House of Commons - Trade and Industry

Select Committee on Trade and Industry Fifth Report

4 Do the procedures reduce as far as is reasonably practicable the risk of supporting contracts tainted by corruption?

79. Having concluded that the procedures are workable we now consider whether they reduce as far as reasonably practicable the risk of ECGD supporting contracts tainted by corruption. Our examination focussed on three areas:

a) the declarations applicants for ECGD's services should be required to give about their controlled companies, consortium partners and others;

b) ECGD's contractual right to reimbursement ("recourse"); and

c) ECGD's right to audit.

Declarations in respect of controlled companies, consortium partners and others

80. All parties accept that applicants for credit should make declarations that the proposed contract is free from corruption and bribery. But two issues were in dispute:

— the extent to which the applicant is able to give assurances that companies or individuals, including agents, controlled or influenced by, or linked to, the applicant are free from bribery and corruption (in the terms used by ECGD, the "entities"); and

— and the nature of these assurances, in particular the diligence an applicant has to exercise before making a declaration on an application form about the absence of bribery or corruption (in ECGD terms, the "representations").

81. Between May 2004 and March 2006 the definition of entities changed as the procedures were revised. Four levels of representation of assurance about the absence of bribery or corruption by the applicant were identified, in descending order of stringency, as follows:

a) an unqualified representation;

b) a representation that reasonable enquiries had been made;

c) a representation made to the best of the applicant's knowledge and belief; and

d) a representation based exclusively on actual knowledge.

THE MAY 2004 PROCEDURES

82. The May 2004 procedures made it a condition of support for a project that the applicant certified that:

[N]either 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.[124]

83. The May 2004 procedures therefore 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".[125]

THE DECEMBER 2004 PROCEDURES

84. Exporters objected to this requirement on the grounds that it involved the provision of information about the use of agents which was entirely beyond the applicant's control. ECGD reacted to their objections by revising its requirements and dropping the concept of affiliate. From December 2004 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 companies. 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 defined as "a party to any joint venture, consortium or other similar arrangement". ECGD now obliged an applicant to notify it of corrupt activity by an associate if the company "becomes aware" of such activity i.e. the lowest level of representation. However, there was no obligation on the applicant to attempt to find out whether such activity was being carried out or to try to prevent it.[126]

85. Our predecessors examined the nature of the declaration which exporters could reasonably be expected to provide. It their Report published in April 2005 they concluded:

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THE JULY 2006 PROCEDURES

86. In the Final Response published in March 2006 the Government concluded that in respect of the controlled companies, group companies, consortium partners or any other entity involved with the transaction the test was not the degree of control by the applicant but whether there was involvement with the transaction in respect of which ECGD support was sought. The Government concluded that the applicant will be required to make reasonable enquiries as to which of its Group Companies, whether controlled or not, have been so involved and a representation (i.e. declaration) will be required about all those Group Companies which the enquiries show to have been involved. On specific requirements the Government reached the following conclusions:

The applicant

Representations will continue […] to be unqualified in relation to the Applicant's behaviour connected with the nature of the transaction in question; and will also be unqualified as far as the past behaviour of the Applicant and its Directors is concerned.

Representations about the past convictions, admissions and appearance on the World Bank list of Debarred Firms will remain unqualified as far as the Applicant and its Directors are concerned. The Applicant will be allowed to base such representations about its Senior Managers on reasonable enquiries.[

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Group Companies, etc. not controlled by the applicant

[ECGD found] there is an element of common ground that representations should not be unqualified. […] For this category of entity representations must take the form either of the reintroduction of the phrase 'to the best of knowledge and belief' of the Applicant or be based upon reasonable enquiries.

The Interim Response suggestion in relation to Consortium Partners that Applicants should make reasonable enquiries of such partners and base representations upon those enquiries, has not met with any objection. […] HMG therefore believes that a similar obligation is appropriate in relation to a non-controlled Group Company, involved in the sense defined.

