Still underwriting corruption?
The ECGD's recent record

Summary

The UK Export Credits Guarantee Department (ECGD) has a long record of backing projects which have involved corruption. New procedures to combat bribery are a step forward, but have major loopholes. For example, the Department does not hold parent companies liable for any corrupt activities carried out by their subsidiaries or agents. This lack of adequate measures to deter corruption leaves the ECGD open to the charge that it is complicit in corrupt activities.

Contents

• Recommendations:
• Still Underwriting Corruption? The ECGD's recent record.
• What the ECGD needs to do to mend its record
  • The ECGD should seriously review its sectoral priorities.
  • The ECGD should be playing a much greater role in sharpening up the UK government's overall anti-corruption measures.
    • Together with DfID and the DTI, the ECGD should:
    • In its own work the ECGD should:
  • The ECGD should close down the loopholes in its stance on corruption, including making companies liable for their subsidiaries and agents, and requiring details of agents and agents expenses on all cases.
  • The ECGD must commit itself to greater transparency.
    • The ECGD should therefore:
  • The ECGD should consider tougher measures against companies engaging in corruption, including debarring from public procurement and suspension of cover while companies are under investigation.
  • The ECGD should require properly implemented codes of conduct from companies as a condition for cover.
  • The ECGD should allow for a much greater role for civil society and parliamentary monitoring, both at home and in countries where it backs projects.
  • The ECGD should tighten its vetting procedures of companies and be more rigorous in its risk assessment of companies, including requiring companies to declare any investigations they are under for corruption.
    • Companies
    • Buyers
• Notes and references

Main text

The ECGD has a duty to combat corruption more effectively, as a public institution backed by tax payers money. Its current measures are a significant step but fall far short of what is needed.

Recommendations:

1. The ECGD should seriously review its sectoral priorities, since it currently gives most export credits to the three most corruption-prone business sectors.
2. The ECGD should be playing a much greater role in sharpening up the UK government's overall anti-corruption measures.
3. The ECGD should close down the loopholes in its stance on corruption, including making companies liable for their subsidiaries and agents, and requiring details of agents and agents' expenses on all cases.
4. The ECGD must commit itself to greater transparency.
5. The ECGD should consider tougher measures against companies engaged in corruption, including debarring from public procurement and suspension of cover while companies are under investigation.
6. The ECGD should require properly implemented codes of conduct from companies as a condition for cover.
7. The ECGD should allow for a much greater role for civil society and parliamentary monitoring, both at home and in countries where it backs projects.
8. The ECGD should tighten its vetting procedures of companies and be more rigorous in its risk assessment of companies, including requiring that companies declare any corruption investigations they are facing.
9. The ECGD should require that buyers (often government departments or state-owned companies) be committed to transparency, public disclosure requirements, competitive bidding, and proper external audit before considering cover.

Still Underwriting Corruption? The ECGD's recent record.

1. The ECGD could play a major role in enforcing the OECD Convention on Combating Bribery and in stopping British businesses from engaging in corrupt activity abroad. As a public institution backed by taxpayers money, it has a duty to do so. In fact, if the ECGD does not have adequate mechanisms in place to make sure corruption is not occurring in the projects it backs, it runs the risk of actually being complicit in that corruption.
2. The ECGD has a long history of backing projects which have involved corruption. The recent emphasis by the ECGD on combating corruption, outlined in its Business Principles and reflected in the warranty it requires from companies, is a significant first step. Unfortunately however, it does not go nearly far enough and has some major loopholes.
3. Bribery by British businesses is still a significant problem despite the OECD Convention. As Gary Campkin of the CBI, put it recently, "The CBI and British business is totally against bribery, corruption and extortion. But these sort of issues are often about the way you do business."¹ TI's 2002 Bribe Payers index shows that British firms come well behind the best of other European countries (Sweden, Austria, Switzerland, the Netherlands and Belgium).²

What the ECGD needs to do to mend its record

1. The ECGD should seriously review its sectoral priorities.

   The majority of ECGD cover continues to be given in the three most corrupt business sectors. In 2000/01, nearly half (48%) of the ECGD's business was in defence. A third (£1,178.4 million out of £3,421.9 million) of its buyer credits in that year went on construction/public works.³ And its Good Projects in Difficult Markets initiative meanwhile has a stated emphasis on oil and gas projects.⁴ According to TI's 2002 Bribe Payer's Index, the three topmost corrupt industries are construction and public works, arms and defence, and oil and gas. It is no coincidence that these sectors tend also to be the least conducive to sustainable development, and the most controversial.

