Rolls-Royce – a case study on the inappropriate use of third party intermediaries
May 2017 | LEGAL & REGULATORY | FRAUD & CORRUPTION
Financier Worldwide Magazine
On 17 January 2017, the UK Serious Fraud Office (SFO) announced that it had entered into a deferred prosecution agreement (DPA) with Rolls-Royce Plc and its subsidiary, Rolls-Royce Energy Systems Inc (RRESI), to the sum of £497.25m. Rolls-Royce also agreed to pay the SFO’s costs of £13m. The DPA was approved by Sir Brian Leveson, president of the Queen’s Bench Division at the Royal Courts of Justice.
The indictment submitted under the DPA was the result of a four year investigation into bribery and corruption, and contained 12 counts of conspiracy to corrupt, false accounting and breaches of section 7 of the Bribery Act 2010, as well as the ‘corporate offence’ of a failure to prevent bribery being committed by an associated person to obtain or retain business or a business advantage. The corrupt conduct took place across Indonesia, Thailand, India, Russia, Nigeria, China and Malaysia. It also led Rolls-Royce to pay fines to the US Department of Justice and Brazil’s Ministerio Publico Federal, resulting in a grand total in fines of £671m. Rolls-Royce has also paid in the region of £130m in legal costs and implementing new compliance procedures.
In the spirit of cooperation, Rolls-Royce effectively opened its doors to the SFO, providing it with copies of key documents identified by the internal investigations it had undertaken, including memoranda of interviews, as well as giving it access to all relevant email and hard copy materials. Rolls-Royce also waived legal professional privilege on a limited basis, a gesture which it seems is now seen as a key indicator of whether or not a company is genuinely cooperating with the SFO and thereby a worthy recipient of a DPA.
In his judgement, Sir Brian Leveson stated that the investigation had revealed “the most serious breaches of the criminal law in the areas of bribery and corruption (some of which implicated senior management and, on the face of it, controlling minds of the company)”. As the DPA does not provide any protection to any individuals concerned, the SFO’s investigation into their conduct continues and may result in criminal prosecutions.
Much of the unlawful conduct outlined in the statement of facts agreed by the parties to the DPA involved the inappropriate use of third-party intermediaries (TPIs). TPIs include a variety of sales and marketing agents, consultants, brokers, lobbyists, distributors, resellers, government intermediaries, joint venture partners and logistic service providers, such as freight forwarders, customs agents or other travel or transportation agents. The risks in using these TPIs can arise from their close association with governmental officials, private customers or suppliers and the use by them of improper offers or payments to obtain business or favourable governmental treatment.
The statement of facts noted that in 1989 Rolls-Royce’s civil aerospace business had appointed a private company, 55 percent owned by a close relative of the Indonesian president, to act as its intermediary in Indonesia. This TPI received a commission of 5 percent on the price of new engines and spares, and was paid part of the commission in advance of a formal contract being signed. Commission payments were in the millions of dollars and payments in kind were also made – a Silver Sprint II Rolls-Royce car was purchased and delivered to the TPI.
In 1991, Rolls-Royce agreed to pay approximately $18.8m to two TPIs. A proportion of these monies were intended for individuals who were agents of the state of Thailand and employees of Thai Airways. In return, the agents of both principals were expected to act in Rolls-Royce’s favour with respect to a purchase of T800 engines by Thai Airways. A side letter to the TPI’s agreement was entered into which described sums of $1.33m per aircraft but made no reference as to any specific third parties which were to be paid. These sums were eventually paid to the TPIs as a ‘success fee’.
Between 2005 and 2008, an employee of RRESI worked with two Russian TPIs to ensure that a key official of the Russian state-owned company, Gazprom, would receive a proportion of the commission made, in return for his influence on a contract to supply Gazprom with gas compression equipment. During discussions with Gazprom, Rolls-Royce employees gave Gazprom officials Rolls-Royce branded watches on a visit to the project site and recommended the son of a Gazprom official as a potential candidate for an energy sales position in Rolls-Royce’s Moscow office. The commission paid was approximately £8m.
