House of Commons - Trade and Industry

Select Committee on Trade and Industry Ninth Report

4 ECGD's anti-corruption measures

33. On 1 April 2004, ECGD announced the implementation of improved procedures to reduce the risk of bribery and corruption.[30] Under the new arrangements, which came into force from 1 May 2004, ECGD extended the scope of the information it required from applicants to ensure that no improper agents' payments are being made to win contracts; would take greater power to inspect exporters' documents, particularly those relating to agents' payments; and required applicants to guarantee that they have not been involved in corrupt practices.[31] Witnesses to our general review of the work of the Department welcomed the strengthening of ECGD's anti-corruption policies,[32] although the CBI expressed unease at what it saw as an extra regulatory and administrative burden. [33]

34. On 5 November, ECGD published revised procedures which relaxed some of the new requirements as from 1 December.[34] The Department's critics reacted badly to what they see as a watering down of ECGD's standards, and the lack of public consultation prior to the revision. When we heard evidence from ECGD officials on 16 November, as part of our investigation of the Department's support for the BTC pipeline project, we took the opportunity to question the rationale for changes to the anti-corruption regime so soon after its introduction.

35. In summary, the explanation provided by ECGD officials was that the Department's major customers, their trade associations and banks had expressed serious concern that the new rules would be unworkable for them.[35] Some of its customers had told the Department that they were unable to apply for ECGD cover because they were so concerned by the new requirements placed on them by the new procedures. The banks feared that the risk of providing incorrect information to ECGD might prejudice the strength of the Department's guarantee.[36] It was explained that the revisions to the Department's anti-corruption measures had been made as a result of negotiations conducted over the period May to November between ECGD and industry representatives led by the CBI.[37] Although ECGD officials made no mention of Ministerial involvement in the process at the time they gave evidence, it had emerged that the discussions had been initiated by the intervention of the Secretary of State for Trade and Industry in response to representations from the CBI and the UK's three main aerospace companies—Airbus, Rolls-Royce and BAe Systems.

36. In view of the apparently sweeping nature of the changes to anti-corruption procedures which had been in effect for less that six months, we decided to inquire further into the background and to review the practical effect of the most recent changes. We decided to invite the Corner House and Transparency International (UK), which had commented in detail on ECGD's anti-corruption procedures during our first inquiry, to submit comments on the effect of the Department's revisions to those measures. We agreed that we would also invite the CBI and the ECGD to provide an explanation of the need for the changes.

37. Our further inquiries were delayed by the application by the Corner House for Judicial Review of ECGD's decision to proceed with the changes without undertaking public consultation on its proposals. On 13 January, the first day of the court hearing, ECGD agreed to carry out the consultation demanded by the Corner House, and to pay all costs associated with the proceedings.[38] As a consequence of the agreement, ECGD published documents relating to its negotiations with industry representatives which began after the intervention of the Secretary of State for Trade and Industry to whom the CBI and others had complained. It also undertook to put its revised procedures to public consultation. The nature of some of the changes introduced by ECGD in December and the development of the ECGD-industry negotiations are discussed below.

The revision of ECGD's anti-corruption procedures

38. It is clear from the documents put into the public domain after the conclusion of the Judicial Review proceedings that after the ECGD's announcement on 4 March of the introduction of enhanced anti-corruption measures the Department's biggest customers, Airbus, Rolls-Royce, and BAe Systems, quickly raised objections to the new rules to be introduced from 1 May. Their concerns were echoed by trade associations such as BExA, SBAC and the CBI. At the time, the CBI did not see any need for the ECGD's new rules, and told the Department:

"All exporters are aware of the obligation in your policies that they should comply with all laws applicable to the insured transactions. We believe that emphasising this fact is all that is necessary for you to do in connection with this issue."[

39. The CBI's main concern seemed to be that the new procedures would have required exporters to provide detailed information on overseas agents and representatives—commercially sensitive information which, it claimed, if made public could seriously affect an exporter's competitive position. It was also concerned that compliance with the provisions of the May procedures with regard to monitoring the activities of a company's business associates and taking action against anyone found to have engaged in any corrupt activity could have put ECGD's customers in conflict with the offence of 'tipping off' under the Proceeds of Crime Act 2002.[40] On the last point, we find it difficult to believe that the act of informing a Government Department could be construed as an act of 'tipping off' a committer of corrupt activity under the Act.

