Examination of Witnesses (Questions 140-159)
RT HON
IAN MCCARTNEY,
MINISTER FOR
TRADE, AND
ECGD OFFICIALS
14 JUNE 2006
Q140 Mr Weir: Paragraph 7 of the
special handling arrangements advises that where an applicant
refuses consent for knowledge about agents to be more widely shared
"it is likely in those circumstances that ECGD would be unable
to process the Application further". Can you tell us whether
there are any circumstances in which a company could reasonably
refuse consent and still expect ECGD to provide support?
Mr Weiss: The first point is to
say that it is unlikely, if a company refuses consent for us to
make wider inquiries, that we could continue to process the case.
However, it would be inappropriate for us in advance to state
for absolute certain that that will be the outcome. We have to
accept the possibility that our information needs might be met
by some other way which would then be sufficient for the case
to proceed. One point the Minister made in his letter to the Committee
was that there is this administrative law point which Nick might
want to put better than I. To say in advance that if they refuse
consent, we shall not process the cover, would be out of order
legally as well. We have to leave this discretion available to
the Secretary of State to find another way around this if he can.
Q141 Chairman: Is this not taxpayers'
money? Can you not lay down whatever rules you want?
Mr Ridley: You can have a policy
not to do things, as indeed we have on, for example, blacklisting.
What you cannot say for once and for all, for all time, in advance,
is that we shall never ever in any circumstances whatsoever until
eternity do that. The reason is that Parliament has actually given
the Secretary of State an absolute discretion and it is not for
anybody else, whether it be him or us on his behalf, to circumscribe
it.
Q142 Chairman: I knew I should have
been a lawyer. Thank you.
Mr McCartney: As a non-legal minister,
I take your point very much to heart.
Q143 Mr Weir: But it is fair to say
that it would be unusual for it to continue.
Mr Ridley: Exactly, yes.
Q144 Judy Mallaber: Moving back to
partnerships again, I know you said earlier that on the whole
you are not dealing with companies which are in those sorts of
partnerships. You tend to be dealing directly with the main company,
but if we do have tighter regulation of agents, which has been
one of the big areas we have tried to clamp down on, almost inevitably
those that are looking for a channel for bribery and corruption
are going to want to find other routes. In evidence that was given
to us last month, again by Transparency International, they said
that they were coming across more situations where corrupt clients
in developing countries were now putting the pressure on contractors
and exporters and saying they must go along with this joint venture
partner or with that sub-contractor. I do not know whether you
are seeing this in the companies we are dealing with, but what
is or can ECGD do to try to block those sorts of new avenues for
pressure towards corruption and bribery?
Mr Ridley: I leave to John the
question of how often this might have come up, because I am not
sure I know the answer to that myself. The answer to the question
of what we will do about it is this. Just to be clear, so that
I am sure what is on your mind, I think the assumption is that
a potential sub-contractor in country X, because of course he
is not a sub-contractor until he actually gets the contract, but
he wants to be a sub-contractor, goes along and proffers a bribe
to somebody and what he gets in return for the bribe is an undertaking
that the overseas purchaser will force the British main contractor,
as a condition of getting the main contract, to use the sub-contractor.
So the sub-contractor is the one actually guilty of corruption,
but it works in that way. What we say in essence about that of
course is that nobody can actually force the British main contractor
to agree to use a sub-contractor; in the end it has to be his
decision. If what is happening, which is perhaps what is envisaged,
is an enormous pressure is put on the main contractor to say "You
will use this guy to fulfil your contract with us" then this
would be something of an oddity, because it would invert the usual
arrangement where the main contractor chooses whom he is going
to sub-contract various portions of his business to and it would
obviously, or it may in certain circumstances, be the case that
that pressure would merit inquiry. If that is the case, then that
takes us back to the discussion we were having about 10 minutes
or so ago. Where, in relation to that matter, the main contractor
knows this, then the current documentation works quite well because
the main contractor will, if he is sensible, be well advised to
make such inquiries as will make him happy. I do not know whether
the Committee would like us afterwards to set some of this out
because it does get rather technical, but, for instance, the main
contractor is obliged to represent absolutely that he has not
authorised, consented or acquiesced in the corrupt activity on
the part of any person—any person. So if he is coming under
an extraordinary or unusual pressure to employ a sub-contractor
that he himself would not have chosen, indeed he may not have
thought about employing any sub-contractor at this stage of the
process, and he knows that he is going to have to represent to
us that he has not been complicit in any corrupt activity, even
if he himself did not carry it out, then we think that it would
be prudent on his part to make some further inquiry.
Q145 Judy Mallaber: It could be done
in such a way as "It would show a sign of your good faith
that you are employing this local contractor to provide local
work". I can imagine it being presented in a way that was
dressed up and where they would not necessarily know the position.
Does ECGD require, or should you be requiring, further details
about partners and sub-contractors so you could make your own
inquiries about them, maybe checking it out locally whether it
was a legitimate partnership to have gone into or not?
