Examination of Witnesses (Questions 120
- 139)
TUESDAY 20 APRIL 2004 (Morning)
TRANSPARENCY INTERNATIONAL
(UK)
Q120 Mr Evans: So if they included
the Serious Fraud Office in it, you think that could be the body
that would be make—
Mr Rodmell: Very much so, yes.
Mr Cockcroft: With the slight
caveat, which is that the Serious Fraud Office itself has said
it does not wish to deal with corruption, it wishes to deal only
with fraud. So we would like to see that mandate extended.
Mr Rodmell: Can I just comment
on that? They have said that they do not need an express power
because they already do it. If there is an element of fraud they
can do it; but if there is not an element of fraud it follows
they cannot do it. It is probably difficult to imagine too many
cases where there is not some element of fraud. However, they
have taken express powers to deal with cartels under the Enterprise
Act, and if they need express powers to deal with cartels it begs
the question: why do they not need express powers to deal with
international bribery, which is now under the Anti-Terrorism Act?
Q121 Chairman: You could do it rather
vaguely, in the sense that you could say, "We will take the
best bits of this organisation and the best bits of that and the
appropriate bits of this one and put them together." Do you
think you will have a lot of difficulty in finding the best bits
of the Serious Fraud Office?
Mr Rodmell: No, I think the Serious
Fraud Office, because—
Q122 Chairman: Given their success
rate?
Mr Rodmell: What I see is a much
wider jurisdiction to deal with serious international economic
crime which embraces fraud, embraces corruption, money-laundering,
probably international securities offences, cartels and so on,
because they need the same body of skills of complex mutual legal
assistance internationally, for cross-border crime. It makes no
sense to refer that kind of crime to a constabulary which has
very little experience and very little staff, and does not even
have a fraud squad.
Q123 Chairman: Really what I was
meaning was that the Serious Fraud Office does not seem to be
one of the most successful arms of our policing process, if I
can put it like that.
Mr Rodmell: Well, the Director
may not altogether agree with you.
Q124 Chairman: No, he may not, but
the general perception is of some relevance!
Mr Rodmell: I understand that.
Q125 Mr Berry: We have had sight
of reports four and five of your anti-corruption initiative in
construction and engineering that Mr Stansbury wrote. The obvious
question here is that you give hypothetical examples about how
bribery and other corrupt practices can affect the outcome of
a bid for overseas contracts. How much of these hypothetical examples
are based on what you have observed in real life?
Mr Stansbury: Basically, I have
worked in the industry for 20 years, and I have probably worked
on about 75 major infrastructure projects in 20 countries probably
for clients from 12 different nationalities. In that 20 years
I have seen an enormous amount of bribery and fraud on construction
projects, and so to some degree the examples I have taken have
been adapted from my personal experience, but, for obvious reasons,
firstly my own duty of confidentiality and, secondly, because
TI does not investigate, we are an advocate of future change,
I have changed various elements of the examples. Secondly, in
that time I have spoken very widely to practitioners in the industry—I
have always been interested in fraud and corruption—and
they have told me their personal experiences. Thirdly, in this
last year I have been working full-time in the anti-corruption
field and I have been working with contractors and consultants
from around the world interviewing them confidentially and finding
out their experiences. Fourthly, there are a lot of cases now
in the public domain: for example the Indonesian power station
projects, the Lesotho Highlands case, the Dabhol Project, from
where I have drawn examples. What I have done is merged all these
practices together into hypothetical examples, but I would say
that every one of those elements is based on fact; and I have,
which I could give to the Committee, if they are interested, a
report from Peter Waldman in the Wall Street Journal dated February
2004 where he exposes a lot of the practices on the Indonesian
power station projects which are absolutely along the same lines
as I was describing in report number four. So hypothetical; yes.
True; yes.
Q126 Mr Berry: On how many occasions
have such practices involving UK firms been reported to the appropriate
authorities?
Mr Stansbury: It is very difficult
to say because we do not know what has been reported to the authorities.
