The UK Parliament's Trade and Industry Committee Inquiry into the Export Credits Guarantee Department
Memorandum from The Corner House

Summary

In December 2004, the UK's Export Credits Guarantee Department (ECGD) significantly weakened its anti-bribery rules after intense industry lobbying, particularly from the aerospace and banking sectors. The Corner House took the ECGD to court on the grounds that it had unfairly consulted one side only before changing its rules, and won an important court victory in January 2005 when the ECGD agreed to open a full consultation on changing its anti-bribery rules.

This submission by The Corner House to the UK Parliament's Trade and Industry Select Committee inquiry into ECGD examines in detail the main changes made by the ECGD to its anti-bribery rules in December 2004 and outlines how they make it more likely for bribery to go undetected in projects supported by ECGD. The submission also analyses the position that industry took during its lobbying of the ECGD to weaken the rules, as revealed by the extensive court documents released to The Corner House during the court challenge.

Following its inquiry, the Trade and Industry Select Committee published a report in March 2005, Implementation of ECGD's Business Principles, that was highly critical of the changes that the ECGD had made to its procedures.

Contents

• Introduction
• Summary
  • The general policy implications of the revisions
  • The impact of specific revisions on the ECGD's anti-corruption procedures
  • How the ECGD's anti-corruption procedures apply in practice

Introduction

The Corner House is a not-for-profit research and advocacy group, focusing on human rights, environment and development. Over the past three years, it has closely monitored the policies and operations of the UK Export Credits Guarantee Department (ECGD) with regard to corruption among other things.¹ In March 2004, The Corner House submitted evidence to the Committee for its inquiry into the ECGD in the 2003-2004 session for its Seventh Special Report.

The Corner House welcomes the opportunity to comment on the following issue:

The ECGD's revision of its anti-corruption measures

Summary

The Corner House believes that the revisions to the ECGD's anti-corruption procedures made in November 2004, both cumulatively and, in some instances, individually, represent a significant weakening of those procedures. The ECGD's procedures now contain, as a result of the revisions, a number of loopholes. The changes also reveal a tendency towards weak implementation and enforcement of the procedures.

The general policy implications of the revisions

• The ECGD must put the long-term interests of UK business as a whole above the short-term interests of a small section of its customers in its anti-corruption procedures.

• The ECGD needs top level political support in order to maintain high standards on bribery and corruption

• The ECGD must maintain its leadership role among ECAs on corruption, particularly in the context of the UK's G8 and EU presidencies.

The impact of specific revisions on the ECGD's anti-corruption procedures

• The introduction of a weak definition of 'to the best of our knowledge and belief' undermines the effectiveness of the ECGD's anti-bribery declarations and warranties.

• The exclusion of Joint Venture partners, parent companies and non-controlled subsidiaries from the November anti-bribery declarations and warranties reopens a loophole that ECGD closed in May.

• The reduced disclosure requirements on agents' commission significantly hamper the ECGD's ability to detect and prevent bribery on projects it supports.

• The reduction in scope of the ECGD's audit rights means that ECGD will unable to monitor compliance with its anti-bribery declarations and warranties in any meaningful way.

How the ECGD's anti-corruption procedures apply in practice

• A recent case involving bribery allegations on an ECGD backed LNG project in Nigeria is a good case study for illustrating how differently the ECGD's anti-corruption procedures apply under their pre-May, May and November versions

• This case also reveals ongoing weaknesses in the ECGD's sanctions for bribery and ongoing inadequacies in how ECGD responds to allegations of bribery.

1. Introduction

   1. In October 2004, it became clear through press reports and parliamentary questions that the ECGD was engaged in negotiations with industry groups to revise their new anti-corruption procedures introduced with much acclaim in May of that year. On 5th November 2004, ECGD wrote to its customers advising them that discussions "with the CBI and our customers" had concluded and that new application forms would come into effect on 1st December 2004. No public announcement was made and no detailed description of the changes and their implications was given. No opportunity had been offered to NGOs or other stakeholders to take part in the negotiations. Nor was the Export Guarantees Advisory Council consulted.² Indeed, information released by the ECGD in the recent court case brought by The Corner House suggests that only a handful of customers were actually directly involved in the negotiations.

   2. On 19th November 2004, The Corner House initiated legal proceedings against the Secretary of State for Trade and Industry for the failure of ECGD to consult anyone apart from industry about revisions to the ECGD's anti-corruption procedures. The Corner House felt that it had no option but to do so, after the ECGD made clear at its meeting with NGOs on 18th November that it was not prepared to consider any specific changes to the revisions except at an unspecified future date. This was despite assurances given by the ECGD to the Trade and Industry Select Committee on the 16th November that it was "always willing to consider improvements to our systems as long as they are practical". On 13th January 2004, the Secretary of State for Trade and Industry agreed to a settlement to the legal proceedings whereby the ECGD would open a full public consultation on the revisions made and would pay The Corner House's costs.

   3. The ECGD has maintained in various fora, that the revisions made in November 2004 were minor, of a solely technical nature, and in no way affected the robustness of its anti-corruption procedures. The ECGD also maintains that, even after the revisions, its procedures are still stronger than those it operated before May 2004.

   4. The Corner House believes that the revisions to the ECGD's anti-corruption procedures, both cumulatively and in some instances, individually, represent a significant weakening of those procedures. The ECGD's procedures now contain, as a result of the revisions, a number of loopholes. The changes also reveal a tendency towards weak implementation and enforcement in how the procedures will be applied.

2. The general policy implications of the revisions

   5. The Corner House's view on the details of the revisions is set out below. However, The Corner House believes that the controversy surrounding the ECGD's anti-corruption procedures has the following general policy implications for the department:

   1. The ECGD must put the long-term interests of UK business as a whole above the short-term interests of a small section of its customers in its anti-corruption procedures.