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Definition of involvement

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Companies controlled by the applicant

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The applicant's agents

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87. In its memorandum Transparency International (UK) considered that the July 2006 Procedures did not reduce as far as reasonably practicable the risk of ECGD supporting contracts tainted by corruption and that the proposals were fundamentally flawed in each of the main areas we examine in this chapter.[133] Transparency International (UK) considered the disclosure requirements "to be materially inadequate". They were concerned whether the March 2006 procedures would require an agent appointed by a joint venture partner to be disclosed to ECGD.[134] Transparency International (UK) pressed for ECGD to reinstate the obligation on the applicant under the May 2004 procedures to disclose details of agents appointed by the applicant's group companies and by the applicant's joint venture, consortium or similar parties.[135] In their oral evidence Transparency International (UK) added that it was a "matter of commercial common sense and due diligence" for exporters to find out exactly what partners "are doing in relation to their agent, find out if the agents are reputable because that joint venture partner's agent can bring you down. Therefore, most companies are doing proper due diligence in this respect, they will have all the details of the joint venture partner's agents et cetera and they will easily, therefore, be able to hand it over to the ECGD."[136]

88. We put Transparency International (UK)'s concerns to the Government. John Weiss from ECGD responded:

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Mr Weiss added a general point:

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89. BExA explained that exporters wanted to be sure that everything they set on the application forms was true and accurate. But, when they were asked to make representations about third parties over whom they have no control, they found that was impractical and something that they simply could not do. BExA explained that that had prompted the discussions with ECGD to find "what it needed in order to feel comfortable about its anti-bribery and corruption procedures and to find a way to make it practical for the exporters who were having to sign up to those representations and warranties in their application forms".[139]

90. We share Transparency International (UK)'s reservations about the force of the disclosure provisions in the July 2006 procedures on agents appointed by joint venture partners. As our predecessors noted in their Report in April 2005, "the payment of commission or fees to agents is generally recognised to be a common method of paying bribes".[140] We are concerned that restricting the flow of corrupt payments via applicant's agents will not stop the flow but divert it through partners' agents. ECGD told us that if that "were to happen […] the applicant is obliged under the standard application forms to make reasonable inquiries about the absence of corruption on the part of his consortium partner and he is obliged to represent he has done that and he is obliged to represent that the results of those inquiries give him no cause to believe that the consortium partner has been corrupt".[141] ECGD also told us that on occasion it had asked UK diplomatic staff to make enquires about agents.[142]

91. ECGD said that initial questions posed by ECGD in its application forms did "not preclude it from asking more questions of any applicant if it considers this to be necessary in the circumstances of an individual application. In the interests of clarity and user-friendliness, ECGD has avoided overloading its application forms with questions that may apply only to a minority of cases."[143] The Minister for Trade gave us an assurance that "we shall try to make these arrangements work effectively and if occasions arise where the profile of the circumstances are such, then a range of inquiries will be made".[144] The Minister's and ECGD's statements give us some reassurance but we consider that for this malpractice to be halted ECGD will actively have to seek additional information from applicants where there is a risk of corruption via their partners' agents.

92. In our view the disclosure provisions in the May 2004 procedures had the benefit of clarity and of fitting with best practice. We consider that the effective operation of the disclosure provisions in the July 2006 procedures will turn on, first, the construction put on the extent to which agents appointed by an applicant's joint venture partner are considered to be acting "on behalf of" the applicant. We recommend that ECGD define the phrase unambiguously in guidance to exporters. The second test will be the extent to which ECGD presses for further information on joint venture partners' agents and whether this information is supplied. If it turns out, as Transparency International (UK) fear, that in most cases exporters maintain that the agents are only acting on behalf of the joint venture partner and are not disclosed to ECGD, then the provision will, in our view, have failed. We recommend that, when the anti-bribery procedures are reviewed, the operation of the disclosure provisions in respect of partners' agents be examined.

SUB-CONTRACTORS

93. Neill Stansbury, Project Director Construction and Engineering Transparency International (UK), argued that as procedures tightened on agents corruption would find other channels:

[W]e are coming across a lot of situations now where because agents are being closed down as an avenue for bribery because of the huge emphasis placed on agents, many corrupt clients in developing countries are now indicating to contractors or exporters to appoint a certain joint venture partner, they say you must appoint X as a 49 per cent joint venture partner, or you must appoint X as being a sub-contractor, particularly in the case of the construction sector where there is a lot of local work.[

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He argued that:

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94. We put Transparency International (UK)'s concerns to ECGD. Nicholas Ridley, General Counsel of the ECGD, replied:

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95. In our view, if those soliciting and paying bribes are looking for conduits for their corrupt activities, one avenue will be partners and contractors. We are concerned whether the July 2006 procedures are strong enough to block this possible new conduit. We recommend that the review in three years examine whether the conduit for bribery and corruption has extended from agents to partners and sub-contractors.

