APPENDIX 3
Memorandum by the Corner House
BACKGROUND
1. The Corner House is a not-for-profit
research and advocacy group, focusing on human rights, environment
and development. Over the past six years, it has closely monitored
the policies and operations of the UK Export Credits Guarantee
Department (ECGD) with regard to corruption.
2. On the 15 March 2006, the ECGD announced
that it would reintroduce key anti-corruption measures that it
had watered down in December 2004 following industry lobbying.
3. The changes made in December 2004 reversed
strong, anti-corruption provisions that the EGCD had introduced
in May 2004 and exposed considerable loopholes in the Department's
anti-corruption procedures.[1]
4. The ECGD's March 2006 announcement follows
its year-long consultation on its anti-corruption procedures,
initiated after a successful court challenge by The Corner House.[2]
5. The various changes made to the ECGD's
anti-bribery procedures between 2004 and 2006 are summarised in
Annex 1, with an accompanying analysis in Annex 2.
6. The Corner House welcomes the opportunity
to comment on the new March 2006 procedures. Its comments are
set out below, following the questions posed by the Trade and
Industry's Sub-Committee in its invitation to submit evidence.
Do the procedures published on 16 March 2006 in
the Government's Final Response to the Export Credits Guarantee
Department's consultation on the changes made to its anti-bribery
and corruption procedures in December 2004 reduce as far as reasonably
practical the risk of ECGD supporting contracts tainted by corruption?
7. The Corner House believes that the reintroduction
of several anti-corruption measures are a genuine and important
step forward that will go some way towards restoring the ECGD's—and
ultimately the UK Government's—reputation on tackling corruption.
The weakening in December 2004 of the improved May 2004 procedures
considerably damaged the UK's reputation, particularly during
2005 when the UK-initiated Commission for Africa emphasised the
importance of tackling corruption. The Commission's report specifically
highlighted export credit agencies as a key factor in contributing
to corruption and governance problems in Africa.
8. Nonetheless, some loopholes still remain
in respect of agents, audits and anti-bribery declarations, which
need to be addressed in order to reduce as far as practical the
risk of ECGD supporting contracts tainted by corruption.
9. The Corner House's analysis of positive
aspects of the new arrangements and the remaining loopholes and
deficiencies are set out below.
AGENTS
Positive aspects of new arrangements
10. The ECGD will now require exporters
requesting ECGD support to provide the ECGD with the name of any
agent involved in the transaction that has been appointed by or
on behalf of the exporter (subject to confidentiality procedures
for companies concerned about the information getting into the
hands of competitors or into the public domain).
Under the December 2004 weakened procedures,
companies had been able to cite commercial confidentiality as
a reason not to disclose agents' identities; they also had to
disclose details only of those agents that were engaged by the
exporter or one of its controlled companies.
During the ECGD's 2005-06 consultation, some
exporters argued that they should not have to provide information
about agents to ECGD as it was commercially sensitive information
that represented part of the company's commercial assets and intellectual
property. The ECGD noted in its consultation response, however,
that:
"no compelling evidence of `unworkability'
or `inappropriateness' . . . has, in [the government's] judgement
been furnished in relation to the provision to ECGD by Applicants
of the identity of Agents."
11. The Corner House welcomes the requirement
on exporters to provide the names of their agents to ECGD. The
Corner House considers this a reasonable and practical provision
that will greatly enhance the effectiveness of ECGD's efforts
to reduce the risk of corruption.
Loopholes and deficiencies in new arrangements
12. Nonetheless, a number of loopholes remain
with respect to the provisions on agents, which the ECGD must
address if the new procedures are to reduce as far as reasonably
practical the risk of corruption in ECGD-backed projects.
— Exporters have to provide information
only about those agents who are instructed by them or appointed
on their behalf. This provides a clear loophole whereby an
exporter can encourage a joint venture partner, subsidiary, parent
or sister company to appoint an agent without the exporter's explicit
authorisation—and therefore not on its behalf—and
thus avoid having to provide any details of the agent to ECGD.
