Mzalendo JR
JF-Expert Member
- Jun 6, 2012
- 1,193
- 515
HC 847 International Development CommitteeWritten evidence from Global Witness
Global Witness
1. Global Witness welcomes the opportunity to make a submission to the International Development Committee Inquiry into Financial Crime and Development.
2. Global Witness is a London-based non-governmental organisation that investigates the links between natural resources, conflict and corruption. We aim to promote improved governance, transparency and accountability in the management of the natural resource sector to ensure that revenues from resources are used for peaceful and sustainable development rather than to finance or fuel conflicts, corruption and associated human rights violations.
3. While the vast flows of capital associated with the extraction of natural resources present a huge opportunity to promote peaceful, stable and democratic states in some of the poorest regions of the world the reality is that these revenues have tended to initiate and sustain conflict across the globe as well as entrenching the rule of corrupt and repressive regimes. The development implications of these sustained conflicts and repressive regimes are widespread and all too evident
4. If the UK's efforts to promote development abroad are to be taken seriously the UK government must ensure that British companies and banks are not complicit in this process by fuelling and facilitating conflict, corruption and human rights violations abroad through their business dealings.
Financial Crime and Development
5. Corruption has devastating impacts on development. Money that should have been destined for investment in public services is diverted into poor quality or pointless procurement projects or indeed into private bank accounts. Corruption also entrenches poor governance and undermines the rule of law. It damages investor confidence and is a disincentive to entrepreneurship and diversification in the economy. The poor, who tend to be more reliant on public services, are the worst affected by corruption.
6. Corruption also fundamentally undermines UK development assistance, in countries where illicit financial flows out of the country dwarf incoming development assistance. In these cases, tackling corruption is not just about ensuring the aid money is not diverted. It means ensuring that the aid is not itself subsidising the looting of the state, by providing basic state services, while corrupt officials get on with the much more lucrative business of corruption. Tackling corruption is an essential pre-requisite to development. As this case will illustrate, it requires a coordinated approach across government departments.
7. The terms "corruption" and "bribery" are often used interchangeably but corruption is far more than just bribery. It can also involve embezzlement of state funds, extortion, influence peddling. Money laundering is usually involved, since it is hard to engage in large scale corruption without a bank to put the money in and move it to a place where it will be spent.
8. Corruption is not just a developing world problem. Bribes cannot be received or solicited without companies willing to pay them, and money cannot be looted or bribes paid without banks willing to accept corrupt money. There are numerous ways that the UK government can help tackle this fuelling and facilitation of corruption, especially when it is done by British companies and banks. These are set out in detail in the Bond Corruption Paper- Annex 1.
The BAE Tanzania Case
9. The BAE Tanzania case illustrates the need for a coordinated UK policy towards transnational financial crime, and specifically corruption.
10. The facts relating to the prosecution and fine of BAE are well known. According to the judgment of Mr Justice Bean at Southwark Crown Court on 21 December 2010, BAE pleaded guilty to accounting failures under Section 221 of the Companies Act 1985 to conceal payments of $12.4 million to a Tanzanian agent called Shailesh Vithlani, employed by BAE as a marketing advisor. BAE agreed to make a £30 million ex gratia payment for the benefit of the people of Tanzania less a £500,000 fine imposed by the court. As the judge noted, BAE's basis of plea was that: "there was a high probability that part of the $12.4 million would be used in the negotiation process to favour British Aerospace Defence Systems Ltd."
11. The International Development Select Committee is right to look at the issues surrounding this case, and the questions asked in the invitation to submit written evidence are pertinent ones. We will answer those questions on which we have expertise. We wish to draw the Committee's attention, however, to some additional questions about the facilitation of this deal which may lead to lessons learnt for the UK's approach to transnational crime.
12. The evidence suggests this damaging deal could not have gone ahead without:
payments made by BAE
export licenses and export credit guarantees granted by HMG
commercial financing from Barclays
13. The first was tackled in the court case, and the implications for the UK's new Bribery Act are examined below. The export licences and export credit guarantees will be tackled, we believe, in a submission from Campaign Against the Arms Trade. The last, the role of Barclays, is examined in our final answer.
14. Our key recommendation is that the UK needs to develop a joined-up approach to corruption which encompasses not only bribery legislation, but export credit guarantees and export licenses and, crucially, anti-money laundering regulation of banks. Recent events in Egypt, Libya and Tunisia have shown how banks have been willing to facilitate corruption by dictators and their corrupt regimes by accepting their money. The unrest in the region has in part been fuelled by such corruption.
