|
UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1124-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE TRADE AND INDUSTRY COMMITTEE Export Credits Guarantee Department's bribery rules)
Export Credits Guarantee Department's Bribery Rules
Wednesday 17 May 2006 MR ANDY SCOTT, MR JAMES CALDWELL, MR CLIVE JONES and MS SUE WALTON MR NEILL STANSBURY, MR GRAHAM RODMELL and MS KIRSTINE DREW Evidence heard in Public Questions 1 - 99
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Trade and Industry Committee Sub-Committee on the Export Credits Guarantee Department's Bribery Rules on Wednesday 17 May 2006 Members present Roger Berry, in the Chair Judy Mallaber Rob Marris Mr Mike Weir ________________ Witnesses: Mr Andy Scott, Director, International and UK Operations, CBI, Mr James Caldwell, Chairman, CBI Export Finance Committee, Mr Clive Jones, Chairman, CBI Export Finance Committee, member, British Exporters Association's Council, and Ms Sue Walton, Chairman, British Exporters Association, gave evidence.
Chairman: Good morning and welcome. Before we go any further, as a new one-off sub-committee, we, as Members, have to declare any interests, so we will briefly do that. I have constituents who work for major aerospace companies and I am a member of the trade union AMICUS. To the best of my knowledge, they are the only interests relevant to this issue. Mr Weir: I have nothing to declare. Rob Marris: I have constituents who work in aerospace and I am a member of the Transport and General Workers' Union and the GMBU. Q1 Chairman: Welcome. Would you introduce yourselves for the record and then we will start the evidence. Mr Caldwell: Thank you for your welcome. My name is James Caldwell; I am here in my capacity as the Chairman of the CBI Export Finance Committee. Mr Scott: I am Andrew Scott and I am the Director of CBI responsible for our international and UK operations. Ms Walton: I am Sue Walton and I am here in my capacity as Chairman of the British Exporters Association. Mr Jones: I am Clive Jones and I am here in my capacity as member of the British Exporters Association's Council and I am also Chairman of the BDA Export Finance Committee. Q2 Chairman: Thank you for your written submissions and thank you again for being here this morning. It is a public evidence session. There will be a record of the proceedings on the internet, I think within a week is the target and that is usually what happens. So, that will be the first place you will see it. May I begin by referring to the CBI's memorandum. In paragraph 6 you state that it is, "The UK Government's intention to be at the forefront of introducing enhanced anti-bribery provisions risks putting both the UK Export Credit Agency and UK exporters at a competitive disadvantage." Do you think the arrangements set out in the Government's final response of March of this year increased that risk or reduced that risk? Ms Walton: It is true that ECGD has certainly been at the forefront of applying anti-bribery and corruption procedures and we are very pleased to see that, through some of ECGD's good efforts, the OECD working party on export credits is now promoting a multilateral approach which is much closer to that of ECGD although I would have to say that ECGD is still probably clearly ahead of what the OECD is proposing. It will be interesting to see how other OECD companies actually implement these new guidelines and, until we see how that is done, it will be difficult for us to determine whether or not UK exporters have been particularly disadvantaged. I think that it is a move in the right direction but there is also the issue of watching very closely what non-OECD countries are doing through their export credit agencies and we see more frequently that ECAs from India and China are very active in some of the markets that our members are competing in but they do not subscribe to the same OECD guidelines and I think that is something that we would like to see the UK pursuing to ensure that we are left on a level playing field. I think this very recent announcement - it was only last week, I think 11 May - is a move in the right direction and we are more comforted by that than we were before. Q3 Chairman: In your memoranda, you both refer to the fact that Germany, Japan, Belgium and the Czech Republic were against tighter OECD guidelines. Do you think they are now coming round to the view that we should all subscribe to OECD guidelines? Ms Walton: Unfortunately, as none of us were privy to what went on in those OECD meetings, it may be a question that is more properly posed to ECGD who were represented there. Looking at the guidelines that have come out, it is clear that they are not as strong as ECGD's and I suspect that that may be due to the influence of some of those parties who were less convinced that this was the way to go. Q4 Chairman: In summary, you are not unhappy about the ECGD position? Ms Walton: We are happier that others are now following it more closely. Where we are today, we can work with ECGD's guidelines. It is more onerous. It will be more difficult particularly for some of our smaller members to comply with because they do not have the manpower and resources to deal with it, but certainly we are in a better position than we were back in the year 2004 when many of our members were simply unable to do these things. Q5 Chairman: Finally on this point, do you believe that the procedures outlined in the Final Response are workable? After all, they are more stringent than December 2004 but they are less onerous than May 2004. Ms Walton: The proof of the pudding is going to be in the eating here. They appear to be more workable to us. Our members have been consulting with ECGD on safe handling arrangements, but I think we will come on to that later. Chairman: Yes, we will come on to that later. Thank you, that is helpful. Q6 Mr Weir: Both organisations advocate an alternative approach to combating bribery based on ECGD "knowing their customers". Would you outline for us how you see that working, please. Mr Scott: I think the comment in our submission on that was really trying to put the new provisions into context. We fully accept that ECGD has decided to go down what we would probably describe as a more proscriptive and procedural approach, but what we were saying was that if ECGD wanted to have greater confidence, then none of its dealings could be described as having been tainted with bribery and corruption. One of the most effective ways of doing that is to have a very close understanding and working relationship with the customer. We do not regard that as being cosy, as some might describe it; we regard that as being a very practical and positive thing for ECGD to do who actually understand what the due diligence procedures are in which the customer himself operates and understand what it does in terms of its own codes of practices. To be fair, in some respects, it does have that full and close understanding with the customer but we believe that it could be developed even further. We actually believe that that would have been an approach which could have given ECGD and then ultimately the taxpayer greater confidence that there was a clear understanding of how companies were approaching this issue, which many do from their own due diligence and their own internal procedures. That was our comment setting it in context. We acknowledge though that what ECGD has decided to do is to tighten up its procedures. It will still need to have that understanding of the companies' own codes of practice, but we would have felt that that approach would have been able to give a degree of confidence which it was looking for and we have acknowledged that it decided to go a more proscriptive approach. Q7 Mr Weir: How do you feel that that approach assists given the transparency necessary to assure taxpayers that their taxes are not underwriting projects tainted by bribery and the fact that they want to see what is going on in these contracts? Mr Scott: I do not think that the revised procedures as opposed to that more closer understanding of what the individual companies are doing themselves by ECGD working closely with them produces any different approach to that transparency. As far as we were concerned, we would believe that ECGD understanding its customers, having information about the due diligence processes which those customers operate and requiring them to produce codes of practice would be a very fair and legitimate way to approach this whole issue. Q8 Mr Weir: I take it from your earlier answer that you have reached the conclusion that you will work with ECGD's anti-bribery rules. If your members did ever find them too onerous, are there other sources of support open to them for export purposes? Mr Scott: Obviously, one of the issues concerned throughout all of this where a company has an option is to look at whether it might get that finance from another ECA. Where some of the larger exporters certainly do have an option, then clearly what it will look at is the procedures and the bureaucracy and the burden of going through an ECGD route as opposed to going through another ECA. It has that option open to it and clearly the acid test will be how this will operate and how, when it operates, it will be implemented, relatively speaking, in other ECAs. If they find that another ECA presents a route which is less burdensome, then clearly that is an option which a company, if it can indeed go to those other ECAs, may choose to take. Mr Caldwell: I would like to add something to that which is to make a point of which I am sure you are well aware. 