The fact that corruption is acknowledged in the international
construction industry as being very widespread, the fact that
the Bribe Payers Index produced by TI puts the construction industry
as the most corrupt sector in the world, the fact that the most
common method of paying bribes internationally is well-known to
be using agents, the fact that the Export Credits Guarantee Department
and other ECAs allow agents' commissions to be covered as part
of the export credits, all would lead you to suspect there had
been numerous cases out there in international markets where bribery
has procured projects. In fact in some markets it is acknowledged
that you cannot win a project without paying a bribe and, therefore,
either the contractor withdraws from that market or it participates
in bribes. Therefore the fact there appear to be no prosecutions
which have taken place in the UK or in most of the other OECD
jurisdictions is astonishing, and we do not know to this day if
there have been any referrals which involve UK contractors.
Mr Rodmell: Can I comment on that,
Chairman? One reason why there may have been few reports to the
authorities in this country is that it actually only became a
crime in February 2002. Now, from that time on, even if every
element of the offence is committed outside of this country, it
is still an offence in this country for a UK National or for a
UK corporation, so we do not know; but it has been reported—I
think some five cases have actually been reported by the ECGD
to NCIS (the National Criminal Intelligence Service) which is,
under that arrangement that I was talking about, the body for
collecting all these reports.
Q127 Mr Berry: Before I forget it,
Mr Stansbury referred to agents' commissions. I seem to recall
on a number of occasions the MoD making a robust response to media
allegations that company X was involved in bribery and corruption
by saying, "No, no, no, no, they pay agents' commissions."
Do you think there is a valid distinction between the two, and,
if so, what is it?
Mr Stansbury: I would say agents
do play, in some cases, a valid commercial role in international
business. You do often need a local agent to offer services, introductory
services, et cetera, and there is a market rate to be paid; but
numerous agents are used to pay bribes and I think it is a relatively
simple process to distinguish the two because the amounts of commission
paid on some of these projects, the currency of the payment and
the destination of the payment show that there is no link whatsoever
with the value of the local services being provided and the commission.
So I think, yes, there are genuine agents, yes, there are corrupt
agents and I think ECGD has to take steps to distinguish the two.
Q128 Mr Berry: Is it possible that
ECGD is unaware of the extent of bribery and corruption to which
you refer?
Mr Stansbury: No.
Q129 Mr Berry: To your knowledge
have they taken any action to deal with it?
Mr Stansbury: I think their proposals
are very welcome. They are now in their new procedures making
it explicit that bribery is a criminal offence and they are saying
that they are going to ensure, as far as is practicable, that
all transactions and ECGD supports are in compliance with the
laws, and the due diligence procedures they are empowered to put
in place are very, very welcome. I think, as Graham and Laurence
said earlier, the key is what they are going to do about it. I
am convinced it is so well-known in the industry what happens,
it is so well-known in the industry what has to be done to stop
it that ECGD has the power and the knowledge to do something.
So the critical issue now is, with the new procedures in place,
are they going to take appropriate measures to investigate? I
think the appropriate measures are not adequate if it is merely
a box-ticking exercise. For example, it is very important that
a non-bribery warranty is made by the applicant for cover to ECGD
where they say, "We will not bribe, and to the best of our
knowledge nor will any associated company." But, of course,
that is to a degree self-serving because if a company is not in
any event going to pay a bribe, the declaration that they have
not paid a bribe is worthless. Secondly, if a company is willing
to risk the huge criminal penalties and sanctions which are involved
if they are caught for bribing, they are not going to say to the
ECGD, "Yes, we paid a bribe." So clearly a company which
is willing to bribe will also be willing to declare falsely to
ECGD. So an anti-bribery declaration is an important insurance
warranty, but it is not an effective anti-corruption tool. Secondly,
the questions they are asking on due diligence at the moment are
very, very welcome because I think it is absolutely critical they
find out the extent of the agent's commission, the name and address
of the agent, where the agent is located, the currency of the
payment. All these are very important points, but the answers
in themselves that they will get on this form are not sufficient.