How BAE will ensure that its payment to Tanzania is used effectively for development purposes/What advice DFID has given to BAE about how this money might be used
15. It should not be left to a private company to ensure that its payment is used transparently and effectively. This process should be conducted in coordination with the UK and Tanzanian authorities who should ensure that money moves into, and through, accounts in a transparent manner and that money is accounted for and independently audited at each stage of the process. Effective civil society oversight in Tanzania will be essential.
16. BAE should ensure that it publicly discloses all payments made, including to whom they are made and which accounts they are made into.
17. An appropriate use of the money might be to promote transparency and accountability in the management of state revenues and budget management, and to promote civil society oversight so as to restore trust in the government and ensure that future incoming revenue is used for development priorities. Tanzanian civil society should be involved in setting priorities for the use of the money.
Whether the law needs to be changed to ensure that British companies and individuals found guilty of financial crimes in developing countries are always required by the court to make reparations to the developing country concerned
18. It would seem fair that where a public procurement project has been affected companies should make restitution payments. These should be greater than the amount that was influenced by the bribe on the basis that it is extremely unlikely that prosecutors are able to detect and prosecute every crime, and also the fines levied should be large enough to deter future potential bribe payers who may conduct cost benefit analysis.
Whether further changes to the Bribery Act 2010 or other legislation are required
19. The Bribery Act is a good act which is fit for purpose. It has gone through extensive consultation with relevant stakeholders including business groups and it passed with cross party support. As such it should not be revisited despite the protests of companies, which have nothing to fear from it unless they pay bribes. The Act should be implemented as soon as possible and without further delay.
20. However, an act is only as good as its implementation-this will now largely fall to the Serious Fraud Office, or its successor body, and the Crown Prosecution Service. The guidance for business published by the Ministry of Justice on the 30th of April 2011 is extremely disappointing and raises a number of areas of serious concern as set out in the following paragraphs. It also raises serious doubt about the government's commitment to effective implementation of the Act. The particular sections that give rise to these concerns were only added following the delay in the publication of the guidance and intense pressure from business groups. In our view the guidance goes beyond the remit of providing guidance to business and risk undermining the act through its interpretation.
21. Our view is that the interpretation of the Act, which was passed by parliament, should be left to prosecutors and the courts, and should be free from intervention by the government and business groups.
22. Firstly, the guidance is intended to provide guidance to companies on complying with the act and putting in place "adequate procedures" to prevent bribery, as such it potentially defines the defence as set out in Section 7 of the act. Section 7 makes companies libel for failing to prevent bribes paid on their behalf by a third party, a company can defend itself in court by showing that it had adequate procedures in place to prevent bribery on its behalf. The guidance, as it is written, risks presenting a tick list for companies to observe in order to avoid prosecution rather than simply providing guidance on compliance. In our view it should be left to the courts to interpret whether a company has adequate procedures in place to prevent bribery, on a case by case basis.
23. Secondly, the guidance suggests that companies will not fall within the jurisdiction of the Act just by virtue of their listing on the London Stock Exchange. If this interpretation of the act were to hold true large international companies which are listed in London would potentially be able to avoid prosecution for overseas bribery. The guidance also suggests that foreign companies who operate subsidiaries in the UK would not fall under the jurisdiction of the Act. This may well incentivise companies to operate subsidiaries in the UK to ensure that they do not fall foul of the act hence restricting the scope of the Act. This interpretation will unfairly disadvantage UK companies, whilst failing to prevent the damaging practice of bribing foreign public officials.
24. The Act should be used to investigate and prosecute not only UK but also foreign companies who are either listed on the London Stock Exchange, or who operate a subsidiary in the UK. This will broaden its indisputably positive impacts and create a level playing field for UK businesses.
25. Thirdly under Section 7 of the act, companies should be held liable for bribes paid by joint venture partners and subsidiaries where they benefit by virtue of their relationship to those entities. The MoJ guidance appears to contradict this. This matters because it will encourage UK companies to operate subsidiaries in high risk environments which they distance themselves from in order to avoid prosecution.
