Harvard Business School 9-382-080

November 4, 1981

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Questionable Payments Abroad: Gulf in Italy

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In the aftermath of Watergate, a number of political contributions by large corporations came
to light, prompting extensive enquiries by a number of government agencies including the Justice
Department, Internal Revenue Service and the Securities and Exchange Commission. In examining
the extent, source, and nature of these contributions, investigators also found in several companies
evidence of “questionable payments” abroad.

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In this environment, the boards of many corporations began their own internal
investigations, and during 1976 and 1977 over 400 “voluntary reports” relating to questionable
payments abroad had been filed with the SEC.

One such report by the Special Review Committee of the Board of Directors of Gulf Oil
Corporation received widespread publicity, not only for its revelation of numerous clearly illegal
payments, but also because it gave some insight to some of the more common pressures and
demands facing managers that are not so clearly defined.
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The following incident is only one of scores documented by the special committee, but may
serve to illustrate the complexity of the issues involved.
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Gulf in Italy

Background

Gulf first entered the Italian scene in the late 1940s. Drilling concessions were obtained in the
Ragusa field in Sicily, and in due course Gulf found oil practically under the nose of ENI/AGIP the
Italian National Oil Company. In due course Gulf’s expansion in Italy included installation or
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acquisition of a chain of filling stations, port and storage facilities, distribution centers, and refining
capacity. Other foreign oil companies were then operating in Italy and Gulf was faced with very
active competition in its effort to establish itself in the Italian market.

In these activities Gulf utilized as its Italian representative and eventually head of operations,
Nicolo Pignatelli, an Italian national, who had been associated with Gulf’s activities in Italy from the
very start. He helped guide Gulf through numerous vicissitudes in the Italian venture including the
divestment of a number of relatively unsuccessful operations as well as the successful consummation
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This case was prepared from public sources by Assistant Professor Christopher A. Bartlett, as a basis for class discussion
rather than to illustrate either effective or ineffective handling of an adminstrative situation.
Copyright © 1981 by the President and Fellows of Harvard College. To order copies or request permission to
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 382-080 Questionable Payments Abroad: Gulf in Italy

of the exchange of the Ragusa concession for a long-term Kuwait crude oil supply contract with

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ENI/AGIP.

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Although Pignatelli enjoyed a substantial degree of independence he maintained close
association with Gulf centers of authority in London and Pittsburgh during the period of his Italian
operations. In fact, he was in the habit of making rather frequent trips to Pittsburgh to acquaint the
management of the progress of activities in Italy.

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The audit committee’s investigation acknowledged that Italy was an area where, by custom
and law, political contributions by corporations were well-recognized phenomena. Prior to May 1974,
corporate political contributions were, generally speaking, lawful in Italy provided the corporation’s
stockholders were informed.

After its investigation of Gulf’s operations in Italy, the audit committee reported that there
was no doubt that corporate funds of Gulf were expended in Italy by its Italian subsidiary from time
to time for the purpose of inducing minor local functionaries to do or to expedite the performance of

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their normal duties or to reward them for extra services. Apparently, the giving of “omaggi” or gifts
to lubricate the sluggish machinery of petty bureaucracy was and is an accepted way of life in Italy.1
The practice was characterized as tipping rather than bribery and was not considered unlawful. A
special “off-the-books fund,” (known as the “Fondo Nero” or Black Fund) was used for this purpose,
among others. However, there were other practices and events in which Gulf’s management behavior
was less clearly understood. One such example was provided by the events surrounding the so-called
“Plum Project.”
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Expansion of the Milan Refinery (the “Plum Project”)

On January 22, 1967, Gulf obtained a license to install a refinery at Zelo Buon Persico near
Milan, despite great public opposition. Numerous extremely hostile, if not vitriolic, press reports and
editorials denounced Gulf and opposed its plans to construct the refinery. The opposition was
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expressed to be largely on ecological grounds, but there was an undercurrent of antiforeign sentiment
as well. The campaign in the press against the refinery continued into 1968 and 1969, and a change in
zoning requirements ultimately blocked construction at the Zelo Buon Persico site which Gulf had
already purchased.

By decree dated August 2, 1969, Gulf was granted permission to move the location of the
proposed refinery to Bertonico in the Terranova Commune, also near Milan. It appears that Gulf
overcame the public opposition, to some extent at least, and the refinery was constructed and went
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on-stream in June 1972.2 A formal opening was attended by local officials and citizens, which
featured the ceremonial drinking of effluent water from the refinery by Mr. Nicolo Pignatelli, Gulf’s
head of Italian operations, Dr. M.R.J. Wyllie, head of Gulf’s Eastern Hemisphere organization, and
various public officials, in an effort to dramatize its freedom from pollution. However, while the
actual processing capacity was 5,800,000 tons per annum, an operating permit for only 3,900,000 tons
was issued.