40. In the face of these objections, ECGD indicated that the new measures would stand.[41] The CBI then lobbied the Secretary of State for Trade and Industry and requested that the new procedures be suspended until ECGD and its customers had resolved their problems.[42] The CBI told us that she acknowledged that "some aspects of wording and some legal definitions may be able to be clarified" and invited the CBI to take on a co-ordinating role to represent the various customers and the banks, and to work with the ECGD to "get this right". She made clear that the principles of ECGD's anti-corruption measures were not for discussion, but the Department was willing to discuss specific issues where legal clarification was required.[43]

41. The CBI convened an 'ECGD Solutions Group' comprising representatives of the main trade associations and ECGD's main customers (principally the aerospace companies), to negotiate with ECGD.[44] Negotiations between ECGD and the CBI Solutions Group continued through the summer. Whilst initially the Department rebutted criticism of its new procedures and refused to consider amending them, following the CBI's appeal to the Secretary of State ECGD gradually conceded ground on the main elements of its new anti-corruption measures.

The net result: principal changes to ECGD's requirements

BUYER CREDIT GUARANTEE

42. The major changes to ECGD's procedures concerned the Application for Buyer Credit Guarantee. This form of Guarantee forms the bulk of ECGD's business. Buyer Credits provide a 100% guarantee to a bank that all sums lent to an overseas buyer or borrower will be repaid. Once the contract and loan are effective the exporter can draw down sums to pay for their goods once they have been exported, or services, once these have been delivered.

43. Prior to tendering for a contract, an exporter obtains a commitment to provide cover from ECGD by completing the 'Application for the Buyer Credit'. If the exporter is successful in winning the contract, ECGD enters into a loan guarantee commitment with the bank, and a 'Premium and Recourse Agreement' with the exporter. In Transparency International (UK)'s view, the information provided in the Application is vital to the prevention of corruption as it is submitted to ECGD prior to contractual commitment.[45]

Agents' commissions

44. The payment of commission to agents and consultants is generally recognised as the most common device for the payment of bribes in international business. From May 2004, ECGD required the exporter to disclose the identity and address of any agent or affiliate involved in the contract, their role(s), the amount of the commission and where it would be paid. There was no percentage or financial limit to the disclosure.

45. Rolls-Royce, Airbus and the SBAC objected to this new requirement, principally on grounds of commercial confidentiality. In registering its objection, Airbus told ECGD:

46. Following intensive negotiations, ECGD acceded to its customers' demands. From December, the exporter was no longer required to provide any details of an agent where the agent's commission was 5% or less of the contract price and where it was not to be covered by ECGD support. Exporters need not give the name and address of agents or affiliates if they were able to give reasons for not being able to do so.[47] ECGD confirmed to the CBI that 'commercial confidentiality' would be an acceptable excuse for withholding such information.[48]

47. TI(UK) and the Corner House identified these amendments as a significant weakening of ECGD's anti-corruption procedures which limited the Department's ability to detect bribery. They pointed out that payment of a commission of 5% (which could then be used as a bribe) would not be unusual in many parts of the world, but 5% of a large contract could amount to a significant sum. Payment of a commission out of funds not covered by ECGD, such as in cash or from a fund specifically set up to pay such fees, would not need to be declared to ECGD. In addition a commission of higher than 5% could also be free from disclosure if it was divided into instalments each of less than 5%.[49]

48. TI(UK) could not understand why it was no longer necessary for the applicant to give even just the name and address of any agent employed by an applicant. The NGO felt that it was "inconceivable the applicant would not have this information, without which it was easier to conceal the payment of bribes".[50] It was concerned that if an applicant refused to disclose these details to ECGD, and ECGD allowed such non-disclosure and proceeded to support the project, ECGD and its officers might be criminally liable for aiding and abetting bribery (on the basis that they were wilfully blind) if the agency arrangements turned out to have concealed a bribe.[51]

49. In its submission to us the CBI defended these amendments simply on the grounds that the May procedures required exporters to provide sensitive information on overseas agents which would affect their competitive position if made public.[52] This suggested to us that the basis of the CBI's objection was the concern that ECGD could not be trusted to respect the confidentiality of such information.