Recourse provisions

96. Recourse is the contractual right to reimbursement. Recourse in respect of the bribery procedures means a liability owed to ECGD, as a result of a contract between ECGD and an applicant, to pay ECGD if certain specified events, including corrupt activity, occur.[148]

97. Transparency International (UK) were concerned that the March 2006 procedures on corruption prevented ECGD from having recourse against an exporter, unless it could be proved that the exporter was complicit in the corruption. Thus ECGD would bear the cost of corrupt acts of the applicant's employees, group companies, agents, joint venture partners, and sub-contractors, unless the applicant's complicity could be proved. Transparency International (UK) argued that ECGD would, in effect, be providing insurance against corruption by these parties and that the inability of ECGD to obtain recourse in these circumstances was contrary to normal contractual principles, to the UK's treaty obligations, and to the UK Government's and ECGD's express commitment to combat corruption.[149] In Transparency International (UK)'s view, any corruption—irrespective of whether the exporter was complicit or not—should be grounds for ECGD to recover its support.[150]

98. In its evidence BExA argued that a distinction could be drawn between corruption and other instances where ECGD had an absolute right to recourse. BExA said that in the case where a sub-contractor had failed to deliver goods the exporter had a remedy available under the contract. The supplier would be able to go to another sub-contractor. But this option was not available where a sub-contractor committed a corrupt act.[151] BExA said that, if ECGD explicitly required, through a sub-contract, that exporters expected the sub-contractor "to behave in a particular way, that any kind of corrupt activity is absolutely against the terms of the contract, and then that sub-contractor, without their knowledge, goes out and commits a corrupt act, then it does not seem equitable that the supplier should be held wholly responsible for the acts of a sub-contractor who has breached the terms of their sub-contract with the supplier."[152] BExA also pointed out that PFI contracts recognised that, if a sub-contractor committed a corrupt act, that should not terminate the terms of that PFI contract because the supplier could not be held responsible for the corrupt act of somebody further down the chain because it was not something that they could correct.[153]

99. We put Transparency International (UK)'s point to the Government and Nicholas Ridley, General Counsel of ECGD, replied:

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100. In a supplementary memorandum Mr Ridley expanded on that reply.[155] He believed that Transparency International (UK)'s argument was flawed. He said that where a main contractor was in default under the main contract, ECGD's Buyer Credit loan documentation provided that this constituted no justification for non-repayment of the Borrower's loan. ECGD therefore would be able to enforce through its guaranteed Bank the repayment of that loan and did not need recourse from the main contractor. He argued that this procedure "by a considerable distance, is ECGD's most important right and remedy in those situations".[156] On Transparency International (UK)'s proposition that ECGD should take a recourse right against exporters which was independent of an exporter's personal fault for any sums which ECGD may have had to pay out, Mr Ridley argued:

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101. The debate on recourse is complex but we start from the principle that where a contract fails because of bribery or corruption—irrespective of the complicity of the UK exporter seeking cover—neither ECGD nor the taxpayer should have to assume liability. To do otherwise will mean that ECGD is providing insurance cover for corruption and bribery. We take reassurance from ECGD's advice that the buyer credit documentation specifically provides that failure to perform the export contract on the part of the applicant for its services is no reason whatsoever for the loan not to be repaid. In the light of ECGD's supplementary memorandum we expect ECGD to insist that English law be applied to all loan contracts and to resist vigorously any attempts to enforce payments where a contract has been vitiated because of corruption. On this basis we find the recourse procedures acceptable at this stage and recommend that the review in three years examine the operation of the provisions.

ECGD's rights of audit

THE MAY 2004 PROCEDURES

102. When it introduced the May 2004 procedures, ECGD stated that it was expanding its rights of audit to enable it to monitor compliance with its new anti-corruption procedures.[158] 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".[159] They were concerned that ECGD could use random audit powers to mount 'fishing expeditions'.