In November 1972, Gulf commenced negotiations with Mobil looking to a transaction

(ultimately referred to as the “Plum Project”) under which Mobil would purchase an interest in the
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1 An example of this was the company’s practice of using gas coupons as gratuities or “omaggi.” Over $7,000
worth of gas coupons were distributed by the company in Italy during the first quarter of 1975 to various
governmental functionaries and others.
2 Of the $425,000 distributed through the “off-the-books” Fondo Nero, 11 separate payments totalling $10,800
had been made to journalists and editors for the purpose of influencing press coverage of the Milan refinery
controversy.
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 Questionable Payments Abroad: Gulf in Italy 382-080

refinery at a price substantially higher than Gulf’s cost of construction. The Mobil transaction

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depended upon Gulf’s obtaining a license to utilize fully the actual, installed refining capacity of 5.8

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million tons per annum.

Concerned with the sort of extreme opposition from the press, local communities and various
citizens and environmental groups which had plagued its efforts to build the refinery in 1968–69,
Gulf felt it needed local assistance to guide it through the bureaucratic maze and to improve the
public relations aspect of the application.

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The decree authorizing the utilization of the full capacity of the Bertonico refinery would
have to be issued jointly by the Ministry of Industry and Commerce and the Ministry of Finance after
obtaining favorable opinions of an Interministerial Commission for the Testing of Plant and
Equipment, composed of representatives of three ministries; an Interministerial Commission for
Petroleum Affairs composed of representatives of 12 ministries; two bureaus in Milan; the regional
government of Lombardy and three of its departments; and the communes of Bertonico, Terranova
de’ Passerini and Turano.

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Accordingly, Pignatelli enlisted the help of Mr. G. Del Bo, president of a company known as
Andergip, S.A., described as a public relations and financial consulting firm, with addresses in
Eschen, Liechtenstein, and Lugano, Switzerland (Del Bo was also the president and principal
stockholder of a company known as Carbonafta, a large petroleum jobber in Italy with which Gulf
had substantial dealings, and president of the Italian Petroleum Jobbers Association). He was
described by Pignatelli as “highly knowledgeable in the industry and a man of considerable
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influence.”

On February 21, 1973, Pignatelli received a letter from Andergip, S.A., which set forth the
basis on which the organization would assist Gulf in obtaining the authorization. The letter stated in
full as follows (translation):

In relation to the results of the final tests of the Bertonico Refinery, which
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have ascertained that it has an installed capacity of 5.8 million tons of crude per year,
I wish to confirm to you on behalf of our company that we are prepared to put at the
disposal of your company our organization in Italy for public relations consulting at
a regional, provincial and local level as well as our necessary technical services in the
sector of urban planning and ecology, relative to the application which Gulf Italiana
will submit in order to obtain the official acknowledgement of the aforementioned
processing capacity of the Bertonico Refinery.
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The acknowledgement of said capacity is for us of relevant interest,

inasmuch as the development programmes of the Italian commercial activities
associated with us, base themselves on the availability of larger quantities of finished
products in the Po Valley.

For our assistance you will credit us an amount of U.S. $870,000 payable at
the Bank Institute of the Swiss Confederation, after the aforementioned processing
capacity will become operational.
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Pignatelli described the contract as a contingency agreement and indicated that there was a
“side” oral agreement that the license had to be obtained by September 30 or Andergip would bear
all its expenditures. Apparently, the September 30 deadline was established because Gulf had to sign
the related deal with Mobil by year-end.

In early February 1973, Pignatelli appeared in Pittsburgh before the Executive Council and
made a presentation of the proposed transaction with Mobil (“Plum Project”). The minutes of the

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 382-080 Questionable Payments Abroad: Gulf in Italy

March 15, 1973 meeting of the Executive Council record approval “to proceed with arrangements to

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obtain a government permit to increase the licensed throughput of the Milan Refinery to 120,000

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B/D.”

In the bureaucratic proceedings relating to the Milan Refinery, all applications and formal
contacts with governmental agencies were handled, according to Pignatelli, by Gulf officials.
However, there was a mass of detail and “promotional” work which had to be undertaken to support
the application and this, Pignatelli stated, was handled by Andergip.

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In its formal application to the government for full utilization of the installed capacity, Gulf
pointed out that the relocation from Zelo Buon Persico to Bertonico, due to denial of zoning
authorization, had cost the company some additional $16 million over the original budgeted cost of
the refinery project. Gulf also argued that expansion of production to 5,800,000 tons per year would
not have adverse ecological consequences or entail any local dislocation due to construction since the
refinery already had that capacity. Moreover, the increased production would benefit the public as
well as result in substantial economies for Gulf.

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On July 4, 1973, the decree authorizing the processing of up to 5,800,000 tons per year at
Bertonico was issued by the appropriate ministries. Implementation of the conditions set forth in the
decree concerning the installation of additional tankage involved four ministries, the regional
government of Lombardy and two of its departments, the three communes referred to above, and a
Consortium for the Navigation Canal Milano-Cremona-Po. The necessity of obtaining the
acquiescence of all of these dispersed governmental agencies would appear to make the
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implementation task a formidable one.