For example, in the Acres and Lahmeyer prosecutions in Lesotho,
where the appeals have just been turned down, both of those companies
have been convicted of paying bribes. I imagine if those companies
had filled in this form, on the face of it it would have looked
fine because it would have said, "Yes, we have appointed
an agent. We are paying him commission of, say, CAN$750,000",
I think, in the case of Acres. "His services are to provide
assistance to Acres in doing business in Lesotho, et cetera, et
cetera.". Although having a payment in an off-shore bank
account in a foreign currency would have rung a few alarm bells,
that would have necessitated the ECGD following up, and if they
had followed up they would have found out in that case that Mr
Bam, the agent, did not even live in Lesotho, he lived in Botswana,
he had no office, he had no organisation whatsoever, and 60% of
all his commissions were going straight to the Chief Executive
of the Lesotho Highlands Development Authority. So you have to
do this due diligence to ascertain what the agency commission
is being used for. So my point is they have the power, ECGD, to
find out, they have the knowledge to be able to find out, but
it is critical when the applicants' forms come in that they take
sufficient steps to try to ascertain whether these agency commissions
are bribes or legitimate. Some are legitimate.
Q130 Sir Robert Smith: A lot of the
concern of other evidence we are getting from businesses is the
level of bureaucracy already they perceive from the ECGD. How
much more would that add to the sort of processes?
Mr Stansbury: Absolutely minimal,
because if you think that a contractor working overseas under
the new regime faces the risk, if he is caught bribing, of imprisonment
of the directors, black-listing for the company, the contract
being terminated for illegality—which is the law virtually
throughout the world now—and having to compensate all banks
and other parties, the contractor faces potential ruin. This is
the case even if he did not know a bribe had been paid. For example,
if an agent he appoints in good faith pays a bribe to win the
main contract, the client could terminate that main contract and
the contractor would be left facing devastation. So any contractor
who wants to make sure he is protected will, as matter of course,
do practical due diligence. The questions we are suggesting in
our report should be asked of the contractor are no more than
you would expect the contractor to have already asked; and when
writing that due diligence proposal, I put myself in my own position,
my own experience, of saying, "If I had known of a bribe
on a project and I was answering these questions, would I be in
difficulty?" "Yes." "If I knew the agent was
legitimate would I be in difficulty?" "No." So
we have honed our questions specifically to be genuine, reasonable
and logical.
Mr Clapham: Can I ask some further questions
regarding the new guidance. As you know, the new guidance was
published on 1st April. Some of the forms have already been made,
and I hear what Mr Stansbury had to say about what he thinks to
be involved in the forms. I know from your submission that you
feel that you were not consulted as well as you would have liked
to have been consulted. Given that Mr Stansbury's examples would
have been made available to the ECGD, do you feel that the lack
of consultation has resulted from an antipathy held by the ECGD
towards you, or is it because they are aware of your position,
given that some of the examples that you refer to, Mr Stansbury,
will have been made available to them?
Mr Cockcroft: I would like to
ask Graham to answer that.
Mr Rodmell: Let me say straightaway
that in all my dealings with the ECGD I have never experienced
any antipathy or sensed any antipathy, and I suspect that this
was simply a procedure where, possibly given the circumstances
of claims coming out of Dabhol Power, I do not know why, but they
did not feel as able to consult us on this occasion as they have
in the past. When I wrote that particular paragraph about lack
of consultation, it was certainly felt, because we genuinely felt
we had positive a contribution to make and we at all stages tried
to be sensitive to the needs of business, so we were not going
to be scoring points unnecessarily as an NGO. What matters is
what is actually in the new procedures, and the new elements there
are so positive that whether or not they consulted us really becomes
of little importance.
Q131 Mr Clapham: That is good to
hear, that you do feel that the measures are positive. Given that
you say you feel they are positive, is it possible to go a little
further and say how significant you feel the changes might be
with regards to being able to contain corruption?
Mr Rodmell: I think, as Neill
said just now, they have given themselves the capacity to deal
with the problem in a much more focused way than they had under
their previous practice. This is not new entirely new practice.