50. The Minister for Trade and Investment acknowledged that ECGD would in future require less information about agents and the commission to be paid to them, but rejected the suggestion that this would reduce the effectiveness of the Department's anti-corruption measures:

51. We are not persuaded by the arguments put forward by those ECGD customers that the Department had no right to information on the agents they use and the money to be paid to them. The payment of commission or fees to agents is generally recognised to be a common method of paying bribes, and in our view ECGD was right to attempt to get access to information on agents as part of the implementation of its anti-corruption policy. We have no doubt that its decision not to require such information in the future weakens that policy.

USE OF JOINT VENTURE PARTNERS

Identification of JVs

52. From May, ECGD required the provision of information about agents appointed by an applicant's affiliates in connection with the contract. For this purpose, "affiliate" was defined as "any company which is a member of the same group of companies or any other party to any joint venture or consortium or other similar arrangement with the applicant".[54]

53. ECGD's customers objected to this requirement on the grounds that it required the provision of information about the use of agents which was entirely beyond the applicant's control. The Department reacted to their objections by revising its requirements. From December, an applicant was obliged only to provide details of agents "engaged by the applicant or any controlled company".[55] Such a distinction would normally exclude joint venture or consortium partners.

54. TI(UK) pointed out that joint venture or consortium business partners could appoint agents and pay commissions which could then be used as bribes. The NGO suggested that this would leave both ECGD and the applicant at risk of loss, legal proceedings and damage to reputation in the event that a contract was terminated as a result of the discovery of a bribe paid by joint venture and other partners.[56]

DUE DILIGENCE ON JV OR OTHER BUSINESS PARTNERS

55. ECGD tried to ensure that an applicant undertook due diligence on those involved in the project for which support was required. From May, it made it a condition of support for a project that the applicant certified that:

"neither we nor to the best of our knowledge and belief any of our Affiliates nor anyone (including any of our or their employees) acting on our or their behalf with due authority or with our or their prior consent or subsequent acquiescence has engaged or will engage in any Corrupt Activity in connection with the Supply Contract or any related agreement, undertaking, consent, authorization or arrangement of any kind."[

56. Consistent with its response to adverse customer reaction on the definition of affiliate, with effect from 1 December ECGD removed most of the applicant's obligations in relation to joint venture, consortium and similar partners. The anti-bribery undertaking applied only to the applicant and its controlled company. The applicant's responsibilities in relation to joint venture and other partners were much reduced in scope. ECGD introduced a new definition of "associate", which was amended to "a party to any joint venture, consortium or other similar arrangement". ECGD now obliges an applicant to notify the Department of corrupt activity by an associate if the company "becomes aware" of such activity. However, there was no obligation on the applicant to attempt to find out whether such activity is being carried out or to try to prevent it.

57. It was TI(UK)'s view that the amended procedures remove the need for due diligence, thereby running counter to ECGD's 'Business Principles for Countering Bribery', part of which states:

"6.2.1.1: The enterprise should conduct due diligence before entering into a joint venture.

58. The net result of the December changes to ECGD's procedures is that companies receiving support from the public purse need make no checks on their business partners to ensure, to the best of their ability, that UK taxpayers' money is not used by these partners to pay bribes. This is unacceptable, to say the least.

DUE DILIGENCE ON CONTROLLED COMPANIES

59. As well as effectively confining an applicant's responsibilities to itself and any controlled company, ECGD also reduced an applicant's obligations on due diligence on controlled companies. From 1 December it has been necessary for an applicant to declare:

"That neither we nor, to the best of our knowledge and belief, any Controlled Company or anyone (including any employees) acting on our, or that Controlled Company's, behalf with due authority, or with our, or that Controlled Company's, prior consent or subsequent acquiescence, shall have engaged, or shall engage, in any Corrupt Activity in connection with the Supply Contract."[

60. This replaced ECGD's original requirement in May that such a statement would relate to joint venture and other business partnerships as well as controlled companies. ECGD also originally intended that the definition of the phrase "to the best of our knowledge and belief" would remain unchanged from that adopted at the introduction of its Business Principles in 2000.[60] When lodging its objection to ECGD's May Proposals, the CBI repeated its long-held objection to that definition, and the definition became a matter for renegotiation.