2. The ECGD should be playing a much greater role in sharpening up the UK government's overall anti-corruption measures.

   As John Githongo, from TI-Kenya, puts it: "Until people are brought before the courts, the OECD Convention will not make a difference to the developing world".⁵ As it currently stands, UK legislation has such serious loopholes and the UK government such weak monitoring and enforcement plans, that it is still highly unlikely that any British business will be tried for corruption in a British court.

   Together with DfID and the DTI, the ECGD should:

   • a) set up a freephone telephone hotline to which corruption allegations can be made anonymously. This hotline number should be advertised through British embassies abroad, and companies backed by the ECGD should be required to distribute this telephone number to all their suppliers, joint venture partners and subsidiaries. The US already operates just such a bribery hotline.
   • b) set up a corporate monitoring unit, which will produce publicly available reports on the activities of British companies abroad and monitor deals in which they are involved.

   In its own work the ECGD should:

   • a) ensure that all projects which it backs which involve large-scale procurement are not only subject to international competitive bidding procedures, but also to prior and ongoing scrutiny by local parliamentary public accounts committees
   • b) in high risk cases, where the buyer or the company has a history of corruption, require that the tendering process is overseen by a monitoring committee with involvement from civil society groups

3. The ECGD should close down the loopholes in its stance on corruption, including making companies liable for their subsidiaries and agents, and requiring details of agents and agents expenses on all cases.

   The most glaring loophole in the ECGD corruption procedures is that it does not hold parent companies responsible for bribes made by subsidiaries and agents unless it is proved that they were involved in the corrupt activity. Corruption cases are notoriously difficult to prove. Even more so is evidence of complicity by parent companies. Few (clever) parent companies will leave any paper trail proving their involvement. Yet it is through local level management, subsidiaries and agents that bribery is most likely to occur. The ECGD must make it clear to companies they extend cover to that they will be held liable for corruption by subsidiaries and agents.

   Another loophole is that the ECGD only requires details of agents or intermediaries 'on potential problem cases'. The ECGD should require details of agents in all cases, and require that agents file all expenses. It should refuse to give cover where agents are registered offshore and are therefore able to operate with secrecy. It should also ensure that government departments acting as buyers have proper regulation of agents, with a register of those signed up to a no-bribes policy and requirement for agents to file all expenses. Companies meanwhile, should be required to disclose ALL payments not just commissions, including gifts, donations and hospitality to any official, middlemen, family and friends of officials.

4. The ECGD must commit itself to greater transparency.

   The ECGD has come a long way in trying to be more transparent but frankly it still has a long way to go. Projects covered by Overseas Investment Insurance (OII) continue to treated as 'commercial-in-confidence'. OII has increased five fold over the last five years, and is issued mainly in developing and transition countries, where the problems of corruption and unproductive expenditure have a disproportionate impact. It is therefore deeply worrying that this part of ECGD's work remains so secretive.

   Furthermore, it is not acceptable that the ECGD will not provide information on buyers credits if the exporting company does not wish it to do so. Since companies are relying on taxpayers money, it should be a condition of cover that they accept public disclosure. In addition, like the US Exim bank, the ECGD should be required to publish those projects that it is reviewing for cover, so that concerns can be raised at an earlier stage if these projects are likely to have a negative social and environmental impact or involve corruption.

   The ECGD should therefore:

   • a) include in its annual reports a list of all projects covered under the Overseas Investment Insurance scheme
   • b) let companies know that publication of details about ECGD backing is a condition of cover
   • c) publish a list of the projects it is reviewing for cover
   • d) be more open with civil society

5. The ECGD should consider tougher measures against companies engaging in corruption, including debarring from public procurement and suspension of cover while companies are under investigation.