They have at all times had some information required, and so on,
at least since 2000 when they began to take these issues more
seriously, so that they have made definite strides forward. The
question will now be how seriously the procedures will be taken
and, if it reveals the kinds of information that Neill has illustrated,
will they do something about it rather than ignore it, because
it is all part of their whole risk management strategy, it seems
to me. Talking about risk management, you have to identify the
risk and you have to measure it and you have to report it. Just
quoting from the KPMG report that they had themselves in 1999,
at the end of the day you have to manage it. You cannot manage
it if you ignore it. If you once know that the circumstances are
such that they ought to be ringing all the alarm bells—those
payments being made off-shore, it is 5% of a massive contract
sum, it is being paid in a different currency in a different place,
there are no real services being provided—if all those alarm
bells are ringing, I would expect ECGD in future to take that
very seriously, because they do not want to be supporting criminal
activity, which is what it is today. That is the major distinction
between now and 2000 when you last had your review, that this
is criminal activity, and, if it is found to be so, that could
invalidate the contractual arrangements on which their whole security
depends and I think they also have a reputation to safeguard in
the same way that banks, contractors and others have reputations
to safeguard. It is very important that ECGD safeguards itself.
I see over a period of time, if they manage that risk properly,
the actual cost of the cover will decline because it will be lower
risk, and that is for the good of business. It is easier to do
good business than, at the end of the day, to do bad business,
and it is much cheaper too.
Q132 Mr Clapham: So it would be fair
to say from your point of view and what you have just said, Mr
Rodmell, that you feel that the ECGD has taken on board much of
what you have had to say previously, and particularly the examples
that Mr Stansbury has given, and that they have come forward in
a very positive way to meet most of your concerns?
Mr Rodmell: Mostly, yes. In an
ideal world, we might have proposed rather different wording,
say, on the warranties, or something of that nature, but I think
we have to recognise where the ECGD is and where it has come from
and it tries to be, I think, to some extent, in step with other
export credit agencies, but I think in some areas that they are
setting an example and this will be good for business and good
for ECGD over the longer term.
Q133 Mr Djanogly: Mr Stansbury mentioned
due diligence. I was wondering if you could go a little further
into what your note talks about. In paragraph 62 you recommend
a tiered approach. Could you explain what you mean by that?
Mr Stansbury: Yes. ECGD obviously
has a criminal risk and it has a civil risk. It has a criminal
risk in the sense that if it could be accused of intentionally
aiding and abetting a bribe through supporting a bribe on an export
credit or could be wilfully blind to that, it is a criminal risk.
It has a civil risk if a bribe is paid regardless of knowledge,
because if a bribe is paid and the contract is terminated, ECGD
will have a civil risk, as has been shown in the Dabhol project
which is going to litigation now. Therefore ECGD must assess,
in all projects, how to deal with those two risks. Therefore it
is obvious it cannot do a huge due diligence on a very, very small
project. It may take the view that the risk on a small project
would be limited, whereas on a major project it could be catastrophic
to ECGD. So what we were proposing was on projects where the risk
to ECGD is over a certain amount of value, or the agency commission
perhaps is also as a separate issue over a certain amount, ECGD
would do full due diligence; they would ask very searching questions;
they would send a representative up to the contractor's office
to speak to various people in the contractor's office to ascertain
the validity of the commission; they would possibly ask the local
trade representative in the country where the project is being
carried out to make inquiries of the local agent to check on his
reputation and his ability to carry out the services. That will
obviously be time-consuming and expensive, but if there is a huge
risk at stake it has to be done. Then, we would say, below that
tier you would have a lesser form of due diligence where only
some of those activities would be carried out, but also, I would
suggest, there would be random full due diligence, because the
contractor must know that there is a danger of a full investigation,
and all the people in the contractor's office—the accountants,
the lawyers, the project managers who are involved in this—must
be aware that they personally could be questioned; and so there
must always be the spectre of an investigation. Therefore, within
the next tier you could have random due diligence: ask certain
questions to take account of the risk.
Q134 Mr Djanogly: Who would pay for
the investigations: ECGD?
Mr Stansbury: I presume that to
be the case. I cannot really comment on that. I am not talking
about pointing the—
Q135 Mr Djanogly: A full due diligence
exercise is not a cheap operation?