      6. Evidence released during the court case brought by The Corner House against the Secretary of State for Trade and Industry has confirmed that discontent about the new procedures was mainly limited to three of ECGD's customers, Airbus, BAE Systems and Rolls Royce, various trade associations in which Airbus, BAE Systems and Rolls Royce were dominant players (CBI Export Finance Committee, BExA and SBAC), and the banking sector represented by the British Bankers Association.³ The ECGD does not appear to have received complaints from any other individual customers.⁴ In fact, many customers appear to have accepted the new procedures. The Secretary of State for the Department of Trade and Industry, Patricia Hewitt, wrote to the trade associations shortly after ordering the then Minister for Trade, Mike O'Brien, to begin negotiations on the revisions that "it would be unfair to companies who have already signed up to the new provisions to continue the debate longer than strictly necessary."⁵

      7. The fact that a number of ECGD's customers did sign up to the new procedures undermines the argument that the procedures per se were 'unworkable'. The real question is why they were 'unworkable' for a particular section of the ECGD's customer base, namely the aerospace and banking sectors. The changes sought by some of ECGD's customers inevitably raise questions as to the level of commitment by these customers to combating bribery.

      8. When ECGD first announced the new May procedures, both ECGD and Mike O'Brien noted that they would "be to the ultimate benefit of all UK companies". Putting an end to bribery is in the long-term interests of UK business as a whole. Companies that do not pay bribes are likely to have more secure, less risky and, in general, better business. They are also likely to pay out considerably less in 'commission payments'. Bribery, meanwhile, creates serious reputational and material risks for companies. Allegations of corruption and a reputation for corruption can jeopardise a company's chances of winning a contract.⁶ Furthermore, companies that pay bribes create serious difficulties for those companies that are unwilling to do so by setting a tone for business practice in particular countries. If a large British company pays bribes to government officials in a particular country, it is much harder for other British companies wanting to do business in that country subsequently to refuse to do so. This particularly affects small- and medium-size enterprises for whom bribe-paying represents an even greater risk and cost.

      9. The Corner House believes that in making the revisions, the ECGD has put the short-term interests of a few of its customers, particularly those in the aerospace and banking sectors, before the long-term interests of UK business as a whole. It is unacceptable that government departments should undermine the efforts of those companies who are willing to eradicate bribery from their business practices by lowering standards for companies that do not appear willing to do so. The Corner House also believes that the UK government, particularly the DTI and ECGD, must be more proactive in making the business case for combating bribery among the exporting community. This would include making very clear to exporters that competitiveness is achieved through excellence and building a solid reputation, rather than through weakened anti-corruption procedures. It could also be achieved through pro-active, constructive but firm engagement with those sectors that experience particular difficulties in eradicating bribery.

   2. The ECGD needs top level political support in order to maintain high standards on bribery and corruption

      10. The three aerospace companies that were the main driving force behind the revisions are the ECGD's largest, most long-standing and most frequent customers. Without their business, it has been suggested that ECGD might not even have a purpose. Moreover, these firms are among the most politically powerful companies in the United Kingdom, receiving a considerable amount of government support and contracts.

      11. In its original submission to the Trade and Industry Select Committee, The Corner House noted that there was a danger that that if the ECGD had effectively been captured by a handful of politically strategic and powerful companies, this could lead to a persistent risk that ECGD's environmental, social and anti-corruption standards would be diluted to meet the needs of those customers. The nature and tenor of the discussions with particular industry sectors over the ECGD's anti-corruption procedures and the subsequent changes that were made at industry's behest suggest this to be the case. For instance, the evidence presented to court by the ECGD shows that:

          • When the new procedures were announced in March 2004, Rolls Royce told the ECGD point-blank that it would not be using the new forms.⁷ It appears that the three aerospace customers (Airbus, BAE Systems and Rolls Royce) received special dispensation (ordered by the Secretary of State) from the new procedures while negotiations were ongoing.⁸ Airbus in particular received such dispensations on at least three occasions between May and November 2004.⁹

          • The companies and the trade associations representing them (primarily the CBI's Export Finance Committee) refused on three occasions to accept deadlines imposed by the ECGD for a resolution to the issues, even when those deadlines had been requested by Ministers.¹⁰ One such deadline was for an Airbus delivery of aircraft to Asia in September 2004. Airbus told ECGD that it would not accept the deadline as discussions about the thorny issue of disclosure on agents' commission were still underway. Airbus insisted that it go ahead with the deal on the pre-May application forms, because, as they put it, "we cannot afford to let the ongoing ministerial debates stand in the way of our day to day business."¹¹

          • The companies and trade associations consistently rejected compromise solutions put forward by the ECGD and even by the Secretary of State herself. The evidence before the court suggests that the industry side sought an almost complete roll-back of the May procedures.¹² It is to the ECGD's credit that they did not achieve this.

          • The companies and trade associations even sought a roll-back of anti-corruption requirements that pre-dated the May procedures. In one instance, Rolls Royce and Airbus informed the ECGD that they would not provide details on agents although this requirement had been in place since April 2003.¹³ Despite considerable resistance from ECGD, the companies sought and gained a private written undertaking from ECGD that they would be able to cite 'commercial confidentiality' as a reason for not providing details of agents.¹⁴ The companies accepted that this could not be stated openly on the application form but effectively won exemptions for themselves.¹⁵

          • The companies and trade associations questioned whether the ECGD had any role to play in combating corruption.¹⁶ Rolls Royce specifically told the ECGD that "we do not see how ECGD's statutory role could be interpreted to include an objective 'to root out wrong doing in international business transactions'."¹⁷ BAE Systems told ECGD that it was aware of its legal obligations and did not believe "that it is ECGD's role to attempt to regulate compliance".¹⁸ Both the banking and aerospace sectors stated that ECGD should be prepared to accept their declarations about taking corruption seriously at face value rather than trying to 'police' whether they were engaging in corruption or not.

      12. During the negotiations with the three companies and the trade associations, ECGD was not assisted by conflicting messages from the DTI, and by a lack of top level political support to enable it to defend the May procedures. In June 2004, the ECGD at first insisted in letters to the trade associations that there was "no valid reason" for making any revisions to the procedures.¹⁹ The trade associations appealed above the head of the then acting chief executive of the ECGD, John Weiss, to the Secretary of State for the DTI.²⁰ Hewitt replied to them saying that she accepted that the ECGD "should not place an undue burden on industry" and that "aspects of wording and some legal definitions may be able to be clarified".²¹ This forced the ECGD into a humiliating climb-down. Similarly, later on in negotiations, while the ECGD was seeking to hold their line on the particularly difficult issue of disclosure on agents' commission, the industry groups told it that the DTI was much more amenable to the industry position than ECGD was.²² The Secretary of State then accepted industry's position that "disclosure of agents' names may have legitimate commercial and competitive sensitivity" for the companies, despite the fact that the ECGD had effectively told the industry groups that neither it nor ministers would be willing to back down on this issue.

