Examination of Witnesses (Questions 40-54)
CONFEDERATION OF
BRITISH INDUSTRY
AND BRITISH
EXPORTERS ASSOCIATION
17 MAY 2006
Q40 Rob Marris: In terms of compliance—and
we are going to move on to audit in a minute—the one thing
I wanted to ask you about, which is surprising to me, if I have
understood it correctly, is the Premium and Recourse Agreement,
every clause with which I am sure you are intimately familiar.
As I understand it, under clause 9, the liability of the supplier
is not absolute if there is corruption but, under clause 7.3—and
forgive me if I have the clauses round the wrong way—liability
of the supplier is absolute if there is defective workmanship
by a subcontractor. There are two different measures here—and
forgive me for not reading it very well—in terms of whether
the policy pays out. Do you think there should be equivalence
or have I confused you by the way I have asked the question?
Mr Caldwell: This is a point that
has been made by Transparency International in their submission.
We read it but I am not quite sure that we understand the point
of the argument.
Q41 Rob Marris: Should liability
in respect of corruption lie with the supplier? Should liability
in respect of corruption and bribery be absolute as it is for
default by a subcontractor?
Ms Walton: I think it is very
difficult for suppliers to take an absolute liability for a subcontractor
in this particular case bearing in mind that—and certainly
from our members' experience, this is not the way that they behave—they
put into their subcontracts the types of behaviour that they expect
from their subcontractor. So, if you explicitly stated in your
subcontract that you expect them to behave in a particular way,
that any kind of corrupt activity is absolutely against the terms
of the contract, and then that subcontractor, 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 subcontractor who has breached the terms of their subcontract
with the supplier.
Q42 Rob Marris: Could one make the
same argument—and you might—in the supply of widgets
by a subcontractor which breached the contract by not supplying
sufficient widgets in time or of sufficient quality?
Ms Walton: Yes except that, in
those circumstances, there is a remedy available, and it gets
into the remedies available under contract. In those circumstances,
there is a remedy available. The supplier can go to another subcontractor
to supply the widget. What you cannot do is to somehow erase the
corrupt act that that subcontractor has committed. You cannot
do that; it is not within your control. This is something that
the UK Government recognises in other dealings. For example, under
PFI contracts, the supplier, if a subcontractor fails to produce
something, can actually go somewhere else to get them to produce
it and can then avoid a termination of contract in that way, but
it is recognised in PFI contracts that if a subcontractor commits
a corrupt act, that should not terminate the terms of that PFI
contract because the supplier cannot be held responsible for the
corrupt act of somebody further down the chain because it is not
something that they can correct—
Q43 Rob Marris: Which means they
have to have done the reasonable inquiries to which you just referred.
Ms Walton: Exactly, yes. If you
have made those reasonable inquiries, that is the test, and again
we come back to this, "knowing your customer". If ECGD
is happy with the supplier and is happy that that supplier will
have done everything within his power to make inquiries of subcontractors
and be happy to get them to sign up to the right kinds of agreements,
then they should have more comfort that that is not going to happen,
but you cannot unfortunately prevent an individual from committing
a corrupt act. It is not something that you can proactively do.
If they do it, there is no way that you can then go back and erase
that act in the same way that you could go back and get a supplier
to be replaced by another supplier if they have not produced goods
that you need.
Mr Caldwell: I am slightly struggling
with the circumstances which are envisaged here. If you are a
prime contractor and you have won a contract, you appoint your
subcontractor to perform that contract. Why is the subcontractor
at that point going to go and commit a corrupt act? He has already
been appointed. If the suggestion is—and I am not sure that
this is the suggestion—that the prime contractor goes to
the subcontractor and says, "We are going to use you as a
conduit to bribe the customer", then I think the prime contractor
would be caught by existing legislation in any event and would
be subject to the same recourse provisions as they would if they
had failed in their contract performance. So, I am not sure that
the distinction which has been identified in reality exists but,
if there is an example which does prove that distinction, I would
be interested to look at it.
Q44 Mr Weir: Is it not the case that
many main contractors would use the same subcontractors for various
contracts and a subcontractor could have a reasonable expectation,
if the main contractor obtained the contract, that they would
get the subcontract from that contractor? That might be an impetus
for ensuring that the subcontractor committed a corrupt act to
make sure that the main contractor gets the contract.
Mr Caldwell: Well, it is theoretical
question. I would have thought that, in those circumstances, the
subcontractor is more dependent upon the goodwill of the prime
contractor than the goodwill of the customer.
Chairman: Perhaps we need to think about
this. I am looking at the time. Can we move on to audits.
Q45 Judy Mallaber: Moving on to audit,
under the Final Response procedure, ECGD will give exporters five
days' notice before conducting an audit. Why do we need that requirement?
Mr Scott: I think it is also important
to put the audit requirement in context. Customers have always
fully accepted, and rightly so, that ECGD can audit or sub-audit
even now, but it is important that in the Government's response/ECGD's
response, they acknowledge that they are not an investigatory
body, they do not have search and seize powers, and therefore
what we would argue is that, by having five days, this is a constructive
approach because some of the information which ECGD quite rightly
wishes to audit may have to be gathered together, it may not all
be in one place, and rather than just literally turning up unannounced
on the doorstep, it would be much more practical to be able to
have large amounts of the information which it is seeking to have
clarification upon and that is why we feel that five days is an
appropriate response for an organisation like ECGD to conduct
its inquiries. It 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.
