The FCPA Files: Katy Industries, Inc. (1978)
The Origins of Katy Industries, Inc.
Katy Industries had an elegant business model, devised by its chairman and CEO, Wallace Carroll. Starting in the 1940s manufacturing gauges to meet war demand, Carroll soon embarked on a program of judicious acquisitions, including the struggling Missouri-Kansas-Texas railroad—the “MKT” from which the parent company eventually took its name. While turning around the railroad’s prospects, Carroll used its residual operating losses as a tax shelter for other promising investments. The company’s holdings soon grew to encompass areas as far afield as electrical equipment, industrial machinery, consumer products, and oil and gas exploration.
Katy’s Business Dealings in Indonesia
This last venture brought Carroll into contact with another massive conglomerate, driven by an altogether different set of considerations. Pertamina, Indonesia’s state-owned oil company, was more than a conduit for converting natural resources into government funds. Under the direction of its President-Director, Lt. General Dr. Ibnu Sutowo, it took upon itself the role of “national development corporation” with projects ranging from steel production to rice farming, hotels to hospitals, monuments to mosques—all made possible thanks to Indonesia’s innovative use of production-sharing agreements, under which foreign companies were contractors receiving a share of extraction rather than owners paying royalties to the government. As the value of oil increased in the early 1970s, Pertamina’s pockets were burning.
An Oil Production Sharing Contract Violates the FCPA
The country’s actual development planners—technocrats known as the “Berkeley Mafia”—weren’t happy with Pertamina’s freewheeling style, but there was only so much reining-in they could do. With its lax bookkeeping and generous spoil-sharing, the company was able for a time to maintain both broad societal approval and the indulgence of President Suharto, even amid swirling allegations of corruption and waste. Things came to a head in February 1975 when it failed to make payment on a relatively minuscule loan of $40 million from a small Texas bank. An investigation revealed massive overleveraging, and Dr. Ibnu ended up under house arrest for a few months before receiving an honorable dismissal from his leadership role in March 1976.
The SEC’s charging documents don’t identify the Pertamina official to whose home Carroll traveled in March 1975 to discuss contract terms—including the appropriate kickback (13.33% of net profits, though payments stopped after 1976). Permanent injunction aside, the entire affair seems little more than a footnote in Katy’s history. Not so much the so-called Pertemina Crisis, whose bailout ended up basically wiping out Indonesia’s foreign exchange reserves.
This post is part of "The FCPA Files" series, examining key enforcement cases under the Foreign Corrupt Practices Act and the lessons they offer for modern compliance. |