      13. The Corner House believes that ECGD needs support from the highest political level in order to be able to maintain high standards against bribery, and particularly from the Secretary of State. The Corner House also believes that DTI, particularly the Shareholder Executive, and the ECGD must speak with one voice on this issue to exporters.

   3. The ECGD must maintain its leadership role among ECAs on corruption, particularly in the context of the UK's G8 and EU presidencies.

      14. During 2005, the UK government will hold the presidencies of both the G8 and the EU. In both those fora, the issue of Export Credit Agencies and anti-corruption procedures are on the agenda. The ECGD rightly has a leadership role to play in these negotiations. However, the fact that ECGD has bowed to pressure from industry to weaken its procedures has undermined its leadership position.

      15. When the ECGD introduced its new procedures in May 2004, it was undoubtedly ahead of other Export Credit Agencies. The ECGD maintained to the Committee in November 2004 that, following a thorough review of other Export Credit Agency practice, the ECGD was "very much in the lead on this still despite the changes". A more realistic appraisal is perhaps found in the minutes of a meeting with the Export Guarantees Advisory Council (EGAC), to whom ECGD stated that it was "at the upper boundary of best practice for ECAs." ECGD told EGAC that "there was not total clarity about the policies of other agencies and [there is] some variation in practice for different aspects of preventing bribery and corruption, but ECGD was applying high standards in all areas".²³ This more realistic assessment fits with research done by The Corner House, which shows that in certain areas ECGD does have anti-corruption requirements not found at other Export Credit Agencies, but that in other key areas (namely sanctions imposed for corrupt activity, and disclosure on agents), ECGD has now slipped behind other leading Export Credit Agencies, while still remaining better than most.

      16. The Corner House believes that leadership works. The negotiations at both the G8 and EU would not be taking place if it were not for the leadership shown by certain Export Credit Agencies on the issue of corruption, leadership that has created a momentum for raising standards across the board. The Corner House also believes that, in a year that Africa will be a major priority for the UK government's presidency of the G8, it will create considerable policy incoherence, if not accusations of hypocrisy, if the UK government is not doing all in its power (including adopting strong anti-corruption measures in all its export support) to ensure the UK companies are not engaging in bribery when they do business in Africa, and elsewhere.

3. The impact of specific revisions on the ECGD's anti-corruption procedures

   17. The conflict between the ECGD and some of its major customers over the ECGD's anti-corruption procedures introduced in May 2004 reflect a fundamental difference of opinion about the role and purpose of the ECGD. The view of the industry side was that the only step that the ECGD need take to underline how seriously it took the issue of bribery was to emphasise to exporters that it should comply with applicable laws on corruption. It is to the ECGD's credit that it did not accept this line.

   18. However, the ECGD did make certain compromises on its new anti-corruption procedures, an action that is hard to characterise as anything other than a watering down of their effectiveness. In particular, the most significant elements of the November revisions that The Corner House believes represent a substantial weakening of the ECGD's procedures are as follows:

   1. The introduction of a weak definition of 'to the best of our knowledge and belief' undermines the effectiveness of the anti-bribery declarations and warranties

      19. In November, the ECGD introduced, at the request of industry groups, a definition of the phrase "to the best of our knowledge and belief" that qualifies its anti-bribery declarations and warranties. This definition specifically states that the phrase does not require the person making the declaration to "make any enquiries" to substantiate its knowledge. Nor does it require them "to seek to improve or augment their state of knowledge before making the statement", or, with regard to belief, "to seek to verify or bolster a belief by enquiry".

      20. The ECGD's new definition is clearly at odds with the legal advice obtained by Rolls Royce that the phrase did require a company to 'make specific enquiry'.²⁴ More importantly, it is a definition that encourages bad business practice. A company that does not undertake reasonable due diligence enquiries to establish whether corrupt activity is being undertaken on its behalf or on projects it is involved in, particularly in risky markets, is storing up serious trouble for itself. Conducting such due diligence is essential for any UK company listed on the US Stock Exchange (which includes several ECGD customers including Rolls Royce and BAE Systems) in order to avoid criminal liability under, and to be compliant with, the US Foreign Corrupt Practices Act.²⁵ Furthermore, the ECGD's new definition creates an incentive for exporters applying for ECGD support to assign responsibility for signing ECGD application forms to an employee who knows least or nothing about the company's arrangements with agents or joint venture partners. This is a serious loophole.

      21. The ECGD has maintained on various occasions that this definition was always the ECGD's operational understanding of the term. It has stated that it had made clear this understanding in a letter to Rolls Royce in October 2001, and that it was now merely making explicit that understanding. However, companies that were not privy to the 'Rolls Royce understanding' may have understood the definition differently, particularly because the previous Export Insurance Policy forms qualified the phrase in brackets at the signatory stage of the form with "and after having made all reasonable enquiries".²⁶ This suggests that the ECGD was at least inconsistent in how it interpreted the phrase itself.

      22. In June 2004, when Rolls Royce and some trade associations complained about the re-appearance of the phrase in the May procedures, ECGD offered to put in a footnote in the application form explaining its understanding of the phrase, which was a much stronger definition than the one it had given Rolls Royce in October 2001. This definition was that "a state of actual knowledge and belief held by the signatory at the time of signature which he either has never had any cause to consider inaccurate nor should have had; or has resolved any such cause by sufficient enquiry".²⁷ That is to say, the phrase required enquiry by the company where there was doubt, but not otherwise. This definition was ultimately rejected by the industry side, particularly by Airbus, who stated that it did "not like the concept that the applicant might be liable if he should have had cause to consider the warranty inaccurate".²⁸ The ECGD accepted industry's argument and reverted to the definition given to Rolls Royce in October 2001. It told the industry side that they should be aware that "this statement does not allow the representation to be accurately made where doubts are entertained".²⁹ This latter point is not, however, reflected anywhere in the publicised definition on the ECGD's application forms.

