House of Commons - Trade and Industry

Select Committee on Trade and Industry Written Evidence

APPENDIX 10

Memorandum by Transparency International (UK)

TI(UK)'S COMMENTS ON THE EFFECTIVENESS OF THE "REVISED ECGD PROCEDURES TO COMBAT BRIBERY AND CORRUPTION". ISSUED ON 5 NOVEMBER 2004

SUMMARY

1. In TI(UK)'s opinion, the "Revised ECGD Procedures to Combat Bribery and Corruption" issued on 5 November 2004 (the "November Procedures") are significantly weaker than those issued by ECGD in May 2004 (the "May Procedures"), and materially increase the risk that:

(a) bribery will occur in relation to projects covered by an ECGD guarantee.

(b) ECGD will suffer unnecessary loss.

In particular, the November Procedures do not fulfil the expressed commitment and intent of the UK Government and ECGD to prevent corruption.

2. The major points of concern in the November Procedures are:

(a) They allow the organisation applying for ECGD support ("Applicant") not to disclose agents' commissions if they are 5% or less of the contract price and are not subject to the export credit.

(b) They allow the Applicant not to disclose the name and address of the agent.

(c) They do not require disclosure of agents' commissions if they are paid by or through joint venture or other business partners.

(d) They do not require the Applicant to carry out due diligence on its joint venture or other business partners.

(e) They do not require the Applicant to give any effective anti-corruption warranty in relation to its subsidiaries or other companies it controls.

(f) They do not require the Applicant to make any enquiry as to whether it, or any companies it controls, or any of its joint venture or other business partners, have been debarred or convicted for corruption.

(g) The entire Schedule to the November Procedures is expressly qualified by a new definition of "to the best of our knowledge and belief" that is so weak that it materially diminishes the effect of the disclosures in the Schedule.

(h) The defects in the Application are perpetuated in the Premium and Recourse Agreement.

(i) ECGD has retained grossly inadequate post-contract inspection powers.

3. It appears that the significantly weaker November Procedures were introduced by ECGD as a result of lobbying from a few major customers and industry bodies. While ECGD agreed to meet these organisations, and substantially accepted what was requested by them, ECGD did not request views more generally from its customers, nor from other interested parties such as TI(UK). Had TI(UK)'s views been requested, it would have warned ECGD that the proposed revisions were materially defective, and exposed ECGD to significant risks. As the Secretary of State and ECGD have now agreed to a full public consultation, TI(UK) does not comment further in this document on the events which led to ECGD adopting the November Procedures. TI(UK)'s comments in this document are confined to explaining why the November Procedures are materially inadequate, and will fail to achieve their purpose.

4. In order to understand fully the inadequacy of the November Procedures, it is necessary to consider the context in which anti-corruption procedures are required. In this document, TI(UK) therefore briefly examines:

(a) the commitment of the UK Government and ECGD to combat corruption;

(b) the case against corruption;

(d) the business case for effective anti-corruption measures;

(e) the concealment of corruption through agents, joint venture parties and sub-contractors;

(f) the reason for anti-corruption procedures; and

(g) what is required for effective anti-corruption procedures.

TI(UK) then examines some of the major defects in the November Procedures.

5. Effective and workable anti-corruption procedures are in the interests of everyone concerned, including overseas project owners, host countries, the UK Government, ECGD, ECGD's customers and the tax paying public. The November Procedures are materially ineffective. TI(UK) will be pleased to work with all relevant parties to develop appropriate and effective procedures.

THE COMMITMENT OF THE UK GOVERNMENT AND ECGD TO COMBAT CORRUPTION

6. The UK Government is committed to implementing effective anti-corruption policies. It is a signatory to the following Conventions, all of which impose various degrees of anti-corruption obligations:

(a) The United Nations Convention against Corruption.

(b) The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

(d) The EU Convention on the Protection of the European Communities' Financial Interests (PIF-Convention), and its first and second protocols.

(e) The EU Convention on the Fight against Corruption involving Officials of the European Communities or Officials of the EU Member States.

These conventions vary in scope and effect. However, they all share common components in that they require signatories to take necessary steps to prohibit and to prosecute bribery.

7. The most significant change that necessarily affects the Government's commitment to combat foreign bribery is the enactment of Part 12 of the Anti-terrorism, Crime and Security Act 2001, which came into force on 14 February 2002. This criminalises foreign bribery even where all components of an offence take place abroad, and makes it an offence in the UK for any UK national or UK registered company to bribe overseas, whether in the public or private sector and regardless of the size or value of the bribe. Whatever may have been the view previously, it is now totally unacceptable for any UK national or company to contemplate winning business by bribing, still less for any government department to encourage, condone or ignore the practice.

8. Since the change in the law, UK Trade & Investment, in association with the Home Office and the Department of Trade and Industry (DTI), draws attention to the criminal offence of overseas bribery in its publications. Its leaflet states that:

"Bribery is bad for business. A culture of corruption is a disincentive to trade and investment and payment of bribes is unacceptable behaviour for UK companies or nationals. By upholding the law and promoting transparency in business activities, British companies enhance their own reputations and staff morale."

"Crown Servants and locally engaged employees in British Diplomatic posts overseas who in the course of their duties, become aware of, or receive information relating to acts of bribery committed by UK nationals or legal persons are obliged to report the matter, so that the appropriate UK authorities can decide whether to pursue an investigation."

9. ECGD expressly states its intention to prevent corruption in the following manner:

(a) In its letter to its customers dated 4 March 2004 (which informed customers of the introduction of the May Procedures), ECGD stated that:

"The new provisions, details of which are appended to this letter, are in the main being introduced to reflect lessons learned by ECGD and to ensure that we continue to play our part in the Government's drive to root out wrong doing in international business transactions, whether exporting, providing finance or investing. We believe that this will be to the ultimate benefit of all UK companies."

