U.S. and British securities regulators are teaming up to sanction Royal Dutch Shell for massively overstating its proven reserves.

The U.S. Securities and Exchange Commission and Britain’s Financial Services Authority announced Tuesday settlement of an enforcement action against Royal Dutch Petroleum Co. and The Shell Transport and Trading Co. plc, in connection with their overstatement of 4.47 billion barrels of previously reported proved hydrocarbon reserves. Royal Dutch is a Dutch corporation headquartered in The Hague, while Shell Transport is a British corporation headquartered in London.

Shell agreed to settle these proceedings by consenting to a cease-and-desist order finding violations of the anti-fraud and other provisions of the federal securities laws, and by paying $1 disgorgement and a US$120 million penalty in a related civil action the SEC filed in U.S. District Court. Shell also has undertaken to commit an additional US$5 million to develop and implement a comprehensive internal compliance program under the direction and oversight of the Group’s legal director. The companies settled without admitting or denying the commission’s substantive findings. Shell simultaneously agreed to pay £17 million to settle a market abuse enforcement action initiated by the FSA.

The investigation was closely coordinated between the SEC, the FSA and the Autoriteit Financiele Markten, the primary financial market regulator in the Netherlands. “The degree of international and interagency cooperation in this case has been extraordinary and sets an important precedent for investors that regulatory efforts to police the financial markets will transcend national borders,” said Stephen Cutler, director of the SEC’s division of enforcement. The SEC’s investigation continues as to other individuals and entities.

According to the commission’s order, Shell overstated proved reserves by 4.47 billion barrels of oil, or about 23%. The order further concludes that Shell also overstated the standardized measure of future cash flows reported in this filing by approximately $6.6 billion. The commission’s order also finds that, during this period, Shell materially misstated its reserves replacement ratio, a key performance indicator in the oil and gas industry.

The SEC says that Shell’s overstatement of proved reserves, and its delay in correcting the overstatement, resulted from its desire to create and maintain the appearance of a strong RRR, the failure of its internal reserves estimation and reporting guidelines to conform to SEC requirements, and the lack of effective internal controls over the reserves estimation and reporting process. These failures led Shell to record and maintain proved reserves it knew or was reckless in not knowing did not satisfy SEC requirements, and to report for certain years a stronger RRR than it actually had achieved. Indeed, Shell was warned on several occasions prior to the fall of 2003 that reported proved reserves potentially were overstated and, in such critical operating areas as Nigeria and Oman, depended upon unrealistic production forecasts. In each case, Shell either rejected the warnings as immaterial or unduly pessimistic, or attempted to “manage” the potential exposure by, for example, delaying de-booking of improperly recorded proved reserves until new, offsetting proved reserves bookings materialized.

In accepting Shell’s settlement offer, the Commission took into account Shell’s cooperation with the staff’s investigation and the remedial actions Shell has undertaken, as outlined in the order.

“Shell’s overstatements of its oil reserves, which occurred over an extended period, mandate a strong enforcement response, including imposition of significant civil penalties, to deter Shell and others from engaging in similar misconduct. As our investigation continues, we intend to focus on, among other things, the people responsible for Shell’s failures,” said Harold Degenhardt, Administrator of the SEC’s Fort Worth Office.