Under the May 2004 procedures, exporters had to provide details
of any agent involved by either themselves or any of their "affiliates",
and affiliates included any group company, whether controlled
or not, and any joint venture, consortium or business partner.
ECGD has said that where an agent is appointed by a consortium
of which the exporter is a member, the agent will be deemed to
have been appointed on the exporter's behalf and will therefore
need to be declared under the new procedures. This is not clearly
stated on the application forms, however.
— Exporters are no longer required
to state whether there is a relationship between the agent and
the buyer of the exporter's goods or services or to provide any
details of such a relationship. Given that the agent might
be a public official, or a relative of a public official, this
is important information that the exporter should be required
to declare.
— The Corner House also has concerns
over the adequacy of the ECGD's new procedures for handling information
about agents' identities. The Corner House believes that the
security of information for customers on the identities of agents
must never be at the expense of ECGD being able to conduct adequate
and thorough due diligence on whether there is a risk that a bribe
payment may be made through the agent of a customer. The ECGD
would expose itself and the taxpayer to unnecessary risk if it
were to put security of information above its duty and right to
conduct such due diligence.
The Corner House believes that it will be extremely
difficult, if not impossible, for ECGD to conduct adequate due
diligence on an applicant's agent solely through open source,
web-based searches. The ECGD will be missing out on vital information
about the background and reputation of an agent if it limits itself
to such searches, and is not able to access local knowledge about
the agent.
13. With respect to the handling of agents'
identities, The Corner House recommends that the following further
reasonable and practical improvements be made to the ECGD's procedures:
(a) Addition of representative of local
diplomatic mission to those permitted knowledge of an agent's
identity
Under paragraph 4 of the "Special Handling
Arrangements", the ECGD can add a fourth person who will
be given the knowledge of the identity of the agent under similar
conditions of confidentiality as those that will apply to ECGD
personnel. This fourth person should be a representative from
the local diplomatic mission where the agent is based. This local
diplomatic official would have responsibility for making discreet
enquiries about the background and reputation of an agent and
is likely to be able to access local information about an agent
without alerting anyone as to the purpose of the enquiry. Where
either ECGD or the local diplomatic official has concerns, the
local diplomatic official should be responsible for conducting
further enquiries, including making a possible visit to the agent's
offices to check that they are bona fide and what experience they
have.
The Corner House believes that the "Special
Handling Arrangements" will be seriously deficient if they
do not enable ECGD to access local knowledge as part of its initial
due diligence searches. The Corner House does not believe that
approval from the applicant should be sought before involving
such a fourth official, but that it should be a condition of cover,
specified in the Arrangements, that such a fourth local diplomatic
official be one of the people given knowledge of the agent.
(b) Independent due diligence
The Corner House believes the new procedures
on agents could reasonably be improved by the ECGD requiring the
applicant to commission an independent "due diligence"
check on their agent/s by an independent and reputable risk consultancy
and to provide the ECGD with the full results of that check in
cases where an applicant requests "Special Handling Arrangements"
for high risk projects, such as a project in a country where the
World Bank and Transparency International regard corruption as
high, or a project in a high risk sector, such as infrastructure
or defence. Companies listed on the New York Stock Exchange regularly
commission such checks on their agents in order to ensure and
be able to document their compliance with the Foreign Corrupt
Practices Act (FCPA). The Corner House believes that the ECGD's
due diligence on agents should be at least as strong as, if not
stronger than, best industry practice, given that taxpayers' money
is at risk.
(c) Refusal to supply consent should result
in a halt to the processing of an application
The Corner House believes that paragraphs 6 and
7 of the "Special Handling Arrangements" are essential,
but that paragraph 7 should make it clear that, if the applicant
refuses consent for knowledge to be more widely shared where ECGD
has concerns and needs to make further enquiries, ECGD will not
be able to proceed with the application. The current phrasing
"it is likely in those circumstances that ECGD would be unable
to process the Application further" leaves open the possibility
that ECGD may still proceed with an application despite such an
unsatisfactory situation.