(b) In the "Important Information" section on the first page of the ECGD "Application for an ECGD Buyer Credit Guarantee" (November 2004), it is stated that:

"Please note that the OECD countries, including the United Kingdom, are committed to combating corruption and money laundering."

10. The following paragraphs were included in the TI(UK) submission to the Trade and Industry Committee in March 2004:

"ECGD Pivotal in Preventing the Export of Bribery

5.1 By virtue of its function and the business sectors that its operations support, the ECGD finds itself in a pivotal position in affecting the incidence of corruption in international business. ECGD approval of an application will, rightly or wrongly, sometimes be perceived as assuring a measure of propriety and "public" approval. ECGD is uniquely well placed to detect and prevent corruption and positively to influence corporate behaviour to reject bribery in the conduct of foreign business. It is hoped that the new measures that the ECGD has introduced to tackle corruption will advance considerably on existing practice and will make a positive contribution to ECGD's business.

5.2 The ECGD, through the OECD Group, seeks parity of practice with other ECAs, hoping thereby not to be at a competitive disadvantage with them. In the rapidly changing legal and business environments, it is not at all clear that a softer regime is a competitive advantage, save in the very short term. Business lost by virtue of maintaining lower anti-corruption hurdles is business that the ECGD would be better off without."

THE CASE AGAINST CORRUPTION

11. Corruption can no longer be regarded as an inevitable and necessary part of business life. The damage to developing countries caused by corruption is now obvious, with under-development, poverty and starvation the inevitable consequences. The World Bank estimates the cost of corruption at US $1.5 trillion per annum. This sum could dramatically reduce world poverty if it was not misappropriated. In particular, corruption can disadvantage the developing world by resulting in projects or products which are unnecessary, unsuitable, defective or dangerous; which require overly complex components; which are over-priced or expensive to operate and maintain; or which are delayed.

12. Corruption results in the misuse of a company's capital, which is invested for corporate purposes. If it is known within a company that it's foreign subsidiaries or joint ventures routinely win business by paying bribes, the corporate culture of that company is tarnished. Corruption distorts markets and is therefore the enemy of fair competition. The ease with which the proceeds of corruption can be laundered fuels extortion, and has the potential to damage banking reputation and financial markets. Corruption is bad for society, bad for the economy and bad for the companies involved.

13. ECGD guarantees are ultimately underwritten by the UK taxpayer. ECGD guarantees should not support projects that are procured through bribes. It is wrong that the UK taxpayer should be used unwittingly to subsidise and facilitate corruption which is having such a damaging effect on the developing world.

14. The responsibility to eliminate corruption is shared between the developed and developing world. Steps must be taken on both the supply and demand sides. Both ECGD and Applicant companies have an obligation to play their part in the reduction of the supply side of corruption.

THE RISKS TO ECGD, THE APPLICANT AND THEIR RESPECTIVE EMPLOYEES AS A RESULT OF CORRUPTION

15. For the reasons summarised below, corruption imposes a clear business and criminal risk on ECGD, Applicants and their respective employees.

The risk to ECGD and its employees as a result of corruption

16. Corruption can result in dangerous or environmentally destructive projects. This could involve ECGD in losses and litigation if it could be shown that the presence of ECGD's guarantee enabled the project to proceed, or that ECGD took inadequate steps to prevent corruption.

17. Corruption can increase the capital, operating and maintenance costs of projects, or result in unnecessary, wrongly specified, or defective projects. Any of these factors can make the project uneconomic. The project owner could as a result fail to repay the banks which are financing the project. The banks could then make a claim on ECGD under the guarantee, and ECGD could fail to recover under its recourse arrangements.

18. A contract which has been procured by an illegal act (which would normally include a bribe) is in many jurisdictions either invalid from commencement, or can be terminated by the aggrieved party, who would then be entitled to claim damages. If a project contract were to be terminated as a result of the Applicant paying a bribe, the Applicant and/or the project may collapse financially, leading to possible claims against ECGD, with the consequent drain on ECGD's resources, management time and reputation. Although ECGD may have the theoretical right of recourse against the Applicant, this will prove valueless if the Applicant has collapsed. Attempts by ECGD to recover the funds from the recipient of the bribe are unlikely to be successful.

19. The cost of bribes is frequently hidden in the project cost. If there is a claim against ECGD, and ECGD is unaware of the bribery, the cost of the bribe may inflate the amount ECGD is compelled to pay under a guarantee. ECGD will therefore be paying for the bribe.

20. Participation in a corrupt project will inevitably involve ECGD in reputational risk.

21. There is possible criminal liability for ECGD and its employees. The extent of corrupt practices in relation to projects in some countries is so widely known that ECGD is on notice of this situation. Some projects would not go ahead were it not for the presence of all necessary constituents, including a bribe, international finance and export credit guarantees. Failure to undertake adequate anti-corruption measures could therefore expose ECGD and its employees to the accusation that they were aiding and abetting bribery.

22. The above risks do not result only from a corrupt act by the Applicant. The Applicant is in many circumstances liable for the corrupt acts of its agents, associated and subsidiary companies, joint venture and consortium partners, sub-contractors and suppliers. Therefore, acts by these parties can also impact on ECGD's liability.

The risk to the Applicant and its employees as a result of corruption

23. Corruption increases costs and risk for exporting companies. It can result in wasted tender expenses, tendering uncertainty, increased project costs, economic damage, blackmail, criminal prosecutions, fines, blacklisting, and reputational risk. Companies which should win business may be denied the opportunity by the corrupt acts of competitors.

24. For individual directors and managers, corruption can result in criminal prosecution, fines, imprisonment, loss of professional status, disqualification from office, and loss of employment.