      23. The Corner House believes that the exceptionally weak definition of 'to the best of our knowledge and belief' creates a loophole in the ECGD's anti-bribery declarations and warranties and encourages bad business practice. It is not unreasonable for ECGD to expect that companies conduct appropriate and reasonable anti-corruption due diligence before applying for ECGD support. The Corner House believes that it is hard to see how companies can accurately and truthfully sign the ECGD's anti-bribery warranties and declarations without undertaking such due diligence.

   2. The exclusion of Joint Venture partners, parent companies and non-controlled subsidiaries from the November anti-bribery declarations and warranties reopens a loophole that ECGD had closed in May

      24. The ECGD's extension in May 2004 of its anti-bribery declarations and warranties to affiliates, including any company in the same group as the applicant company and joint venture partners, was perhaps the most visionary part of its new procedures. It reflected the reality that UK companies are unlikely to pay bribes directly themselves. Rather, in order to distance themselves from liability and to enable them to maintain 'deniability', UK companies, like other Western companies, are more likely to let subsidiaries, joint venture partners or agents make payments to win contracts. Bribes made outside of the UK by non-UK bodies in jurisdictions with weak enforcement are unlikely to be detected, investigated or prosecuted, while proving complicity by a UK company is an uphill task. It is very much to the ECGD's credit that it had sought to cover this loophole in its May procedures.

      25. With the May procedures, ECGD sought a) assurance from companies that their related companies and joint venture partners did not have a record of corruption; and b) assurance that related companies and joint venture partners had not and would not engage in corruption on the contract to be supported by ECGD. Companies and trade associations complained that they were being asked to make declarations about companies over which they had no control and that this was unreasonable. This is in part a misunderstanding, or a misrepresentation of what was being asked of companies. The ECGD was asking them to make such declarations only 'to the best of their knowledge and belief'. At the most, this should have required companies to conduct anti-corruption due diligence of their affiliates. Given the ECGD's advice to certain companies on the definition of this term, however, it actually required them to do very little.

      26. Under the US Foreign Corrupt Practices Act (FCPA), any UK company listed on the US Stock Exchange is required to do due diligence on any business partner, including a joint venture partner, in order to avoid liability. Companies liable under the FCPA, which include BAE Systems and Rolls Royce, are advised to implement a compliance regime, which includes well-documented, searching due diligence procedures on all business relationships including joint venture partners, and to establish such relationships only with reputable and qualified business partners.³⁰ The US Department of Justice will take into account when establishing liability whether a company has undertaken this due diligence.³¹ In order to avoid liability for complicity with a corruption offence under UK law, UK companies should also be adopting such procedures.

      27. As a result of the complaints about the May 2004 extension of the warranties to affiliates, ECGD replaced the term with 'controlled company' so that companies would have to make the declarations only on behalf of companies in which they had a majority ownership or contractual relationship. The ECGD introduced a new warranty requiring companies to inform the ECGD if it became aware that a joint venture partner or anyone acting on that partner's behalf had engaged in corrupt activity. However, it is not clear what ECGD would do with this information once provided with it. Furthermore, the requirement to supply such information is qualified by an interpretation of whether doing so would constitute 'tipping off' under the Proceeds of Crime Act, which it is at the company's discretion to apply.

      28. The Corner House believes that, if companies have adequate due diligence procedures in place with regard to joint venture partners and subsidiaries, which they should have in order to comply with both UK law and US law (if they are listed on the US Stock Exchange), they should have no problem with making the declarations required by ECGD in May 2004 with regard to 'affiliates'. Again, it is not unreasonable for the ECGD to require that its customers establish business relationships with reputable partners, and to require its customers to engage in reasonable due diligence to ascertain that such partners have not and do not engage in corruption on the project to be supported by ECGD. The Corner House believes that by removing joint venture partners from the anti-bribery declarations and warranties, ECGD has reopened the loophole it sought to close in May.

   3. The reduced disclosure requirements on agent's commissions significantly hamper the ECGD's ability to detect and prevent bribery on projects it supports.

      29. Under the November revisions, the amount of disclosure that companies are required to make on agent's commission has been substantially reduced. This is a significant step-back. Agent's commission has long been recognised as one of the main routes by which bribes are paid and disguised. Given that ECGD in most instances underwrites agent's commission directly, it is of the utmost importance that ECGD is able to ensure that it is not in any way underwriting bribes. To do so could leave ECGD itself open to liability for complicity in corruption. Even where it is not underwriting commission payments, the ECGD needs to be able to ensure that agent's commission does not include potential bribes. As it told the industry side during negotiations: "any wrongdoing involving an agent associated with a contract that ECGD was supporting would impact on ECGD regardless of whether the commission itself was being covered."³²

      30. The November revisions introduced the following changes:

          • If the agent's commission will not be covered by the ECGD, no details at all are required if agent's commission is under 5% of the total contract price. This was a compromise solution after Airbus and Rolls Royce stated that they were not prepared to provide any details of agents' commission at all. Airbus refused to tell ECGD what the size of payments made was or whether they were even employing an agent on a particular contract.³³ The first compromise offered by ECGD, that it would employ very strict procedures to ensure confidentiality, was rejected by industry. The second compromise, which was presented to the industry side as the Secretary of State's final decision on the issue, was that companies would not have to provide details on agents' commission that did not exceed £2 million or 5% of the total contract price. This was also rejected by industry who refused any set limit, on the grounds that it would "catch too many deals", thereby "increasing the amount of commercially sensitive detail that companies would be required to provide".³⁴ This means that on a very large deal (which are very commonplace in ECGD's portfolio³⁵), say of £1 billion, an exporter could pay agent's commission of up to £50 million before having to declare it.

