Securency Corruption Conviction: 11 May 2016
The SFO announced on the 24th March that it had arrested three members of the UK board of Alstom, an infrastructure and transport group with its headquarters in France, and raided five of Alstom’s UK offices, and four residential properties. The arrests were made on suspicion of bribery and corruption, conspiracy to pay bribes and money laundering and false accounting in relation to overseas contracts. The SFO said that it had been working with the Swiss Federal Police, as well as the Attorney’s office and other local police forces in the UK. On the 25th March, the SFO said that they hadextended their search following the arrests.
The arrests mark the beginning of a UK investigation: the three executives have not yet been charged. The Guardian newspaper and the Financial Times reported that the executives are: Stephen Burgin, Alstom’s UK president, Altan Cledwyn Davies, its legal director, and Robert Purcell, its finance director, and that they were on the boards of Alstom UK Holdings Ltd, Alstom Ltd and Alstom Network UK Ltd.
In May 2008, the Wall Street Journal reported that Alstom was under investigation by Swiss and French authorities. The French prosecutors started a probe in November 2007 into allegations that Alstom had paid hundreds of millions of pounds in bribes to win contracts in Asia and South America. The French investigation was initiated as the result of information provided by the Swiss Judicial Authorities in May 2007 where Alstom is also under investigation. The Swiss investigation in turn had been prompted by a report by auditors KPMG for the Swiss Federal Banking Commission in 2004 which revealed that Alstom had circulated 20 million euros through shell companies in Switzerland and Liechtenstein, which was then transferred to its marketing people in Singapore, Indonesia, Brazil and Venezuela.
Alstom is alleged to have paid $6.8 million in bribes in Brazil, for instance, to win a $45 million contract to expand the Sao Paulo underground network. The KPMG report also found that another 7.74 million euros had been paid via accounts in Hong Kong, Bahrain, Thailand, Singapore, the US, Switzerland and Liechtenstein to pay individuals in Venezuela, China, Thailand and Singapore (see AFP). Investigators were said to be looking at $200 million worth of payments.
According to a document from Swiss investigators, “the Swiss investigating authorities strongly suspect that senior officials at the Alstom group systematically embezzled money over years and horded it in ‘black funds’” between 1995 and 2003 (see Spiegel). Swiss banker, Oscar Holenweger, was said to be at the centre of the payments.
In August 2008, Bruno A. Kaelin, a former Alstom compliance officer, was detained in Switzerland on bribery and money laundering charges and raids were made on Alstom offices in Switzerland. In a public statement at the time, the Swiss prosecutor’s office stated that “payments were made for corrupt ends by an intermediary of Alstom Prom AG located in Baden” (which is in Switzerland) and that they suspected that “these sums were transferred by other companies of the Alstom group to public servants or officials of various countries in cases determining the awarding of contracts.” In September 2008, a Swiss court found that there was a reasonable suspicion that a large part of $400 million paid out by Alstom, may have been bribes. Payments up to 2008 were said to have been found.
No charges against Alstom have been brought by the French authorities yet. Alstom’s general counsel and compliance chief were interviewed by a French investigating magistrate in February 2008. The case is being looked into by the French investigating judge, Renaud van Ruymbeke, who has a reputation as a fierce investigator, and who also initiated the investigation into bribes paid by KBR in Nigeria. In May 2008, Alstom sought plaintiff status in the French investigation alleging that it was a victim of corruption. Alstom was however saved from bankruptcy in 2004 with a $1.24 billion bailout by the then finance minister and current President, Nikolas Sarkozy and is regarded by some as having considerable political protection.
The UK arrests will put pressure on France to take further action against the company. Alstom is France’s Siemens moment. Siemens was found guilty of corruption in December 2008 in the US and Germany, and which was fined $1.4 billion. Unlike Siemens, however, Alstom is not registered on the US Stock Exchange and so has been beyond the reach of the US Department of Justice.
Some of the projects are said to have received World Bank backing. Alstom Power UK Ltd has received numerous guarantees from the UK’s Export Credit Guarantees Department.
On 18th March 2010, Lord Justice Thomas, a Court of Appeal judge was brought in to hear the settlement agreed between the SFO and a small UK company, Innospec, for bribery in relation to Indonesia. The week before, Judge Rivlin had said that such a settlement was “deeply wrong” given the “massive criminality“. At the last minute he recused himself to allow an appeal judge to hear the settlement. It is the first such global settlement to come before the UK courts which have only heard one corruption settlement (Mabey and Johnson, see Cases) before.
Innospec pleaded guilty in the US on the same day, to defrauding the UN’s Oil for Food Programme to Iraq and violating the US Foreign Corrupt Practices Act, and violating the US embargo against Cuba. It was fined $14.1 million by the US Department of Justice (DOJ) and $11.2 million by the US Securities and Exchange Commission (SEC). In the UK, it is to be fined $12.7 million for conspiracy to corrupt, under section 1 of the Criminal Law Act 1977, in relation to corrupt payments in Indonesia. The total global settlement is $40.2 million.