THE BUSINESS CASE FOR EFFECTIVE ANTI CORRUPTION MEASURES

25. It follows from the serious risks outlined above that there is a strong case for a company to take every reasonable precaution to avoid winning business by bribing. It is no longer an option for a responsible director or manager to countenance the practice. Reputation risk that is not properly managed can lead to the collapse of major enterprises. Reputation is a company's single most valuable asset. Several recent corporate scandals have demonstrated the catastrophic effects of a lack of integrity in board rooms. Given the criminalisation of foreign bribery, carrying heavy prison sentences and fines, there is no longer a valid argument that to be denied the opportunity to bribe places a company at a competitive disadvantage. The fact that there are international conventions should contribute to achieving fair trading conditions, and criminalisation can operate as a shield against extortion. UK embassies and high commissions abroad are now urged by the FCO to report allegations of bribery by UK companies and nationals and several reports have been sent to the National Criminal Intelligence Service from that source and from the ECGD.

26. Even before foreign bribery was criminalised, many progressive companies had appreciated that in the medium to longer term, a reputation for integrity in business dealings would prove positive and lead to more sustainable and profitable business. Some major companies have adopted zero tolerance of bribery world wide. Following a regime change in a country where extortion and bribery are commonplace, to be a company that has developed a reputation for integrity in business dealings should command competitive advantage. Companies looking to remain competitive and to enhance shareholder value into the future, will see corrupt business as a serious threat, and positive measures to combat it as an opportunity.

THE CONCEALMENT OF CORRUPTION

27. Corruption is normally concealed. The payment of a bribe may be made direct to the recipient. However, it is common for a bribe to be paid through intermediaries so as to obscure its identity and purpose.

(a) Agents. The most common form of intermediary is the agent. The Applicant may appoint an agent who has contacts with a senior officer of the project owner or with an official of the government of the country concerned. The Applicant may pay the agent a percentage of the contract price on being awarded the contract. The agent may pass the whole or part of the payment to the officer of the owner or government official as a bribe in return for the Applicant winning the contract. The officer or official are not accepting the bribe on behalf of the owner or government. They are accepting the payment secretly and unlawfully for their own personal benefit. The payment is therefore concealed. The payment is often made in foreign currency into an offshore bank account. Applicants may attempt to give the bribe a veneer of false legitimacy by signing a formal agreement with the agent that purports to state that the agent is carrying out legitimate services. The scope of work will often be false or exaggerated, however, and the size of the payment significantly in excess of the value of any legitimate services the agent carries out.

(b) Joint ventures and subsidiaries. The level of due diligence by export credit agencies, banks and prosecution authorities is lower in some countries than in others. When an Applicant bids as part of an international joint venture from several countries, the joint venture may arrange for the agency agreement to be executed in, and the commission paid from, the country least likely to investigate the commission. Similarly, where an Applicant is part of a multinational group, the commission may be paid by a subsidiary in a country where the commission is less likely to be investigated. The subsidiary may then be repaid by the Applicant through inter-company charges for false services, or services of inflated value. These commissions may then be used as bribes.

(c) Sub-contractors. An Applicant may also channel a bribe through a disguised sub-contract arrangement. For example, a sub-contractor might agree to provide equipment and materials to a contractor in return for a certain payment, but in reality it will not provide the services, or will provide services of a vastly lower value than the price agreed. The balance of the payment can then be passed on by the sub-contractor to the relevant party as a bribe.

THE REASON FOR ANTI-CORRUPTION PROCEDURES

28. For the reasons stated in paragraphs 15 to 26 above, it is unquestionably in the best interests of both ECGD and Applicants to adopt procedures which are effective in reducing the risk of corruption.

29. For ECGD, effective anti-corruption procedures reduce the risk that ECGD could suffer financial loss or reputational damage, and that its employees could face criminal prosecution for adding and abetting bribery. Moreover, it is entirely normal for underwriters to require the insured to take necessary steps to minimise risk.

30. For Applicants who wish to avoid bribery, effective anti-corruption procedures by ECGD will reduce the risk that competitors will continue to bribe while benefiting from ECGD guarantees.

EFFECTIVE ANTI-CORRUPTION PROCEDURES

31. Effective anti-corruption procedures for export credit agencies require a mixture of actions. These would include at a very minimum:

(a) warranties from the Applicant;

(b) pre-contract due diligence;

Warranties

32. It is necessary for ECGD to require Applicants to provide appropriate anti-bribery warranties, both in the Application and in the Premium and Recourse Agreement. These warranties should extend to both the Applicant and to the Applicant's business partners (such as subsidiary and associated companies, agents, joint venture and consortium partners, sub-contractors and suppliers). The acts of the Applicant's business partners can result in liability for the Applicant, and therefore for ECGD. The warranties should contain sufficient contractual commitment from the Applicant so that it is clear that the Applicant appreciates the risk, and will therefore undertake sufficient preventative measures of its own. The exact wording of these warranties needs to be agreed as part of the imminent consultation process between ECGD, industry and civil society, with a view to ensuring that the warranties are reasonable and effective.

33. However, warranties are not a complete solution. Any Applicant which is willing to break the law by paying or permitting a bribe is likely to be willing to give a false or misleading declaration to this effect to ECGD. It is inconceivable that an Applicant which proposes to pay a bribe would admit this to ECGD in the Application. Therefore, warranties need to be supplemented by other methods, such as due diligence and inspection.

Pre-contract due diligence

34. Pre-contract due diligence comprises the necessary measures which should, as a matter of best practice, be taken by all relevant parties prior to contracts being entered into. The purpose of the due diligence is to ensure, as far as reasonably possible, that there will be no corruption. There are three categories of due diligence:

(a) The due diligence which ECGD should undertake on the Applicant and the relevant project. ECGD needs to obtain sufficient information from the Applicant so that ECGD can take reasonable steps to assess the likelihood of corruption taking place.

(b) The due diligence which the Applicant should undertake on its business partners and the relevant project, so as to be reasonably certain that no corruption will take place.

(c) The key aspects of the due diligence undertaken by the Applicant under (b) above which the Applicant should disclose to ECGD as part of ECGD's due diligence under (a).