AUDITS
Positive aspects of the new arrangements
14. The ECGD's new audit clause will now
permit the ECGD to audit the contract records of an exporter so
as to verify declarations that the exporter has not engaged in
corrupt activity on a random basis. This is welcomed by The Corner
House as a reasonable and practical measure to reduce the risk
of corruption in ECGD-backed projects.
Under the December 2004 weakened procedures,
the ECGD had first to confirm in writing to the exporter that
it had reasonable grounds for suspecting wrong-doing by an employee,
agent or partner of the exporter before it could conduct an audit.
Exporters argued during the consultation that,
during such audits, ECGD staff might become aware of "commercially
sensitive information". They objected to the fact that, under
the ECGD's May 2004 procedures, ECGD had been able "to investigate
at will any aspects of the Supply Contract award and post-award
administration" (CBI submission, June 2005).
In its final response to the consultation, the
ECGD has accepted that audit rights are a normal part of both
private and public sector insurance contracts and stated that
it no longer considered it:
"appropriate that ECGD needs to have, or
shall have, expressed a suspicion about bribery and corruption
in order to trigger an audit".
Loopholes and deficiencies in new arrangements
15. The Corner House has, however, identified
the following loopholes that the ECGD must address if the risk
of bribery is to be reduced. The most significant are as follows:
— The ECGD will give exporters five
days' notice before conducting an audit. This provides ample
time for a company to destroy or hide any incriminating documents,
and runs counter to recommendations made by Parliament's Trade
and Industry Select Committee in March 2005 that the ECGD remove
this clause.
— The audit clause allows ECGD to
audit documents "only to the period up to the date of the
award of the Contract" and does not allow ECGD to inspect
documents relating to measures taken by exporters to prevent,
detect and deal with corruption or relating to the placing of
subcontracts. As The Corner House and others have pointed
out to ECGD, commission payments are often made after the award
of a contract, and ECGD will not therefore be able to audit any
documents relating to such payments, or to any administration
of the agency agreement after that date. Furthermore, the fact
that ECGD cannot inspect documents relating to how exporters prevent,
detect and deal with corruption means that it cannot verify statements
made in the application forms and repeated in the contract documentation
that companies are requiring anyone acting on their behalf not
to engage in corrupt activity, that they are monitoring that requirement
and have taken appropriate action against anyone involved in corrupt
activity. The placing of subcontracts, meanwhile, is an area open
to considerable corruption. The fact that the ECGD can still not
audit this area of a transaction, as it could under the May 2004
procedures, is a considerable weakness.
ANTI-CORRUPTION
DECLARATIONS
Positive aspects of new arrangements
16. The ECGD will now require companies
requesting ECGD support to declare that they have made reasonable
enquiries of all other companies involved in the transaction in
which there is an element of control (eg parent companies that
control the exporter; sister companies controlled by the parent
company; and controlled subsidiaries of the exporter itself) and
that, following these enquiries, they do not believe that any
of these companies, their consortium partners or their agents
have engaged in corruption. Companies will also be required to
declare that they have made reasonable enquiries as to whether
any of these parties has been debarred for, convicted of, or admitted
to corrupt activity in the previous five years. Again, The Corner
House welcomes these provisions, which it views as both reasonable
and practical.
Under the December 2004 weakened measures, a
company had to declare only that neither it nor its controlled
subsidiaries had engaged in corruption, or been debarred for,
convicted of, or admitted to corrupt activity in the previous
five years. If a joint venture partner engaged in corruption,
ECGD required exporters only to notify it promptly once the exporter
became "aware" of it Furthermore, some parts of the
required declarations were qualified with the phrase "to
the best of our knowledge and belief"; the ECGD's definition
of this phrase did not require the exporter to make any enquiries
whatsoever to ensure the truth of their declaration.
