Bribes And The United Kingdom ECGD.

The United Kingdom's Export Credit Guarantee Department was set up in 1919 to act as an export credit insurance operation. It offered a range of services from comprehensive cover to one exporter for a range of goods and contracts to individual policies tailored to single trade contracts. It helped foreign investors to borrow cash for their purchases from UK banks and repay this in stages, by providing the bank with guarantees. Thus, the British exporter was able to negotiate a cash contract with the buyer. The banks would pay over the cash, supported by the ECGD guarantee, and the buyer would repay the bank loan in agreed stages.

The ECGD provided bank guarantees for exporters also. These were usually on contracts where goods were exported on credit terms of two years or more. During the 1980's there were millions of pounds of losses because traders were using ECGD guarantees for questionable contracts. The ECGD was defrauded of millions of pounds each year, and many of these export contracts were with Nigerian importers.

Many of the ECGD guarantees were called upon for receiverships, defaulting payments and changes in import restrictions. In the 1980's each ECGD policy allowed exporters leeway to trade in consumer goods with any buyer and many traders has many policies. The ECGD gave insurance cover for up to 90% of the value of the goods or services against the risk that the country of the buyer would encounter some problem or introduce some measure that will scupper the transaction. In 1984-1985, the ECGD paid out [pounds sterling]784 million in claims out of the [pounds sterling]17 billion worth of exports for which it had provided cover. The exporter is supposed to make efforts to recoup this money for the ECGD.

During this period a simple fraud took place many times over. This is the essence of such a fraud. An overseas importer orders goods and deliberately defaults on the payments- sometimes even going into receivership to avoid the payments. The British exporter is left without his goods or his payment but if he was covered by an ECGD policy, the exporter would then claim 90% of the debt from the ECGD, who must pay up. In the case of large import-export businesses trading globally, the fraud multiplied with the use of forged documents1. Instead of being paid to a non-existent UK supplier, monies passed by the confirming finance house to the importer, facilitating the finance house to make a claim to the ECGD for the value of the contract. This was purely a paper chase where no actual goods were exported. If bank loans were linked to an ECGD insurance policy as opposed to an ECGD guarantee, the cover for a defaulting purchaser was made void and the bank would suffer the loss. In the 1980's the British Bank Johnson Matthey Bankers lost [pounds sterling]130 million though bad debts linked to ECGD insurance policies.

The fraud could also be also perpetrated using an overseas arm of an international trading house which would order goods through its subsidiary operation in the UK. With no intention of taking delivery, an order would be placed with a UK manufacturer. The contract with this UK manufacturer would provide the documentary evidence with which the UK subsidiary company would then obtain ECGD Cover or Guarantees, raise finance from a bank with this ECGD backing and then vanish with the bank's money.

When, in due course, the manufacturer fulfilled the order, he was left with the goods at the docks. He would have to either store the goods until he found another buyer, or sell at reduced prices.

ECGD guarantees covered far greater sums than did ECGD insurance policies. ECGD's income was derived from premiums it charged on policies and the income it had earned from its consolidated funds and interest from debts. By 1985, the amounts of money in ECGD trade deals at risk were [pounds sterling]33 billion and 60% of this [pounds sterling]33 billion was on deals with developing countries, including Nigeria, Poland and Brazil.

The 1984 Matthews Report coincided with the ECGD Consolidated Fund being in deficit by [pounds sterling]42.3 million. The Matthews Report recommended that the ECGD become a government-owned corporation that provided insurance and financial services in support of exports and to do so at a profit. It also recommended that EDGD guarantees be fully backed by Her Majesty's Government.

There was the Chapman Report in 1985 which recommended a new board structure for the ECGD but did not approve the previous Matthews recommendation of a separate corporation. During this year news of ECGD bribery and corruption surfaced.

Bribes

Such bribes are the usual bribes paid to agents by third parties to compromise the agent's fiduciary duties owed to his principal. By taking bribes, an agent acts contrary to his principal's interests and can make void the transaction between the third party and the principal.