35. The extent of this due diligence needs to be agreed as part of the imminent consultation process between ECGD, industry and civil society,

Post-contract inspection

36. Post-contract inspection comprises the necessary measures which should, as a matter of best practice, be taken by ECGD after contracts have become effective. The purpose of the inspection is to ensure, as far as reasonably possible, that no corruption is taking place.

37. Post-contract inspection is necessary as:

(a) Pre-contract due diligence may not in practice have prevented or uncovered all potentially corrupt activities.

(b) Parties which had no intention of participating in corrupt activities at pre-contract stage may participate in corrupt activities at post-contract stage.

(c) Inspection acts as a deterrent. If the Applicant and its business partners are aware at pre-contract stage that ECGD may at any time at post-contract stage inspect their records and interview their staff, the Applicant and its business partners will be less likely to enter into corrupt transactions.

38. Inspection must be reasonable, cost-effective and proportionate. Major projects may have a permanent inspection regime. Smaller projects may have a part time or random inspection regime. The extent of inspection needs to be agreed as part of the imminent consultation process.

Prevention of corruption is the prime aim

39. Prevention of corruption is the prime aim of effective anti-corruption procedures. If a bribe is discovered after it has been paid, the damage will often be irreparable. The project and participants may collapse, the recipient of the bribe may vanish with the proceeds, and ECGD may be obliged to indemnify the affected parties. It is therefore imperative that ECGD takes more proactive steps to prevent bribery from occurring.

40. Bribery is concealed. The more successful the bribe, the less likelihood of it ever being uncovered. It is widely acknowledged that corruption is widespread in international business, yet very few prosecutions are ever brought. ECGD may therefore have provided guarantees, at taxpayers' risk, for a corrupt project. There must therefore be a transparent environment in which corruption is too risky to perpetrate.

41. Anti-corruption warranties, due diligence procedures and inspection mechanisms need to be adequate to prevent as far as possible not only the payment of bribes by the Applicant, but the payment of bribes by the Applicant's agents, associated and subsidiary companies, joint venture and consortium partners, sub-contractors and suppliers. The corrupt acts of these parties can impose liability on the Applicant, and endanger the economics of the project, which can in turn adversely impact on ECGD.

42. Recognition also needs to be given to the fact that anti-corruption procedures must be reasonable and proportionate. A large high risk project should require a higher level of disclosure, due diligence and inspection than a small or low risk project. Business should not be unduly burdened by anti-corruption procedures. Yet, at the same time, business should realize that the changed anti-corruption environment brought about by the new international intolerance to corruption and anti-corruption treaties requires a more open and honest method of undertaking business. Alleged "commercial confidentiality" and similar justifications should not be allowed to conceal corrupt practices.

ANALYSIS OF THE EFFECTIVENESS OF THE NOVEMBER PROCEDURES

43. In preparing this analysis, TI(UK) is not commenting on the detail of the November Procedures, but only on some of the major points of concern. The purpose of these comments is to illustrate that the November Procedures are materially defective in their professed purpose to prevent corruption. TI(UK)'s detailed proposals on effective anti-corruption procedures will be submitted as part of the imminent public consultation process. For the sake of simplicity, TI(UK) has commented only on the "Application for an ECGD Buyer Credit Guarantee" and on the "Premium and Recourse Agreement" for the Buyer Credit Guarantee. According to ECGD's web-site, the bulk of ECGD's business involves buyer credits.

44. A Buyer Credit functions in the following manner. A project owner may request tenders from exporters. The owner may not have sufficient funds to pay the exporter, and may therefore request the exporter to provide an offer both to supply the product, and to finance its purchase. The exporter will gain the agreement of an international bank to provide a loan of 85% of the cost of the product. The balance of 15% will normally be directly payable by the owner to the exporter. If the exporter is successful in winning the tender, the bank will pay the exporter for the supply at agreed intervals, and the project owner will then repay the bank the capital and interest over an agreed loan term. ECGD provides a guarantee to the bank that ECGD will repay the bank in the event of specified events of default by the project owner. In return for this guarantee, the exporter pays ECGD a premium. Prior to tendering, the exporter obtains a commitment 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. For some projects, political and similar risk may be covered by recourse arrangements between ECGD and the governments of the host countries.

45. In terms of corruption prevention, the key document is the Application, as it is submitted to ECGD prior to contractual commitment.

APPLICATION FOR AN ECGD BUYER CREDIT GUARANTEE

46. The following comments apply to the "Application for an ECGD Buyer Credit Guarantee". The Procedures being compared are the "May Procedures" issued by ECGD in May 2004, and the significantly weakened "November Procedures" issued by ECGD in November 2004.

The November Procedures do not require disclosure of agents' commissions if they are 5% or less of the contract price and are not subject to the export credit

47. Under Paragraph 7 of the Schedule to the Application in the May Procedures, ECGD required the Applicant to give disclosure of specified details in relation to any agent involved by the Applicant or any Affiliate in relation to the Supply Contract. There was no percentage or financial limit to the disclosure.

48. Under Paragraph 7 of the Schedule to the Application in the November Procedures, the Applicant is no longer required to provide any details of an agent where the agent's commission is 5% or less of the contract price and where it is not to be covered in any way by ECGD support.

49. This amendment leaves a significant gap in ECGD's anti-corruption procedures. As explained in paragraph 27 above, the use of agents through which bribes are channelled is a relatively common mechanism in international business. Payment of a commission of 5% (which could then be used as a bribe) would not be unusual in many jurisdictions. These commissions could deliberately be paid by the Applicant out of funds which do not fall within the scope of the ECGD support, and as such would not need to be declared to ECGD. For example, they could be paid out of the cash down payment, or out of a separate fund set up by the Applicant to pay commissions. 5% of the price of a large contract can be a significant amount of money. A commission of higher than 5% could also be free from disclosure if the Applicant divides the commission into separate elements each of less than 5%. As many agents are shell companies based in haven jurisdictions, it would be easy to appoint several agents, and to divide the commission between them.