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. Q9 Rob Marris: One way in which people get round English law is by the use of agents. You may recall that in the Select Committee's report in March 2005, we said, "We are not persuaded by the arguments put forward by ECGD's customers that the Department had no right to information on the agents they use and the money to be paid to them". Does the CBI accept that one of the common conduits for bribes is through agents and that therefore, if one accepts that and you may not, the control or regulation of agents is rather important? Ms Walton: I think the way in which we would like to address this is to say that actually agents play a perfectly normal and legitimate role in our members' business day to day and again, reiterating the point that James has just made, UK companies are subject to some of the most stringent rules in this regard around the world and those laws have extra territorial effect. So, our membership is very concerned that they and their agents are deemed to be working within the law. Q10 Rob Marris: I am not suggesting that all agents are corrupt by any means. I am saying that those are commonly taken to be, for reasons I will get on to, a conduit for bribery where bribery and corruption take place. I am not saying that every agent is corrupt or that there is bribery and corruption in every case, not at all, but in some cases there is but part of the difficulty is of course discovering the identity of agents and whether ECGD will have that information and is prepared to disclose this. Do you think that all agents' details should be given to these people? Ms Walton: ECGD will, under its new guidelines, be given details of those agents --- Q11 Rob Marris: I am asking you if you think that is appropriate. Ms Walton: What our members were concerned about was the confidentiality of that information. I do not think there was a particular problem with sharing the information if our members could be confident that ECGD was going to keep what is very commercially sensitive information confidential and, as we were all working to understand, for example, the impact of the Freedom of Information Act - and there is no case law in that respect yet - it was difficult for our membership to say categorically that they were happy for ECGD simply to have this information on the face of an application form. Q12 Rob Marris: Are they now reassured? Ms Walton: Having been through very recently a consultation on safe handling arrangements, I think that we are getting to a stage where members are more reassured though we actually have not had yet the outcome of that consultation, so we will have to wait and see on that. Q13 Rob Marris: Do you have a date for the outcome of the consultation? Ms Walton: I do not believe we do on safe handling. Mr Caldwell: I am not sure. Mr Scott: We did not have a date for the outcome, we had a date by which we had to make our submissions. Ms Walton: The new arrangements for ECGD's anti-bribery and corruption procedures come into effect by 1 July, so one would hope it would happen before that. Q14 Chairman: It has been noted. Before I move on to the question I have on special handling arrangements, you may have heard a whistling. There is a whistle. Attempts have been made to sort it out but the only way to eliminate it for sure is to stop the broadcasting and there is web casting and so on. So, since we clearly would not want to do that, I apologise for the whistling. If you cannot hear it, you are lucky! Paragraph 7 of the special handling arrangements to which there has been reference 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". I appreciate that this may be a contentious point, so I would like to ask whether you believe there are circumstances in which a company could reasonably refuse that consent and still expect ECGD to consider its application for support. Mr Caldwell: I think it is probably more a question for ECGD. Q15 Chairman: Do not worry, we will ask them! Your views on these matters are, as always, extremely important to us. Are they being reasonable or are they being unreasonable? Mr Caldwell: I think it will depend upon the circumstances of the case; it will depend upon the information that is available to them. It is a hypothetical case, so it is quite a difficult question to be able to answer with any certainty. Q16 Chairman: Can you think of circumstances in which a company could reasonably refuse consent to give that information and still expect ECGD support? Mr Scott: I think at this stage, as James has said, it is difficult to identify what those circumstances would be. I think the reason why we would have argued it the other way is to leave that option open in the event that such circumstances do arise. At the end of the day, the decision ultimately will be ECGD's. It will decide whether it feels that there is any basis for continuing to provide support if the customer decides not to give that information, but all I think we would have argued for is that that would give that option should a situation arise in the future rather than having a blanket automatic refusal. At the moment, we have not identified what those specific circumstances might be. Q17 Chairman: If you take you TV licence, you do not have the choice. If you want to pick up a TV program, you have to pay the licence fee. What is being said here is, if you want ECGD's support, there are certain conditions that you have to satisfy including disclosure of knowledge about agents. Either you think that is a reasonable thing for taxpayers through ECGD to be expecting of those applying for support or you think it is unduly intrusive and unnecessary. Mr Caldwell: If it is an absolute requirement, then it is an absolute requirement. There is no flexibility and the question does not arise. Q18 Chairman: The question of whether you think it should be a requirement does arise. I have asked it! Ms Walton: I think that potentially there would be a case where, for example, a customer/applicant for ECGD services has actually provided ECGD with a great deal of information about the agent already. They may have been through a review which has involved a third party. A number of our members use agencies to do very detailed scrutiny and analysis of their agents abroad. They may have provided ECGD with that information already and they may be in the middle of a very sensitive and very competitive campaign where they do not want further information potentially leaked into the market that might jeopardise their campaign. If ECGD is actually happy with the information that has been provided to them by the exporter, I think that in those circumstances the exporter might well be valid in its decision to say, "No, we don't want you to do any further exploration in the country because we are at a very sensitive stage of this campaign and you have had every piece of information that we have diligently collected on our agent". Q19 Chairman: That is helpful. Do you think that many companies will invoke the special handling arrangements? Mr Scott: I think it is difficult for us to say how many will do that. Again, it will be entirely up to that company to make that decision. All that we have been looking for in this is to give that option, so that the exporting company can take that option if it so chooses. At this stage, it is difficult to predict how many will take that route. Mr Caldwell: That is right. The answer to that and the previous question is that, to the extent that flexibility is permitted from an exporter's perspective, that is a good thing. Q20 Chairman: Are there any particular circumstances when you might advise your members