, according to the Treasury Department.

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The story about Weatherford’s operations in Sudan (worth about $296,000 in 2005 and 2006, according to the Treasury Dept.) warrants retelling, as a lesson in how U.S. companies were able to skirt sanctions rules with relative ease, using loopholes that in theory protected them under the law, but which offered little shelter from the PR fallout when they were exposed.

In 2007, Fortune dispatched me to Sudan to write about how China was filling the vacuum left by U.S. sanctions in the huge African oil nation. There were new Chinese restaurants and shopping malls in Khartoum, and a new Beijing-built high-rise luxury hotel was about to open.

A Sudanese journalist mentioned to me that he believed some American company was operating in a suburban neighborhood of Khartoum. The news was not a complete surprise to me. On assignment in Iran for Fortune two years before, I had stumbled upon Halliburton (HAL), yet another Texas oil-services company, which was operating from a high-rise building in central Tehran, despite decades of U.S. sanctions and intense hostilities between the two nations. When I called the company’s office from their Tehran lobby, a receptionist answered, “Halliburton!” as though its presence was no secret. Indeed, at the time, the company spokeswoman Wendy Hall said their Iran operation was “clearly permissible,” since it was part of a Dubai-based subsidiary registered in the Cayman Islands.

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Weatherford in Sudan was a replay. A few inquiries on the street in the Khartoum suburb led me to a gate with no identifying plaque, on a modern brick villa ringed with a high wall. Inside, the lobby showed the familiar looking logo of Weatherford, which was headquartered in Houston until it moved to Switzerland in 2009. Upstairs in his office, the local manager, Tarek Khalil, an Egyptian who was not thrilled to see me, said the Khartoum operation had “nothing to do with the U.S.”

Khalil was right — at least within a narrow interpretation of U.S. law. Weatherford Oil Tool Middle East, of which the Sudan operation was a part, is a wholly owned subsidiary of Weatherford, headquartered in Dubai and registered in Bermuda. So long as no Americans worked for the subsidiary, it could in theory continue selling equipment to a government that the U.S. blacklisted for human-rights abuses. On the telephone, then-CFO Andrew Becnel admitted that the law was indeed subtle. “Sudan is a sanctioned country,” he told me at the time. “In my world, it means no U.S. people and no U.S. goods must have any dealings with Sudan.”

Once the news broke, the veneer was too thin to maintain. Sudan-divestment activists placed Weatherford on its “worst offenders” list, and flew to Houston to press the company to withdraw. Two months after Fortune published the story, Weatherford announced that it was shutting down its operations in Sudan, Cuba, Iran, and Syria. In Khartoum, Khalil’s team packed up the suburban villa, and donated the entire operation’s equipment — pipes, trucks, and heavy tools — to Thirst No More, a Texas NGO that drills wells in Darfur and other parts of Africa. Halliburton withdrew from Iran shortly after its presence there hit the news in 2005.

It took until 2012 for Congress to close the loophole that had allowed Halliburton, Weatherford, and others to bust U.S. sanctions through offshore subsidiaries. Last week Treasury officials said they were serious about enforcing those rules. The Weatherford fine “underscores our deep commitment to target those who seek to violate our sanctions,” said a statement by Adam Szubin, director of the Treasury’s Office of Foreign Assets Control, or OFAC. “Our dedicated staff of investigators will continue their important work to identify, expose, and take action to combat sanctions evasion wherever we find it.” Whether a high-rise in downtown Tehran, or a suburban villa in Khartoum.