61. As a result of those discussions, the definition of the phrase "to the best of our knowledge and belief" has been clarified by ECGD and made explicit in the documentation which accompanies the application form. According to the Department's definition:

— "knowledge" means "the actual knowledge of the person concerned at the time of making the statement";

— "the best of" requires "the maker of the statement to review his or her then state of knowledge and report all that that review tells him or her";

— however, this definition "does not require the person to make any enquiries or in any other way to seek to improve or augment his or her state of knowledge before making the statement";

— the definition of "belief" has been limited by ECGD's clarification that "there is no requirement to seek to verify or bolster a belief by enquiry, other than by a diligent search of the person's own conscience." [61]

62. In other words, applicants were required only to state what they thought at the time they completed the application form. They were not required to conduct enquiries to ensure that their statement was correct. TI(UK) poured scorn on the revised definition:

"to the best of our knowledge and belief"

63. In TI(UK)'s view, the change in definition runs counter to that part of the ECGD's 'Business Principles for Countering Bribery' which states:

TI(UK) also felt that the revised definition was weaker than the English criminal law test under which "wilful blindness" is sufficient to result in criminal liability.[64]

64. The Minister of Trade and Investment and Mr Nick Ridley[65] explained that ECGD had not changed its understanding of the phrase since it was first set out in a letter from the Department to a customer in 2001.[66] Mr Ridley did not accept that the concerns expressed by TI(UK) were valid:

65. We are not convinced by ECGD's defence of its definition of the meaning of the phrase "to the best of our knowledge and belief". While its action may be perfectly defensible in legal terms we are concerned that the Department has chosen to interpret the phrase in a way which is inconsistent with the rules of common sense. It is a nonsense to suggest that the December rules will ensure that due diligence will be carried out on 'controlled companies'.

STATEMENT OF KNOWLEDGE OF BLACKLISTING OR CONVICTIONS

66. From May applicants were required to make the following declaration:

"We declare that to the best of our knowledge and belief neither we, nor any of our Affiliates nor any of our or their directors or employees:

"5.1 appears on any list of contractors or individuals debarred from tendering for or participating in any project funded by the World Bank or any other multilateral or bilateral aid agency, and

"5.2 has at any time freely admitted or been found by a court to have engaged in any Corrupt Activity."

67. From December, the required declaration had been limited in scope to cover only the applicant and any controlled company. The scope of the second element of the declaration was further limited to offences committed within five years of the application for support. Applicants are therefore no longer required to disclose to ECGD whether any of its joint venture or other partners has been debarred or convicted for corruption.

68. Once again, TI(UK) felt that this represented a significant erosion of ECGD's anti-corruption procedures:

"It is impossible to comprehend why an Applicant would be relieved by ECGD of an obligation to make any enquiry as to whether itself or its own subsidiary company or director had been debarred or convicted for corruption."[

69. The CBI justified the changes on the basis that the broad definition of "affiliates" to include partners to any joint venture or consortium or similar arrangement required applicants to make a declaration in respect of companies/banks not within their control and on individuals on which they could not have the necessary information. The CBI pointed out that such a declaration would have had to include multinational organisations with thousands of employees.[69] The Minister for Trade and Investment told us that in making the changes ECGD had recognised the argument put forward by its customers that not all of the representations and warranties required in the May forms about behaviour beyond the applicant's control were appropriate.[70] John Weiss had acknowledged earlier that ECGD had not taken proper account of the full implications of the Department's request for information about affiliates.[71] ECGD had conceded that it was not realistic to expect applicants to be able to provide warranties about the behaviour of individuals or organisations for which they were not legally responsible.

70. In our view, it should be possible to address the CBI's concern about the extent to which their members should be knowledgeable about the activities of their partners' employees by limiting the requirement to having knowledge of senior employees and defining that term to mean people with executive power in the company. This would cut down the extent of the information required considerably and maintain the need for some semblance of vigilance on the part of the applicant for ECGD's assistance.

ECGD'S RIGHTS OF AUDIT

71. When it introduced the procedures to be operative from 1 May, ECGD stated that it was expanding its rights of audit to enable it to monitor compliance with its new anti-corruption procedures.[72] The main point of the new procedures was to allow ECGD to conduct full audit checks, having given five days notice of its intention to do so. Its customers objected to this extension of its audit rights, principally on the grounds that ECGD auditors might become "aware of information that the supplier considers commercially sensitive."[73]

72. Redrafting over the summer produced an audit clause which was acceptable to industry, but which limited ECGD's powers of independent audit. In future, 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; the Department will be allowed to audit those records only up to the date of the award of the contract; and ECGD will not be able to conduct a full audit using its own staff, but must use 'an independent third party acceptable to the supplier and ECGD'.