to use the arrangements? Mr Scott: As far as the CBI is concerned, we would not be inviting our members one way or the other. All we have been involved in throughout this exercise is to look at what is practical and what is workable and to put on the table a serious option, and it would then be up to the individual customer to make the judgment themselves. We will not be inviting members to either use it or not to use it. It is an option there for them to make their own commercial judgments on. Ms Walton: And the same is true for the British Exporters Association. Q21 Mr Weir: Would you tell us what, if any, consultation you have had with ECGD prior to the issue in May 2004 of anti-bribery procedures. Mr Caldwell: In 2000, there was what we thought was a fairly significant consultation process over some significant amendments to ECGD's anti-bribery and corruption provisions. It is not clear whether that was a consultation with a capital C but it certainly was a consultative process which involved ECGD's customers and trade bodies. There were, as a consequence of that discussion, amendments to ECGD's original proposed wording were made and were implemented in 2000. Between then and May 2004, we are not aware of any consultation, with or without a capital C, with ECGD's customers and trade bodies. So, when new provisions were announced, they did come, as far as we were concerned, as a complete surprise. Q22 Mr Weir: How did you lobby for them to be changed? Did you lobby for them to be changed after they were announced in 2004? Mr Caldwell: The events that followed from after May 2004 are well recorded. There was considerable concern expressed by the major British exporters and by the BDA about the practicality of some of the provisions that had been proposed in May, in particular the breadth of the undertakings that were required. Ultimately, the then Secretary of State requested that the CBI establish a so-called solutions group to work with the exporting community and ECGD to try and find a resolution to these practical problems. Q23 Mr Weir: Do you have a relationship with the Export Guarantees Advisory Council? Were they involved in this procedure at any time? Mr Caldwell: Individual members meet with the Advisory Council and I think that the trade bodies also meet with them. There was not, as far as I am aware, a specific discussion with them on this issue. Q24 Mr Weir: Should there have been? Mr Caldwell: They are the Council that advises ECGD and we would expect them to have that discussion with ECGD. Q25 Mr Weir: Do you think that if these discussions with the Advisory Council had taken place prior to May 2004 or April 2004, the subsequent problem would not have arisen in the same way? Mr Caldwell: I really cannot say whether that would have had any effect or not. Q26 Mr Weir: Had discussions between ECGD and you taken place before that? Mr Caldwell: Indeed, one would hope so in that, when they did consult with us in 2000, then a solution was found and I have no doubt that, had they done the same prior to May 2004, a solution would also be found. Q27 Chairman: The May 2004 procedures operating until December 2004 were --- Mr Caldwell: No, I am sorry, that is not correct. An interim arrangement was agreed pending the outcome of the solutions group. Q28 Chairman: Yes. Let me rephrase my question. Were most of your members content with the May 2004 procedures? Mr Jones: Certainly from the point of view of the Banking Association, we came to the view fairly early on that it was not possible to work with the 2004 procedures because of the breadth of the undertakings that were required. From the point of view of the undertakings we were required to sign, aspects of them were impractical and, as the exporters were likewise asked to sign not dissimilar undertakings, I think a number of exporting companies also had grave reservations that they could actually complete the formalities. Mr Caldwell: I do not think there was a full survey conducted by the trade bodies but what I think it is fair to say is that the majority, if not all, of the CBI's and BeXA's members who were actively involved in major export campaigns were not content with the provisions. Q29 Chairman: As you said, the focus of the opposition and the main opposition to the May 2004 procedures came from aerospace and defence manufacturers. Mr Caldwell: If you study the ECGD's annual reports, then you can see who are the principal constituents of their custom base. Ms Walton: I think that the problem hit those customers first because they are consistently users of ECGD's products. There were certainly many other members of BeXA who also had similar concerns. I think we should make it very clear that our members take making these representations very, very seriously. They want to be sure that everything they are telling ECGD in their application forms is true and accurate but, when they are being asked to make representations about third parties over whom they have no control and to make representations about future behaviour of those parties where they actually exercise no control over them, they found that was impractical and something that they simply could not do, and that prompted these discussions to try and find a way to get ECGD 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. Mr Scott: I would like, just so that we understand, to put into context some of the volume of business which we understand took place between May 2004 and December 2004, again just to reiterate the point about the concerns expressed to us reflecting the structure of the ECGD customer base. We understand that something like £55 million of business was done on the new procedures whereas about £900 million of business had to be done on the interim procedures because those were the customers who were finding difficulty with it. It is important to put into context that the reason why particular focus seemed to be on the aerospace and defence rated customers is that they were the largest customers with the most significant contracts at that particular stage, and that relative balance to the volume of business --- Q30 Chairman: Were the interim arrangements put in place at the request of those customers? Mr Scott: They were put in place at the request of those customers having identified some of the problems and I think, as Clive Jones has just said, particularly the banks found it very difficult, indeed almost impossible, to be able to provide the cover because of some of the provisions being sought in those May 2004 arrangements. As a result of that, in order to be able to continue doing business, there had to be some interim arrangement to enable that business to continue until resolution of this issue could have been found. Q31 Chairman: What precisely were those interim arrangements? How were they different from the May 2004 procedures? Mr Jones: I think the interim arrangements were really a continuation of the arrangements which had existed prior to the introduction of the May 2004 procedures. I do not think there were any fundamental differences. One was effectively working with a situation which we all knew and understood. We thought that was probably the most appropriate methodology to move forward on whilst a solution to the new procedures was put in place. Q32 Chairman: Am I right that basically what happened was that in May 2004 we have the ECGD procedures, some key clients said, "Sorry, they are impracticable; it is not workable; we are not going to do business on these procedures" and therefore somebody, presumably ECGD, the Secretary of State or somebody somewhere, said, "Right, okay, we had better agree some interim procedures until we sort this out"? Is that roughly what happened? Mr Jones: I believe so, yes. Mr Caldwell: Whilst the solutions group was trying to find a solution, the interim arrangements continued as pre-May. Ms Walton: We should not forget that, throughout all of this, as ECGD had had the right before, it still had the right to refuse cover if it felt there was something untoward going on. Q33 Chairman: Absolutely. I am trying to think of other examples of public policy where a policy is set down and those who are affected by it say, "Sorry, it won't work" or whatever and the policy enforcers say, "It's okay, don't worry about it, we'll have a chat and change it". I am being slightly facetious but you get my point. Clearly, what did happen in that period of time is quite important essentially for ECGD rather than for the business community. I am sorry, I am not asking questions, I am commenting. Just to explain, the purpose of my question was to get to the role of ECGD