Q46 Judy Mallaber: I can understand
and appreciate the argument but how do we make sure that, where
there is something a little dicey going on, the five days are
not just used to clean up the evidence and get rid of things that
maybe ECGD ought to be looking at?
Mr Scott: I think that is why
it is important to understand what EGCD's role in all of this
is and what actually at the end of the day are the legal provisions.
If at the end of the day there is some evidence which has been
uncovered, then that is where the due force of the legal process
will come into place and that is when you would have an inquiry
or you would have a search and seize type of inquiry which you
have through an SFO type of inquiry, but ECGD is not an investigatory
body of that nature. So, I think it is not an appropriate response
to the role which ECGD has been given.
Q47 Judy Mallaber: There must be
some purpose for doing the audit and surely there must be some
safeguards to make sure that, in the cleaning up of a presentation
of information to ECGD, things that a company does not have to
show are not hidden in the background in another filing cabinet
or at the office. Are there any safeguards to ensure that ECGD
is getting a full and proper audit picture?
Mr Scott: Again, let us just be
clear what the purpose of all of this is, coming back to my point
about it not being an investigatory body. If, for whatever reason
when ECGD does this audit, it feels uncomfortable with the outcome
of the audit, it has the ultimate sanction to either withdraw
some of that provision or not give it to the customer. I think
it is important that we are clear about what ECGD is able to do
as an organisation with an audit provision as opposed to what
it would do if it were a search and seize type of audit inquiry.
Mr Jones: I would like to make
the observation that if ECGD feels uncomfortable with the outcome
of its auditing such as items being kept from view, it does have
the power to report the issue directly to the appropriate authorities
so that they can come in with search and seize orders and undertake
due inquiry.
Q48 Judy Mallaber: The whole point
is that ECGD has to be in a position to know that there might
be something that does need further investigation. Can you explain
to me exactly what you would see as being the difference in practice
of what ECGD would wish to look at if it were a search and investigative
operation as compared to it being an audit operation. What is
the difference in practical terms of the actual information that
they would want to see? Surely it is the same sort of information
anyway, is it not?
Mr Jones: I would concur, yes,
it probably is.
Mr Caldwell: Perhaps the question
that one should ask is, what is it that has triggered the requirement
for the audit in the first place? I do not know how ECGD works
these things out but if they have a strong suspicion of illegal
activity, then I would have thought that what they would do is
not go and investigate it themselves but they would report that
to the SFO straightaway. I think that might be the answer to your
question, that the purpose of the audit is not the same as an
SFO investigation. When they are in front of you, perhaps you
can ask them what they think the purpose of the audit is.
Q49 Judy Mallaber: It may be interesting
to get an answer from your point of view. What would you regard
the purpose of the audit as being?
Mr Caldwell: I would have thought
what our members think is that the purpose of the audit is to
make sure that the transactions which ECGD is providing support
for are as described in the application. So that it covers the
goods manufactured in the locations at the prices delivered at
those times, that sort of thing, to make sure that the transaction
is as described in the application.
Q50 Judy Mallaber: Should it also
cover the procedures that a company uses to make sure it abides
by the requirement?
Mr Caldwell: I think most of our
members who work regularly with ECGD will have gone through those
procedures in advance of doing transactions. So, I would not have
thought that an audit post the fact is really going to add anything
to that.
Q51 Judy Mallaber: Moving on to the
other side where there were concerns expressed that ECGD might
use those powers to go on a fishing expedition, do you have any
evidence of those fears taking place or of commercial information
leaking? Those were some of the ones that were expressed by companies.
Mr Scott: First of all, these
provisions are still under discussion with ECGD under special
handling arrangements where some of those issues might arise and
I think that companies do have concerns that, with the wider access
to some of this information, there could be risks that some of
it might be inadvertently released in the public domain. Do we
have individual examples? I think we have some concerns that that
might be the case. There has been concern in the past going back
to a case of a South African defence related contract where information
from an ECGD file did appear in the public domain and it is that
sort of example where I think companies do have fears and concerns
that unless there is a very careful arrangement put in place for
the handling of this sensitive information, it could emerge in
the public domain inadvertently and therefore to the detriment
of the commercial confidentiality of the customer.
Mr Jones: In relation to the fishing
comment, I would comment that at this point the provisions about
which we are talking are the new ones and therefore ECGD has not
yet undertaken any examination of companies' files in relation
to this particular bribery and corruption issue.
Q52 Chairman: During the consultation
exercise in 2005, exporters were concerned that the audit process
might leak classified or commercially sensitive information. Has
an auditor appointed by ECGD ever passed on sensitive information
to someone who has used it for their own benefit?
Mr Caldwell: I do not think this
was an audit point. There were concerns expressed but this was
to do with the provision of information to ECGD about identities
of agents and other relevant agency details. That was the point
where there was concern.
Q53 Chairman: So, you are saying
that it was not a concern of the audit process?
Mr Caldwell: It was an audit point,
it was a point about provision of information.
Q54 Chairman: So, you would not have
made the point because you do not have those concerns?
Mr Scott: We do not have any evidence
of those concerns.
Mr Caldwell: As to audits, no,
I do not think so.
Chairman: I just wanted to see if you
did. Thank you very much indeed for your time this morning, we
really appreciate it. Due to Parliamentary business coming up
later this morning, I am sorry that we have to stick to our timetable.
Thank you very much again. If we have any further questions, we
will drop you a line but we are very grateful for the information
you have given us. Thank you.
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