73. The Corner House was concerned that ECGD was no longer able to conduct random audits, which might uncover evidence or signs of corruption or of non-compliance with anti-bribery warranties. It felt that the new audit clause ran counter to the Department's stated policy of referring suspicion of corruption to the police, on the grounds that it would be impossible for ECGD to write to customers informing them of their suspicions without jeopardising a potential police investigation. The Corner House doubted that such restricted audit powers could ever be used effectively.[74]

74. The Minister pointed out that ECGD had no statutory powers to seize documentation. ECGD's audit rights included in the May provisions the ability to audit documents relating to contractual award as well as performance. The rights regarding audit of contractual award remained, but were restricted in December to occasions when ECGD had reasonable grounds to suspect corrupt activity because the Department had accepted at the time it was not appropriate for it to have the right to audit papers without reason.[75] This explanation begs the question of how ECGD could find grounds to suspect corrupt activity if it was not allowed to look for it.

75. In conceding its right of independent audit, ECGD weakened its ability to detect fraud or other corrupt activity. The Department may not have statutory powers of investigation, but it does have the responsibility to ensure that public funds are used appropriately. We saw nothing wrong in requiring an applicant to agree to audit and inspection by ECGD as a condition of receiving support from the public purse and we regret ECGD's concession of the principle.

Response from ECGD's customers

76. Under the terms of the agreement reached with the Corner House, the December procedures will remain in force while ECGD conducts a public consultation on these measures.[76] ECGD told us that, over the period May to December, seven of its customers felt able to transact business under the more stringent procedures in place during that time.[77] £55 million worth of cover was transacted during that time.[78] ECGD told us that during the same period three of its industry customers and a number of banks had refused to use the new procedures.[79] Under what ECGD called its interim arrangements, approximately £900 million worth of business was conducted.[80] Of this, $202.8 million went to Airbus,[81] which had been granted dispensation to use such arrangements on three occasions while negotiations with ECGD were taking place.[82] We cannot understand why, if some of ECGD's customers could accept the Department's support under the more rigorous procedures effective from 1 May, others could not.

The role of the Export Guarantees Advisory Council

77. The Export Guarantees Advisory Council was established under Section 13 of the Export and Investment Guarantees Act 1991 (which provides the legal base for the ECGD's operations) to give advice to the Secretary of State, at his/her request, in respect of any matter relating to the exercise of his/her functions under the Act. It appears from EGAC minutes that, while the Council was alerted to the objections raised by industry and kept informed of progress with negotiations, it was not consulted about the consistency of the changes negotiated by industry with the Department's Business Principles.

78. It was clear from the minutes of EGAC's November meeting that some EGAC members were unhappy that they had not been involved in a review of the industry-inspired changes:

"6.2.2 It was questioned whether the Council had been able effectively to provide advice before the changes were introduced. Although the Council had provided advice on anti-corruption procedures to Ministers in January, specific advice had not been officially sought since discussions had commenced on the changes requested by customers. The Council had nevertheless been regularly updated at meetings. But it was agreed that there might have been a benefit for ECGD if the Council had been able properly to review the changes.

6.2.3 Council members felt that they had been unable to properly engage on this issue, whereas the role and benefit of EGAC was to give timely advice in such circumstances. This should be considered going forward, and the Council hoped that their view would be sought on any changes in policy."[

79. The Minister acknowledged that there would be opportunity for lessons to be learned from the ECGD's handling of this issue,[84] and that :

80. We welcome ECGD's acknowledgement that the introduction of new procedures could have been handled better. In the light of this experience, we would expect the Export Guarantees Advisory Council to be consulted on any proposal to amend ECGD's procedures and that ECGD would seek its advice on the need for consultation with customers and other interested parties.

30 ECGD Press release: http://ecgd.gov.uk/print.news 1 April 2004 Back

31 Ibid Back

32 For example, HC 506-II, Q 73 Back

33 Q 27 Back

34 Letter from John Weiss to ECGD customers, 5 November 2004 Back

35 Q 57 Back

36 Ibid Back

37 Q 61 Back

38 App 11 Back

39 Letter from CBI to ECGD, 19 May 2004 Back

40 App 12 Back

41 Letter from CBI to Chairman, Export Finance Committee, CBI Back