   The ECGD must consider debarring as a means of making companies take seriously the corruption risks involved. Both the World Bank and the European Union are currently considering debarring the companies (some of them British) which could face corruption charges in Lesotho. It would be extraordinary if the ECGD did not do the same. The ECGD should also work with other government departments to set up a database of debarred companies. A company found guilty of fraud or corruption should be debarred from all public procurement including ECGD cover for a period of at least 3 years, and should only be reinstated when it has proven that is has adequate internal mechanisms to prevent corruption occurring again.

6. The ECGD should require properly implemented codes of conduct from companies as a condition for cover.

   The ECGD should require as a condition of cover that companies can prove compliance with the OECD Convention on Bribery and the UK's 1991 Anti-Terrorism, Crime and Security Act, particularly through properly implemented codes of conduct. It is not enough that a company have a code of conduct. As a recent Friends Ivory and Sime report showed, most companies have such codes but many of them are extremely weak.⁶ BAe, meanwhile, which received the lion's share of ECGD cover in 2000/01, has a policy on Integrity in Business Dealings which it says is confidential -- raising serious issues about its commitment to transparency.

   The ECGD should stipulate that in order to be eligible for cover, companies must be able to show that:

   • a) they have a publicly available, comprehensive code of conduct that shows full compliance with both UK legislation on corruption and the OECD Convention on Combating Bribery, as well as the OECD Guidelines on Multinationals.
   • b) their code of conduct includes guidance on all areas of corruption, including facilitation payments, gifts and donations, and it outlines what disciplinary measures the company will take where instances of corruption are found
   • c) they have in place proper management systems and clear lines of communication and accountability about who is supposed to enforce the code of conduct
   • d) they have trained all staff, including local middle managers in the risks that corruption poses to the business and in implementation of the code of conduct
   • e) they have set up an internal confidential reporting system for employees, as well as advertising an external body to which employees can report
   • f) they have adequate whistleblower protection
   • g) they have strong audit procedures which include preventing the keeping of 'off the books' accounts, and require breakdowns in areas where corruption can be hidden, such as expense and hospitality accounts.

7. The ECGD should allow for a much greater role for civil society and parliamentary monitoring, both at home and in countries where it backs projects.

   The ECGD must be more open to concerns raised about projects it backs, from both a corruption and sustainable development point of view. In this regard, it should develop with the FCO a mechanism by which civil society in the country where the project is to be backed can be consulted, and it should make as a condition for cover that projects are subject to local parliamentary scrutiny, particularly by the public accounts committee. This is particularly important since it is usually the taxpayers of those countries who foot the bill for projects. Where local parliamentary scrutiny is not undertaken, or where it is compromised itself by corruption, and where projects are subject to considerable concerns by civil society organisations and local communities, the ECGD should simply not give cover.

8. The ECGD should tighten its vetting procedures of companies and be more rigorous in its risk assessment of companies, including requiring companies to declare any investigations they are under for corruption.

   The ECGD boasts that in the first nine months of 2001 they have processed more projects through the new risk management system and project impact questionnaire than in the whole of 2000. This is not entirely encouraging. Indeed from a brief look at the list of buyer credits and the 2000/01 report, it is clear that the ECGD has backed applications where either the companies or the buyer institutions or both are linked to allegations of corruption or have a history of such an association. In some cases, the parties or individuals associated with them are the subject of court proceedings or of official investigations. Nonetheless, the decision by the ECGD to support credits where the parties involved are associated with corruption allegations - even if unsubstantiated - inevitably incurs a reputational risk. Given the possible damage that this may entail for UK exporters as a whole, the ECGD has an obligation to demonstrate that the thoroughness of its due diligence investigations and the basis of its assessment as to reputational risk.

   Below we consider the allegations that have been associated with a number of companies and buyers which benefited from ECGD support in 2000. We would stress that, for the most part, the allegations have either been denied by the parties involved or remain unsubstantiated. Nonetheless, in the interests of informing the deliberations of the ECGD's current anti-corruption procedures, we feel that it is in the public interest that the allegations be reported. We do so without prejudice to any of the parties involved.

