Last month, the U.K.’s anti-corruption enforcement agency, the Serious Fraud Office (SFO), opened a criminal investigation into allegations of fraud, bribery, and corruption in the civil aviation business of Airbus. The key area of concern is Airbus’ use of third-party consultants to win contracts to build passenger jets.
The European aircraft manufacturer issued a terse statement on 7 August (though the SFO had notified it two days earlier that there would be a criminal inquiry). It confirmed that the agency was conducting a criminal investigation “relating to irregularities concerning third-party consultants,” whereby the company failed to notify authorities on the use of third-party agents in deals that it was asking the U.K. government to cover with financing guarantees. Airbus—which self-reported the alleged corruption to the SFO in March after conducting an internal compliance review—added that it is cooperating with the agency.
However, the news has not gone down well with the United Kingdom’s export credit agency and its counterparts in France and Germany, who have all suspended financing after the disclosure. The major components of Airbus commercial aircraft are manufactured and assembled in France, Germany and the United Kingdom, giving the company access to finance support from all three governments. Roughly 6 percent of Airbus deliveries were covered by export credit last year.
In a statement that the company issued on 1 April, Airbus said that “although some export credit financing will be temporarily unavailable, the affected customers will be able to resume obtaining such financing or refinancing in the near future. The group is cooperating with the relevant export credit agencies to resolve this issue as soon as possible.”
Airbus has since said that it has agreed to a process with the U.K. export credit agency to resume financing by the end of the year. In a footnote in its half-yearly financial statements at the end of July, the aerospace group said it was working with U.K., French, and German export credit agencies to resolve compliance issues raised by the irregularities, which sources have said date back years.
However, the launch of a formal criminal investigation is a severe blow. The investigation could last several years and the cloud it casts will be aggressively exploited by the company’s U.S. rival, Boeing. Furthermore, investigators in France and Germany, and possibly farther afield, could also launch their own inquiries into Airbus’ use of agents.
Third-party intermediaries have been identified as one of the most likely areas of corruption in business deals, and they have therefore become the target of anti-bribery regulation. The U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act demand high levels of risk-based due diligence when using intermediaries to do business on a company’s behalf. Penalties for any violations can be severe.
“Airbus is only the latest in a long line of aircraft manufacturers undergoing a traumatic series of investigations. The industry is notorious for the extent and scale of past corruption investigations.”
Ben Rose, Partner, Hickman & Rose
However, while the FCPA applies to bribery and corruption involving foreign public officials, the U.K. legislation actually casts it net wider and can technically cover any organisation involved in a suspect transaction. Consequently, many companies have radically reduced the number of agents used to secure orders and have also taken greater steps to audit and monitor their supply chains.
Despite such efforts, experts say that it is still difficult to do business without third-party agents and intermediaries in certain countries or in certain industries.
“Airbus is only the latest in a long line of aircraft manufacturers undergoing a traumatic series of investigations,” says Ben Rose, white collar crime expert and partner at law firm Hickman & Rose. “The industry is notorious for the extent and scale of past corruption investigations. It’s a difficult area to do business in when so many airlines are still state-owned and not subject to normal business rules.”
According to Andrew Oldland QC, partner and head of the regulatory team in the London office of law firm Michelmores, “the aerospace sector represents about 12 percent of all FCPA investigations.”
Airbus is not the first major aerospace company to have its collar felt. The SFO is currently conducting a long-running probe of Rolls-Royce over allegations of bribery and corruption in Asia (principally Indonesia and China, but also other overseas markets) and South America.
In December 2012, the U.K. jet engine maker handed the SFO the findings of an internal inquiry launched after questions were raised by a whistleblower. The SFO announced on 23 December 2013—a full year later—that it was beginning criminal proceedings into allegations of bribery and corruption at the company. No charges have yet been brought.
As with Airbus, some of the claims against Rolls-Royce focus on its use of intermediaries to clinch contracts. The SFO probe into the jet engine maker is understood to be the largest international investigation the agency has conducted, and has expanded to Nigeria.
AIRBUS TIMELINE
Airbus first revealed that it had been in contact with the Serious Fraud Office (SFO) regarding “its findings concerning certain inaccuracies relating to applications for export credit financing for Airbus customers” on 1 April.
On 7 August Airbus then issued a press statement saying that it had been told by the SFO that the agency has opened a criminal investigation into allegations of fraud, bribery and corruption into Airbus’ civil aviation business “relating to irregularities concerning third party consultants.” Airbus also confirmed that it is continuing to cooperate with the SFO.
