House of Commons - Financial Crime and Development - International Development Committee

Financial Crime and Development - International Development Committee Contents

2 Payment for benefit of people of Tanzania

Basis for the payment

13. Following BAE's agreement with the United States Department of Justice, BAE approached the SFO. The Director of the SFO told the company that settling the Tanzania investigations would require a payment. An agreement was reached for a voluntary payment to be made for the benefit of the people of Tanzania, leaving it as open as possible for BAE Systems and the SFO, with advice, to be able to find the right way of ensuring that money went to the people of Tanzania.[6]

14. Paragraph 5 of the Settlement Agreement between the Serious Fraud Office and BAE Systems PLC states:

The Company shall make an ex gratia payment for the benefit of the people of Tanzania in a manner to be agreed between the SFO and the Company. The amount of the payment shall be £30 million less any financial orders imposed by the Court.

Level of payment

15. The settlement agreement provided that BAE would pay £30 million minus court penalties. After Mr Justice Bean had imposed a fine of £500,000 on BAE Systems on 21 December 2010 and ordered the company to pay £225,000 towards the prosecution's costs, BAE had a legal obligation under the Settlement Agreement to make a payment of £29.275 million for the benefit of the people of Tanzania. BAE Systems agreed to pay the prosecution's costs, leaving £29.5 million as the level of the ex gratia payment.[7]

16. The Director of the SFO told the Committee that he had arrived at the figure of £30 million by starting from the value of the radar systems contract. It had seemed to him that in policy terms BAE Systems should not derive any benefit from this contract and that "if they lost £30 million, that would be a good result".[8]

17. In contrast, BAE Systems told us that the figure for the ex gratia payment was not equivalent to the value of the contract to supply air traffic control systems to the Government of Tanzania, and that it did not relate to any estimate of overcharging on the contract.[9] The company said that the £30 million was a negotiated sum, which took account of the $400 million paid to the United States Department of Justice as part of the global settlement, which covered many countries, and the overlaps between the US and UK investigations.[10]

Ensuring payment is used effectively for development purposes

18. We wished to ensure that BAE Systems payment to Tanzania would be used effectively for development purposes in accordance with the settlement agreement. A problem in achieving this was the lack of precedents.

19. In June 2011, after this Committee had announced its inquiry, BAE Systems decided to establish an independent advisory board under the chairmanship of Lord Cairns to advise about expenditure in Tanzania. The company informed us that the Director of the SFO had agreed this was appropriate and that the Foreign and Commonwealth Office had been consulted about the broad approach.[11]

20. The SFO remained in contact with BAE Systems in relation to the payment, but believed that ensuring the payment to Tanzania was used effectively for development purposes was a matter for BAE Systems.[12]

21. The Department for International Development (DFID) informed us that it had not given any advice to BAE Systems on how the payment might be used, but had provided advice to the Director of the SFO and the Government of Tanzania.[13] From March 2010, DFID had worked with the Government of Tanzania to develop a proposal for spending the payment. The proposal, which the Government of Tanzania formally presented to the SFO on 16 November 2010, involved using the money to buy essential teaching materials and to improve classroom facilities and teachers' accommodation. The money would be allocated to the Government of Tanzania's budget line for the Non- salary Education Block Grant. The proposal included details of how the payment would be monitored and would be subject to independent evaluation and audit to international standards.

22. The Secretary of State for International Development wrote to the Chairman of BAE Systems on 3 July 2011 advising the company to adopt the Government of Tanzania proposal in full. The Secretary of State added that, as a lead donor in Tanzania, DFID would be in a position to help verify that the money was being uses for its intended purpose.[14]

23. BAE Systems responded to the Secretary of State for International Development's letter on 15 July 2011,[15] stating that the company had not been informed of the discussions that other UK based organisations and the Government of Tanzania had been having in 2010, whilst the Agreement was sub judice. An impression had been created that the terms of the Settlement Agreement entitled the Tanzanian Government to receive payment direct from BAE Systems, but this was not the case. The company had received representations from many Tanzanian citizens, NGOs, and others opposed to a payment direct to the Tanzanian Government. These groups feared that the payment would not be used properly or in the best interests of the Tanzanian people.

24. The chairman of BAE Systems argued that the company should continue with its advisory committee, but said that he had asked Lord Cairns to consider the Government of Tanzania's proposal. Lord Cairns was minded to advise the company that, as a first step, the company make a payment to a third party, based on DFID's advice as to suitability, and acceptability to BAE Systems and the SFO. The company proposed that the operation of the scheme be reviewed after 12 months to determine whether the agreed objectives were being met

25. BAE Systems acknowledges that it does not have the expertise to ensure that its ex gratia payment is used effectively for development purposes. Therefore, we were surprised that the company did not seek an early discussion with the Department for International Development, once the court proceedings had been concluded on 21 December 2010.

26. DFID has endorsed the proposal from the Government of Tanzania for the ex gratia payment to be used to top up the country's 'non salary education block grant'. Through providing essential teaching materials and improving classroom facilities and teachers' accommodation, this proposal would undoubtedly benefit the people of Tanzania. The inclusion in the proposal of a requirement for an external audit of the grants to be carried out to international standards will help ensure that the use of the funds for the benefit of the people of Tanzania can be demonstrated.

27. In any future payments of this kind, we recommend that DFID be involved in providing advice on the expenditure of the funds at an early stage.