50. The reason why details should be provided by Applicants to ECGD in relation to agents is that the use of agents is such a common mechanism for paying bribes. Disclosure to ECGD of the identity of the agent, the amount of the commission, the country in which the commission will be paid, the agent's scope of work and related details alerts ECGD to the existence of the agent, and could highlight potentially suspicious circumstances (eg payment of the agent's commission into an offshore bank account, payment of an unusually large amount, or a potential connection between the agent and an official or Government minister involved in the tender process). Disclosure to ECGD also puts both the Applicant and the agent on notice that ECGD may undertake subsequent due diligence on the agent to ascertain whether it was in fact carrying out the services in question. This has an important preventative effect.

51. The following hypothetical examples show obvious situations where ECGD's procedures would not be effective in this regard.

52. Example 1:

The Applicant appoints an agent in relation to a tender for a £100 million power station. The agent is the sister of the President of the country in which the power station will be built. The commission will be 5% (£5 million) payable into a "haven" jurisdiction. The commission is paid out of a separate fund which the company maintains to pay commissions. The commission therefore does not fall within the ECGD support. The Applicant wins the project, and pays the commission. The sister of the president provides only minimal legitimate services. The payment is a bribe which she shares with the President. Under the May Procedures, the Applicant would have had to notify ECGD of the name and address of the agent, details of the services to be provided by the agent, the amount of the commission, and the country where the commission was payable. Under the November Procedures, the Applicant has no obligation to declare the existence of the agent, or the commission, or any related information to ECGD, as the commission is not more than 5%, and does not fall within the export credit. Whether or not the commission is included in the credit, the contracts on which the project relies are voidable as a result of the bribe and may collapse prejudicing the entire project with potentially huge economic consequences.

53. Example 2:

The facts are as in Example 1, except that the commission is 20% (£20 million). So as to avoid ECGD's disclosure obligations under the November Procedures, the President's sister sets up four separate shell companies in a "haven" jurisdiction. Each shell company signs a separate agency agreement with the Applicant. Commission of 5% (£5 million) is paid to each agent. Although the aggregate commission is in excess of 5%, the November Procedures only require disclosure if the commission exceeds 5% per agent. This arrangement would have needed to be disclosed under the May Procedures. It does not need to be disclosed under the November Procedures.

54. Disclosure of this information to ECGD will not be difficult for the Applicant. An Applicant faces significant risks if an agent pays a bribe on its behalf. An Applicant would normally be liable under the contract with the project owner for the acts of its agent. A contract is often either void, or can be terminated, in the event that a bribe has been paid in relation to the contract award. Therefore, if the Applicant's agent pays a bribe to a senior officer of the project owner, and the project owner terminates the contract as a result of the bribe, and/or claims damages, then the Applicant may be liable to the project owner and other parties for the consequences, even if the Applicant had no knowledge of the bribe. Therefore, it is a commercial imperative for a company that it conducts proper due diligence on its agent, and takes necessary preventative steps, so as to try to avoid this type of liability.

55. The need for due diligence on agents has also been acknowledged as international good practice by many leading international companies. TI in 2002 published its "Business Principles for Countering Bribery". These principles were developed as a benchmark for international good practice in conjunction with many leading international companies such as General Electric, Norsk Hydro, Pricewaterhouse Coopers, Rio Tinto and Shell. The Business Principles require the enterprise to prohibit bribery in any form, whether direct or indirect, and to implement a programme to counter bribery. Paragraph 6.2.2 of the Business Principles states as follows:

"6.2.2.1 The enterprise should not channel improper payments through an agent.

6.2.2.2 The enterprise should undertake due diligence before appointing an agent.

6.2.2.3 Compensation paid to agents should be appropriate and justifiable remuneration for legitimate services rendered.

6.2.2.4 The relationship should be documented.

6.2.2.5 The agent should contractually agree to comply with the enterprise's Programme.

6.2.2.6 The enterprise should monitor the conduct of its agents and should have a right of termination in the event that they pay bribes."

56. The ICC Rules of Conduct to Combat Extortion and Bribery, produced by business for business, include the following provisions in respect of agents:

"Enterprises should take measures reasonably within their power to ensure

(a) that any payment made to any agent represents no more than an appropriate remuneration for legitimate services rendered by such agent;

(b) that no part of any such payment is passed on by the agent as a bribe or otherwise in contravention of these Rules of Conduct; and

(c) that they maintain a record of the names and terms of employment of all agents who are retained by them in connection with transactions with public bodies or State enterprises. This record should be available for inspection by auditors and, upon specific request, by appropriate duly authorised governmental authorities under conditions of confidentiality."

57. Therefore, a well run company will have access to full details of its agents, and can easily pass these details to ECGD. The ICC Rules specifically recommend that these details are passed on to governmental authorities. A 5% cut-off makes no sense as there could be an enormous disparity depending on the contract price. 5% of £100 is £5. 5% of £100 million is £5 million. Furthermore, a bribe does not cease to become a bribe merely because it is 5% or less of the contract price. The bribery risk remains, whatever the amount in question.

58. The May Procedures provided for disclosure in relation to agents without any monetary limit. The November Procedures provide for the above 5% exception. As such, the November Procedures are materially defective.

The November Procedures allow the Applicant not to disclose the name and address of the agent

59. Under Paragraph 7.3 of the Schedule to the Application in the November Procedures, ECGD requires the Applicant to provide details of the name and address of the agent. This is critical information, as it may highlight a possibly suspicious circumstance (for example a connection between the agent and a representative of the project owner or government of the country in which the project will be located, or the fact that the agent is located in a "haven" jurisdiction). However, ECGD expressly provides in this paragraph that "If you are unable to provide this information, please give your reason(s) for not being able to do so."

