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A noose tightens *(no mention of Shell’s key role in Al Yamamah oil for arms scandal)

Financial Times

By Michael Peel

Published: March 24 2009 16:37 | Last updated: March 24 2009 16:37

As Gordon Brown joined other Commonwealth leaders in a ringing condemnation of corruption they delivered at their 2007 summit in Kampala, Uganda, he could hardly have imagined how close to home the problem was.

The local troops responsible for guarding the prime minister, the Queen and other guests at the meeting had been trained in part by a British company that paid bribes to win the contract. Niels Tobiasen, the Danish managing director of The CBRN Team, a Wiltshire-based specialist in combating chemical, biological and nuclear warfare, was given a five-month suspended jail sentence in London last September, after he admitted giving £83,000 to two senior Ugandan officials to win about £210,000 worth of business.

The landmark conviction – the first, says the UK government, under tougher anti-bribery laws introduced in 2002 – highlights the growing, if still-modest, risks facing executives who use corruption to win work overseas. The case is a tiny part of a US-led international effort to cut the corruption that, for decades, has been a staple of the way powerful multinationals have done business in poor countries, particularly in industries such as arms, energy and construction.

Bruce Yannett, partner at Debevoise & Plimpton, the law firm, who led a vast investigation into corruption at Siemens, the German conglomerate, says: “The landscape has changed considerably. You have got more cross-border enforcement, and more vigorous enforcement generally.”

Mr Yannett is one of many lawyers specialising in financial crime who say they are expanding their work on corruption. This is in response to rising demand from companies, in the UK and elsewhere, for advice on how to avoid becoming involved in deals that might be illegal.

The internationalisation of the legal pursuit of bribery means British companies have to consider how their conduct will stand up to scrutiny both at home and in other nations that might be able to investigate them. Lawyers and anti-corruption campaigners say the risk of prosecution in Britain for bribery overseas remains relatively small, as authorities are waking only slowly from a long period during which the phenomenon was pretty much ignored.

The Serious Fraud Office has the main brief to tackle overseas corruption but – despite numerous investigations – it has yet to bring a prosecution before a jury. Richard Alderman, who took over as the SFO’s director last year, says he is trying to adopt a new approach of encouraging companies to come forward to confess, in exchange for more lenient treatment.

The first example of this was the October deal under which Balfour Beatty, the construction company, admitted “payment irregularities” and accepted a penalty of £2.25m to end an SFO probe into suspected bribery in the £93m re-creation of the lost ancient library in Alexandria, Egypt. Mr Alderman says the deal – in which Balfour agreed to toughen its compliance systems and have them externally monitored – was a “highly significant development in our efforts to reform British corporate behaviour”. Anti-corruption campaigners are more guarded, warning that companies should not be allowed to pay their way out of trouble and admit less serious offences when they deserve to be investigated and prosecuted.

A bigger preoccupation for British companies expanding internationally is that they face increasing difficulties in dealing with growing variations in rules, customs and regulatory zeal. Foreign authorities – and, in particular, the US – have an ever-widening reach, using corporate subsidiaries, stock market listings and bank transfers as levers to investigate parent British multinationals. The US Department of Justice – widely regarded as the authority most vigorous in pursuing bribery overseas – has launched more than 50 prosecutions under its Foreign Corrupt Practices Act since 2001, more than the total in the 23 previous years of the law’s existence. One of the DoJ’s investigations is into suspected bribery by BAE Systems in a Saudi Arabian arms deal, a case in which the company has denied wrongdoing.

A survey last year of more than 100 companies by Integrity Interactive, an international consultancy, found that bribery probes had become the number one fear among compliance officers, many of whom feel they lack boardroom support to implement policies across dozens of countries and among thousands of employees. Many British lawyers in the corruption field note the contrast between companies’ proclaimed anti-corruption credentials and what employees do on the ground, sometimes with the tacit knowledge of their superiors.

A further headache for compliance officers is that behaviour permitted in one country may be proscribed in another. One example is “facilitation payments” to expedite decisions by public officials: US law allows companies to make these payments, but British law does not.

British companies also face a growing perception that they are less likely to be clean, because the UK has been in the news for its lack of corruption prosecutions and for the scrapping of its probe into BAE and Saudi Arabia. In October 2008, British business was branded with an unprecedented corruption health warning by its fellow members of the Organisation for Economic Co-operation and Development. Mark Pieth, chairman of the working group responsible for enforcing the OECD convention on bribery, says the warning shows British companies could be riskier to deal with. He says: “If a country is not up to standard, if the companies are under-regulated, in dealing with them you have to be a bit more careful … That is a very costly procedure.”