          • If the exporter can provide a justification, the name of an agent need not be disclosed at all, even where the commission is covered by the ECGD and where it is above 5%. The ECGD has given an assurance to Airbus, BAE Systems and Rolls Royce, through a letter to the CBI, that it will accept "commercial confidentiality" as a legitimate justification for non-disclosure.³⁶ The ECGD conceded this point to the industry side despite the fact that the requirement to provide this information had been in place since April 2003. This is clearly at odds with the OECD Guidelines on Multinational Enterprises, which both the ECGD and the government as a whole have committed themselves to promoting. The Guidelines state that "where relevant, a list of agents employed in connection with transactions with public bodies and state-owned enterprises should be kept and made available to competent authorities" (VI, 2). The refusal by Airbus, whose its business is frequently with state-owned airlines, to provide the names of its agents to ECGD, would appear to be a potential breach of these guidelines.

          • Exporters are no longer required to state whether agent's commission has been paid by a Joint Venture partner, a consortium of which it is a member, or a non-controlled subsidiary, even where the commission is above 5%. This creates an incentive for companies to ensure that agent's commission is paid by joint venture partners or non-controlled subsidiaries in order to avoid scrutiny.

      31. The Corner House believes that it is imperative that the ECGD have access to all the relevant information on agent's commission to ensure that bribes are not being paid on projects it supports. The Corner House believes that the November revisions on the disclosure requirements pertaining to agent's commission significantly reduce the ECGD's ability to detect and prevent bribery through commission payments.

   4. The reduction in scope of the ECGD's audit rights means that ECGD will unable to monitor compliance with its anti-bribery declarations and warranties in any meaningful way

      32. In May 2004, the ECGD stated that it was expanding its audit clause "to enable us to monitor compliance" with its new anti-corruption procedures.³⁷ As the Committee itself stated, the effectiveness of the new procedures was always going to depend "on the rigour with which they are to be implemented", and particularly with how rigorously the ECGD applied its audit powers.³⁸

      33. The companies and trade associations told ECGD that the audit powers were not acceptable to them. One of their concerns appears to be that ECGD auditors might become "aware of information that the supplier considers commercially sensitive."³⁹ After several drafts and intense negotiation, a revised audit clause was finally accepted by industry. This clause states among other things that:

          • ECGD will be able to conduct a full audit of a company's records only if it first confirms in writing to the company that it has reasonable grounds for suspecting that corrupt activity may have taken place.

          • ECGD is allowed to audit those records only up to the date of the award of the contract to be supported by ECGD.

          • ECGD personnel themselves are not allowed to conduct a full audit. Rather, 'an independent third party acceptable to the supplier and ECGD' has to be chosen.

      34. These revisions mean that the ECGD is no longer able to conduct random audits. Such audits are a strong incentive towards proper conduct. They also may throw up evidence or signs of corruption or of non-compliance with the anti-bribery warranties that would not otherwise have been detected. Furthermore, where ECGD has reasonable grounds for suspecting corruption, its stated policy is that it will routinely refer such allegations to the police. Given that it would be impossible for ECGD to write to customers informing them of their suspicious without jeopardising a potential police investigation, it is therefore difficult to see how the ECGD could now use its revised audit powers. The process of giving companies advanced notice in writing also gives companies an opportunity to remove or destroy crucial documents. Finally, the revisions create an incentive for companies to ensure that any bribes are paid after the award of a contract -- which is not an unusual occurrence anyway.

      35. The Corner House believes that the revisions introduced in November 2004 have rendered the ECGD's audit powers almost meaningless and that as a result the ECGD is no longer able to monitor compliance with its anti-bribery declarations and warranties in any meaningful way.

4. How the ECGD's anti-corruption procedures apply in practice

   Case Study: Bribery allegations at LNG Plant at Bonny Island, Nigeria

   36. The following case study illustrates the different applications and outcomes of the ECGD's pre-May, May and November anti-corruption procedures.

   37. In October 2003, French authorities announced publicly that they were beginning a major investigation into allegations of bribery by a major energy consortium, TSKJ. TSKJ is a joint venture of companies from France (Technip), Italy (Snamprogetti), the US (Kellogg Brown and Root, a subsidiary of US energy and logistics contractor Halliburton) and Japan (JGC), acting through three offshore companies based in Madeira, Portugal. The allegations were that one of the TSKJ Madeira companies, LNG Servicos e Gestao de Projectos had paid $175 million to an agent, and that the agent had used this money to pay bribes to Nigerian officials, and to expatriate managers of Kellogg Brown and Root. These bribes were alleged to have been paid to enable the TSKJ to win contracts for a liquefied natural gas (LNG) plant at Bonny Island in Nigeria. In January 2004, US authorities also opened an investigation into the allegations. Despite the fact that much of the activity relating to the alleged payments took place in the UK, UK authorities have failed so far to open a domestic investigation.

   38. One of the contracts on the LNG plant at Bonny Island, now under investigation in France and the US, was awarded to TSKJ to build the second extension (trains 4 & 5) to the plant. This contract was awarded on a negotiated basis to TSKJ in March 2002. The ECGD was one of a number of export credit agencies that helped finance the project in December 2002. ECGD gave support worth £127 million on the project to a UK subsidiary of the US energy company, Halliburton, MW Kellogg, for goods and services including project management.

   39. Evidence now in the public domain from the ongoing investigations reveals that:

       • The agent involved was a UK based lawyer, Jeffrey Tesler, acting through his Gibraltar based company, Tri-Star.

       • Tesler signed an agreement with LNG Servicos e Gestao de Projectos, one of the TSKJ Madeira companies, on 24th December 2001 for "consulting and commercial promotion services for the Nigeria LNG Plus Project". According to this agreement, Tesler was to receive a fee of $51 million to be paid into a bank in Monaco, if he obtained the EPC (Engineering, Procurement and Construction) contract for trains 4 & 5 on behalf of TSKJ. Tesler's fee represented roughly 3% of the $1.6 billion contract price.

       • Tesler has admitted that he has only ever been to Nigeria for half a day in the 1980s.⁴⁰ However, some of the services he agreed to provide under his agreement with TSKJ would have required to be performed in Nigeria. Others services were exceptionally vague, such as "maintaining favourable relationships with the Client" and advising on an "appropriate sales strategy".