Self-reporting the incidences of bribery and corruption should help reduce any financial penalty that the company receives under the UK Bribery Act. However, the company should not expect a quick turnaround: engine-maker Rolls-Royce self-reported allegations of bribery and corruption in 2012, was informed of an investigation in 2013, and is still waiting for the outcome.
—Neil Hodge
In a press statement issued on 6 December 2012, Rolls-Royce said that it had “significantly strengthened” its compliance procedures in recent years, including introducing a new global ethics code, a new intermediaries policy, and expanding the compliance function. As a further measure, Rolls-Royce said it would appoint an “independent senior figure” to lead a review of current procedures and report to the board’s ethics committee. The company has subsequently cut its use of third-party agents significantly.
Experts believe that the SFO wants to make a strong impression and show that it is ready to tackle serious allegations of bribery and corruption. French Caldwell, chief evangelist at MetricStream, a governance, risk, and compliance software provider, says that the SFO’s investigation into Airbus “represents a good test of its powers under the Bribery Act, and will demonstrate just how effective its processes and capabilities are.”
Michael Dean, partner and head of the EU competition & regulatory practice at U.K. commercial law firm Maclay Murray & Spens, says that “the SFO is certainly getting more active: The funds it recovered during its investigations was up 42 percent last year, and it has already opened 12 new criminal investigations and three civil recovery investigations this year.” Dean adds that “perhaps rather than being tougher, the SFO is becoming better at catching offenders.”
David Kirk, a partner specialising in government investigations and white collar litigation at law firm McGuire Woods, also believes that “the SFO wants to make its mark.” “It’s five years since the Bribery Act came into effect and not much has happened. There has been a relatively small number of investigations and the SFO only achieved its first corporate conviction in February this year [Sweett Group, a United Kingdom-based construction company]. The whole process is also very slow and costly.”
“Airbus has self-reported the offence, so one should expect the case to be settled quite quickly, especially if the company is cooperating. But look at Rolls-Royce—four years on and still not much happening,” adds Kirk.
There are serious advantages for companies to self-report incidences of bribery and corruption as a “Section 7” corporate offence, whereby in effect, a company is prosecuted for failing to prevent bribery carried out on its behalf. For a start, it is strictly a corporate offence (so no individuals—particularly executives—can be sent to jail), and companies can expect a possible 30 percent discount off any penalty they receive: potentially 50 percent or more if the SFO gets its way in future under current plans being mooted to encourage more companies to come forward.
Dean believes that the SFO has shown that it can be pragmatic after agreeing deferred prosecution agreements (DPAs) with Standard Bank last November and an unnamed organisation in July this year (a SME referred to as “XYZ”). Allowing a prosecution to be suspended for a defined period—provided the organisation meets certain specified conditions—these are the first two DPAs to gain court approval in the United Kingdom. In the July settlement, the DPA extended the 30 percent discount normally given to companies that self-report to 50 percent as the admissions were made “far in advance of the first reasonable opportunity” after charge. This means that the businesses may in future secure a more advantageous outcome through a DPA than a guilty plea (which can only take place after charge).
Some lawyers have expressed a degree of scepticism about how far the SFO is willing to go in reality to secure big-ticket fines anyway, suggesting that DPAs may be the best option for all parties. As one lawyer says: “Is the SFO seriously going to hand companies like Airbus or Rolls-Royce a fine that will see them go out of business, move orders outside of the United Kingdom, or make people redundant? Do me a favour! Just look at the financials and the workforce numbers to see how unrealistic that is.”
Rolls-Royce’s annual underlying revenue was £13.4bn in 2015, while its order book stood at £76.4bn. The company also employs over 50,000 people across 46 countries. Airbus Group, on the other hand, generated revenues of €64.5bn in 2015, and employs a workforce of around 136,600. Investigating either of these companies in the past has led to highly-charged political debates.
However, while it may be more expedient for the SFO to cut deals, such a strategy at least shows that the agency is prepared to act against corporates. “There has been a tendency for law enforcement agencies in the west to make an example of a few individuals and let the corporate off with a fine,” says Rose. “The previous Cameron-Osborne government seemed to be backing away from these tactics. Many staff at Airbus in the United Kingdom must be waiting anxiously to see what will happen on Teresa May’s watch,” he adds.
Continue the conversation at Compliance Week Europe: 7-8 November at the Crowne Plaza Brussels. Join us as we look at changes in global anti-corruption regulations, slave labour risks in your supply chain, and how to detect fraud, to name just a few topics. Learn more
1 Reader's comment