Innospec was one of the last companies to produce a fuel additive product, Tetraethyl Lead (TEL), which has been banned in the US and EU and across large parts of the world because of its health and environmental impacts. It paid bribes in order to win contracts in countries where the product was not banned and to help influence those countries to continue buying leaded fuel. In the UK, Innospec pleaded guilty to paying bribes to win $170 million worth of sales of TEL to Indonesia between 2002 and 2006. It paid commissions of $11.7 million, an unknown amount of which was used to bribe officials from the state owned petroleum company, Pertamina. It also operated an ad hoc slush fund for influential individuals at Pertamina and the Ministry of Energy and Mineral Resources. The SFO stated in its case that “undoubtedly their actions prolonged the use of leaded fuel in Indonesia“.
The Indonesian officials that Innospec admitted paying include Rachmat Sudibyo, the Indonesian Director General of Oil and Gas at the Ministry of Energy and Mineral Resources at the time who in 2002 becamse Chairman of BPMigas, the Indonesian oil and gas authority and Suroso Atmo Martoyo, the Director of Refining at Pertamina, a position that was second only to the President of Pertamina and had authority to sign and agree purchase orders for Pertamina. Mistiko Saleh, the Vice President of Pertamina was also entertained at Innospec’s expense on a visit to the UK along with Suroso. In addition, Innospec operated a ‘lead defence fund’ which was used to target high ranking oficials within the Indonesian Government and the Directorate of Oil and Gas MIGAS to keep using leaded fuel, though these were not named in the hearing. Innospec’s Indonesian agents included Willy Sebastian and Mohamed Syakir who ran a company called PTSI (PT Soegih Interjaya). The agents were paid just short of $17.5 million between January 1999 and December 2006. In 2003, PTSI was provided funds to buy off another local agent, Wisnu, acting for a Chinese company that wanted to sell TEL to Pertamina.
In the US, Innospec was found to have used its Swiss subsidiary, Alcor, to pay $4 million of bribes in Iraq, to win E 40 million worth of contracts between 2000 and 2003. Alcor inflated the cost of the contracts by 10% to cover the cost of the bribes. Innospec also admitted to paying $1.5 million in bribes to Iraqi oil ministry officials between 2004 and 2008 to secure sales of TEL.
In the UK, Lord Justice Thomas reserved his sentencing remarks until next week. During the hearing however he raised a series of trenchant questions about the global settlement process. He specifically questioned whether the SFO Director had authority to enter into such agreements, and whether by doing so he was taking on a quasi-judicial role that interfered with the discretion of the courts. He commented that there was a need for a constitutionally recognised process for such settlements and questioned whether under our current constitution, the Director has the power to enter into these agreements. The judge was also concerned about the use of confiscation orders by the Director of the Serious Fraud Office, suggesting that they represented a form of ‘incentivisation’ that was improper for someone in a quasi-judicial role.
Lord Justice Thomas made some groundbreaking remarks about corruption cases, describing such cases as about the rule of law and democracy which are a “matter of seriousness which is unimaginable“. He described corruption of foreign government officials as “almost at the top of the criminal cannon for a company” and said that massive fines were absolutely essential to show that “people who engage in this type of activity have engaged in criminality of the most severe kind“. He said that there needed to be a “seismic change” in the level of fines for corruption, and couldn’t understand why the fines that the US levy for it should be so different from what the UK levies. He remarked that he thought that agreed press notices between the SFO and companies found guilty of corruption were “distasteful“, and gave the impression that white collar criminals were different from other types of criminals. He commented, “people think that just because people wear suits they are not criminals, but they are“.
His sentencing remarks next week will be critical for the SFO’s new plea-bargaining approach and may have considerable implications for the BAE settlement.
On the 30th March, the Indonesian Corruption Eradication Commission (KPK) was reported as saying that as a result of the verdict, they were hoping to open an investigation in Indonesia.
On the 5th February 2010, BAE was fined a total of £285 million by the US Department of Justice and the Serious Fraud Office. In the US, it was fined $400 million for making fraudulent statements to the US government and with conspiracy to defraud the US government. In the US, BAE was fined just £30 million for an offence under section 221 of the Companies Act 1985 for failing to keep reasonably accurate accounting records in relation to its activities in Tanzania.
Andrew Feinstein and Susan Hawley in their comment piece for the Guardian, described the settlement as an affront to justice.
On 22nd March 2010, Mr Justice Collins refused permission by the Campaign Against the Arms Trade and the Corner House for a judicial review of the SFO’s decision to reach its settlement with BAE (see caat-ch_ruling). The judge said that the Director of the SFO was entitled to consider:
a) the US decision
b) the steps taken by BAE to remedy what had gone before
c) the substantial sums which would benefit Tanzania
d) the impact a corruption conviction might have on BAE (which he said was not prohibited by Article 5 of the OECD Convention).
In addition he accepted that the SFO had difficulties in proving criminal liability prior to 2002 and the liability of the company by identifying its controlling mind.