If it can be proved that an agent has received a bribe, this would cause the agent not to be entitled to his commission, as but one choice of remedy. In Fyffes Group Ltd v Templeman2 the general manager of the Fyffes banana group had taken bribes over a period of four years in exchange for shipping bananas using the third party's ship. A restitution action was brought to recover the monies lost, a similar action to a 1979 case.3 Such bribery still occurs despite the 1999 Convention against Bribery of Public Officials. It is to be noted that the UK still has not enacted a modern Corruption Act, although it has the Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Act 1906 and the Prevention of Corruption Act 1916. It can be argued that the UK has implemented the OECD Convention in the Anti-Terrorism Crime and Security Act 20014 which confers extraterritorial jurisdiction on the United Kingdom courts, causing a UK citizen and company to be prosecuted in relation to offences of bribery and corruption of a foreign public official if this bribery were committed in the UK or overseas. Later still were reports of EDCG guarantees to BAE Systems for [pounds sterling]1 Billion for a BAE-Saudi Government transaction5, when it was disclosed that BAE was the ECGD's biggest risk. At the time The Serious Fraud Office was investigating BAE over a [pounds sterling]60 million bribe. This was not the first British transaction with Saudi Arabia as Geoffrey Edwards was the beneficiary in the 1960's of the then largest military export sale in British history and for [pounds sterling]120 million, the British Aircraft Corporation contracted to provide forty Lightning Jets, twenty five Provost Trainers and an undisclosed number ofair-to-air missiles. As part of that same package, Associated Electrical Industries provided the Saudis with a new advanced radar system. Edward's coup earned him [pounds sterling]2 Million in commission6.

The ECGD supports overseas trade and must therefore minimize incidents of bribery and corruption. In the year 2000, the ECGD issued a procedural code which established new anti-corruption conditions. From then on, a significant amount of information was required from companies which made applications for guarantees or insurance policies. Among the required information was the amount of commission and a company's Code of Conduct. Companies complained that this was sensitive information. British exporters lobbied government and in 2004, changes were made to the information a company must provide, thus weakening the ability to discover bribes and corruption. Under the 2004 measures, the ECGD stated that it would:

obtain additional information from applicants to ensure that no improper payments involving agents had been made to win contracts;

have greater rights to inspect exporters' documents relating to winning contracts and any payments made to agents;

require applicants to provide ECGD with a copy of their Codes of Conduct (or similar procedures);

ensure that applicants show that they have procedures in place to prevent corrupt activity and monitor compliance with their Codes of Conduct (or similar procedures);

extend the range of various declarations regarding corruption to include affiliates- i.e., any company which is a member of the same group of companies, or that is party to any joint venture or consortium, as well as directors and employees in those companies;

require applicants to warrant that neither they nor , to the best of their knowledge, their affiliates have been convicted of, or admitted to, an offence of money laundering;

remind applicants of their legal obligations with all new ECGD cover application forms containing a statement of United Kingdom laws on bribery and corruption and money laundering; and

remind applicants that all allegations of bribery and corruption, and money laundering will be referred to the appropriate authorities.

BAE was one of the first to complain to the ECGD about these 2004 measures and the matter rumbled on until 2005, even though the World Bank, the International Monetary Fund and the EBRD had formally acknowledged that revenue transparency should be a fiduciary duty for all loans, investments, underwriting and technical assistance programmes to resource-rich countries. The ECGD held a second inquiry in November 2004 and amended the May 2004 procedures and this was published in April 2005.

There was the International Development (Anti-Corruption Audit) Bill 2006 which was set for a second reading in the House of Commons in June 2006, but it failed. So did the Corruption Bill 2006 in June 2006. With British tax havens in Jersey and the Cayman Islands, it is difficult enough to fathom out which company is a subsidiary of which, who owns what, which company is a Special Purpose Vehicle or a secret Trust. A very important study of 25 years of monies illegally flowing out of countries showed that 65% of that money came from the developed countries7 This money consists of illegal, disguised and hidden financial flows.