On July 16, 1973, an interim authority for expenditure (AFE) in the sum of $1 million was
prepared and signed by Dr. Wyllie and Mr. J.J. Earnest, president and comptroller, respectively, of
Gulf-Eastern Hemisphere, covering the obligation to Andergip. Under “description,” the interim AFE
stated:
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Preliminary Expenditures

Note: This AFE will be incorporated into the final AFE for total product
cost of about $28 million when finally issued.

The interim AFE was delivered for countersignature to Zane Q. Johnson, executive vice
president of Gulf Oil in Pittsburgh, who returned it with a handwritten buckslip initialled by Johnson
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stating: “I discussed with J. Lee (president of Gulf Oil) and then advised Wyllie that he was to handle
some other way.” An undated memorandum for file by Mr. J.M. Turnbull, comptroller in London,
stated in part:

While Mr. Johnson did not sign AFE there were discussions between Messrs.
Wyllie and Johnson on this subject and the Executive were aware that a “special”
payment had to be made in order to obtain the permit.

. . . in any event Mr. W.H. Meador, the Corporate Director Internal Auditing,
was in London at the time the payment was being arranged and he was made fully
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aware of the transaction.

In the Board’s enquiry, neither Lee nor Johnson had any recollection of the transaction.
However, Lee stated that his reaction would be not to sign the interim AFE because it was not a usual
or normal AFE. Lee distinguished between a “preliminary” AFE, which this was, and a “final” AFE,
noting that preliminary AFEs were generally based upon concrete engineering estimates of costs,
which the interim AFE in question was not, nor was it for a specific sum for a particular purpose.

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 Questionable Payments Abroad: Gulf in Italy 382-080

On July 26, 1973, Gulf paid $868,853 to Mr. G. Del Bo, president of Andergip, and received a

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receipt from him. Payment was effected in the following manner. Morgan Guaranty Trust Company,

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London, was instructed to transfer $868,853 to Swiss Credit Bank, Chiasso, for retention pending
instructions from Mr. Giartosio (administrative manager, Gulf Italy) who was to be identified by his
passport. On July 26, 1973, Giartosio caused funds to be transferred to Del Bo at Swiss Credit Bank in
Chiasso in exchange for appropriate receipts. These receipts were forwarded by Giartosio to
Turnbull, the comptroller in London, with a buckslip stating “Not for Circulation in Italy.” The
receipt, said to have been signed by Del Bo with the left hand, stated as follows:

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This is to certify that the remittance of U.S. dollars $868,853 equivalent to
Italian lire 530,000,000 attested by the attached bank receipt no. Sirenetta of 26/7/73
represents the agreed full and final settlement of all sums due in reimbursement of
any expenses incurred for carrying out preliminary technical, urbanistic and
ecological studies and surveys, as well as in payment of consultancy fees for public
relations and administrative services rendered at national, regional and provincial
levels in preparation of the application and development of information and data in

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support of the obtainment of the authorization, by means of debottlenecking, to
process up to 5.6 million tons per year of crude oil in Gulf’s Milan Refinery.

The accounting for this payment on the Gulf books was as follows: Gulf-Eastern Hemisphere
charged the payment to a suspense account in July 1973. In December 1973, the charge was
transferred to a fixed asset account: Milan Refinery, Italy. In May 1974, the charge was transferred
back to Gulf-Eastern Hemisphere, where it was again held in a suspense account. In July 1974, the
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charge was transferred to Gulf Europe, a Liechtenstein corporation, where it was expensed in 1974.
The records of this entry are maintained in Zurich.

Mobil ultimately paid Gulf 36.5% ($317,134) of this payment upon the sale to Mobil of an
interest in the Milan refinery.

The committee’s investigation was unable to determine what disposition was made of the
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$868,853. However, Pignatelli claimed that neither he nor to his knowledge any other Gulf official
had any intention, understanding or knowledge that any portion of the payment would be, or was,
used for payments to political parties or government officials or in an otherwise improper manner to
obtain the authorization. Nor was any part of it to be returned to Gulf for any purpose.

The board committee requested Del Bo to state in writing the general use to which the fee
had been put. In response, on July 30, 1975, he wrote a letter to the chairman of the committee which
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stated as follows (translation):

As you courteously requested, I am hereby reconfirming in writing what Mr.

Del Bo has already declared to you verbally in the course of the meetings in London
and in Rome: That is to say that it is certain that no part of the sum turned over by
GOC was directly or indirectly, destined for political parties or political personalities
or to governmental functionaries; as it is also certain that no part of that said sum
was returned to dependents or organs of the Gulf Oil Company. . . .

To the extent that this will interest you, we inform you that said sums were
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destined approximately as follows: 50 to 55% to the newspaper and publication

agencies specializing in the sector (Petroleum), about 35% to consultants and experts
and the remaining to Andergip.

We remain at your disposal for any further information and we welcome the
opportunity to give you our best wishes.

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 382-080 Questionable Payments Abroad: Gulf in Italy

Mr. Del Bo did not furnish the committee with copies of any documents constituting the

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“work product” of the Andergip organization or a detailed description of the work performed or the

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expenses incurred in obtaining the authorization. However, the committee did not feel it was in any
position to demand an accounting, a lump-sum payment having been provided for with no
obligation to account for its use.

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