Mr Ridley: If I may repeat something
John said in another connection quite recently, the application
forms should not really be viewed as a sort of be all and end
all. They are not a mechanical process: you tick all these boxes,
you get our cover. They are a starting proposal form or application
and if the circumstances merit it, we are perfectly able and have
always expressly reserved this right—although we do not
technically need expressly to reserve it—that we can ask
such further questions as the circumstances suggest to us should
be asked. It may be that circumstances such as those that you
have mentioned would cause further question.
Q146 Judy Mallaber: But you do not
automatically ask for details of any sub-contractors.
Mr Ridley: We do not automatically
because we have to craft the standard documentation to deal with
as many of the standard things that come into us as possible.
If we covered every possible circumstance, and John was explaining
before that we do not do a lot of consortium partner business,
we would overload the application forms for the absolutely standard
stuff to a degree which we thought would make them overly bureaucratic.
Mr Weiss: I believe that our application
form does ask the applicant to tell us if there is a consortium
partner and the fact of it and who it is. It does not ask about
sub-contractors.
Q147 Chairman: You said that our
procedures for dealing with bribery are amongst the strongest
in the world. OECD figures suggest that we are ninth. There are
clearly eight export credit agencies which OECD data suggest are
doing better than we are. Do you have any comment on that? I know
somebody has to be number nine.
Mr McCartney: It is a very fair
question. ECGD's analysis and UNICORN's analysis are both based
on the same data from OECD. What differs is the methodology being
used. For instance, UNICORN gives credit to ECAs who claim to
be able to withhold support or invalidate cover on the basis of
suspicions of bribery. This appears to be contrary to the UK policy
of innocent until proven guilty. Also, UNICORN analyses ECAs like
ECGD that are prepared to consider providing cover for agents'
commissions. ECGD considers that most agents are not corrupt,
they provide a worthwhile service that forms part of the expenditure
to secure a contract, so considers that agents' commissions are
eligible for its support. Despite the differences in methodology,
I should point out that ECGD is second in the UNICORN league table
for G7 countries, Italy being top and ninth place in the overall
table compares well with France at 19, the United States at 25,
Germany at 27.
Q148 Chairman: If you could let us
have a note on that, it would greatly assist us in writing our
report. That is important; I appreciate that.
Mr McCartney: Yes, we can.
Q149 Mr Weir: The OECD published
a new agreement in May to combat bribery in export credits. Do
the procedures in the final response meet the terms of the OECD's
latest agreement?
Mr Ridley: The latest action statement?
Q150 Mr Weir: Yes.
Mr Ridley: Yes, indeed they do.
They not only comply, but exceed the requirements of the latest
action statement in the July procedures that we are bringing in.
Q151 Mr Weir: Does paragraph (j)
in the OECD agreement, which removes the requirement to show complicity
by the exporter in bribery, run counter to the approach in the
final response that the recourse obligations apply only where
there has been some degree of complicity by the applicant for
ECGD support, in other words it is not an absolute?
Mr Ridley: Yes. May I just read
that back to make sure I am answering the right question. This
is a suggestion that the action statement will cause us to change
the recourse arrangements.
Q152 Mr Weir: The OECD agreement,
if I understand it correctly, removes the requirement to show
that the applicant for the credit guarantee has been complicit
in the bribery, which is a different approach from the one you
are taking.
Mr Ridley: Yes. I think that is
Transparency International's view. We have read the evidence that
they gave to you. May I just begin by explaining what recourse
effectively means in these circumstances? It is a contractual
right that we will take, pursuant to a contract between ourselves
and the applicant, to reimburse us if we pay money and certain
specified events happen. The one specified event which is relevant
here would be an act of corruption on somebody's part in which
there is no complicity. I think Transparency suggest that paragraph
2(j) of the new action statement suggests that we shall have to
change that policy on recourse to give ourselves the right to
take recourse even where there is no complicity and no fault,
no knowledge on the part of the applicant. I have to say that
we are a bit puzzled by that. I apologise but this is going to
get very technical and semantic. I am very happy to distribute
the action statement or to give you a memorandum afterwards or
both. Briefly, article 2(j) deals with what an ECA should do if,
before export credit is agreed to be given, there is credible
evidence of corruption. It does not deal with what terms you have
to put in the contract if you do decide, having obeyed what the
action statement says in 2(j), to give support. It did occur to
us that perhaps Transparency meant to refer to 2(k), which deals
with what you put in the support agreement when you do give grant
support, but in that case, our answer would still be no, we are
not obliged to change the recourse provisions because of the action
statement for two reasons really: one because the OECD action
statement itself, and I can take you to this if you wish to see
it, says that actions taken under any of 2(j), 2(k) or indeed
2(a) to wherever it runs to, are not to be prejudicial to the
rights of parties not involved in the corruption. Secondly, 2(k)
says that we shall take only appropriate action, leaving it to
the ECAs to judge what is appropriate. Then there is an issue
as to whether it is appropriate to take a right of recourse from
an innocent party.