The UK government had promised to include within the Company Law Reform Bill a requirement for UK registered companies to declare beneficial ownership and end the practice of directors of registered companies being themselves companies, unless beneficial ownership can be shown. There is much UK legal subterfuge in offshore trusts and shell companies. The Company Law Reform Bill was going to require at least one director of every company to be a natural person. What in fact we do have is a UK Trade and Invest Guidance Leaflet on bribery for companies doing business overseas. We have bribery and corruption offences nested in obscure places in non-financial legislation such as the Anti-terrorism Act. Not to mention the vast amount of UK companies that use financial derivatives, foreign exchange, interest rate and commodity derivatives to manage risk.8

The following debate led to the SFO closure of its investigation of BAE on 14th December 2006.

BAE Systems: Al Yamamah Contract

5.21 pm

The Attorney-General (Lord Goldsmith): My Lords, with the leave of the House, I shall make a Statement which relates to the investigation by the Serious Fraud Office into BAE Systems plc concerning payments made in relation to the Al Yamamah programme with Saudi Arabia. This afternoon, the Serious Fraud Office has announced that it is discontinuing this investigation. Its statement says:

"The Director of the Serious Fraud Office has decided to discontinue the investigation into the affairs of BAE Systems plc as far as they relate to the Al Yamamah defence contract. This decision has been taken following representations that have been

14 Dec 2006: Column 1712

made both to the Attorney General and the Director concerning the need to safeguard national and international security. It has been necessary to balance the need to maintain the rule of law against the wider public interest. No weight has been given to commercial interests or to the national economic interest".

The Serious Fraud Office sent out a memo as follows:-

Serious Fraud Office.

Statement

14 December 2006

The Director of the Serious Fraud Office has decided to discontinue the investigation into the affairs of BAE SYSTEMS Plc as far as they relate to the Al Yamamah defence contract with the government of Saudi Arabia.

This decision has been taken following representations that have been made both to the Attorney General and the Director of the SFO concerning the need to safeguard national and international security.

It has been necessary to balance the need to maintain the rule of law against the wider public interest. No weight has been given to commercial interests or to the national economic interest.

End of statement

Serious Fraud Office

Elm House

10-16 Elm Street

London WC1X 0BJ

Footnotes

1. A forged Bill of Lading, for example, was often used when a carrier transfers goods in exchange for a forged bill of lading as in Motis Exports Ltd v Dampskibsselskabet AF 1912, A/S [1999] 1 Lloyd's Rep 837. In this case the carrier had acted innocently, delivering goods in exchange for forged bills of lading, unaware that they were forged. Also backdated bills would entitle the innocent party to treat the contract as repudiated and then property and risk would revest in the seller as in Kewi Tek Chao v British Traders and Shippers Ltd [1954] 2 QB 459.

2. Fyffes Group Ltd v Templeman [2000] 2 Lloyd's Rep 643

3. See [2000] 2 Lloyd's Rep 643,660 per Toulson.J, applying Mahesan v Malaysian Government Officers' Co-operative Housing Ltd [1979] AC 374,PC.

4. The maximum penalty for a bribery offence is seven years imprisonment.

5. D.Leigh and R.Evans, "Secret [pounds sterling]1 Billion deal to insure Saudi arms contract", Guardian Newspaper,14.12.04.

6. D.Boulton, The LOCKHEED Papers, (Jonathan Cape, London 1978)

7. J.K.Boyce and L. Ndikumana, "Africa's Debt: Who owes whom?", in G.A.Epstein, Capital flight and capital controls in Developing Countries, (Cheltenham,UK, 2005).

8. A. A. El-Masry, "A survey of derivatives use by UK nonfinancial companies", Manchester Business School, 2003.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Mrs Sally Ramage

Sally Ramage

COPEHALE

COPPENHALL

STAFFORD

South Staffordshire 

ST18 9BW

UNITED KINGDOM

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