THE DECEMBER 2004 PROCEDURES

103. The procedures redrafted over the summer of 2004 produced an audit provision which was acceptable to exporters, but which limited ECGD's powers of independent audit. It provided that ECGD would be able to conduct a full audit of a company's records only if it first confirmed in writing to the company that it had reasonable grounds for suspecting that corrupt activity may have taken place; ECGD was allowed to audit those records only up to the date of the award of the contract; and ECGD was not able to conduct a full audit using its own staff, but had to use "an independent third party acceptable to the supplier and ECGD".[160]

104. In the earlier inquiry 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 ECGD'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.[161]

105. When he gave evidence to the Trade and Industry Select Committee on 23 February 2005 the then Minister of State for Trade and Investment, Mr Douglas Alexander MP, pointed out that ECGD had no statutory powers to seize documentation. ECGD's audit rights included in the May 2004 procedures 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 the December 2004 procedures to occasions when ECGD had reasonable grounds to suspect corrupt activity because ECGD had accepted it was not appropriate for it to have the right to audit papers without reason.[162] The Committee questioned how ECGD could find grounds to suspect corrupt activity if it was not allowed to look for it.[163]

106. Our predecessors stated their concern:

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ECGD'S FINAL CONCLUSIONS

107. In its Final Response in March 2006 ECGD concluded it should have a right to audit, by using one of its own staff, without needing the consent of the audited party to the identity of the auditor. It accepted that the records to be inspected could be of a commercially confidential and sensitive nature with the result that the identity of the auditor is a legitimate matter of interest to the audited party if he is not to be a government official. The Government concluded that "in all cases of audit, whether in relation to the obtaining of a supply contract or its performance, the auditor will therefore either be a (ECGD) government official or a third party acceptable to the entity to be audited, such agreement not to be unreasonably withheld".[165]

108. We welcome the provision under the July 2006 procedures that ECGD has the power to audit at any time the accuracy of an applicant's representations, when considering possible bribery and corruption, rather than just when it suspects that bribery has taken place.

109. The non-governmental organisations were not, however, satisfied with the audit provisions. Transparency International (UK) considered them "defective", and identified the following as unduly restrictive:

— The inspection rights are limited to the Supplier's UK premises.

— The inspector does not have access to the records of the Supplier's parent, associated and subsidiary companies, agents, joint venture and consortium partners, sub-contractors or suppliers.

— Records can only be inspected if they relate to the period up to the date of award of the Supply Contract.

— Records can be inspected for the sole purpose of verifying statements made and information given to ECGD by the Supplier in the Application.

— Five business days' notice is required for inspection.[166]

110. The CBI reassured us that "customers have always fully accepted […] that ECGD can audit or sub-audit even now" but it was important to acknowledge that ECGD is "is not the SFO arriving on the doorstep, this is the ECGD quite legitimately wanting to have audit provisions and we believe that having five days is a legitimate way in order for both parties to be able to get the information that is required."[167] Mr Scott from the CBI explained that, if something untoward was uncovered by ECGD:

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He added:

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111. The Government also pointed out that ECGD's primary function was not the enforcement of the criminal law and that it was in the position of a contracting party, whether the insured or insurer, who was trying to find that it has not received misrepresentations about corruption. Nicholas Ridley, General Counsel of ECGD, pointed out:

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112. The Minister for Trade added in his evidence to us:

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113. We accept that, as it is currently constituted, ECGD is not a regulatory or investigatory body. It is an insurer.[172] But it does, in our view, have a clear duty to the taxpayer to ensure within all the powers available to it that bribery and corruption do not occur in a contract that it supports and that such contracts are compliant with UK law. ECGD's powers of audit are currently governed by private law when it enters into contracts between itself and exporters. In the absence of investigatory or regulatory powers, we accept that it is therefore reasonable for ECGD to frame the audit and inspection provisions as it has done in the July 2006 procedures. That is not to say we are content with the provisions: we consider the provision allowing five days' notice before an audit is too generous. In our view two working days' notice would have been sufficient for an exporter using ECGD's services to assemble the paperwork for inspection.

Should ECGD become a regulatory and investigatory body?

114. We have not considered in detail whether ECGD needs regulatory or investigatory powers. When we put the suggestion to Transparency International (UK), they replied that they were not saying ECGD should be investigatory.[173] They did, however, propose that ECGD should increase its resources to carry out more audits because it had "commitments to prevent corruption, and if the exporters do not believe there is a reasonable chance of being audited then the exporters may not take sufficient steps to prevent it."[174] We consider that such a change, if made in combination with some or all of the increases in ECGD's powers to audit proposed by Transparency International (UK) at paragraph 109 above, would take ECGD a considerable way towards becoming an investigatory body requiring additional resources to audit, for example, overseas subsidiaries of British companies.