60. The May Procedures allowed no such concession.

61. As it is inconceivable that the Applicant would not know the name and address of an agent it was appointing, it seems that ECGD is providing the opportunity for Applicants not to disclose this information. Correspondence in relation to the November Procedures between ECGD and some industry groups recently published on ECGD's website suggests that this exemption may be to allow non-disclosure in the event of "commercial confidentiality". There can be no reason for any such exemption. Corruption is concealed. Agents have commonly been one of the most common routes through which bribes are paid. The whole purpose behind disclosure of an agent's details is to make it more difficult to use agents as a conduit for a bribe. Commercial confidentiality cannot be used as a justification for non-disclosure to ECGD.

62. Many agents and intermediaries are companies or individuals of the highest integrity, and provide legitimate business services for fair remuneration. If they are reputable, there is no reason why these agents should not be willing to be open and transparent in their business dealings, and be willing to have details of their identities, scope of work and commission payments made available to ECGD as part of the due diligence procedures. They should have nothing to hide. Agents would be likely to wish their experience and expertise to be widely known so that they attract more business. There should always be extreme concern in relation to projects where the Applicant attempts to conceal these details from ECGD. Suspicion must be present that the details of these agents are being kept confidential because of their close links to someone who has influence over the contract award or contract management process. Therefore, 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 may be criminally liable for aiding and abetting bribery (on the basis that they were willfully blind) if the agency arrangements turned out to have concealed a bribe.

63. Therefore, in all cases, details of the agency arrangement should be disclosed to ECGD. There may be exceptional circumstances where extra care needs to be taken by ECGD to ensure that ECGD keeps these details confidential under secure arrangements that would equate, for example, with Inland Revenue practice.

64. As such, the November Procedures are materially defective.

The November Procedures do not require disclosure of agents' commissions if they are paid by or through joint venture and other business partners

65. Under Paragraph 7 of the Schedule to the Application in the May Procedures, ECGD required the Applicant to give disclosure of specified details in relation to any agent appointed by its Affiliates in relation to the Supply Contract. An "Affiliate" included "in relation to (the Applicant), 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) in connection with the Supply Contract" (paragraph 4.1 of the Application).

66. Under Paragraph 7 of the Schedule to the Application in the November Procedures, the Applicant is no longer required to provide any details of an agent appointed by a joint venture or consortium partner, or under any similar arrangement. The Applicant's obligation is now limited to providing specified details of agents "engaged by (the Applicant) or any Controlled Company". A Controlled Company is one which the Applicant controls by virtue of any contractual arrangements or through owning a majority of the voting rights (paragraphs 4.4 and 4.5 of the Application). It would be unusual for the Applicant to control its joint venture or consortium partners.

67. This amendment leaves a significant gap in ECGD's anti-corruption procedures. Joint venture, consortium or other business partners, which may be resident in countries where bribes are less likely to be uncovered, may appoint the agents and pay the commissions. These commissions may be used as bribes. Bribes paid by joint venture and other partners place both ECGD and the Applicant seriously at risk. The Applicant is normally jointly and severally liable to the project owner for the acts of its joint venture and other partners. Illegal acts such as bribery normally entitle the project owner to terminate the contract. Termination as a result of a bribe paid by joint venture and other partners could leave both ECGD and the Applicant exposed to losses, litigation and reputational risk.

68. Example 3:

The Applicant forms part of an international joint venture in relation to a tender for a £500 million petrochemical plant. One of the joint venture partners is located outside the UK. It has good contacts with the chief executive of the national oil company which will be the owner of the petrochemical plant. The chief executive has requested, via an agent, a bribe of 15% (£75 million) of the contract price in return for ensuring that the joint venture is awarded the project. The joint venture partner located outside the UK agrees to pay the bribe through the agent, and includes part of the cost of the bribe into its part of the project price. The balance of the cost of the bribe is contributed to by each partner in the joint venture paying a "leadership fee" to the joint venture partner which is paying the bribe. The bribe is concealed as a "commission" payable to the agent. No disclosure of this arrangement needs to be made by the Applicant to ECGD under the November Procedures. The contract is awarded to the joint venture and the bribe is paid. A change of government in the country where the project is located leads to an anti-corruption investigation of the project. The bribe is revealed and the contract terminated, leading to massive losses falling on the project participants. Claims are made on ECGD. ECGD has to compensate the banks under the guarantee (although it may be able to argue contributory negligence or default by the banks in themselves failing to undertake adequate anti-corruption due diligence). ECGD also faces litigation costs and reputational risk. The country in which the project is located commences criminal proceedings against the joint venture partners, ECGD and the relevant individual employees of the joint venture parties and ECGD. The criminal cause of action against the joint venture partner which paid the bribe is that it paid the bribe either intentionally, or with willful blindness to the possibility that the commission could be used as a bribe. The criminal cause of action against the Applicant and ECGD, and their employees, is that they aided and abetted the bribery in that, despite being aware of the high risk of bribery, they deliberately or with willful blindness required no disclosure from the joint venture partner of the identity of the agent, the amount paid to the agent, and its scope of work (which may have alerted them to the bribery).

69. Any Applicant which is genuinely concerned about protecting its position in relation to payments of bribes by its joint venture and other partners would, as a matter of course, require disclosure from these partners of details of agents appointed in relation to the project in question. It should therefore be very simple for the Applicant to pass this information on to ECGD. It is important that ECGD receives this information as part of its pre-financing due diligence.

70. The May Procedures provided for full disclosure in this regard. The November Procedures eliminate the need for such disclosure. As such, the November Procedures are materially defective.

The November Procedures do not require the Applicant to carry out due diligence on its joint venture or other business partners

71. In the May Procedures, the definition of "Affiliate" in paragraph 4.1 included "(the Applicant), 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) in connection with the Supply Contract". Paragraph 8.2.1 of the May Procedures made it a condition of the guarantee 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." Consequently, as a result of these provisions, the Applicant would need to undertake due diligence on its Affiliates so as to be reasonably sure that they would not engage in corrupt activities.