26. Successful implementation of the Act will be a matter for prosecutors and courts. This potentially misleading guidance from the MoJ should not get in the way of their ability to prosecute; nor should it lull companies into a false sense of security
Further Recommendations:
Effectively enforce the Bribery Act, ensuring that the UK is fully compliant with the 1997 OECD Anti-Bribery Convention; fines and penalties should be large enough to both punish and deter. The UK's financial penalties for companies that commit financial crimes including bribery and money laundering offences are currently woefully inadequate. This is particularly true when compared to the US which has levied substantial financial penalties against companies and banks that have either been prosecuted for financial crimes or that have settled voluntarily. If the UK is to successfully deter companies and banks from paying or processing bribes or from accepting stolen assets then the UK must levy fines large enough to act as a successful deterrent. In the BAE case the size of the fine was restricted because any increase would have decreased the size of the ex gratia payment to the people of Tanzania. Such a structure should be avoided in future.
Ensure that sufficient dedicated resources are available for the Act's effective implementation. UK diplomatic posts must have the awareness, capacity, political backing and will to assist UK companies to deal with demands for bribes. UKTI and other UK representatives should also be trained to identify risks and warn companies.
Introduce greater transparency and consistency in relation to the terms of negotiated settlements in bribery cases.
Actively and effectively enforce Article 45 of the EU Procurement Directive within the UK and work with the EU to ensure its successful enforcement across the Union, to ensure that companies found guilty of bribery are automatically precluded from government contracts.
Encourage self reporting and whistle-blowing as this is the most efficient way of bringing bribery to light.
The UK should use its anti-money laundering laws to tackle bribery by treating profits from a deal struck following a bribe as the proceeds of crime.
27. None of the above would require amendments to the Bribery Act or further legislation. However we do have recommendations for further legislation and regulation that would help curb financial crime. The Bribery Act is welcome, but alone will never curb corruption, or even bribery. Tackling bribery is not just about prosecution; it is also about uncovering the bribes in the first place and making it more difficult to pay them.
28. At present it is extremely difficult to detect bribes as they are often paid through shell companies and other corporate vehicles, often in secrecy jurisdictions or tax havens (half of which are British). The fact that companies and individuals are able to set up companies and trusts without providing their identity means that they can make and receive payments anonymously. This makes it enormously difficult to detect where bribes have been paid, slows down investigations, and severely limits the effectiveness of any anti-bribery legislation.
Recommendation:
29. Each country should maintain a verified national registry of beneficial ownership and control of all companies incorporated and trusts established there (ie, not just the immediate shareholder). No one should be allowed to become a director or company secretary or shareholder owning 10% or more of the shares of a UK company without having first proved their identity to the Registrar of Companies to the standards required by money laundering regulations for the opening of a bank account. The use of nominees to record the ownership of shares can be permitted, but only if the name of the beneficial owner is also on public record.
30. This would have to be an international standard to work. Two possibilities exist for the UK to push it internationally:
through its membership of the Financial Action Task Force, the OECD body that sets the global anti-money laundering standard and is currently reviewing its standards, including this one
in Brussels, where a recent EC Internal Security review called on the EU to amend its anti-money laundering standard to provide greater disclosure of beneficial ownership and control of companies and trusts.
How the government coordinates its policy against transnational financial crime
31. The following aspect of the BAE Tanzania story is indicative of the need for a more joined-up UK strategy towards transnational financial crime.
Barclays' Loan to Tanzania
32. It was extensively reported at the time that Barclays was providing the loan for the deal: a loan without which the sale could not have gone ahead. When the deal first came up in 1995 it could not go ahead because the Tanzanian Central Bank would not pledge the country's gold reserves as collateral.
33. According to the Guardian, Barclays made the loan at a rate of 4.9% even though the World Bank and IMF refused to lend for such a white elephant project. This was reportedly just below market rates, even though Tanzania was not supposed to borrow on commercial terms due to its existing debts, $3 billion of which had just been written off by its donors. A World Bank report said that a civilian radar system could be bought for a fraction of the price.
34. Barclays' involvement was criticised in Parliament by Clare Short, then Secretary of State for Development, and Norman Lamb MP.
35. Clare Short said: "under the HIPC [Highly Indebted Poor Country] initiative, countries cannot borrow unless the loan is concessional. Somehow a loan from Barclays Bank, which is funding the project-there is no way that Barclays can provide concessional funding-has been reported to the IMF as being concessional, so the project squeaked through, which is very odd."
36. Norman Lamb MP said that the IMF had written to him explaining the financing Barclays had provided, saying "the terms of the financing package obtained by Tanzania in 1999 for its air traffic control system yielded a weighted average grant element of 35.9%, which is consistent with the definition of concessionality under the terms of the IMF's concessional loan facility, the Poverty Reduction and Growth Facility."