In Wiltshire, The CBRN Team has gone into liquidation, for reasons which are unclear (the company did not take calls after last year’s court case). Ananias Tumukunde, one of the Ugandan officials who received the corrupt payments, was jailed for a year, while Mr Tobiasen – “a businessman who made a bad decision”, according to one person involved in the case – also now has a criminal record. It is a small but telling example of how, even in laggardly Britain, bribery is no longer quite the no-risk enterprise it once perhaps was.

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Case study: BAE Systems

When Lord Goldsmith, then UK attorney-general, told a shocked House of Lords in December 2006 of the scrapping of a probe into suspected bribery in BAE Systems’ Saudi Arabian arms deals, it marked a beginning rather than an end to the company’s problems. Within six months or so of the UK’s decision, the company found itself embroiled in a series of further probes, including in the US, Switzerland and Sweden.

The case – in which BAE has always denied wrongdoing – is a case study in how anti-corruption probes can last for years and mushroom far beyond the jurisdiction in which a company is based. The steadily multiplying official investigations into alleged bribery by BAE have covered four continents and a raft of individuals, from a Saudi Arabian prince to a British businessman in east Africa. Neither BAE nor any of its current or former employees have been charged in connection with the cases.

The first SFO investigations into BAE were triggered by allegations in The Guardian newspaper in 2004 that the company had financed lavish hospitality for Saudi Arabian officials involved in the giant Al Yamamah arms deal. The agreement is worth tens of billions of pounds and is Britain’s biggest export deal.

Over the following years, the SFO expanded the probe to look into the pattern of the company’s relationships with its agents worldwide, principally in Romania, the Czech Republic, South Africa, Tanzania, Chile and Qatar. In the Tanzania case, for example, the SFO has said it is looking at why BAE used offshore companies in the British Virgin Islands and Panama to pay more than $11m (£8m) to a British agent on the sale of a £28m radar system to the government.

But the biggest case was always the Al Yamamah probe, which became even more explosive after it emerged that the SFO was investigating allegations that the company had paid more than £1bn to Prince Bandar bin Sultan, the former Saudi ambassador to Washington. Prince Bandar has also always denied wrongdoing. The scrapping of the Saudi case on national security grounds proved a pyrrhic victory for BAE, however, as it triggered a wave of criticism of the company and was followed by the launching of other investigations around the world.

The company responded by commissioning a report by Lord Woolf, the former top judge for England and Wales, into its business practices. The May 2008 report made 23 recommendations, including that the company should implement a global code of ethical business conduct and appoint a senior executive to oversee it.

BAE promised to implement the recommendations, while Lord Woolf noted that senior executives had acknowledged to him that the company “did not in the past pay sufficient attention to ethical standards and avoid activities which had the potential to give rise to reputational damage”.

The cost of that shortcoming is still seen in the resources being expended at BAE in responding to the investigations, whatever their eventual outcome.

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Case study: MW Kellogg

A british construction company has been implicated in the largest-ever US corporate graft scandal in a case that shows how Washington’s zeal in tackling corruption can have a big knock-on impact on the other side of the Atlantic.

Both the UK government and MW Kellogg, which is based in Middlesex, have been criticised by anti-corruption campaigners because the company is still receiving British government support for the contentious project, a multibillion-dollar giant Nigerian gas plant.

The case highlights how the reach and power of the US authorities can create both legal and reputational difficulties for foreign businesses whose names crop up in their investigations. Kellogg’s US-based majority owner, KBR, admitted in February to involvement in a near-10-year plot to win construction deals at the Bonny Island gas liquefaction plant by bribing Nigerian officials, including some at the highest levels of government.

KBR admitted using Kellogg in an “intentional effort” to “insulate itself” from US laws forbidding bribery of foreign public officials. Although Kellogg was not directly involved in the transaction, US case documents say a Kellogg salesperson in London sent a fax during talks on the project describing how Jack Stanley, a director of the company, had agreed with co-conspirators in other construction companies to send a message to Nigeria “to the top man that we are ready to do business in the customary manner”.

Mr Stanley admitted in September to participating in meetings with top Nigerian officials to discuss the distribution of bribes, some of which were linked to the gas plant expansion later backed by the British government.

The US authorities imposed $579m of penalties on KBR and Halliburton, its former parent, in the biggest fine for corruption so far levied in a case involving US companies. The court admissions in the US also potentially offer important evidence to investigators in the UK. Under a deal to win $212m of British government insurance cover for its work, Kellogg signed a warranty explicitly committing not to participate in bribery.

Kellogg is already the subject of a criminal bribery probe by the Serious Fraud Office. The company has declined to comment on the case.

The SFO investigation is part of a web of long-running probes and political controversy generated by the Bonny Island case. This month a lawyer in London was arrested by police for allegedly funnelling tens of millions of dollars to Nigerian officials. The US Department of Justice is seeking to extradite him and a former salesman at a UK unit of KBR to stand trial on bribery charges.

Michael Peel is legal correspondent

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