72. However, in paragraph 9.2 of the November Procedures, ECGD has removed most of the Applicant's obligations in relation to joint venture, consortium and similar partners. It has done this in the following ways:

(a) The anti-bribery undertaking in paragraph 9.2.1 now only applies to the Applicant and a Controlled Company (any company which the Applicant controls by virtue of any contractual arrangements or through owning a majority of the voting rights (paragraphs 4.4 and 4.5 of the Application). The obligation under the May Procedures to give this undertaking in relation to any joint venture, consortium or other partner has therefore been removed.

(b) A significantly reduced obligation in relation to joint venture and other partners has been substituted for the previous more extended obligation. A new definition of "Associate" has been introduced which means "a party to any joint venture, consortium or other similar arrangement" (paragraph 4.1). Paragraph 9.2.2 provides that the Applicant is obliged to notify ECGD in relation to a Corrupt Activity by an Associate if the Applicant "becomes aware" of such activity. In other words, the Applicant has no obligation to take any active steps to ascertain whether such activity is being carried out, or to try to prevent it.

73. If a company genuinely wishes to ensure that joint venture, consortium and other partners do not pay a bribe in relation to the project, then proper due diligence on these parties would be a commercial necessity. The partners in a joint venture are normally jointly and severally liable under the contract with the project owner. A contract is often either void, or can be terminated, in the event that a bribe has been paid in relation to the contract award. Therefore, if a joint venture partner pays a bribe to a representative of the project owner (either directly or through an agent), and the project owner terminates the contract as a result of the bribe, and/or claims damages, then all the joint venture partners may be liable to the project owner and other affected parties for the consequences, even if they had no knowledge of the bribe. Therefore, it is a commercial imperative for a company that it conducts proper due diligence on joint venture, consortium and other partners so as to try to avoid this type of liability. This commercial reality was recognised by ECGD in its May Procedures.

74. The need for due diligence on such partners has also been acknowledged as international good practice by many leading international companies. Paragraph 6.2.1 of the "Business Principles for Countering Bribery" referred to in paragraph 55 above states as follows:

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

6.2.1.2 The enterprise should ensure that subsidiaries and joint ventures over which it maintains effective control adopt its Programme. Where an enterprise does not have effective control it should make known its Programme and use its best efforts to monitor that the conduct of such subsidiaries and joint ventures is consistent with the Business Principles."

75. The May Procedures provided for due diligence by the Applicant, in that it required the Applicant to give warranties to ECGD on behalf of it joint venture and other partners. The November Procedures eliminate the need for such due diligence. As such, the November Procedures are materially defective.

The November Procedures do not require the Applicant to give any effective anti-corruption warranty in relation to its controlled companies

76. In the May Procedures, the definition of "Affiliate" in paragraph 4.1 included, inter alia, "a member of the same group of companies". Paragraph 8.2.1 of the May Procedures made it a condition of the guarantee 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." Consequently, as a result of these provisions, the Applicant would need to undertake due diligence on its controlled companies so as to be reasonably sure that they would not engage in corrupt activities.

77. However, in paragraph 9.2 of the November Procedures, ECGD has materially diminished the Applicant's obligations in relation to its controlled companies. Under paragraph 9.2.1, the Applicant is required to declare as follows:

"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."

This declaration is expressly qualified by the wording "to the best of our knowledge and belief". The declaration has been rendered entirely meaningless by the addition in the Appendix to the November Procedures of a new definition of "to the best of our knowledge and belief". Under this definition, "knowledge" simply means "the actual knowledge of the person concerned at the time of making the statement". "The best of" simply 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". Astoundingly, the definition expressly states that it "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". Similarly, the definition of "belief" is strictly limited. "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." The overall effect of this undertaking is that the person providing the statement simply puts down what is in his mind at the time of making the statement, with no obligation to make any enquiries.

78. Therefore, even if a subsidiary company of the Applicant were to pay a bribe, the Applicant would not be liable in this regard to ECGD as long as the person signing the Application on behalf of the Applicant did not actually know of the intention to pay a bribe at the time he made the statement.

79. The effect of the revised definition of "to the best of our knowledge and belief" is that it will be in the interest of the Applicant to have the Application signed by a representative who has as little knowledge as possible, and who has never made any enquiries.

80. This revised definition is contrary to commercial common sense and good practice, which would require the Applicant to make constant enquiries of the true position, and to exercise effective supervision over companies which it controls. Paragraph 6.2.2 of the "Business Principles for Countering Bribery" referred to in paragraph 55 above states as follows:

"The enterprise should ensure that subsidiaries and joint ventures over which it maintains effective control adopt its (anti-corruption) Programme".

81. This revised definition is also significantly weaker than the English criminal law test under which "wilful blindness" is sufficient to result in criminal liability.

82. As such, the November Procedures are materially defective.

The November Procedures do not require the Applicant to make any enquiry as to whether it, or any companies it controls, or any of its joint venture or other business partners, have been debarred or convicted for corruption

83. In the May Procedures, the Applicant is required to declare as follows:

"We declare that to the best of our knowledge and belief neither we, or 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."

84. However, the November Procedures have materially weakened this obligation. In paragraph five of the November Procedures, the Applicant is required to declare as follows:

"We declare that, to the best of our knowledge and belief:

5.1 we or any Controlled Company or any board director of ours or of any Controlled Company:

5.1.1 neither 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, nor

5.1.2 has at any time during the last five years, other than under duress, admitted having engaged, or been found by a court in any competent jurisdiction to have engaged, in any Corrupt Activity that has not previously been notified to ECGD."

85. As a result, there is no longer any obligation on the Applicant to disclose to ECGD whether any or its joint venture or other partners has been debarred or convicted for corruption. This would be a necessary and obvious enquiry for an Applicant to make on its joint venture and other partners in undertaking its own anti-corruption due diligence. It would therefore be easy for the Applicant to pass on this information to ECGD. It is also imperative that ECGD is informed whether a member of the Applicant's joint venture has been debarred or convicted for corruption.