Other examples of Rolls-Royce’s inappropriate interactions with TPIs detailed in the statement of facts included: (i) levels of commission agreed by Rolls-Royce exceeding the threshold imposed by its own internal policy in place at that time; (ii) intermediaries engaged by Rolls-Royce in contravention of a foreign government’s restrictions on their use; (iii) TPIs classified as customers to allow them to earn substantial mark-ups in excess of the internal Rolls-Royce limits on percentage commissions and mark-ups for TPIs; (iv) payments made to TPIs for expenses, such as office space and drivers, which were well above market rates; and (v) clauses inserted in distribution agreements with a TPI to cover “additional costs associated with politics”. The SFO inferred the latter meant improper payments to public officials.
By 2010, Rolls-Royce had implemented its new Anti-Bribery & Corruption Global Intermediaries Policy. Despite this, inappropriate payments to intermediaries were still made after its introduction, resulting in the admission by Rolls-Royce that it had failed to prevent bribery under the 2010 Act.
The Rolls-Royce DPA demonstrates clearly how important it is for a commercial organisation which engages TPIs to have a fully operational and effective compliance policy to regulate their use. Each company has to consider the risks a TPI will pose to its particular business and tailor a policy and procedures accordingly.
However, the key elements of any effective TPI policy will remain the same. The company must assign the roles and responsibilities regarding a TPI to particular individuals. One individual should be appointed to propose and manage the relationship with the TPI and others should have oversight and monitor the relationship between the business contact and the TPI. Escalation procedures should be put in place to refer matters to senior management, legal and/or compliance teams.
The proposed TPI relationship manager should be responsible for preparing the written proposal for the engagement of the TPI. This should outline the business need for the TPI, detail the services they will provide and provide justification for the TPI’s proposed form of remuneration. This should be agreed by the senior manager with oversight and approval formally provided. Any red flags appearing at this point should be considered and if necessary escalated to the legal or compliance teams.
An initial risk assessment should be conducted to identify the TPI. If it is a corporate entity, this procedure should confirm the shareholders and identify the direct or indirect owners. A risk ranking based on the country risk assessment should be undertaken and confirmation obtained of the financial arrangements to be put in place should the relationship proceed.
The TPI should be asked to complete a due diligence questionnaire to provide information about themselves or their company, the services they provide, their qualifications and experience, details of any government relationships or close associations with public officials, and details of references. Any red flags arising from the questionnaire should be explored and rectified as far as possible at this stage.
Where it is proposed that a higher risk TPI be engaged, consideration should be given to commissioning a due diligence report from an external provider and conducting an interview with the TPI. Again, any red flags would need to be examined and escalated as appropriate before the relationship continues or any payments are made. This form of screening should be refreshed regularly to ensure any more recent events are picked up.
Once the results of the due diligence have been approved as satisfactory, an agreement should be prepared which includes appropriate contractual wording to address the particular bribery and corruption risks posed by conducting business with the TPI. A breach of these clauses should entitle the company to terminate the agreement with the TPI with immediate effect.
Once the agreement has been signed by both parties, the business contact should ensure that the TPI has been briefed or provided with training on what the company expects of them during the term of their agreement. Details of any whistleblowing hotline and policies should be disclosed and the TPI encouraged to report any concerns or inappropriate behaviour it encounters.
Payments made to the TPI should only be made in accordance with the agreement and documentary evidence provided in support of the work completed. More generally, the ongoing relationship should be kept under review and the TPI’s activity monitored.
While implementing the steps above will go some way to ensuring that a company does not fall foul of the corporate offence, they will only be effective if everyone in the company, from board level down to the employees on the ground, work together to prevent bribery from being committed. Corporate culture should enable employees to walk away from a business deal without fear of reproach if they have concerns that there may be corrupt activity occurring. The Rolls-Royce DPA serves as a stark reminder of what could happen if they do not.
Elinor Lloyd is managing partner of CCG Legal. She can be contacted on +44 (0)207 760 7590 or by email: firstname.lastname@example.org.
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