       • Tesler had been engaged as the consultant on the advice of MW Kellogg (which is controlled by Kellogg Brown and Root) and Kellogg Brown and Root, with whom Tesler had a long standing relationship.⁴¹ A decision to keep Tesler as the consortium's agent was taken at a consortium meeting in 1999 in the UK, at the insistence of Kellogg Brown and Root.⁴² The contracts with Tesler were signed by UK officials working with or for MW Kellogg, as authorised signatories of LNG Servicos. The payments were made by LNG Servicos e Gestao, which is 50% owned by MW Kellogg.

       • In September 2004, Halliburton revealed that an internal probe had uncovered notes written between 1993 and 1998 showing that consortium executives discussed bribes to Nigerian officials in order to win the contract.⁴³ Halliburton has also reported in its filings to the US Securities and Exchange Commission that it understands from the ongoing investigations that payments were actually made to Nigerian officials. The former Nigerian chairman of Nigeria LNG Ltd has admitted to a Nigerian House Committee that he received 'loans' from Tesler some of which he did not pay back, although he denies that these were bribes.⁴⁴

       • The agreement with Tesler included a no-bribery declaration. The fact that it did so shows the limitations of requiring agents and other parties to make such declarations, and that while they look good on paper, such declarations are not sufficient to stop bribery.

   40. In March 2003, shortly after it gave support to MW Kellogg, ECGD gave a presentation to its advisory council, EGAC on the Bonny Island project. EGAC members asked ECGD about the possibility of corruption on the project. ECGD told them that "this had been dealt with in the underwriting process in the normal way".⁴⁵ MW Kellogg had signed a no-bribery warranty for the ECGD on the project stating that neither it nor anyone acting on its behalf had engaged in bribery on the contract to be supported. The ECGD did not underwrite agent's commission on the project, as this involved TSKJ rather than MW Kellogg. In a reply to an NGO letter of March 2004 about the bribery allegations, ECGD stated that "ECGD undertook its usual due diligence checks, which revealed nothing adverse in relation to the parties involved in the transaction".⁴⁶

   41. The case is a very good illustration of how differently the ECGD's anti-corruption procedures apply under the respective pre-May, May and November versions:

       1. The fact that ECGD's due diligence checks revealed nothing abnormal in the contract suggests that prior to May 2004, the ECGD's anti-corruption procedures were inadequate. Large offshore payments to a UK-based agent for vague services should have raised a multitude of red flags particularly when that agent was not based in Nigeria, and had only ever visited Nigeria once two decades previously. However, before May 2004, the ECGD asked only limited questions about agents and agent's commission. Because it was not covering agent's commission on this project, it would have asked even less.

       2. The pre-May anti-bribery warranty was too narrow, and would not have covered this particular case, therefore potentially allowing MW Kellogg to avoid liability if bribery were proved. The pre-May warranty only required the company to state that neither itself nor anyone acting on its behalf had engaged in corrupt activity on the contract to be covered by ECGD. MW Kellogg could (and presumably will if the allegations are proved) argue that the bribes were agreed and paid by the consortium and on behalf of the consortium, not on its own behalf. Furthermore, despite the fact that MW Kellogg officials are deeply implicated in the allegations, and appear to have run the contract with Tesler, MW Kellogg could argue that any payments made by Tesler to Nigerian officials were for the main Engineering Procurement and Construction contract won by the consortium and not for MW Kellogg's sub-contract with TSKJ Madeira, which alone was directly supported by ECGD. Therefore, MW Kellogg may not be liable under the pre-May warranty and related provisions in the pre-May premium and recourse agreement, and the ECGD may not be able to void its cover.

       3. Under the May procedures red flags would have been raised for the ECGD in its due diligence procedures on the project. Under the May procedures, despite the fact that ECGD was not supporting agent's commission, MW Kellogg would have had to declare that an agent had been employed on the project by its 'affiliates' (i.e. a related company or consortium partner). The company would have had to state that Tristar, based in Gibraltar, was the agent. It would have had to state what services Tristar was providing. It would also have had to inform ECGD that the commission was being paid in Monaco and give an explanation as to why it was being paid outside of Nigeria. At this stage, if ECGD had not raised serious questions about this arrangement with the company, it would indicate that its commitment to preventing corruption on projects it supports was not as strong in practice as it was on paper.

       4. The May anti-bribery warranty and the related provisions in the premium and recourse agreement would have covered this particular case, thus making MW Kellogg liable if bribery were proved. The May anti-bribery warranty would have required MW Kellogg to state that 'to the best of its knowledge and belief', none of its affiliates had engaged in corrupt practices. Under the May warranty, this included corrupt activity not just on the contract to be underwritten by ECGD but on "any related agreement, undertaking, consent, authorisation or arrangement of any kind". It would have been difficult for MW Kellogg truthfully to have signed this warranty, given that it had a 50% share in the consortium subsidiary that was making payments to Tesler and Tristar, and given that it must therefore have known that payments were being made on the main Engineering Procurement and Construction contract. If bribery was proved, MW Kellogg would have been liable under the May warranty, would have had its cover terminated, and would have been required to pay back any sums that the ECGD had paid out.

       5. Under the November revisions, ECGD would not have had access to the necessary information that would in this particular case have enabled it to assess whether bribes were being paid on the project. Tesler's fee represented only 3% of the contract price. Given that ECGD was not supporting agent's commission, MW Kellogg would not be required even to state whether an agent was being used on the project, and could have put 'not applicable' on all the disclosure questions asked on the ECGD's application form. Furthermore, under the November revisions, ECGD asks companies only whether they or a controlled company have used an agent and whether or not the commission is above 5%. While MW Kellogg owned 50% of the consortium's offshore subsidiary that paid Tristar, it did not control the subsidiary, either through contractual arrangements or through ownership of the majority (above 50%) of voting share capital.⁴⁷ Therefore, even if Tesler's fee had been above 5%, MW Kellogg would not need to have declared any details of the agency arrangements on the project.