because our inquiry is into ECGD's role in pursuing its own bribery policy. Mr Scott: I think I can answer that question. Q34 Chairman: It was not actually a question but it is nice of you to rescue me! Mr Scott: I think all we were saying as the CBI and indeed BeXA was, here were a set of circumstances which the customers were presented with in May. Prior to May, they had not had any opportunity to comment on those. Q35 Chairman: That is significant. I did not know that. Mr Scott: As far as representative business organisations are concerned, it is what we are here to do which is to lobby government or the bodies to say, "Here are concerns which we have for which we feel the procedures introduced are impractical. Did you actually mean to have this impact when you were introducing these procedures?" Ultimately, it is for the Government and indeed in this case ECGD to decide if it feels that those submissions which we and others have made had substance. As far as we were concerned as the representative of the business community, we were doing what was absolutely the legitimate thing to do which is to say, "Procedures have been introduced; no consultation took place prior to them; here are the concerns that we have as representing those interests; it is for you to decide whether you feel those are fair or not" and our reflection of that discussion is that ECGD took some of those key points which we had all made and, as a result of it, we are where we are today. Chairman: Thank you for that. That was very clear and very helpful. Q36 Rob Marris: I would like to deal with anti-corruption declarations and we were talking just now about the workability. For shorthand, as I understand it under the Final Response, a supplier who is looking for ECGD support has to give a clean bill of health for the previous five years from various other bodies down the chain over which that supplier has control. Does that work? Mr Jones: When the supplier is providing such a declaration, I think it is qualified to the extent of "after making due inquiry". Q37 Rob Marris: Yes, that is right, "reasonable inquiry". Mr Jones: Obviously it is going to be up to the individual suppliers to make what inquiries they deem appropriate amongst their colleagues who they are working with and, if they feel comfortable making such a declaration, then I hope they will do so. There may well be occasions where exporters say, "We cannot give such a declaration covering a five-year period". It may be that the subject has only been in business for two or three years. There could be a number of issues which will need to be settled. Mr Caldwell: I would like to say that this is a complex area. Q38 Rob Marris: I did say that I was doing it in shorthand. Mr Caldwell: To the extent that we have sought an analysis of the declarations that are required of exporters and the extent to which some of those declarations are absolute, which a good many are, and others are subject to reasonable inquiry. So, it very much depends upon which question you are asking as to what the answer is, but there are a good number of declarations that have to be made particularly concerning the applicants themselves and their directors and their employees which are absolute. Then, if you like, the further out you go away from the centre, the less absolute the declaration becomes but it never gets less absolute than reasonable inquiry. Q39 Rob Marris: I know you said that it changes as you get further out and I understand that but, if there is a kind of absolute list and a reasonable inquiries list, are there bodies on the absolute list that should be on the reasonable inquiries list and vice-versa? Mr Caldwell: I suppose from a trade bodies' point of view the answer is "no" and that the distribution is the result of a good deal of discussion between us and OCGD and it is where OCGD comes to rest. I think that what we have ended up with is a situation where it is felt to be practical to comply with it, it is possible to comply with it. It does not mean that it is not time consuming to comply with it on occasions, but it is practical to comply with it. 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 expect 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 inquires 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 than 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 or 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. Witnesses: Mr Neill Stansbury, Project Director Construction and Engineering, and Mr Graham Rodmell, Director Corporate and Regulatory Affairs, Transparency International (UK); and Ms Kirstine Drew, The Corner House, gave evidence. Q55 Chairman: Welcome and thanks to both organisations for your written submissions and so forth. For the record, would you introduce yourselves, please. Ms Drew: My name is Kirstine Drew and I am a representative from Corner House in place of Dr Susan Hall. Mr Stansbury: I am Neill Stansbury. I am Project Director of Transparency International's Construction and Engineering initiative which is designed to stop corruption in the construction industry internationally. I am a lawyer and have worked for more than 20 years in the international infrastructure sector and I have worked on projects where there have been agents and where there have been export credits over those 20 years. Mr Rodmell: I am Graham Rodmell. I am Director of Corporate and Regulatory Affairs for Transparency International. Q56 Chairman: Thank you. May I begin by asking whether you accept that the Government have to take account of the views of business and that there is a point at which anti-bribery procedures may deter UK companies from seeking customers abroad. Mr Rodmell: Of course we accept that ECGD has to take account of the view of business. Is there a point at which anti-corruption procedures deter companies from doing business abroad? I do not think that should arise. I think there are two separate questions. I would say that it is not the procedure for deterring, it is the conditions generally in the countries in which they are seeking to operate, so that extortion is prevalent. That is a factor which will deter. Other things which will deter is the fact that contriving by whatever means to secure business by some illicit commission or payment is a criminal act in this country which is visited by up to seven years imprisonment and unlimited fines and so on. That also might be a deterrent. I think what is the most major deterrent for most of the companies - we have many corporate supporters of the TI position - is what damage it does to the reputation of the company if it comes to be known that it wins business as a result of illicit means rather than on fair and open competition. Q57 Chairman: It is often said that the most productive approach to tackling bribery, as other issues, is to have common international standards, international agreements and so on. In the case of bribery, do you believe that is feasible and, if so, where? Mr Rodmell: It is feasible and we have examples. We have an OECD convention; we have the multinational guidelines which have a chapter on corruption; we have, very importantly now, the UN Convention which we have just ratified which will have potentially up to about 45 countries ratifying. So, you have international understandings to have objectives to improve matters. When it comes to anti-bribery procedures for export credit agencies, we have also the OECD export credit group who have been working and we have heard this morning about the new standards which have come out of them which I think is a considerable step forward. The problem with asking whether we can have international understandings is that you are likely to go for the lowest common denominator, the most laggard, what will he or that country subscribe to, and I think that part of TI's position now is to encourage the UK to actually take a lead and having UK PLC known as being a country that does not tolerate bribery in international business is, in the medium to longer term, a much better position than trying to accommodate the in the short term. Most companies find that and I think the same is the case for the Export Credit Guarantees Department and also for the individual companies concerned. Ms Drew: May I take the opportunity to answer a few questions? Q58 Chairman: We are very happy for you to respond as long as you do not repeat the points that have already been made as we are very pressed for time. Please, forgive me saying that. Ms Drew: I will be very brief. On the first point, the events of the last two years have not been about accepting the views of business, they have been about