   Companies

   • BAe Systems received a £1.679 billion ECGD guarantee the sale of 12 Hawk jets and 9 Gripens to South Africa. It has been embroiled in allegations of corruption and improper influence in this sale. In November 2001, the Italian company, Aermacchi, which lost out to BAe in the contest for the contract, was considering challenging the contract award process in court.⁷ Their case was that in early 1998 the then-defence minister Joe Modise (now dead) intervened to change the tender evaluation mid-way through negotiations, from a costed to a non-costed option. This allowed for the jets sold by BAe which were £450 million more than the Italian aircraft to win the tender. South Africa's Standing Committee on Public Accounts noted that the process had been 'unusual' while the Auditor General of South Africa described it as "a material deviation from the originally adopted value system".⁸ In March 1998, a month before Modise intervened to influence the process, BAe donated 5 million rand (£614,000) to the ANC's MK Veteran's Association -- of which Modise was a founding trustee and steering committee member.⁹ At the time of the negotiations for the contract, Modise also held a controlling stake in a company, Conlog Holdings, that was set to win a contract under the controversial offset or 'industrial participation' arrangements that accompanied the BAe deal.¹⁰ A subcontractor on the project, EADS (European Aeronautic Defence and Space Company), with whom BAe conducts several joint ventures, and co-owns several companies, has admitted to giving discount Mercedes to Vanan Pillay, who was director of the industrial participation programme but has since been moved sideways, as well as Tony Yengeni, the ANC's chief whip, who faces prosecution shortly.¹¹ A report by the Joint Investigative Committee Report on the arms deal in November 2001 cleared the South African government of unlawful conduct. However, South Africa's Special Investigation Unit, which was responsible at the time for dealing with issues of corruption, was blocked from taking part in the investigation, and critics called the report a whitewash.

   • Balfour Beatty received a guarantee in 2000/01 of £23.4 million, as part of a consortium building bridges in the Philippines. Balfour Beatty is part of a consortium whose lead company, Spie Batignolles, faces bribery charges in the Lesotho Highland Water Project.¹² Balfour Beatty received an export credit from the ECGD for participation in this project. The consortium of which Balfour Beatty is part, Lesotho Highlands Project Consortium, is alleged to have paid more than £1 million via an intermediary into the Swiss bank account of an official, Masupha Sole, working on the project. Balfour Beatty was also investigated by the FBI in the US in 2000 in relation to fraud allegations over the company's contract for constructing Amtrak's electric systems for Northeast Rail Co. And, in 1996, its then parent company BICC was banned for five years from competing for government tenders in Singapore, following a corruption inquiry.¹³

   • Kier International meanwhile got two credits of £30.5 million and £17.3 million (as part of a joint venture) for work in India and Jamaica, plus a £79.5 million guarantee jointly with Mivan Ltd, from Account 3 for work in Romania. Kier International is also part of a consortium, Highlands Water Venture, which allegedly paid £250,000 of bribes to Masupha Sole on the Lesotho Highlands Water Project. Kier International, like Balfour Beatty received an export credit from the ECGD for its involvement in this project.

   • Alstom Power UK, part of Alstom, received two export credits of £12 million and £16.1 million for work in Mexico and Turkey respectively in 2000/01. Alstom has also been cited in court in relation to the Lesotho Highland Water Project bribery case.¹⁴ Alstom has been investigated in various countries, including South Korea, Malaysia, Spain and Mexico, for alleged improper payments. In early 2000, a lobbyist acting for Alstom was alleged to have received kickbacks from the company of £7.2 million in relation to a TGV rail project in South Korea.¹⁵ In the summer of 2000, ABB Alstom Power, part of Alstom, was being investigated by the Anti-Corruption Agency of Malaysia for alleged payments of £54.6 million made between 1992-6 in order to secure a contract for a power project, when the company was just ABB.¹⁶ (In 1999, ABB Alstom Power received an ECGD guarantee for £442 million to build a different power station in Malaysia). Alstom is also currently under investigation in Spain for allegedly paying large commissions in relation to a high speed train line between Madrid and Seville to an offshore company linked to a close associate of the previous ruling party, PSOE.¹⁷ In May 2002 it was implicated in an inquiry by the federal attorney general and national auditor's office of Mexico regarding irregular payments of £548,000 to the former head of Luz y Fuerza, the Mexican Federal District's metro system and power company.¹⁸

   While the ECGD cannot of course apply its strict new corruption criteria retrospectively, it would only be sensible due diligence to ensure that companies that have been involved in cases with a high level of corruption, or who were themselves suspected of or investigated for corruption, be required to prove that they have sufficiently changed internal management, reporting, disciplinary and auditing mechanisms so as to ensure that they are no longer at risk from corruption. Companies that are unable to show this, should not be given cover. Companies should also be required to state while applying for cover whether they are facing any investigations for corruption.