Timing and arrangements for making the payment

28. An alarming feature of the BAE Systems case was the length of time it took to make the payments. BAE Systems explained that the Settlement Agreement with the SFO contained no deadline by which the sums had to be applied, no requirement that the funds be paid out for the benefit of any one class of beneficiary and no restrictions stipulating the payment of a single lump sum or multiple payments over time.[16]

29. We asked BAE Systems in July 2011 why it had not yet made any payment. The company had taken the view that although the Settlement Agreement was reached in February 2010, it was not appropriate to hold discussions before the Crown Court had passed sentence.[17] They had not held a discussion with the SFO to confirm that it was inappropriate to discuss the Settlement Agreement because both parties were working towards getting the matter before the Courts. There had also been an application for a judicial review, which could theoretically have set aside the settlement.[18] The Director of the SFO confirmed that had been no detailed substantive discussions between BAE Systems and the SFO in the period between February 2010 and the Court hearing, but the question of what was going to happen to the payment was raised.[19]

30. After the fine had been imposed, BAE Systems set up a separate interest-bearing account in January 2011 to hold the funds set aside for the ex gratia payment.[20] In June, the company had established the independent advisory board, chaired by Lord Cairns, to take a responsible, measured and open approach to achieving the objective. In July, the company told us that it could be a matter of weeks before the first tranche of money was paid out,[21] but could not give a date for completion of the payments.[22]

31. The Director of the SFO accepted that the company could not have made a payment before December 2010 since the amount could not be known in advance of the Court hearing and because the judge could have said that he disagreed with the agreement. However, he did not agree with BAE Systems that the company were precluded from doing any preparatory work on possible mechanisms for disbursing the ex gratia payment between February 2010 and the final Court proceedings in December 2010.[23]

32. The Director of the SFO had expected the payment for the people of Tanzania to have been sorted out in the early months of 2011, by the end of March at the latest.[24] The Director accepted that there was a discrepancy between what BAE Systems and the SFO thought had been agreed as part of the Settlement Agreement. However, at a meeting with BAE Systems in February 2011, he had emphasised the need for speed, the need for transparency and the need to take the public with them. He thought that the sooner that BAE Systems made the payment in an open and transparent way the better.[25]

33. After the evidence In July we wrote to the chairman of BAE, urging him to accept the Secretary of State's proposals and indicating that we would call him to give evidence in person if he did not do so. In August he informed us that he would make the payments along these lines.

34. The Settlement Agreement did not require BAE Systems to make the ex gratia payment by a specified date. We recognise that the payment could not have been made before the conclusion of the Court proceedings on 21 December 2010. Nevertheless, we are concerned that the payment for the 'benefit of the people of Tanzania' remained outstanding more than eight months after the Court hearing and that BAE Systems envisaged spreading payment over a period of years, describing the payments as 'our money'. Following our evidence session, we wrote to the Chairman of BAE Systems, urging the company in the strongest possible terms to pay immediately the full £29.5 million ex gratia payment to the Government of Tanzania in accordance with the proposals made by that Government and endorsed by DFID. Finally, the company agreed. We welcome this decision announced in a letter to the Committee Chair dated 19 August 2011 to make the payment to the Government of Tanzania and subsequent confirmation that it had made arrangements for the payment.

Monitoring the Impact of the Payment

35. The Government of Tanzania made the following proposals for monitoring the payment. Routine monitoring of the support would be through the Government of Taanzania's public quarterly reporting on budget disbursements and expenditure and through annual audit reports produced at local government and national levels. An external, international standard targeted audit of the block grants would be undertaken within 18 months of the receipt of any funds. These proposals were endorsed by DFID.

36. Arrangements have been proposed to ensure that the objectives of the Government of Tanzania's proposal, funded by the ex gratia payment, are achieved. Nevertheless, we will monitor the situation to check that the promised additional textbooks, syllabi for teachers, desks for children, houses for teachers in remote areas and other materials have been delivered. To enable us to do this we recommend that DFID make periodic progress reports on their delivery.

Proceedings against individuals in Tanzania

37. We were informed that corrupt payments might have been made by, or to, residents of Tanzania in relation to the sale of the air traffic control system.[26] We have asked the Government of Tanzania what action is being taken to bring those Tanzanians with a case to answer before the courts. The Tanzanian High Commissioner to the UK informed us that the Government of Tanzania had already stated its intention to ensure that individuals involved in the case face justice. It is essential that all those involved in financial crime are dealt with appropriately, and that where there is a case to answer individuals are brought before the courts. We welcome the Government of Tanzania's plans to bring individuals before the courts and we will continue to monitor developments in relation to proceedings against individuals in Tanzania.

Future Settlement Agreements

38. The Settlement Agreement reached between BAE Systems and the SFO was the first time such an agreement had been reached in the UK. Deficiencies in the agreement were noted by the Crown Court judge, Mr Justice Bean, who observed that the agreement was loosely and perhaps hastily drafted.[27] This allowed the parties to hold different views on what had been agreed. Moreover, as we have seen, problems arose from the absence of specific timetables.

39. The Director of the SFO told the Committee that, if there were future agreements of the type agreed with BAE Systems, he would seek to put in more rigid timescales.[28] He noted that the judge was critical of the agreement, and that future agreements would need to be drafted more tightly. The SFO would learn from experience and would aim for better drafting of future agreements.[29]

40. We recommend that future settlement agreements made by the SFO, on the basis of plea bargaining in relation to financial crimes, should be drawn much more tightly than the agreement concluded with BAE Systems. Specifically, the agreements should be explicit about what the those involved are required to do and include a timetable for the actions required of the company.

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