On 5th February, the Guardian revealed that UK Export Finance (UKEF) – a government body which provides exporters with government backed insurance products – is conducting an internal review into whether Rolls-Royce complied with its anti-corruption policies. This follows Rolls-Royce’s admission in two Deferred Prosecution Agreements in the UK and the US to having paid bribes in 12 countries over nearly two decades.
Taxpayers appear to have underwritten at least some of the corrupt activity that Rolls-Royce admitted to. Last week, Private Eye revealed that UKEF had given support to Rolls-Royce on three contracts in Thailand, Indonesia and Russia totalling over £700 million, on which it had admitted corrupt activity. UKEF also supported a fourth contract in Brazil relating to the P-52 offshore oil platform with Petrobras worth £32 million. The full amount of UKEF support may be significantly higher given that some support isn’t made public due to commercial sensitivity, some support will have been given as re-insurance for products provided by other export credit agencies, and a significant amount of support is given to Rolls-Royce as a subcontractor to Airbus.
Rolls-Royce has long been a major customer of the UK’s export credit agency. In March 2016, UKEF’s CEO, Louis Taylor, described UKEF as having “a phenomenal relationship with Rolls-Royce.”
As the Guardian reminded people in January this year, back in 2004 Rolls-Royce lobbied the export credit agency (then known as the ECGD) alongside BAE Systems and Airbus to weaken new anti-corruption procedures. In particular, the companies objected to requirements to reveal information about agents used on contracts. The companies lost that battle and new rules were clarified in 2006 which meant that all companies applying for support had to reveal the name of the agent, amount and purpose of commission payments, and place of payment. They also have to sign a warranty that they had not engaged in corrupt activity.
Disclosing the middlemen
The requirement on companies to disclose the use of an agent is crucial to the ability of UKEF to do due diligence on corruption risks in the contracts it underwrites. The use of agents to distance a company from bribe payments has long been the pattern in corporate bribery. According to the OECD Foreign Bribery Report, 71% of all bribery cases on which enforcement action was taken between 1999 and 2014 involved an intermediary or agent.
UKEF is unique among government departments in being able to scrutinise companies’ use of such agents. The number of companies disclosing the use of agents to UKEF has averaged around 20% since 2008 according to annual statistics provided to the Export Credit Advisory Group. A snap shot of the kind of disclosures made on agents during 2014-15 was given to Private Eye in late 2016 under Freedom of Information. While the names of agents and some other details were blacked out, some of the disclosures would appear to raise serious red flags. In one instance, commission was 20% for “introduction and contract negotiation”, despite the fact that for a good number of export credit agencies, 5% is the ceiling for commission payments above which they will not give support. In another, $6.5 million was paid in commission for “political and business intelligence… and relationship building.” In another, the purpose of the commission was cited simply as ‘facilitation’.
The main way that UKEF conducts due diligence is to ask the diplomatic mission in the relevant country about the agent. However, since 2008, UKEF has never turned down an application from an exporter following due diligence on its agents and commission and has only ever twice referred a suspicion of corruption to the law enforcement authorities. This raises questions about how robust its due diligence procedures are in practice.
UKEF is already in the firing line on this. In April 2016, Airbus announced that it had informed UK authorities of “its findings concerning certain inaccuracies relating to applications for export credit financing.” UKEF stated that the inaccuracies, which were picked up by Airbus and not UKEF, related to the “historical use of overseas agents” and referred the findings to the Serious Fraud Office (SFO). In August 2016, the SFO announced a criminal investigation into allegations of fraud, bribery and corruption relating to ‘irregularities’ involving third party consultants by Airbus.
UKEF’s response to the Airbus findings was to freeze temporarily all Airbus applications pending a review. In November 2016, however, it said that it was open to Airbus applications subject to “conducting appropriate due diligence on compliance issues.” UKEF also launched ‘Project Trident’ in which it (jointly with German and French export credit agencies) commissioned legal advice from Slaughter and May for £30,000 and a review by PWC “to understand and seek assurances about compliance issues” worth £614,460 (to be reimbursed by Airbus).
Until 2012, Airbus accounted for around 80% of all UKEF support given and still receives roughly a quarter of its support. Given that it is such a major customer of UKEF, the implications for UKEF of any potential criminal action against Airbus are huge.
Other corruption cases where UKEF has provided support have also started to emerge. In 2013, UKEF gave £12.2 million of support to Smith and Ouzman for exporting ballot papers to Kenya despite the fact that the company was under investigation by the SFO at the time for potential bribes on other electoral contracts in Kenya via a middleman. UKEF has confirmed that an agent was involved in the Smith and Ouzman contract. Smith and Ouzman was convicted in December 2014 of paying bribes via a middleman in Kenya.