Mr Stansbury: No. I am not talking
about a four-week full due diligence by five accountants. I am
talking about a very focused due diligence by people who are very
specialist in the area who have a very detailed knowledge of construction
projects. If you know what to look for you can focus specifically
in terms of agency agreements. I think that if that amount of
project risk is being taken on by an organisation you would always
do comprehensive due diligence before it starts.
Q136 Mr Djanogly: You do not think
that this would have an impact on the premiums that ECGD cover.
Mr Stansbury: I cannot believe
it would have a material impact, no, but I cannot really comment
on the cost.
Mr Cockcroft: The concept of the
sliding-scale to some extent addresses that, because this proposal
is being made in relation to the very large-scale projects and
obviously the premiums associated with larger projects are, by
definition, larger. So we are talking about three person-days
at work—somebody carrying out an investigation in a head
office—that is not going to be that significant in the context
of a project costing several tens of millions or obviously several
hundreds of millions.
Mr Stansbury: That is certainly
correct. What I had in mind was that someone would fly up or go
to the contractor's office and would speak to the project director
and say, "Who is this agent? Have you met him? Did you do
due diligence on him? Who met him? Who is drawing up the agency
commission agreement? Can I meet the lawyer? Who is processing
their payment? Where is the payment going? Can I meet the accountant?"
You can focus very specifically on these questions if you know
what you are looking for; and it may only take one day, or it
may take three days, as Laurence suggested, but I am not envisaging
any huge due diligence.
Q137 Mr Hoyle: Obviously, with due
diligence you have mentioned there could be a cost to the company,
but is there not an added burden, and it is a burden that could
be put on companies, by slowing down decision-making, because
it must do that. Do you then put British business at a disadvantage:
because in some cases, as you well know, there is a penalty clause
and it is about timescale, the delivery of decisions that can
matter to a contract. Do you think it has an effect in that way?
Mr Stansbury: I would not say
so, because the penalties you are talking about are during project
execution.
Q138 Mr Hoyle: Let me rephrase it.
If you have to get the information in in a set time because they
want to get on, they may have a budget to spec, you cannot say,
"Well, unfortunately we have got agency due diligence upon
us and before we can complete the contract details we need an
extra month", and that country says, "Well, I am sorry,
we need to spend the budget. We want to get this project underway."
What happens then?
Mr Stansbury: A lot would depend
on how fast ECGD could react. Normally cover, I believe, is given
as an indicative cover initially; and certainly on major projects
you do not have just a few weeks tendering. You are normally alerted
well in advance for a major international infrastructure project.
Sometimes they take months to tender for and negotiate. So the
ECGD would need to be responsive to those concerns. Perhaps again
that could be tiered, in the sense that the initial indicative
due diligence could be undertaken on the understanding that if
the project is awarded, further due diligence would be taken up
at project execution stage. That would put a certain caution on
the contractor because they know that, if they win the project,
ECGD investigators will be in and that would certainly deal with
the problem of delay by treating it in that way. There are many
ways of handling this concern.
Q139 Mr Hoyle: In recognising the
due diligence that can be used and will be used, how many other
countries operate the same system in the same effective manner?
Mr Stansbury: I am not aware of
what other countries' due diligence practices are. Graham, do
you want to come in?
Mr Rodmell: I do not have knowledge
about what the other ECAs are doing, but what I do feel, and I
am sure this is what is driving the Export Credit Group at the
OECD, is that now there is the OECD Convention, now it is criminal
in all the OECD states, you cannot afford to ignore it, because
it goes to the root of the contracts on which the security of
all the ECAs depend. So it is not an option to ignore it. The
question then is how far can you rely on what you are given by
the applicant? Frankly, I think as soon as the applicant realises
that the issue is taken seriously, the applicant who wants to
do dirty business will not come to ECGD. If that is regarded as
a competitive disadvantage, I am sorry, but I do not see it that
way. I see over the quite short, or medium-term anyway, that the
fact that ECGD becomes associated with doing good and clean business
will actually be a competitive advantage.
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