The industrial giant said it has a robust compliance operation and doesn’t believe it has violated any federal laws, including ones covering foreign corruption. However, that confidential report, parts of which were reviewed by The Wall Street Journal, underscores the dilemma GE faces as it chases new business in one of the few places with demand for its multimillion-dollar heavy duty gas turbines.
The study, prepared for GE by corporate intelligence firm Hakluyt & Co., paints a portrait of widespread corruption and bribery in the Iraqi power sector, accusing high-ranking officials in the Ministry of Electricity, from which GE is currently vying with Siemens AG for $15 billion in new power contracts. Siemens declined to comment.
The Hakluyt report, based on interviews with business people and political officials working in the power sector, provides a broad overview of the corruption concerns in the industry and advises GE to distance itself from at least one of its contractors. Hakluyt’s staff includes former British MI-6 officers and strategic consultants from the business world.
The report, prepared for GE this spring, follows a previously unreported Justice Department inquiry into corruption allegations against GE employees in Iraq in April. That inquiry was triggered by a whistleblower complaint alleging employees of GE Power, the conglomerate’s power unit, in the country were involved in corruption, according to people familiar with the complaint.
GE said it investigated the whistleblower accusation and found it to be without merit. The company learned of the whistleblower when U.S. agencies, including the departments of State and Commerce, withdrew their commercial support for the company’s efforts in Iraq over the accusation. The embassy resumed its support for GE after the company agreed to investigate the allegation, the people familiar with the complaint said.
The status of the Justice Department’s inquiry into the whistleblower’s claims couldn’t be determined. The Justice Department declined to comment.
However, the corruption concerns are an unwelcome headwind for GE’s power business, its oldest and largest industrial unit, whose revenues and operating profit have plummeted over the past year, dragging GE’s share price to historic lows. Management has said reversing the decline of the power business will take years. In the quarter ended Sept. 30, the power business recorded a $631 million loss, and took a $22 billion goodwill charge, writing down virtually all of the goodwill in the business.
Ties to bribery and corruption in foreign markets, even among third-party partners, could mean the possibility of violations of the Foreign Corrupt Practices Act among other laws—and millions of dollars in fines.
The industrial giant has “robust processes for all kinds of ethics and compliance issues,” a spokeswoman said. “We believe that based on our review, the company hasn’t committed any FCPA violations or violated any other laws.”
GE shares closed down 1.9% on Friday to close at $8.02, a roughly 45% fall over the past six months.
The Hakluyt report warned about corruption allegations against construction magnate Ali Shamara, a central figure in the Iraqi power sector, with whom the company has worked on multiple projects since 2004, including a massive 2008 deal in which GE sold 56 9E turbines to the Iraqi Ministry of Electricity. Mr. Shamara’s firm was contracted to install some of the units.
“Ali Shamara earned his fortune largely through his relationship with former Prime Minister Nouri al-Maliki,” Hakluyt said in its report. “This presents what is acknowledged by these contacts as a real dilemma: currently, any firm that completely avoids Ali Shamara will struggle to win major contracts from the (Ministry of Electricity), yet any firm that partners with him runs—at the very least—serious reputational risks.”
And yet, the report concedes that to win business in a market like Iraq, the company may have to do business with figures like Mr. Shamara.
Mr. Shamara’s company “remains essential” to operating in the Iraqi power sector, the document said.
Mr. Shamara, in an interview, staunchly denied allegations of corruption on the part of himself and his firm, International Free Company, which is currently wrapping up its postconstruction work with GE on the rebuilding of a power plant called Baghdad South. He said he expected to continue to play a major role in Iraqi power projects, and hoped to work with GE in the future.
“We had no corruption with GE,” Mr. Shamara said. “Zero.”
GE said that its customer vetting process didn’t raise any red flags about corruption in its past dealings with Mr. Shamara. The company also said it doesn’t have any future projects scheduled with Mr. Shamara’s companies or any plans to bid on future work with his companies.
GE said its operations ensure its employees and business partners operate within the bounds of the law.
However, one question debated within GE Power, according to people familiar with the matter, is why its dealings with Mr. Shamara had never raised concern. The company declined to comment on the reported debate.
The company said it hired Hakluyt this spring to review its local network of contractors who install turbines and build out power plants as part of a broader internal review of its power business in the country. GE added it doesn’t necessarily agree with the findings of consultants like Hakluyt, but the company views their findings as “important input in our investigative process,” a spokeswoman said.
The Hakluyt report quotes businessmen accusing officials in the Ministry of Electricity, including Deputy Minister Abdul Hamza Hadi Aboud, of demanding bribes before allowing power plant construction projects to go forward. Neither Mr. Aboud nor the Ministry of Electricity responded to requests for comment.
Hakluyt also warned about a Turkish contracting firm with which GE has business in Iraq. Several senior Iraqi and Turkish politicians have said they believe it might be a front for the business interests of a senior official in Ankara, though Hakluyt couldn't independently confirm the politicians’ statements, the report states.
“You are probably on safer ground with your Turkish partner,” the report said, adding, “You will also want to be realistic about the fact that any firms working in Iraq—even Turkish ones—are required to work through Iraqi partners.” The Turkish company and the Turkish embassy didn’t respond to requests for comment.
The findings have caused concern at the highest levels of GE, and have been included in briefings for Chief Executive Larry Culp, according to people familiar with the matter.