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Rolls-Royce’s corruption fine isn't to blame for its record losses

February 21, 2017

This article first appeared on FCPA Blog

 

Recent media reports suggesting Rolls-Royce’s bribery settlement drove the engineering giant to a record £4.6 billion ($5.7 billion) loss are not factually accurate, and contribute to a misleading narrative that big companies are too fragile to be punished robustly for corruption.

 

This week’s newspapers were awash with alarming headlines about the financial results of Rolls-Royce, which on February 14 reported the largest loss in its 130-year-odd history. Many media organizations were quick to blame Roll-Royce’s poor financial results on the company’s £671 million ($834 million) corruption settlement in January, which resolved wide-ranging bribery charges brought by authorities in the UK, U.S. and Brazil.

 

To give but a few examples, the BBC’s Ben Thompson said the corruption fine “tipped” Rolls-Royce to a £4.6 billion loss, while the Guardian, the Wall Street Journal and Reuters said the settlement was one of the driving forces behind the company’s poor results.

 

A closer analysis paints a different picture. The vast majority of Rolls-Royce’s losses, some £4.4 billion ($5.5 billion), were due to a post-Brexit slump in the value of the UK pound. Rolls-Royce, which incurs most of its costs in sterling but gains much of its revenue in U.S. dollars, invests in currency hedges to ensure that it can secure a fixed exchange rate between the two currencies.

 

Rolls-Royce had to write down the value of these derivatives to reflect the falling value of sterling -- but, this was done to comply with accounting rules, the value of money flowing in and out of the business remains unaffected. As the company’s CEO Warren East told reporters: “This has no impact on what is really going on in the business and cash, it is just an accounting measure.”

Regardless of what the true state of Rolls-Royce’s financial health is, the central point remains: the vast majority of the company’s losses were due to the £4.4 billion writedown in the value of its derivatives, not the £671 million bribery fine.

 

Media reports that suggest Rolls-Royce suffered billions of pounds in losses from the bribery settlement are not only misleading, they create a false narrative that companies are too weak and delicate to survive robust punishment for corruption. This argument can be seen in its most startling form in a Daily Mail article by Peter Oborne in which he declares that the fallout from the Rolls-Royce corruption scandal may mean that “tens of thousands of British men and women, with families to support, risk losing their jobs.”

 

The idea that companies are too fragile to suffer robust punishment is not only popular in the media, it is also common among judges. Sir Brian Leveson, who presided over the UK’s second-ever deferred prosecution agreement (DPA), was lenient on the misbehaving company in question, which cannot be named for legal reasons, as he feared that a large financial penalty would push it into insolvency. After ordering the company to give up some of the profits it gained from bribery, Leveson decided to impose only a paltry £350,000 ($436,000) financial penalty.

 

Leveson also erred on the side of leniency when deciding on the appropriate punishments for Rolls-Royce, which stood accused of a bribery scheme that spanned over two decades and 12 countries. Leveson decided that the company’s corruption should be dealt with using a deferred prosecution agreement, a type of court-sanctioned settlement tool, rather than criminal conviction. Again ungrounded fears of massive financial hardship were behind Leveson’s decision to allow Rolls-Royce to escape conviction.

 

Leveson said, citing information presented to him, that a conviction would put around 30 percent of the company’s business at risk from debarment. Private Eye has since contacted the SFO to find out where the 30 percent figure came from, but the prosecutor did not provide an answer. As Corruption Watch has previously noted, EU regulations now allow convicted companies to show that they have reformed to avoid mandatory debarment, making the prospect of exclusion from government contracts in Europe very unlikely for Rolls-Royce.

 

The origins of the myth that companies are too weak to withstand robust punishment for economic crimes, can be traced back some 15 years to the infamous Enron scandal. The U.S. energy company Enron went bankrupt in 2001 after revealing that it had stashed massive debts off balance sheet. The scandal wiped $70 billion off the company’s shareholder value. It also ensnared one of the world’s largest accountancy firm’s, Arthur Andersen, which audited Enron.

 

Andersen was convicted in June 2002 of obstructing justice by destroying reams of potentially incriminating documents about Enron’s financial activities. In the run up to June, Andersen’s clients had already begun deserting the company, but the conviction proved the final nail in the coffin as the auditor was forced to surrender its U.S. accounting licences.

 

The example of Arthur Andersen is routinely cited by government officials on both sides of the Atlantic as a reason why large companies, which employ thousands of people, should not be prosecuted. It has profoundly shaped U.S. Department of Justice policy, as evidenced by the fact that companies are never prosecuted at trial for foreign bribery in the United States.

 

It is concerning that the case of Andersen figures so prominently in the thinking of prosecutors and politicians, especially as it is something of a one-off. A research paper by Gabriel Markoff for the University of Pennsylvania Journal of Business Law found that of the 54 convictions of publicly traded businesses in the United States between 2001 and 2010, not a single one resulted in a company going out of business.

 

The legacy of Andersen casts a long shadow to this day, not least in the idea that Rolls-Royce is too weak to suffer a large fine, let alone a guilty plea or even a full-blown prosecution. There is a real of danger of large companies coming to be seen as above the law; too delicate to face prosecution. This is why it is imperative to challenge the untruths, myths and misleading narratives about the fragility of corrupt companies, otherwise they will continue to get off lightly for egregious and damaging behaviour. 

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