       6. Under the revised November anti-bribery warranty and the related premium and recourse agreement provisions, this case would not be covered and MW Kellogg would be able to avoid liability if bribery were proved. The revised November anti-bribery warranty requires a company to state that neither it, nor any controlled companies, nor anyone acting on its own or their behalf have paid bribes. Given that, as previously stated, MW Kellogg did not control the consortium subsidiary that paid the agent, MW Kellogg could have signed the warranty truthfully. Furthermore, the November warranty now applies only to corrupt activity in relation to the contract to be supported by ECGD and not to 'any related agreement' as the May warranty did. Again, given that payments were made to Tesler, not for the sub-contract to be supported by ECGD, but for the main Engineering Procurement and Construction contract, the warranty would not cover this case, despite the fact that MW Kellogg officials were themselves involved in helping to arrange payments to be made for the main contract. MW Kellogg may therefore not be liable under the November provisions. The only action that MW Kellogg may have had to take under the November revisions would be to inform ECGD that they had become aware that their joint venture partners had engaged in corrupt activity. Given that this requirement carries no penalty, and that MW Kellogg could have considered that informing the ECGD would reasonably constitute a 'tipping off' offence under the Proceeds of Crime Act, it is an open question whether MW Kellogg would have done so.

   42. The bribery allegations at Bonny Island, Nigeria, raise several other questions about weaknesses in the ECGD's anti-corruption procedures and how the procedures are being applied in practice:

       1. ECGD's sanctions for bribery are inadequate and entirely discretionary.

          1. The ECGD's current procedures are currently that if a company is convicted of bribery on a project underwritten by ECGD, it will have its cover voided and will have to repay any sums to the ECGD where there has been a loss or default. Additionally, if the company makes an untrue anti-bribery warranty, the ECGD may require a company to repay the full loan made to the Banker to cover the contract underwritten by ECGD plus any interest accrued. In this particular case, if bribery were proved, as there has been no default so far, the company would not be required to repay any losses. As noted before, because of the narrow terms of the pre-May warranty, the company could argue that it has not made an untrue warranty and the ECGD would not therefore be able to require it to repay the full loan. The only possible sanction left would for the company to have its cover voided. Given that the extension to the LNG plant at Bonny Island for which MW Kellogg provided goods and services is due to be completed in July 2005, the voiding of cover after any conviction (which would be unlikely prior to that date in any case) would mean that voiding cover will have little if any impact on MW Kellogg. The ECGD's Advisory Council has suggested that the ECGD introduce a further provision into its contracts to require a penalty to be paid to ECGD if a conviction for bribery occurs.⁴⁸ Clearly ECGD's sanctions process should apply regardless of whether there is a default or not, and a fixed and mandatory penalty would be one way of addressing this inconsistency. The ECGD should seriously consider adopting this proposal when it makes any changes to its procedures following the forthcoming public consultation.

          2. The main other sanction that the ECGD has at its disposal is refusing further cover to a company that is convicted of bribery or freely admits to bribery. In 2002, Halliburton admitted in a filing to the US Securities and Exchange Commission that one of its subsidiaries had paid bribes in Nigeria on an unrelated project to win favourable tax treatment. Towards the end of 2003, ECGD received an application from a subsidiary of Halliburton, and because Halliburton had freely admitted to bribery in Nigeria, it proceeded to ask Halliburton a series of questions to see if its subsidiary should be refused cover under the ECGD's anti-corruption procedures. In January 2004, ECGD told its advisory council that the explanations and answers it had received from Halliburton "had been judged to be more than satisfactory, and the conclusion had been that rogue individuals had created an isolated problem."⁴⁹ ECGD came to this conclusion despite the fact that it had then become public knowledge that the French investigation into the bribery allegations at Bonny Island implicated Halliburton, and that Halliburton was under investigation for allegations of corruption in another country as well. This raises serious questions about the ECGD's procedures for assessing whether a company should be refused cover, and suggests that ECGD's approach is entirely discretionary and tends to give the company the benefit of the doubt. The ECGD should seriously consider adopting a proper blacklisting system, debarring companies found guilty of corruption or admitting to corruption for a period of three years.

       2. ECGD's response to allegations of bribery is still insufficient. In December 2004, ECGD told Parliament that it had been "informed by Halliburton that it is not currently being examined by either of the [French or US] investigations. We await the conclusion of the investigations in question."⁵⁰ Halliburton has clearly admitted in its filings to the US Securities and Exchange Commission that it has received a subpoena from the US Department of Justice and the Securities and Exchange Commission, so the ECGD's response is inaccurate. Furthermore, Halliburton told the Guardian newspaper in October that it had "clearly advised the individuals at ECGD that there were investigations in the US and France".⁵¹ This suggests that ECGD may not be monitoring the investigations underway as pro-actively as it could,⁵² and that its response to allegations is effectively reduced to hand-wringing until there is a conviction. Furthermore, despite the fact that Halliburton and its subsidiary Kellogg, Brown and Root are under investigation in the US for the bribery allegations in Nigeria, in September 2004, ECGD issued Kellogg, Brown and Root with cover for an oilfield services contracts for the Alibekmola field in Kazakhstan.⁵³ Former US Attorney General, Dick Thornburgh, has recommended to the World Bank in a review of the World Bank's anti-corruption procedures that it temporarily suspend companies facing allegations pending the final outcome of an investigation by the Bank. The reason behind his recommendation was that a company facing allegations "had an incentive to delay the proceedings as long as possible rather than bringing them to a speedy conclusion".⁵⁴ Suspending them would create an incentive to cooperate. The same is true of companies supported by ECGD. The ECGD should seriously consider putting in place a proper regime of suspending companies facing allegations of bribery on ECGD backed projects pending a final outcome to an investigation. This would greatly assist investigative authorities in gaining greater cooperation from companies.

Notes and references

1 Hawley, S., Turning a Blind Eye: Corruption and the UK's Export Credit Guarantee Department, The Corner House, July 2003.

2 EGAC Minutes of meeting held 17th November 2004, para 6.2.2. EGAC members raised their concern with ECGD that "specific advice had not been officially sought [from EGAC] since discussions had commenced on the changes requested by customers."

3 The exception is the British Consulting and Construction Bureau (BCCB), whose main complaint was that it had not been consulted before the new procedures were introduced. Its complaint is in marked contrast to the complaints of the other trade associations, which were almost identical in tone and content.