During the consultation, exporters argued that
the undertakings required of them by the May 2004 procedures about
bribery in respect of third parties were unworkable. They also
argued strongly that the ECGD should keep the qualification "to
the best of our knowledge and belief". The Corner House,
however, argued that, if the phrase "to the best of our knowledge
and belief" was defined as "requiring reasonable enquiries",
the May 2004 declarations essentially required exporters only
to have conducted appropriate due diligence on its business partners—something
that any responsible exporter should carry out in any case.
In its final response to the consultation, the
ECGD has drawn up declarations that are not qualified by the phrase
"to the best of our knowledge and belief", that require
exporters to state that they have made reasonable enquiries of
their business partners involved in the proposed transaction,
and that they are satisfied that there has been no corruption.
Exporters are still required to notify ECGD promptly if they uncover
any corruption in relation to the transaction, including by any
consortium partner.
Loopholes and deficiencies in the new arrangements
17. The Corner House has, however, identified
the following loopholes that the ECGD must address if the risk
of bribery is to be reduced. The most significant is as follows:
— Companies do not have to make
any declarations about non-controlled subsidiaries, parent companies
that do not control them, or sister companies that are not controlled
by the parent companies. Ideally, the ECGD should have required
exporters to declare that they had made reasonable enquiries of
all parties involved in the transaction. Furthermore, the required
declarations specifically exclude subcontracts. Subcontractors
and non-controlled parties may therefore become an obvious conduit
for bribes to be paid on ECGD-backed transactions.
ARE THE
PROPOSALS SET
OUT IN
THE FINAL
RESPONSE WORKABLE?
18. The Corner House views the new procedures
as workable and notes that no objections were raised by many of
ECGD's customers to the May 2004 procedures, despite their being
more onerous in several areas.
MAKING THE
PROCEDURES EFFECTIVE:
TRANSPARENCY AND
MONITORING
19. The Corner House believes that the key
to ensuring that the ECGD prevents bribery occurring on projects
it supports now lies in effective and consistent implementation
of its new procedures.
20. One way of ensuring this is full transparency.
The Corner House believes that ECGD should publish results of
how its new policy is working in practice, including information
about how many audits it has conducted to verify anti-bribery
declarations, how many transactions it has refused because of
suspicions or evidence of bribery, and how many suspicions of
bribery it has passed on to the law enforcement authorities. The
ECGD should also report how many companies request the confidentiality
arrangements for their agents on an annual basis.
TAKING A
LEAD MULTILATERALLY
21. The Corner House believes that the UK
must now, on the basis of this March 2006 announcement, play a
strong role in pushing for improved export credit agency procedures
multilaterally through the Organisation for Economic Cooperation
and Development (OECD). At the time of writing, negotiations are
underway at the OECD to improve an agreement on how export credit
agencies deter, detect and sanction bribery.
22. As the country that presided over the
G8 Summit in Gleneagles in July 2005, the UK has a special responsibility
to seek to ensure that its G8 partners meet the commitments made
at the Summit. The ECGD's new procedures represent emerging best
practice for how export credit agencies deal with corruption,
and the UK should be encouraging both its G8 and EU partners to
adopt similar procedures.
April 2006
1 See: Hawley, S., Submission by The Corner House
to the ECGD Consultation on Changes to ECGD's Anti-Bribery and
Corruption Procedures Introduced in December 2004, http://www.thecornerhouse.org.uk/item.shtml?x=369015 Back
2
The grounds of The Corner House court case were that the ECGD
had weakened its anti-corruption measures in December 2004 without
proper consultation, and that stakeholders known by the ECGD to
be interested in its anti-corruption measures (such as The Corner
House) had been excluded from what were in essence secret negotiations
with industry groups alone. The ECGD settled out of court with
The Corner House in January 2005, agreeing to pay all costs and
to carry out a full public consultation. Back
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