37. As Mr Lamb pointed out, this seemed like an extraordinary thing for Barclays to do:
"Barclays might simply have had a fit of generosity, but that seems unlikely. Perhaps it had something to do with the fact that, on 11 October 2000, Barclays secured a banking licence to operate in Tanzania. Was that the payback for subsidising the deal? The other more sinister explanation is that the contract price was fiddled and artificially inflated so that it looked to the outside world as if Barclays was providing a concessional loan, which was necessary to get the deal past the IMF."
38. He continued: "When a Secretary of State alludes to corruption, surely it is time thoroughly to investigate the financing of the deal. I have also been told that bungs were paid to oil the wheels of the deal."
39. These questions about the role of Barclays in allowing this deal to go ahead were not satisfactorily answered at the time. Now that that the payments by BAE have come to light and BAE has pleaded guilty to accounting errors which hid them, it is once again pressing to ask what due diligence Barclays did on this loan to reassure itself that its funding would not facilitate a corrupt deal.
40. A leaked request for mutual legal assistance from the SFO to the Tanzanian authorities says: "the SFO has reasonable grounds to believe that the financing package was structured to circumvent, and in reality may have breached" the requirements agreed with the IMF and World Bank.
41. In the same leaked document the SFO alleges that it had reasonable grounds to believe that a recipient of payments from Vithlani was the Tanzanian Attorney-General, Andrew Chenge. Without his agreement, the SFO says, the financing package involving Barclays could not be agreed.
42. According to the document the SFO had evidence to believe that:
Chenge was personally in charge of negotiations by 1995
Between 19 June 1997 and 17 April 1998 Chenge received $1.5 million into an account at Barclays in Jersey in the name of a company he controlled called Franton Investments Ltd. The money had previously come from another Barclays account in Frankfurt, and may ultimately have been sent from LGT Bank in Liechtenstein.
Barclays later became concerned over the governance of the Franton accounts and ended the client relationship (a date is not given).
Vithlani, the recipient of BAE's payments, was involved in setting up the financing package with Barclays. For example, the SFO says that on 28 September 1999 Vithlani wrote to Barclays enclosing the final draft of the financing package. He enclosed a legal opinion dated 15 September 1999 from Chenge concerning the financial arrangements, including that they would not be subject to suit in Tanzania, that English law would be used in the event of any dispute, and that these arrangements would not cause Tanzania to become ineligible for IMF funding. Such conditions, the SFO said, were important to Barclays' willingness to proceed.
In September 2009 £600,000 was transferred by Chenge from the Franton account at Barclays in Jersey to an RBS account in Jersey. Later he moved the funds to the investment manager J O Hambro, this time in his own name, and also had an account at Standard Chartered in Dar es Salaam.
43. Chenge resigned in April 2008 following claims about more than £500,000 in an account in Jersey. He denied wrongdoing and claims, through the law firm DLA Piper, that the completion of the SFO's investigations vindicates him. The SFO's plea bargain preventing further investigation of matters prior to 5 February 2010 means that these allegations will not now be tested in court.
44. The SFO's information about the Franton account at Barclays in Jersey raises the extraordinary possibility-untested by the case that concluded in December-that a bribe may have been paid into a Barclays account to facilitate the agreement of conditions which allowed a Barclays loan to go ahead to finance an unaffordable deal for Tanzania.
45. We recommend that the Committee call Barclays to account for its role in this deal. The questions which we believe need to be asked include:
(i)Can Barclays confirm the IMF's statement to Norman Lamb MP that 35.9% of the loan was a grant, and explain what this meant, and why this was done?
(ii)Can Barclays respond in detail to allegations that the size of the deal was inflated to make it look as though the loan was on concessionary terms?
(iii)What due diligence did Barclays do on Shailesh Vithlani and his role as an intermediary in arranging the financing?
(iv)How does Barclays justify its comment, reported in the Guardian in December 2001, that it was "not involved" in the debate surrounding the sale, when
its provision of a loan was so central to allowing the deal to proceed
it had received documents from Vithlani and Chenge discussing Tanzania's eligibility for IMF funding if the Barclays loan went ahead, this being one of the questions at the centre of the debate about the appropriateness of the deal?
(v)Has Tanzania repaid the loan to Barclays? If so how long did it take? What is the total amount repaid including interest? Does this exceed the ex-gratia payment to be made by BAE?