“I am unable to see that it is arguable,” he said, “that [the Director’s] decision to limit the charge to one under s. 221 [of the Companies Act] is unlawful…. The Crown Court Judge will have to consider whether the sentence proposed is acceptable and he will be able to consider all material facts and, if necessary, to decide issues of fact.“
The SFO’s arguments are laid out here: SFO_Grounds_2010-3-10
BAE’s arguments to the court as to why permission should not be granted is at:BAE_grounds_2010-3-12
Impact on investigations in other jurisdictions
The decision to pursue a settlement has had varying impacts in the countries concerned. It emerged on the 23rd March that the Austrian prosecutor will continue with the investigation into Alfons Mensdorff-Pouilly, BAE’s agent in Eastern Europe. Mensdorff-Pouilly was charged with conspiracy to corrupt by the SFO on the 29th January 2010. The charges were dropped when the SFO reached a settlement with BAE on the 5th February 2010.
However, in South Africa, the National Prosecuting Authority announced on 19th March 2010 that its Director, Menzi Simelane, had ordered that a preservation court order restraining the assets of Fana Hlongwane, the former advisor to Joe Modise who was defence minister at the time of the BAE deal be abandoned. The order had been obtained in early March 2010. Simelane said there was no evidence of criminal wrongdoing.
The same day, the Czech prosecutor announced that she had ordered the police toreopen the Czech inquiry into a 2002 deal to lease Gripen from BAE and SAAB.
In Tanzania, the Prevention and Combating of Corruption Bureau (PCCB) has said it will continue its investigations into the local officials who were alleged to have received the bribes.
Domestic money laundering investigations in Switzerland and Liechtenstein however are likely to face an uphill struggle to bring charges or try to forfeit the assets frozen in their jurisdictions because the Companies Act offence that BAE has pleaded guilty to is not a predicate offence for money laundering.
While the SFO is believed to have told investigators in other jurisdictions that it will assist them with their investigations, this may be difficult in practice. In some jurisdictions, they may require extradition of UK citizens to provide witness evidence in order to prove charges against local officials. As one leading Tanzanian journalist, Richard Mgamba, put it, is the UK really likely to extradite former BAE officials to Tanzania, or anywhere else for that matter?
A Corruption Watch briefing on the details of the allegations examined by the SFO in South Africa can be found here: South Africa – BAE allegations.
On 26th March 2010, new court documents were revealed by the Mail and Guardian in South Africa, including an affadavit by a South African investigator on the Liechtenstein investigation into allegations of payments made by BAE to South African suspects, anaffadavit from a key South African prosecutor outlining the process by which BAE came to win the tender for aircraft as part of the arms deal, the letters of request for assistance from the Liechtenstein authorities to South Africa, and the letter of request for assistance from the South African authorities to Liechtenstein.
Corruption Watch briefing on the details of the allegations examined by the SFO in Tanzania can be found here: Tanzania – BAE allegations
The SFO’s letter of request for legal assistance to Tanzania from March 2008 which outlines much of the information that the SFO had garnered and its keys areas of investigation is here: SFO Tanzania request
Mabey and Johnston
Mabey and Johnson was the first company ever convicted in the UK for overseas corruption in September 2009.
Allegations against the company first emerged in relation to Papua New Guinea in 2004 and again in late 2005 in relation to the Philippines. In 2007, the company was named in the Oil for Food enquiry led by Paul Volcker. The Volcker report alleged that Mabey and Johnson had paid bribes of $202,000 between 2001 and 2003, in return for a $3.6 million contract. In May 2007, the Serious Fraud Office started investigating the Oil for Food allegations. In January 2007, meanwhile, the company began proceedings against former employees for breach of their employment contract and fiduciary duty. One of the employees, Jonathan Danos, claimed in his defence (seeDanosDefenceandCounterclaim) that it had been common practice for Mabey and Johnson to pay bribes. In particular he referred to bribes in Jamaica, the Dominican Republic and Panama. In February 2008, the company’s solicitors, Herbert Smith LLP approached the SFO and provided details that the company had engaged in corruption. Thereafter it cooperated with the SFO, including providing details of its internal investigation to the agency.
On 25 September 2009, Mabey and Johnson pleaded guilty to paying bribes in Ghana and Jamaica. The court heard that it had been common practice for the company to pay bribes in order to secure contracts. Ministers in Angola, Bangladesh, Madagascar and Mozambique were also given payments according to the court documents. The company was fined a total of £6.6 million, including fines of £2 million in relation to Iraq, £750, 000 in relation to Jamaica and £750,000 in relation to Ghana; a confiscation order of £1.1 million; and reparations of £658,000 to Ghana, £139,000 to Jamaica and £618,000 to Iraq.
Theoretically, the company having pleaded guilty to corruption is liable to be debarred under EU procurement laws (see Analysis page for more information on these laws). However, the company, now called Mabey Bridge, has been awarded several contracts since it was convicted in the UK and in Austria.