including the views of other stakeholders and I would very strongly like to make that point. The second point is that business has been at the forefront of the anti-bribery agenda. In 1977, at the time of the Foreign Practices Act, the International Chamber of Commerce wrote its first report on bribery and corruption and the ICC is at the forefront and takes a very strong stand. So, if the framing of the question is that anti-bribery is an NGO question and an NGO issue, I would like to say that it is not. On the issue of international standards, we heard about the OECD statement that is out and I want to just pick up on a couple of things. We heard about the ECGD being a leader and the cost to business of being a leader. There is a comparative survey that comes out from the OECD which documents exactly what practices the ECAs are implementing and ECGD is not at the top of that list. An index has been done on compiling the answers that are given and the ECGD is way out of the top five. It is the case that much has been done at the multilateral level, it is the case that there are different practices, there are different leaders in different areas. I just wanted to make that point. Chairman: Thank you very much. Q59 Rob Marris: I wanted to explore a bit again the question of agents, spreading the net a bit wider in terms of applicants having to provide the names of agents of consortium partners or other group companies, which I think was the ECGD requirement until May 2004 and is in a sense up for discussion now in respect of the final response. Why should companies have to spread the net that widely, beyond the immediate contract, if I can put it that way? Mr Stansbury: Because of the contractual situation, if you have a main contractor he is responsible contractually for the acts of his joint venture partners, his agents and his sub-contractors under normal commercial principles. Therefore, if a contractor is working on a joint venture, the joint venture partner appoints an agent, that agent pays a bribe in connection with the award of the main contract to the joint venture, the UK exporter will be responsible for the consequences of that as far as the client is concerned, even though it is the joint venture partner's agent who paid the bribe. The client can terminate, under most legal jurisdictions, that contract as a result of illegality, and the whole contract will fail. The UK exporter can then turn to its joint venture partner and say "Your fault, you caused this, compensate us" - assuming he has any assets to obtain compensation - but the contract has failed. The ECGD then has a problem because they have provided an external credit to the UK exporter, they have probably paid the bank, the bank will have paid the UK exporter, how then can the ECGD give recourse? Therefore the ECGD is at risk, however the bribe is paid, whether it is paid by a joint venture partner, a sub-contractor, an agent or whoever, it does not matter whether or not the bribe is paid by the exporter's agent. When we give a lot of training workshops around the world to many companies on this issue, we always recommend to companies when you have a joint venture partner, a consortium partner, a major sub-contractor, always as a matter of commercial common sense and due diligence find out exactly what they 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. The suggestion raised in the ECGD's reports that it may be impossible for an exporter to provide details of the agent of its consortium partner is, frankly, ludicrous because you would always as a matter of common sense find out your consortium partner's agent. Q60 Rob Marris: You should as a matter of common sense. Mr Stansbury: You should as a matter of common sense. Q61 Rob Marris: Have you got a sense of what proportion do and what proportion do not find out that information? Mr Stansbury: A lot of companies are not taking all the steps they properly should, but certainly when we do work with companies, as we do very closely, more and more companies are taking this view. Also, when it comes to a point raised which is relevant in relation to sub-contractors, can sub-contractors pay a bribe, as I say we work in many countries and we 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. Therefore, the onus then is on the contractor to say why is this joint venture partner being imposed on me, why is the sub-contractor being imposed on me, what is their price, because that is now how the bribes are being filtered, because if the sub-contract price is higher than the market an element of the bribe can be in the sub-contract price. It is increasingly common and increasingly well-known that the sub-contractor's joint venture partners can be a conduit for bribes, so that is why we say as a matter of commercial common sense find out about these partners. Having found out, hand over the information to ECGD, just a page of information, take 10 or 15 minutes to fill in the form. Q62 Rob Marris: What you suggest will protect itself anyway whether the ECGD is involved or not. Mr Stansbury: Absolutely, it is best practice. Q63 Rob Marris: Shifting a bit sideways from that into special handling arrangements, which we discussed when Dr Berry was asking questions about it, if an applicant refuses information about its agents to the ECGD it is likely that their application will be refused, but not certain. Do you think that is the right balance, to have a kind of rebuttable presumption that the application will be refused in the absence of that information? Mr Stansbury: We have serious concerns about this confidentiality arrangement anyway because again when we are dong corporate training we say if you are appointing an agent one of the questions you should find out initially is, is the agent willing to disclose to the client and to the banks involved who he is, what his commission is and what his scope of work is? A reputable agent will say no problem, no problem at all, and the fact that it is public information will not be damaging to anyone. We say to companies if the agent says do not disclose to anyone who I am or what I am being paid, alarm bells should ring all the way through the hall, and our recommendation in that situation is do not appoint them, because the chances are very extreme that they could be corrupt agents, because we do not accept for a second the argument that it is a competitive disadvantage to disclose the agent because in all contractual fields there are good companies and bad companies. If you want to do an exclusive deal with a company you sign an exclusivity agreement, so you say that sub-contractor, that joint venture partner, we work together exclusively, no one else can take you, it is public. Why then should agents be kept secret because you are worried about someone poaching them, you just sign an exclusivity agreement. We believe that is a false premise. Q64 Rob Marris: You do not think that should be rebuttable, because the presumption of the special handling arrangements is that there should be no such effect if possible. Mr Stansbury: We think that there should be no rebuttal presumption and that the special handling arrangements should not be there, but if they are then we would then say to ECGD if a company then says please keep the details confidential, the ECGD would say "My God, this is very suspicious, why?" and therefore they would immediately go into enhanced due diligence, but how can they do enhanced due diligence if only three senior executives are allowed to know who the agent is? It is almost impossible to carry out enhanced due diligence when you are trapped, so what we are saying is, firstly, the whole logic is flawed, about agencies needing to be kept confidential and, secondly, if any attempts are made by ECGD they should do full due diligence, and if they cannot they should refuse. Q65 Mr Weir: In your memorandum you express serious misgivings about the recourse provisions in the procedures in ECGD's Final Response, but is it reasonable to make an exporter absolutely liable for corrupt activity, over which it has no control and of which it may have been unaware? Mr Stansbury: In previous discussions Sue Walton explained very clearly the logic of this position and my disagreement with that logic is that if it is unfair on the contractor or the exporter to take responsibility, why should it be fair on ECGD to assume that liability? I go further than that and say how is it correct that the taxpayer should actually provide, effectively, insurance against the corrupt acts by the exporters sub-contractors or joint venture partners, because that is effectively what will happen. If