115. We found the discussion on the role of ECGD which took place at the Export Guarantees Advisory Council of 21 January 2004 illuminating. The discussion appears to have taken place when the May 2004 procedures were being developed. There is a suggestion that the procedures had been brought forward because:

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We are concerned by the inference in the Export Guarantees Advisory Council's minutes of 21 January 2004 that the impetus behind the May 2004 procedures was a desire to protect the reputation of, and to deflect criticism from, ECGD. If this is correct, it may explain why the Government failed to test the feasibility of the May 2004 procedures before announcing them. We have no doubt that a policy derived from a desire to protect ECGD is no basis from which to tackle bribery and corruption. We invite the Government to comment on the minutes in its response to our Report.

116. The Advisory Council's minutes continue:

There was general agreement that the issue of bribery and corruption was a concern, but that there was no way to fix this with changes only to ECGD. Other parts of government also dealt with exporting firms, and a joined-up solution was appropriate.

The possibility of seconding an individual to an investigating authority to provide expertise and additional resource to help on relevant cases was discussed. It was agreed that this could be offered, and may have some effect, but would still not tackle the wider problem. […]

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117. We note that members of the Advisory Council considered that bribery and corruption was a concern and that it should be addressed comprehensively with the involvement of other government departments. As the CBI pointed out: "English law will apply to the exporter irrespective of which country they are exporting to and irrespective of which export credit agency they employ, or indeed if they employ no export credit agency at all and simply put in place a commercial bank finance structure. They are still subject to English law and its provisions against bribery and corruption".[177] We also note that the Advisory Council had identified a need for ECGD to acquire expertise to be able to investigate bribery and corruption. This chimes with ECGD's further memorandum which said that "it has neither the powers, resources, nor the expertise to undertake the role that would be required to investigate suspicions or allegations of criminal behaviour in relation to business it is supporting".[178] We express no view in this Report whether ECGD should become a regulatory or investigatory body with a remit to tackle bribery and corruption. There may be good reasons why it should; for example, it may need greater powers to keep in step with export credit agencies in the OECD (see chapter 5). We are, however, clear about three points. First, such a change would be substantial and must be subject to full consultation with all interested parties. Secondly, when the operation of the provisions is reviewed in three years, we recommend that the Government invite views on the need to make ECGD a regulatory or investigatory body. We consider that by then it will be time to address the issue squarely. In the meantime we invite the Government to describe what expertise ECGD has, and does not have, to investigate bribery and corruption. Third, the Government's strategy for tackling bribery and corruption needs to encompass other government departments.

124 ECGD Application form valid from 1 May to 30 November 2004, HC (2004-05) 374-I, para 55. See ECGD, Consultation on Changes To ECGD's Anti-Bribery and Corruption Procedures introduced in December 2004, 18 March 2005, Annex E, para 4.1, http://www.ecgd.gov.uk/index/pi_home/pi_pc/changes_to_public_consultation_document_december_2004.htm. Back

125 HC (2004-05) 374-II, App 10, para 65 Back

126 HC (2004-05) 374-I, para 56 Back

127 HC (2004-05) 374-I, para 70 Back

128 ECGD, Final Response to ECGD'S Consultation on Changes to ECGD'S Anti-Bribery and Corruption Procedures Introduced in December 2004, 16 March 2006, paras 122, 131 Back

129 ECGD, Final Response to ECGD's Consultation on Changes to ECGD's Anti-Bribery and Corruption Procedures Introduced in December 2004, 16 March 2006, paras 123, 125, 132 Back

130 ECGD, Final Response to ECGD's Consultation on Changes to ECGD's Anti-Bribery and Corruption Procedures Introduced in December 2004, 16 March 2006, para 116 Back

131 ECGD, Final Response to ECGD's Consultation on Changes to ECGD's Anti-Bribery and Corruption Procedures Introduced in December 2004, 16 March 2006, para 126 Back

132 ECGD, Final Response to ECGD's Consultation on Changes to ECGD's Anti-Bribery and Corruption Procedures Introduced in December 2004, 16 March 2006, para 125 Back

133 Appendix 5, paras 5-6 Back

134 Appendix 5, para 22(c) Back

135 Appendix 5, para 26 Back