The Rolls-Royce of bribery scandals
Outright bribes, ‘success fees’ and a free car for a fixer all feature in corruption probe, reports Alan Tovey
Handing over a brown envelope stuffed full of cash just wouldn’t suffice in the murky world of bribes and backhanders that Rolls-Royce was immersed in for decades.
The jet engine and power systems sector is highly advanced and so are its ways of making corrupt payments: wire transfers to Swiss banks were just one of the ways the engineering company paid tens of millions in bribes to middlemen, executives and government officials around the world.
However, court documents released as part of Rolls’ £671 million ($1.16 billion) settlement to end a corruption investigation showed that the nature of bribery hasn’t changed: lavish entertainment, meetings in top hotels and payments buried in documents under innocuous names.
It’s a dirty and dark business and one that Lord Justice Leveson shone a light on in his judgment on the deal thrashed out between Rolls and the Serious Fraud Office (SFO) and its equivalents in the US and Brazil.
The judge said the company had been involved in “devastating, egregious criminality” making “truly vast corrupt payments and, consequentially, even greater profits”.
British, US and Brazilian documents show that Rolls was conducting criminal acts in a dozen countries, from Azerbaijan to Indonesia: from at least 1989 to 2013, it bribed its way around the world to win business, often using middlemen who were paid “commissions” that would be spread around to grease the wheels.
The gritty details are astounding. In Indonesia, the company handed over US$2.2m to win the engine contract for Airbus A330s for national airline Garuda in the late 1980s. An internal memo mentioned appointing “commercial advisers”, stressing the importance of “close palace connections, with influence and intelligence at levels”. It later appointed a company 55 per cent owned by a relative of the Indonesian President to advise it.
It originally anticipated commissions of US$4.5m but internal documents noted it needed to “revise the figures” as Garuda bought only six of the airliners.
There was a further hiccup when an individual involved claimed he had been promised a Rolls-Royce car if the deal was secured. He was duly handed the keys to a new Rolls-Royce Silver Spirit II.
Rolls’ organised approach to bribery was highlighted in its actions to win business with Thai Airways, which began to order Boeing 777 jets in 1991. Rolls told intermediaries it had US$1m per aircraft “available for dispersal”, later termed a “success fee”.
Rolls also increased the rate of commissions, to “maintain local enthusiasm for future business” but again there were problems.
Middlemen complained of “disappointed recipients” and contacts feeling “short-changed”. One was upset the US$500,000 he received was an advance on commission due, rather than cash for expenses, saying it was costly to lobby a senior officer at the airline. Rolls gave in, saying the $500,000 was ex-gratis and would not be deducted from his commission.
Payments to win business with Thai Airways attracted the attention of the Rolls contracts committee in 1997, which approved a report asserting no payments had been made to agents in the previous 12 months that were “non-compliant with relevant laws and regulations”, despite the report containing details of sums paid to intermediaries. An internal memo described such payments as “marketing expenses”.
Leveson said three deals with Thailand between 1991 and 2005, which generated a gross profit for Rolls of £118m, “involved corruption at a high level with vast payments being made to intermediaries and clear inference others were being paid as well. Senior employees of Rolls were clearly implicated.”
It wasn’t just channelling money to officials that got Rolls into trouble. Between 2005 and 2009 the company was involved in false accounting relating to Indian defence deals.
It signed an official “integrity pact” promising not to use unauthorised intermediaries. Then, to hide its use of middlemen, Rolls created documents saying it had paid for “general consultancy services”, with payments routed through other countries.
In 2007 Rolls did a deal to set up a warehouse in Dubai where parts for Indian defence contracts could be shipped through. The warehouse was owned by an intermediary who received £3.3m, despite only one test run of parts going through the warehouse.
A tax inspector threatened Rolls’ business in India in January 2006 after he got hold of a list of advisers receiving payments. A “senior employee” decided this list had to be retrieved, with Rolls’ London HQ approving a payment to get it back.
The judgment says it has “not been established” that a bribe was paid to the tax inspector, but it infers Rolls executives saw paying off a third party as the only way to get the document. Either way, the company’s staff in India reported their tax issues “had been satisfactorily resolved” and it had only cost a £500,000 payment to an intermediary.