there is a corrupt act which takes place, exporter is paid by bank, client does not pay bank because of the illegality, ECGD has to compensate the bank, who can they get recourse against - not the client and not the bank - and they have now stopped the ability to get recourse against the exporter. Therefore, effectively, ECGD is providing anti-corruption insurance against the corrupt acts of the sub-contractors and the joint venture partners. It is not part of their function, firstly, so it is wrong but, secondly, we have moved on in fact, I am pleased to say, because the OECD action statement published last week is quite clear on this point, and I think ECGD will now need to revise its recourse provisions because basically what they say in paragraph (j) is "If, before credit, cover or other support has been approved, there is credible evidence that bribery was involved in the award or execution of the export contract ..." Note, it is nothing to do with complicity by the exporter or limited responsibility, just bribery in the award or execution, which we fully support, then the action they will take will be: "suspending approval of the application during the enhanced due diligence process. If the enhanced due diligence concludes that bribery was involved in the transaction, the Member shall refuse to approve credit, cover or other support. If, after credit, cover or other support has been approved bribery has been proven, taking appropriate action, such as denial of payment, indemnification, or refund of sums provided." The way we see the action statement it is very clearly saying that any corruption in the award or execution of that export contract would lead to indemnification. Under OECD guidelines now the ECGD must now revise its recourse provisions in line with what we were saying in our submission. Q66 Mr Weir: So effectively there is absolute liability. Mr Stansbury: It is absolute liability, there is no qualification, it is OECD best practice. Q67 Mr Weir: Where does that leave the exporter, how far do they then need to go in investigating third parties who may be involved within these contracts? Mr Stansbury: It is very difficult for exporters. Many companies we work with have actually taken the decision to withdraw from countries where they cannot do honest work and many of the major contractors are now pulling out of many countries, so we say to them you cannot do everything possible, there is always a business risk, but if there is corruption in your contract, you are responsible for it, you bear the civil and possibly criminal responsibility, so you have to be very careful. They do what they reasonably can, if they assess the risk as reasonable they take it, if they do not they withdraw, and that is happening more and more frequently around the world. Q68 Mr Weir: That is fine, but from what you were reading out earlier from OECD it does appear that there is effectively absolute liability now. Surely many exporters will be looking at any country where there is any corruption and saying what is the commercial risk to us, do we want to get involved in that country at all. Is that going to impact seriously on exports from the UK? Mr Stansbury: I do not see why it necessarily should because businesses do business in countries without export credit cover to cover corrupt circumstances. Export credit covers a very small part of the business done overseas, other companies take on the corruption risk themselves, but secondly we need to work with other export credit agencies in other countries to make sure that we are all moving in alignment. We firmly believe that at TI. Q69 Mr Weir: That is the point I was getting to, do you believe that all other countries are moving in the same alignment, are all other countries exercising the same control that ECGD are exercising on UK exporters? Mr Stansbury: There is a great disparity between countries, certainly, and I agree with Kirstine that the UK is certainly not the leader in this field in all the work we do around the world. There are disparities in different areas and we at TI, working through our 90 national chapters, are trying to make sure that everyone is moving ahead; inevitably some countries are always ahead in some aspects, but we have to keep moving forward. Q70 Rob Marris: Who is the leader? Mr Stansbury: You cannot say who is the leader in any respect because some countries are better at prosecuting, other countries are better in their due diligence, other countries are more careful, I do not think I would like to say that. Ms Drew: If I could just make an additional point, the discussions at the OECD are behind closed doors so it is hard to know which countries have which position, but the one exchange mechanism they have is this questionnaire, the survey of practices. We have compiled an index on the basis of that and we could forward it to you because it would give you a good idea of where they are in terms of what they say. We cannot say that is in fact what they do, there is no monitoring, but it is based on information exchanged. We can forward that to the Committee. Mr Weir: That would be useful. Q71 Chairman: We would be very grateful, that would be very helpful. Thank you very much indeed. Ms Drew: I have to say that the index is compiled on the basis of the May 2004 procedures, not the changes. Q72 Judy Mallaber: Can I move on to the Corner House proposal in your evidence that in particularly high risk countries or sectors the ECGD should commission independent due diligence checks on the agents by an independent and reputable risk consultancy. Can you explain why such checks are needed? Ms Drew: Firstly, we do not think those checks are going beyond what is generally accepted good business practice. If one reads anything about compliance in the United States under the Foreign Corrupt Practices Act - and it is relevant to talk about the Foreign Corrupt Practices Act because it is the only national anti-bribery legislation that has been in place for a very long time and it is the only significant body of case law where companies have developed their internal procedures - many of the companies going for export credit support in the UK will in fact be listed on the New York Stock Exchange so therefore they will be subject to the Foreign Corrupt Practices Act and they will have FCPA internal compliance already. Our first point is, therefore, that we think this is not additional and if you need any other good practice companies should be commissioning due diligence checks on their agents anyway; the second point is that we do believe that the special confidentiality arrangements limit the ability of the ECGD to do due diligence and therefore this is a counter-mechanism that they will be required to submit a due diligence report to the ECGD as evidence that there were no red flags to merit further investigation. Q73 Judy Mallaber: Do you know who pays for those checks in the States and who do you think should pay for them? Ms Drew: In the United States it is the companies that pay, but it is a good question because there is therefore an incentive to get something cheap and quick, but then that gives you less protection. It is a good question and it is an interesting question about who should pay, but the practice to date, certainly in the United States, is that it is the company who pays. Q74 Judy Mallaber: They choose who should do the checks. Ms Drew: Exactly, it raises the question of who they choose and who is monitoring the monitors, if you like. From our point of view we would be concerned about that and wondered if there were any precedents in the context of the UK for social and environmental legislation where in fact it is the public purse that pays in order to protect the integrity of expenditure. Q75 Judy Mallaber: Do you think there should be any point at which the cost of such due diligence checks meant that particular work was being lost in a particular sector or country that we should be concerned about? From your point of view would you just say good? Ms Drew: If there is any such point we certainly have not reached it. It is not as if there have not been any corruption cases involving companies with ECGD support. I think you are familiar with the report done by Dr Hawley which documented nine case studies through the 1990s, and of course one could say that since the 1990s everything in the anti-corruption agenda and policy world has changed, but unfortunately there are cases involving ECGD support since 2000 which involve allegations of corruption. Mr Rodmell: Could I just come in there very briefly? We should think about where that question is coming from. It