4 With the possible exception of Alstom, which attended at least one negotiating meeting on the 5th July 2004.

5 Letter from Patricia Hewitt to British Exporters Association, 9/7/04.

6 According to an Economist article, complaints by the US government to the Saudi Arabian government after the National Security Agency in the US intercepted telephone calls and faxes revealing that Airbus personnel were paying bribes to Saudi officials, are thought to have been a factor in why Airbus eventually lost the contract for modernising Saudi Arabian Airlines' fleet to Boeing (Economist, 12/6/03, "Airbus's secret past"). More recently, BAE Systems came under considerable fire in Bulgaria when, in January 2004, rumours emerged that the Bulgarian government was about to award it a contract for refurbishing helicopters, despite the fact that its bid was higher than competitors and after what appeared to be a cursory and unusually fast review of the competing technical offers. Allegations of corruption were made, and previous allegations of corruption against BAE in other countries were aired in the Bulgarian media. The public scandal that ensued forced the Bulgarian government to undertake a full open tender process. BAE subsequently lost the bid to an Israeli firm who tendered for 57 million euros compared to BAE's 128 million euros.

7 Letter from Rolls Royce to ECGD, 23/4/04. Correspondence between Airbus, BAe Systems, Rolls Royce and the Confederation of British Industry (CBI) with the ECGD about the department's rules aimed at reducing corruption and the subsequent detailed exchanges and negotiations on the revisions that the exporters were seeking can be found at http://www.ecgd.gov.uk/20050121_webdocs_lowres.pdf

8 Letter from Patricia Hewitt to BExA, 9/7/04

9 Hansard, 27th October 2004, Column 1242W

10 Email from John Weiss to CBI, 8/7/04 and email from Peter Malcolm of CBI to John Weiss, 8/7/04; email from Patrick Crawford to James Caldwell of BAE Systems, 5/8/04 and email from James Caldwell of BAE Systems to Patrick Crawford of 5/8/04.

11 Email from Airbus to ECGD, 9/9/04

12 The banking sector, for instance, sought to get an agreement from ECGD that the definition of corrupt activity a) would not extend to facilitation payments, despite the fact that these are illegal under UK law; b) would not extend to activity that was not unlawful in the country where the activity took place; and c) would relate only to activity found by a court to be corrupt prior to the bank giving its undertaking, because the banks said they could not reasonably be asked "to make a decision in advance as to whether a competent court would, in the future, judicially condemn the relevant activity".

13 Notes of meeting between ECGD and industry, 5/7/04; Aerospace Industry Note, "Bribery and Corruption Wording", 30/7/04; Letter from Airbus to ECGD, 31/8/04; Notes of meeting between ECGD and industry, 9/8/04

14 Letter from ECGD to CBI, 29/10/04

15 Note of meeting between ECGD and industry, 7/10/04

16 In fact, it is one of the ECGD's three main objectives under the Business Integrity subsection of its Business Principles, that it "will combat corruption" (http://www.ecgd.gov.uk/index/pi_home/pi_bp_bi.htm)

17 Letter from Rolls Royce to ECGD, 23/4/04

18 Letter from BAE Systems to ECGD, 24/5/04

19 Letter from ECGD to CBI, 19/5/04

20 Letter from CBI to Patricia Hewitt, 23/6/04

21 Letter from Patricia Hewitt to BExA, 9/7/04

22 Email from CBI to ECGD, 25/8/04

23 EGAC Minutes of meeting held 21 October 2004, para 3.2.1

24 Letter from Rolls Royce to ECGD, 23/4/04

25 Under the FCPA, a company can be liable for 'wilful ignorance' or 'conscious disregard' in relation to payments made to intermediaries including joint venture partners and agents, where those payments are then used to pay bribes.

26 Pre-November 2004 Export Insurance Policy application form, para 13. In the new November forms, this phrase still appeared until The Corner House pointed it out to ECGD, at which point The Corner House was told this had been an oversight, and the phrase was removed.

27 Letter from ECGD to BExA, 11/6/04

28 ECGD Document, "Customer Complaint Summary", 24/6/04

29 Letter from ECGD to CBI, 5/8/04

30 Wilmer Cutler Pickering Hale and Dorr, "Foreign Corrupt Practices Act Update", 5/1/05; Business Laws Inc, "Transnational Joint Ventures", September 2003;

31 Business Laws Inc, "Transnational Joint Ventures", September 2003.

32 Note of meeting between ECGD and CBI, 7/10/04

33 Letter from Airbus to ECGD, 31/8/04

34 Note of meeting between ECGD and CBI, 7/10/04

35 EGAC Minutes of meeting held 17th November 2004. Analysis of ECGD's future business volumes recently carried out by ECGD suggests that ECGD is likely to have "a greater dependence on occasional large deals".

36 Letter from ECGD to CBI, 29/10/04

37 Letter from ECGD to customers about new corruption procedures 4/3/04

38 House of Commons Trade and Industry Committee, "The Work of the Export Credits Guarantee Department", Sixth Report of Session 2003-4, para 77

39 Aerospace Industry Note, "Bribery and Corruption Wording", 30/7/04

40 Wall Street Journal, "In Halliburton Nigeria probe, search for bribes to a dictator", 29/9/04

41 Financial Times, "Halliburton 'backed' bribes probe agent", 16/9/04; Wall Street Journal, "In Halliburton Nigeria probe, search for bribes to a dictator", 29/9/04

42 ibid.

43 Wall Street Journal, "Halliburton uncovers talk of bribes", 2/9/04. These notes are likely to be have been found in the London offices of Kellogg, Brown and Root or MW Kellogg.

44 This Day (Nigeria), "Halliburton's $180 Million Bribe Scandal: A Can of Worms...", 4/11/04

45 EGAC Minutes 19/3/03

46 Letter from Mike O'Brien to The Corner House and others, 5/5/04

47 MW Kellogg Ltd and Subsidary Companies, Annual Report and Financial Statements, 31/12/03

48 EGAC Minutes 21/10/04

49 EGAC Minutes, 21/1/04

50 Hansard, 13/12/04, Column 888W

51 The Guardian, 30/10/04, "British lawyer may have handled cash in oil investigation".

52 ECGD has said on various occasions said that it has sought information from the French authorities but not received it, which may have hampered their ability to monitor the case.

53 Hansard, 7/12/04, Column 468W

54 US Senate Committee on Foreign Relations, Testimony of Dick Thornburgh, 21/7/04