Tax issues in India came back to haunt the company in 2010, when Rolls ended its dealings with the middleman. The judgment reveals how he reminded executives of his help “resolving the tax difficulty”, adding that “had he not done so, some Rolls employees would have gone to jail and the company been closed out of the Indian market for 25 years”.
The energy market was also ripe for Rolls to indulge in corruption.
It held clandestine meetings in Moscow about supplying equipment to Gazprom, with the son of an official at the gas giant being recommended for a job with Rolls’ Russian business.
The company used an intermediary to arrange payments to the official who was “instrumental” in awarding the contract.
Rolls wasn’t above nobbling the competition, either. A contract to service power generators in Indonesia was won after a letter was sent to the president of a rival bidder offering him 2 per cent of the deal’s value paid through an intermediary if Rolls won the job. Regular payments were made to the intermediary from 2007 until 2013, meaning the period was encompassed by the Bribery Act of 2010, which makes it an offence for a
company to fail to prevent corruption.
Rolls fell foul of this new law in Nigeria, where it paid at least US$760,000 to public officials for expenses such as drivers and office space — accounted for as “PR” — as it bid for offshore oil deals.
The Bribery Act caught Rolls in its dealings with Garuda again in 2011, when the company failed to prevent an intermediary bribing the airline’s staff on an engine servicing deal. The intermediary was paid over US$1m.
Panic set in at Rolls over a deal started in 2010 to sell engines for 16 jets to China Eastern Airlines (CES). A board member of the airline asked Rolls to make a financial contribution for a training scheme and a health centre for the airline’s pilots, saying doing so would “close the deal”. Rolls agreed US$3m for an MBA programme at Columbia Business School in the US and US$2m for the health centre and the same day the engine deal was signed.
As details emerged of a training scheme that included luxurious accommodation, glitzy parties and shopping trips in New York, Rolls realised the deal potentially violated anti-corruption laws. To get around this it was suggested the funding could be converted to cash. Rolls told Columbia it wanted to create a “sponsorship fund” for “legal and commercial reasons” but when a programme was received, it revealed “lavish social events” and just seven days’ education during the 14-day visit.
Rolls tried to separate itself from the scheme, deciding to offer a £5m credit in cash to CES, terming it as “non-escalating spare parts” and eventually asking the airline to take no part in the MBA course. A few days after the event had finished, Rolls received an email from Columbia saying the “entire package, New York city, business meetings, touring, shopping — everything was well received”.
Further showing that the company could get into trouble without needing to employ middlemen to do so, Rolls offered US$3.2m in credits to an executive at the parent of Air Asia X so he could have his private jet serviced, with the implication this would land contracts with the airline.
Internal memos showed the executive was not happy with credits, reporting he “wants a cash settlement that is off the record and not visible to Air Asia X group”.
US Department of Justice documents are just as damning. To win a Kazakhstan energy deal, Rolls held meetings with intermediaries to discuss commission levels that would be high enough to bribe local officials who awarded contracts.
In other markets, staff used codenames such as “Master of the Game” in internal emails to try to hide the identity of officials who would send confidential documents directly to Rolls and had contract-awarding powers.
An email exchange between staff also referred to the need to be more careful about bribes, noting “the rules have changed since the old days”.
Perhaps the most shameless example of Rolls’ criminality is in a contract in war-ravaged Iraq. Officials raised concerns about gas-generating turbines the company had supplied to the nation’s energy company. Intermediaries used bribes to prevent Rolls from being blacklisted.
Rolls has admitted its guilt, accepting a “deferred prosecution agreement” that avoids a criminal conviction that could have lost it up to 30 per cent of its £76b order book.
Chief executive Warren East and chairman Ian Davis, who both took up their positions after the corruption identified had ended, have called the behaviour “unacceptable” and pledged that Rolls can “win right” — even if it did earn £258m in profits from winning wrong through bribes.
Other senior industry figures have said that, while the company was wrong, it was only doing the same as its rivals.
“Times have changed and while not acceptable, there was more tolerance for this sort of thing back then,” said one aerospace leader.