(vi)When exactly did Barclays close Chenge's Franton account in Jersey? It is to Barclays' credit that it did so, but had it identified its customer as a politically exposed person (ie a senior official and therefore a greater corruption risk)? When it closed the account, did it make the connection between suspicious money received by its customer Andrew Chenge, and the fact that the same man was responsible for giving the go-ahead for Tanzania to borrow heavily from Barclays?
46. In addition, Royal Bank of Scotland, J O Hambro and Standard Chartered-the banks that handled Andrew Chenge's funds after they left the Barclays' account in Jersey- should be asked what due diligence they did on Chenge and his source of funds. Did they identify him as a PEP and do enhance due diligence? How did they reassure themselves that these funds were not the proceeds of corruption? Did they file any suspicious activity reports?
Recommendations:
47. Commercial banks should be required by law to disclose loans made to sovereign governments or state owned companies, including details of rates as well as all fees and charges. Proposed loans should be published well in advance, allowing parliamentary scrutiny in the recipient country and, if necessary, in the home country of the company whose deal is being paid for by the loan. This would need to be a global standard in order to be effective, but the UK, as a major financial centre, is in a position to push this.
48. The UK should ensure that its anti-money laundering laws, with their requirement to do customer due diligence, are rigorously implemented both in the UK and in the Crown Dependencies and Overseas Territories. The current furore over frozen funds belonging to Ben Ali, Mubarak and Gaddafi shows that the lessons are still not being learnt by banks when it comes to accepting corrupt funds. The current light touch approach to AML regulation means that banks can tick the box to say they've done their customer due diligence yet still do business that fuels corruption.
49. The UK also needs to set up a whole of government approach to tackling corruption which spans all the relevant government departments. The current PEP group and Bribery groups are untransparent and they do not cover all of the relevant issues. The UK government's efforts to tackle corruption have so far been largely limited to bribery and asset freezing/recovery. We would urge the UK anti-corruption champion to introduce an anti-corruption strategy that tackles all of the aspects of corruption which UK companies and banks-and the government itself-contribute to as set out in the Bond corruption paper.
House of Commons - HC 847 International Development Committee: Written evidence from Global Witness
Global Witness
1. Global Witness welcomes the opportunity to make a submission to the International Development Committee Inquiry into Financial Crime and Development.
2. Global Witness is a London-based non-governmental organisation that investigates the links between natural resources, conflict and corruption. We aim to promote improved governance, transparency and accountability in the management of the natural resource sector to ensure that revenues from resources are used for peaceful and sustainable development rather than to finance or fuel conflicts, corruption and associated human rights violations.
3. While the vast flows of capital associated with the extraction of natural resources present a huge opportunity to promote peaceful, stable and democratic states in some of the poorest regions of the world the reality is that these revenues have tended to initiate and sustain conflict across the globe as well as entrenching the rule of corrupt and repressive regimes. The development implications of these sustained conflicts and repressive regimes are widespread and all too evident
4. If the UK's efforts to promote development abroad are to be taken seriously the UK government must ensure that British companies and banks are not complicit in this process by fuelling and facilitating conflict, corruption and human rights violations abroad through their business dealings.
Financial Crime and Development
5. Corruption has devastating impacts on development. Money that should have been destined for investment in public services is diverted into poor quality or pointless procurement projects or indeed into private bank accounts. Corruption also entrenches poor governance and undermines the rule of law. It damages investor confidence and is a disincentive to entrepreneurship and diversification in the economy. The poor, who tend to be more reliant on public services, are the worst affected by corruption.
6. Corruption also fundamentally undermines UK development assistance, in countries where illicit financial flows out of the country dwarf incoming development assistance. In these cases, tackling corruption is not just about ensuring the aid money is not diverted. It means ensuring that the aid is not itself subsidising the looting of the state, by providing basic state services, while corrupt officials get on with the much more lucrative business of corruption. Tackling corruption is an essential pre-requisite to development. As this case will illustrate, it requires a coordinated approach across government departments.
7. The terms "corruption" and "bribery" are often used interchangeably but corruption is far more than just bribery. It can also involve embezzlement of state funds, extortion, influence peddling. Money laundering is usually involved, since it is hard to engage in large scale corruption without a bank to put the money in and move it to a place where it will be spent.
8. Corruption is not just a developing world problem. Bribes cannot be received or solicited without companies willing to pay them, and money cannot be looted or bribes paid without banks willing to accept corrupt money. There are numerous ways that the UK government can help tackle this fuelling and facilitation of corruption, especially when it is done by British companies and banks. These are set out in detail in the Bond Corruption Paper- Annex 1.