Q153 Chairman: Mr Ridley, you recklessly
offered a memo. The Committee will have to take you up on this
one. That would help on that.
Mr McCartney: Here is one we cooked
up earlier.
Q154 Mr Weir: May I probe it slightly
further? As I understand it, certainly as Transparency International
put it to us, under the ECGD agreement there is absolute liability
on companies applying to ECGD in a number of areas including defective
workmanship, for example, by a sub-contractor, but there is none
in respect of corruption. Did I take it from what you have been
saying that is because the applicant for the finance might not
necessarily have control over the corruption in the first place,
if it is being done by a third party?
Mr Ridley: Yes.
Q155 Mr Weir: I just wondered why
there is a difference between that and the workmanship of a sub-contractor,
because you could make the same argument there surely.
Mr Ridley: Yes indeed. I am going
to be doubly reckless because I am going to offer you another
memorandum. Very briefly may I say, because I should like to say
this, that we have read the Transparency submission to the Sub-Committee
and there is a suggestion that we take recourse not in relation
to bribery and corruption, but just where there is a circumstance
where the British exporting contractor misperforms. The Transparency
submission states that what will happen there is that we shall
be able to take recourse against him if the loan should not be
repaid and we have to pay instead. The reason that the loan will
not be repaid is in the submission of the defective performance
of the main contractor. I have to say that that is not the case
and the buyer credit documentation specifically says the contrary,
that failure to perform the export contract on the part of the
applicant for our services whom we have supported, is no reason
whatsoever for the loan not to be repaid. So in those circumstances
we should still be looking to the borrower through our ability
to instruct the bank. There are several other points, but I am
conscious of time and detail and you need the papers before you.
Mr Weir: A memo might be very useful
in this situation.
Q156 Chairman: May I quickly just
ask you about the OECD guidelines? We have been told that those
against tighter OECD guidelines included the Germans, Japanese,
Belgians and Czechs. Is that an accurate description? Where did
the UK stand on this? Did we get something near what the UK wanted
or those who wanted less stringent guidelines?
Mr McCartney: The answer to this
is a simple one. These international discussions with the OECD
are confidential. It would therefore be wrong for me to reveal
individual negotiations.
Q157 Chairman: Okay; let us move
on then. Any comment about whether India and China have export
credit agencies that meet OECD standards or is that also confidential
information?
Mr McCartney: It is not clear
whether the anti-bribery and corruption procedures of the export
credit agencies of China and India meet the requirements of the
OECD action statement on bribery on officially supported export
credits, but it is of course very desirable for all ECAs to meet
such levels and that includes India and China. Given the importance
the Sub-Committee have accorded this issue, I have asked my international
officials to seek from their Indian and Chinese counterparts more
information about their anti-bribery procedures. Once they have
received this response, I shall let the Committee have a written
memorandum. Several international events are occurring in the
context of the OECD outreach programme which I could mention to
the Committee, but it might be better if I included those in the
memorandum as well.
Chairman: Thank you. We should be very
grateful.
Q158 Judy Mallaber: When we reported
last year the Select Committee was concerned that ECGD would not
be allowed to look for corrupt activity and you referred earlier
to what kind of a body you are or are not. Do the procedures in
the final response allow you to look for corrupt activities and
bribery or are you very circumscribed in terms of what you are
or are not allowed to manage to do?
Mr Ridley: As my colleagues mentioned
earlier on, we are not a criminal investigation agency and the
purpose of the contractual right to audit is to satisfy ourselves
that the information given in the application is accurate and
that is really what we think is appropriate to our role as a commercial
contracting party. However, if, as a result of that commercial
auditing, if one wants to call it that, we should have come to
believe that an offence may have been committed, we would report
that to the appropriate investigatory authorities who are in the
proper position to take decisions as to what action may be appropriate.
Q159 Judy Mallaber: But you are quite
circumscribed in terms of what you can look at and where you can
visit and so on. In particular, does the procedure for allowing
exporters five days' notice before conducting an audit not just
enable any incriminating evidence to be destroyed and therefore
make it impossible for you to know whether they were or were not
legitimately presenting their activities in their responses to
you?
Mr Ridley: We go back to what
our function in this is. Our primary function is not the enforcement
of the criminal law. We are in the position of a contracting party,
whether the insured or insurer, who is trying to find that they
have not been misrepresented to, about corruption in this instance,
and the Corner House themselves in their representations in the
course of the consultation drew analogies with the insurance industry
and the reinsurance industry. When, for example, a reinsurance
inspection takes place, that will take place on reasonable notice
and it will take place at a place which will not disrupt the cedant's
business because these are two parties to a civil contract who
are checking their civil rights against each other. All that said,
if in fact we had suspicions of criminal behaviour before we conducted
an audit, not as a result of conducting it but beforehand, we
should refer those to the appropriate bodies to take more drastic
action if they saw fit. The overwhelming likelihood is that they
would instruct us not to muddy the waters by going and conducting
our own commercial audit on notice.
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