The key question facing UKEF now in the Rolls-Royce case is whether the company gave accurate information to UKEF about its intermediaries and the commission payments made.
But UKEF must also look at the appropriateness of its Special Handling Arrangements (SHA) for agents, which companies can request where they want to keep the identity of an agent confidential. These arrangements were a compromise reached between UKEF’s predecessor, ECGD, and Rolls-Royce, Airbus and BAE back in 2006 to get around the reluctance of the big defence companies to reveal their agents at all. Under these arrangements only a senior UKEF manager is allowed to know the identity of the agent and must keep it confidential. They have been used on six occasions by Rolls-Royce.
UKEF is adamant that these arrangements do not compromise their ability to do due diligence, but if senior members of staff at UKEF must keep the identity of the agent confidential, it is not clear how UKEF conducts due diligence on the agent. Furthermore, industry insiders say that the desire to keep an agents’ identity confidential raises red flags in itself about whether the agent is appropriate. In light of the admissions of Rolls-Royce and the Airbus investigation, UKEF must seriously reconsider the Special Handling Arrangement regime.
Broken promises? UKEF anti-corruption warranties and consequences
Companies must sign anti-corruption warranties when applying for UKEF support stating that:
1. they have neither engage nor acquiesced in ‘corrupt activity’ in relation to the contract for which they are seeking support; and
2. they will “promptly notify” UKEF if they become aware of any such activity with full details.
Rolls-Royce told the Guardian that it had made such anti-corruption declarations to UKEF in three of the contracts on which it admitted bribery. Additionally, it emerged from Rolls-Royce’s DPA with the SFO that senior management at the company had known about corrupt conduct since 2010 but decided not to notify authorities. That means that Rolls-Royce may have breached both parts of the warranty by engaging in corrupt activity and failing to notify UKEF when it became aware of such activity.
But what isn’t clear is what consequences Rolls-Royce faces for such breaches. Most of the support that Rolls received was not direct from UKEF but involved UKEF guaranteeing a loan made by a bank. UKEF states that it cannot cancel the policies on the contracts where Rolls admitted bribery despite ongoing liabilities as this would ‘unfairly penalise the banks involved in the financing’. Unless UKEF faces direct losses on any of these contracts – in which case it could refuse to indemnify Rolls – there is no immediate financial or other impact on the company.
So are UKEF’s anti-corruption warranties worth the paper they are written on?
If UKEF can’t cancel the policies it has with Rolls, what action can it take to ensure that there is some real consequence to the company for breaching its warranty?
The options are as follows:
1. Seek law enforcement action against Rolls for fraudulently obtaining government support. This would require the SFO to press charges on these grounds against Rolls. Given that the SFO has made a final settlement with Rolls through a Deferred Prosecution Agreement it is unlikely to have the appetite for doing this, but it could and should at the very least ensure that this is one of the range of charges that can be made against the senior Rolls executives it is now investigating.
2. Withdrawing cover from Rolls for a set period of time. UKEF says that a conviction for corruption is ‘prima facie’ grounds for refusing cover to a company. However, Rolls has not been convicted, but only admitted corrupt acts under a DPA. It is likely that UKEF, which tends to take a narrow interpretation of these things, will argue that it can’t refuse cover in these circumstances. However, UKEF could use its ‘discretionary’ decision-making power to withdraw cover for a three-year period as a response to its warranties being breached. This would send a strong message to exporters about the serious consequences they can face for breaching the warranties.
3. Improse increased premiums on Rolls. Rolls-Royce has clearly shown that it is at a higher risk than other companies because it has lied to UKEF and breached its warranties. One option would e for UKEF to increase Rolls-Royce’s premiums for a set period of time as a consequence which is how a commercial insurer would deal with such risk.
4. Impose increased due diligence procedures on Rolls-Royce. Rolls could and should be subject to increased due diligence on any contracts it seeks UKEF support for with any costs for this borne by Rolls.
What is clear is that unless there are some real consequences for Rolls’ breaches of its anti-corruption warranties, UKEF risks undermining its anti-corruption procedures. It will create a real moral hazard that other companies, knowing there is no penalty for lying to UKEF about corrupt activity, may also be economical with the truth. Taking no action is not an option.
Scrutiny of whether UKEF’s anti-corruption procedures are up to scratch is desperately needed at a time that the government has announced that it will double the risk appetite of UKEF from £2 billion to £5 billion. This is in a context when UKEF has reduced anti-corruption burdens (particularly in respect of disclosure of agents) on companies in relation to its new general working capital facility. If UKEF is going to manage the real risk of corruption that exporting to risky markets brings, it needs to get serious about its due diligence, controls and sanctions for corrupt activity. It cannot wait for more scandals to emerge.