is not the ECGD imposing a burden, this is the point, a company in selecting its agent will want to carry out the most appropriate due diligence which could be through a due diligence agent - a risk group or something of that nature, a consultancy - or it could do it through its own resources. It is not a burden that is being in some way imposed by ECGD, the company does it for its own purpose and in terms of cost, if it gets a good agent that is going for clean business and will not render the company liable to have voidable contracts because there is some bribe behind the deal, then it is a cost which will repay itself many times over. It will be a good agent and it will have the opportunity to do good business. That is a cost saving, it is not a cost expenditure. Q76 Judy Mallaber: It slightly implies that actually all businesses would want to be good businesses and so one wonders why we need these criteria. Ms Drew: If I could also say that this is the business position. The International Chamber of Commerce has its own recommendations and it has a manual to back up those recommendations and it gives good practice. One of the good practices that it cites is that a company would conduct formal reviews with agents, not only with its own agents but the agents of its partners. These are the good practice principles that have been developed by industry. Chairman: Thank you, we do need to move on. Mike. Q77 Mr Weir: In your memorandum Transparency International identifies what it says are deficiencies in the audit procedures - for example, that only records in the UK can be inspected and that records can only be inspected for the sole purpose of verifying statements and information given to ECGD by the supplier in the application. You appear to be calling for a substantial increase in the role and powers of the ECGD far beyond even the May 2004 procedures. Can you tell us what justification you see for such a change? Mr Stansbury: We do not say that the May 2004 procedures are the international benchmark against which we measure everything, all we do is look at what we believe should be done to protect against corruption and to protect ECGD's interest. I find it very hard to understand why an agency like ECGD providing taxpayer subsidised money for a guarantee is tying its hands in such a way, because if you are talking about export contracts it is inevitable that a lot of documentation will be overseas - you have overseas subsidiaries, overseas suppliers or whatever - so why on earth are you saying that the only right of audit is to go to the UK supplier's premises. In an industry which has to sub-contract and joint venture the whole time, why the disclosure only to the supplier's own records? It is an absurd situation, I think, and whether ECGD want to go overseas and check the supplier's or sub-contractor's records is another issue, but at least they should have the right to do so and I do not see why they have tied their hands, so what we have put there is what we believe ECGD should have the right to do. Q78 Mr Weir: Are you saying then that ECGD should in effect become an investigatory body to combat bribery and corruption, have overseas agencies to look into contracts in the numerous countries in which British exporters work? Mr Stansbury: We are not saying they should be investigatory but they are providing insurance on a commercial basis and when you provide insurance on a commercial basis you always ensure in your contracts that you have the full right of audit and inspection. That is (a) a deterrent against corruption and fraud because people know they can be inspected, and (b) if there is a suspicion it enables you to go and investigate. It is a commercial investigation; if they subsequently find criminal evidence, they will then surely hand it over to a criminal investigation agency, but as a commercial organisation they should not tie their hands in such a way. Q79 Mr Weir: That is all very well but they would have to have a massive increase, presumably, in resources and personnel to be able to do that in the first instance before handing over to the criminal investigation agency. Mr Stansbury: You would not audit every contract all the time, you have the right to audit. You may make the decision to do random audits or random partial audits, or only to audit in the event of suspicion, but you need to have the right. Q80 Mr Weir: It would still need a substantial increase in resources from its current level to enable them to do so, would it not? Mr Stansbury: Maybe they should increase their resources because they have 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. Q81 Mr Weir: What proportion of corruption has been found so far in export contracts? Mr Stansbury: I am sorry, I missed that. Q82 Mr Weir: What proportion of current export contracts are showing some corruption involved in them? Mr Stansbury: We do surveys around the world about this and everything we get is obviously word of mouth and confidential because there is not much prosecution at the moment. In some countries we are informed that nearly all contracts in certain sectors involve bribery, in other sectors, other countries, people believe that 40 to 50 per cent of the contracts involve bribery. I have no idea how many contracts involving UK exporters involve corruption, but our evidence from around the world is that there is significant corruption still in many, many countries. Q83 Chairman: The famous interim arrangements that ECGD set up between May and December 2004, I would be grateful if you could briefly comment on why you believe these arrangements were put in place and how they in fact operated. Mr Rodmell: I do not think in truth we have any real information about them other than what has been published as a result of Parliamentary questions and so on. Q84 Chairman: An extremely honest and transparent reply. Kirstine, did you want to comment? Ms Drew: Only that we do not know what the arrangements were, we are not privy to what they were, but we do know that eight meetings were held with representatives of business, many attended by British Aerospace, Rolls Royce attended six of them and Airbus five of them. These were discussions only with industry, there were no other stakeholders present. Q85 Chairman: Do you have any direct evidence about why those particular aerospace and defence manufacturers might have been concerned, or is it just that they are major clients of ECGD? Ms Drew: I do not have any knowledge. Q86 Mr Weir: You said you have no direct knowledge of the interim arrangements. If I understood correctly from our last set of witnesses they indicated that it was the same arrangements as applied up to the change; are you saying that is not correct? Mr Rodmell: It is just that we do not know. Ms Drew: We have no way to know what those interim arrangements were. Q87 Chairman: We will ask them when we take evidence. Ms Drew: It is an interesting question to know what is happening now. We know that the new procedures are coming in on the 1st, but are they still operating the interim procedures or are they back to the May 2004 procedures? I would be very grateful to know the answer to that. Q88 Chairman: We are very grateful that you suggest that question be put to them, certainly. To pursue this business about what do exporters do if ECGD tightens up controls, may I start by asking if an exporter decided that ECGD's anti-bribery rules were too onerous - rightly or wrongly, if that was the view they adopted - the only alternative source of support for them would be other ECAs, would it not? Mr Rodmell: That would be one alternative resort, but of course they can, as Neill says, accept the risk themselves - the vast majority of exporters do in fact accept the risk themselves. Q89 Chairman: If they were driven to seek alternative providers of support and those alternative providers were not so rigorous in their anti-bribery rules, is there not an argument that this is therefore counterproductive? Mr Rodmell: No argument at all, with great respect. Q90 Chairman: I was simply asking the question. I knew what the reply was going to be but we need it for the record. Mr Rodmell: Let me just develop that. Why should it become too onerous, why would they find less rigorous questioning more to their liking? I should think the red flags ought to be flying and I am put in mind of a question that I heard at a BBA conference actually when the Wolfsberg Principles against money laundering were introduced. They had the person in charge of Barclays Bank private client business there and they said, "If you observe all these principles against money laundering, will