9. The ECGD should require that buyers (often government departments or state-owned companies) be committed to transparency, public disclosure requirements, competitive bidding, and proper external audit.

   ECGD should ensure that countries in which they are offering cover have transparent public procurement processes. A brief look at some of the buyer institutions that were involved in ECGD guarantees in 2000/01 reveals that some of them have very poor records on corruption.

   Buyers

   • Dabhol Power Plant in India was the buyer in a guarantee worth £30.5 million for Kier to build a liquefied petroleum gas port terminal for the power plant in 2000/01. Dabhol was 65% owned by US Energy giant Enron, until Enron's recent collapse in early 2002, and has been mired in corruption allegations since it began. An Indian public interest group filed charges that Enron and the Indian company Reliance bribed the Indian petroleum minister in 1992-3 to secure the contract for the plant. The plant supposedly cost three times what it should have done, and Enron was accused of spending £186 million in buying off local fishermen who complained that the power plant had unfairly acquired their land and was diverting scarce water. Human Rights Watch issued a report in 1999 on extensive human rights abuses in which Dabhol was complicit, and in which bribery of officials was cited. In April 1993, the World Bank refused to provide funds for the plant questioning its economic viability.¹⁹ The Indian state of Maharashtra started to refuse to buy electricity from the plant in 1999 claiming that the tariffs were far too high, and its agreement with Dabhol collapsed in May 2001. A recent Indian investigative committee report noted the "utter failure of governance" including bribery, lack of competitive bidding and secrecy by the national and state governments in India in relation to the project.²⁰

   • PEMEX in Mexico, the state oil company, which was the buyer in 3 guarantees issued in 2000/0, has a long history of corruption. It is currently under investigation for supposedly channelling £114.7 million illegally to the company's union which then helped finance the presidential campaign of the Institutional Revolutionary Party (PRI). Six former officials of PEMEX, including the former head, are under warrant for arrest.²¹ PEMEX heads the list of the Federal Comptrollers Secretariat for investigation for corruption. In 2001, PEMEX officials were being investigated for defrauding the government of £72.4 million by selling heavily subsidised marine diesel as industrial diesel.²²

   • Gazprom. In October 2000, the ECGD gave backing under its Good Projects in Difficult Markets scheme to the Blue Stream Gas Pipeline for the reinsurance of goods and services worth £81.5 million from British companies. Blue Stream is a joint venture by the Italian company, ENI and Gazprom, the Russian gas company, to supply gas from Russia to Turkey. In April 2001, Turkey's Energy Minister, Cumhur Ersumer was forced to resign after being named in a court case of 15 officials from his ministry charged with corruption in relation to the Blue Stream pipeline.²³ In July 2001, the head of the Turkish state pipeline company, BOTAS, was sacked during an investigation into possible corruption in the project. There was no competitive tender, and irregularities were noted in a £31.8 million advance payment made in 1998 to the OHS consortium, made up of Stroitransgaz (50% owned by senior Gazprom managers and their relatives) and two Turkish companies building the Turkish stretch of the pipeline.²⁴ This was not the first corruption allegation involving Gazprom-affiliated companies in the Blue Stream project.²⁵ Due to political pressure to get the project completed, the corruption allegations faded away.

     Gazprom itself meanwhile has long been a by-word for corruption and asset-stripping. In May 2001, president Putin sacked the chair of Gazprom's board, after a string of allegations that some £2.6 billion a year of Gazprom assets were being transferred to family and friends of top management officials.²⁶ In January 2002, the deputy chief and two top executives from a subsidiary were arrested by prosecutors trying to track down funds allegedly siphoned out of Gazprom.²⁷ In April 2002 Gazprom was under investigated by the Russian prosecution service for misappropriation of state funds.²⁸