86. In addition, the remaining obligation of the Applicant to make a declaration in respect of itself and its controlled companies is expressly subject to the same virtually meaningless definition of "to the best of our knowledge and belief" referred to in paragraph 77 above. Therefore, as long as the actual signatory did not know of any such debarment or conviction, the Applicant would not be in breach of this undertaking, even if the Applicant or a subsidiary or a director had been debarred or convicted. The signatory would not even have to ask any colleagues, or check any company records. 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.

87. The November Procedures are therefore materially defective.

The entire Schedule to the November Procedures is expressly qualified by a new definition of "to the best of our knowledge and belief" that is so weak that it materially diminishes the effect of the disclosures in the Schedule

88. The introduction to the Schedule to the November Procedures states that "All relevant questions in this Schedule must be answered fully and truthfully to the best of your knowledge and belief." As stated in paragraph 77 above, this expression has been re-defined with the result that the information becomes virtually meaningless. The Schedule contains vital underwriting details, and information on the Applicant's agents. As the Applicant's signatory expressly does not have to make any enquiry whatsoever while filling in this Schedule, no error in the form will prejudice the Applicant as long as it was correct as far as the signatory's actual knowledge and actual belief was concerned. The signatory would merely have to swear in court that that was all he knew, and what he believed, and that would be the end of the matter. It would not be relevant that all other senior managers of the Applicant knew, or would have known, that the information provided by the Applicant was wrong. No commercial organisation would ever permit a director or employee to manage any part of the business expressly on the basis that they need never make any enquiry as to what was occurring.

89. This qualification results in a virtually meaningless and unenforceable Schedule, and leaves ECGD materially exposed. The November Procedures are therefore materially defective.

PREMIUM AND RECOURSE AGREEMENT FOR THE BUYER CREDIT GUARANTEE

90. The following comments apply to the "Premium and Recourse Agreement" for the Buyer Credit Guarantee.

91. The key document in terms of corruption prevention is the Application which could lead ECGD to decline cover, or alert criminal authorities, before it was at risk, and before the project commenced. The Premium and Recourse Agreement is signed once ECGD has agreed to cover the Applicant, and the project contract has been signed. The terms of the Premium and Recourse Agreement are as a result very much an exercise in damage limitation. Therefore, TI(UK)'s comments in this regard are limited to two key observations.

The defects in the Application are perpetuated in the Premium and Recourse Agreement

92. Many of the comments made above in relation to the weaknesses in the Application apply also to the Premium and Recourse Agreement, as the defects in the former document are to a large extent perpetuated in the latter document. For example, paragraph 5.11 of the Premium and Recourse Agreement obliges the Applicant to indemnify ECGD, but this indemnity is limited to the circumstances envisaged by paragraph 9.2 of the Application (which excludes joint venture and other partners from the terms of the non-corruption warranty, and only obliges the Applicant to inform ECGD if "it becomes aware that any Associate . . . has engaged in Corrupt Activity . . .".

ECGD has retained grossly inadequate post-contract inspection powers

93. ECGD has not retained power to undertake any effective post-contract inspection to ensure that no corruption has taken, or could take place. Paragraph 5.9.2 of the Premium and Recourse Agreement provides as follows:

"IF ECGD confirms in writing to the Supplier that it has reasonable grounds for suspecting that an employee, agent or intermediary of the Supplier has been engaged in any Corrupt Activity . . . in connection with the Supply Contract, (the Supplier shall) permit an independent third party acceptable to the Supplier and ECGD to visit any of its UK premises where records relating to the obtaining and performance of the Supply Contract and the making of Disbursement Claims under the Loan Agreement are kept during business hours for the sole purpose of inspecting and auditing any records, other than those covered by legal privilege, preserved in any medium or form including records stored electronically which relate (a) specifically to the Supplier's obtaining of the Supply Contract or the employment of, and payments to or for the benefit of, any agents or other intermediaries involved directly or indirectly at any time with the Supply Contract and (b) only to the period up to the date of award of the Supply Contract (the "Contract Records" and, together with the Administration Records, the "Records"), provided that ECGD may only inspect and audit Contract Records for the sole purpose of verifying statements made, and information given, to ECGD by the Supplier in the Application Form."

94. This wording contains the following major deficiencies:

(a) ECGD can only exercise these powers if it has reasonable grounds for suspecting a Corrupt Activity. Corruption is concealed, and most successful bribes are never uncovered. The power of ECGD to inspect is a powerful deterrent, and may also uncover bribes in relation to which ECGD had no prior suspicion. This power to inspect should not be limited only to the situation where ECGD has reasonable grounds for suspicion.

(b) The independent third party needs to be acceptable to the Applicant (Supplier). It is difficult to see why this approval is necessary.

(c) The inspector can only visit the Applicant's UK premises. However, the issue concerns exports and overseas bribery. Records may be kept at the Applicant's overseas premises, and the right to inspect should extend to these premises also.

(d) The inspector does not have access to the records of associated and subsidiary companies, agents, joint venture and consortium partners, or sub-contractors, even though bribes may, with the knowledge or willful blindness of the Applicant, have been arranged through these companies.

(e) Records can only be inspected if they relate to the period up to the date of award of the Supply Contract. However, most bribes will actually only be paid after award of the Supply Contract (for example out of the contract down payment). An inspection of pre-award documents would be unlikely to reveal this. Inspection should not be limited to this period.

(f) Records can only be inspected for the sole purpose of verifying statements made and information given to ECGD by the Applicant in the Application. As is made clear in paragraphs 46 to 89 above, the information requested in the Application is seriously inadequate. The inspection will therefore be equally inadequate. In addition, much of the information given in the Application is expressly qualified by the "to the best of our knowledge and belief" proviso, the power of which has been neutered by the definition of this term in the Application (see paragraph 77 above). As a result, the inspector may in practice be confined to interviewing the signatory of the Applicant as to his state of mind at the time he signed the Application. This would be a worthless exercise.

95. These inspection powers are grossly inadequate, and put ECGD materially at risk. The November Procedures are therefore materially defective.

February 2005