you not lose business?" He said "Yes". He said "How much will you lose?" "Perhaps 20 to 25 per cent of my private client business." "How do you view that?" "That is the kind of business I do not want." ECGD could well take an equivalent position, that if it is driving customers away because they want to engage only with much less rigorous anti-bribery controls, it sends a very clear message about the kind of business that they were being applied to underwrite. That is the kind of business that ECGD and the British taxpayer could do without. Q91 Chairman: Are you not making two arguments? One is the argument you have just made which is that ECGD in these circumstances may reasonably say we will go away. The argument you used earlier is that good companies do not behave this way anyway, or should not behave this way anyway, and yet we do know that there was extensive lobbying, as you have noted, it is in the public domain, after the May 2004 rules were published, and the major aerospace companies in this country seem to be working very hard indeed to water down the provisions. How do you explain that? Mr Rodmell: The point you make is very interesting actually. One of the key people in those meetings, according to the information which was public, was BAE Systems. Q92 Chairman: Indeed. Mr Rodmell: When I look at their latest corporate responsibility report in April this year - it was an excellent report - it talks about ethical conduct and it talks about the operational framework. It says "This is supported by detailed policies covering such matters as anti-corruption. Our anti-corruption programme has been established in alignment with international standards such as those developed by the International Chamber of Commerce and Transparency International." I can tell you that the Transparency International standards, which are the Business Principles for Countering Bribery are very clear about what they should be doing about subsidiaries and joint ventures, what exactly they should be doing about agents and so on, and if they comply with those principles they will have no difficulty complying with the ECGD anti-corruption procedures which would not appear in the least burdensome, and we welcome that. Q93 Chairman: Thank you, we will certainly get a copy of that document. Ms Drew: If I could just follow on with a couple of points, on the first question the alternative is other ECAs, especially for consortia which are made up of different companies. There has to be some sort of national interest normally and that puts the focus back on the OECD, the negotiations there and the fact that the ECGD must take a lead role in bringing standards up. That is my first point. The second is that I also have a quote from BAE's corporate responsibility report but this time it is from Robert Barrington of F and C Asset Management. Mr Rodmell: We did not liaise on this. Q94 Chairman: It matters not. Ms Drew: It is a long one so I will get to the crux. He says, "But the company [BAE] does need to tackle head on its residual reputation as being a laggard in corporate transparency, an opponent of NGOs and an abrasive partner in discussions about its business practices." Then it goes on to say "Becoming a champion for stronger anti-bribery positions in international defence procurement would be [one of their demands]. As shareholders, we fully respect commercial confidentiality, but we also live in a transparent and information-rich age, which requires companies to be accountable." In acknowledgement BAE say: "We acknowledge Robert Barrington's view that we could have better communicated our stance on the debate with ECGD and are constantly seeking to improve our communication to our stakeholders ..." Chairman: Thank you very much. The final question is from Rob. Q95 Rob Marris: Speaking of transparency and openness, I understand that in its Mission and Status Review about six years ago the ECGD said it was going to be more transparent and more open. Has it been, particularly in the two years since April 2004? Has that been your experience of it, more open, less open, about the same? Mr Rodmell: It has gone in stages. You say from 2004 and in recent years it has been unfortunate because I think they have aspirations to be more transparent --- Q96 Rob Marris: I know, that is what their Mission and Status Review said six years ago. Mr Rodmell: I have to say the fact that we only had the consultation on these procedures as a result of a settlement to an action for judicial review brought by Corner House, it does not exactly say much for transparency. It has been a great shame that this has happened because the Government has been saying all the right things in regard to the Africa Commission report and the G8 communiqué last year about ECAs needing to tighten up on their anti-bribery provisions because it has such a damaging effect on developing countries; it is running counter in a way or it has run counter, unfortunately, to the fact that the World Bank themselves are taking this a whole notch further forward in their anti-bribery policies and in their statement the other day in Indonesia they are starting a completely new anti-corruption strategy. It has pulled the UK back and the UK does not deserve that reputation, it needs to move on. I just hope that out of this whole process, supported by what might come from the Trade and Industry Select Committee, we can move forward with a much more transparent way of dealing with the matter. Q97 Rob Marris: I am going to ask you in a minute for two things that they could do to be more open and transparent, but to give you time to think about it I wonder if Kirstine from Corner House could give her views on the initial question, are they more open and transparent? Ms Drew: The fact that Corner House had to take legal action against ECGD in order to force a consultation suggests that the answer is very clearly no. The original May 2004 procedures were brought in without any consultation, despite efforts by Dr Hawley to secure meetings and discussions, and also despite ECGD's position that the Corner House, together with Transparency International, are the two primary NGO stakeholders on anti-corruption, yet they brought those procedures in without consultation and they then revised the procedures with consultation with only one set of stakeholders. Our answer therefore is no. If I could also say on that that as a result of the process that we have all gone through the procedures have been changed again and we now have stronger anti-bribery rules in place and it shows that the results are better when all stakeholders are consulted and not just one side of the argument is listened to. I hope that is the lesson that has been learned from all of this. Q98 Rob Marris: Graham is busy doing his exam question which I am now going to ask you while I ask for his answer, which is if you could point to two things which the ECGD could do to be more open and transparent. Have you got an answer there, Graham? Mr Rodmell: I have one answer, which in a way is sufficient for the present purpose, and it would be to look again at the proposals which TI(UK) very carefully put to them and see whether they cannot actually move towards accepting those proposals for amending their forms and so on, and I suppose secondly, because I have to have two answers, they should now look at the ECA action statement and take the additional steps which they would seem to need to look at their recourse arrangements, to make sure they do in fact comply. It is perhaps a little tame. Q99 Rob Marris: No, no, it is fine. You may just agree with those, but have you got a couple of steps they could take? Ms Drew: We have new procedures in place, I think everyone agrees that they are a step forward and that they are reasonable and practicable. The next steps are to monitor those procedures and to publish the results of the monitoring of those procedures periodically, openly, so that all stakeholders can have basic information on how they are being implemented, and that will provide the basis for on-going improvements to which everybody can contribute. If there are two things to do, therefore, it is to monitor and to publish the results of the monitoring. Rob Marris: Thank you. Chairman: Thank you very much indeed, it has been really helpful to the Committee. Thank you not only for being here today but for your written submissions which, if I might say, as always have been very helpful and very detailed, so thank you again. If we can dream up any third or fourth questions we will certainly write to you and be very happy to take a written response. Thank you very much indeed. |