The BAE Tanzania Case
9. The BAE Tanzania case illustrates the need for a coordinated UK policy towards transnational financial crime, and specifically corruption.
10. The facts relating to the prosecution and fine of BAE are well known. According to the judgment of Mr Justice Bean at Southwark Crown Court on 21 December 2010, BAE pleaded guilty to accounting failures under Section 221 of the Companies Act 1985 to conceal payments of $12.4 million to a Tanzanian agent called Shailesh Vithlani, employed by BAE as a marketing advisor. BAE agreed to make a £30 million ex gratia payment for the benefit of the people of Tanzania less a £500,000 fine imposed by the court. As the judge noted, BAE's basis of plea was that: "there was a high probability that part of the $12.4 million would be used in the negotiation process to favour British Aerospace Defence Systems Ltd."
11. The International Development Select Committee is right to look at the issues surrounding this case, and the questions asked in the invitation to submit written evidence are pertinent ones. We will answer those questions on which we have expertise. We wish to draw the Committee's attention, however, to some additional questions about the facilitation of this deal which may lead to lessons learnt for the UK's approach to transnational crime.
12. The evidence suggests this damaging deal could not have gone ahead without:
payments made by BAE
export licenses and export credit guarantees granted by HMG
commercial financing from Barclays
13. The first was tackled in the court case, and the implications for the UK's new Bribery Act are examined below. The export licences and export credit guarantees will be tackled, we believe, in a submission from Campaign Against the Arms Trade. The last, the role of Barclays, is examined in our final answer.
14. Our key recommendation is that the UK needs to develop a joined-up approach to corruption which encompasses not only bribery legislation, but export credit guarantees and export licenses and, crucially, anti-money laundering regulation of banks. Recent events in Egypt, Libya and Tunisia have shown how banks have been willing to facilitate corruption by dictators and their corrupt regimes by accepting their money. The unrest in the region has in part been fuelled by such corruption.
How BAE will ensure that its payment to Tanzania is used effectively for development purposes/What advice DFID has given to BAE about how this money might be used
15. It should not be left to a private company to ensure that its payment is used transparently and effectively. This process should be conducted in coordination with the UK and Tanzanian authorities who should ensure that money moves into, and through, accounts in a transparent manner and that money is accounted for and independently audited at each stage of the process. Effective civil society oversight in Tanzania will be essential.
16. BAE should ensure that it publicly discloses all payments made, including to whom they are made and which accounts they are made into.
17. An appropriate use of the money might be to promote transparency and accountability in the management of state revenues and budget management, and to promote civil society oversight so as to restore trust in the government and ensure that future incoming revenue is used for development priorities. Tanzanian civil society should be involved in setting priorities for the use of the money.
Whether the law needs to be changed to ensure that British companies and individuals found guilty of financial crimes in developing countries are always required by the court to make reparations to the developing country concerned
18. It would seem fair that where a public procurement project has been affected companies should make restitution payments. These should be greater than the amount that was influenced by the bribe on the basis that it is extremely unlikely that prosecutors are able to detect and prosecute every crime, and also the fines levied should be large enough to deter future potential bribe payers who may conduct cost benefit analysis.
Whether further changes to the Bribery Act 2010 or other legislation are required
19. The Bribery Act is a good act which is fit for purpose. It has gone through extensive consultation with relevant stakeholders including business groups and it passed with cross party support. As such it should not be revisited despite the protests of companies, which have nothing to fear from it unless they pay bribes. The Act should be implemented as soon as possible and without further delay.
20. However, an act is only as good as its implementation-this will now largely fall to the Serious Fraud Office, or its successor body, and the Crown Prosecution Service. The guidance for business published by the Ministry of Justice on the 30th of April 2011 is extremely disappointing and raises a number of areas of serious concern as set out in the following paragraphs. It also raises serious doubt about the government's commitment to effective implementation of the Act. The particular sections that give rise to these concerns were only added following the delay in the publication of the guidance and intense pressure from business groups. In our view the guidance goes beyond the remit of providing guidance to business and risk undermining the act through its interpretation.
21. Our view is that the interpretation of the Act, which was passed by parliament, should be left to prosecutors and the courts, and should be free from intervention by the government and business groups.
22. Firstly, the guidance is intended to provide guidance to companies on complying with the act and putting in place "adequate procedures" to prevent bribery, as such it potentially defines the defence as set out in Section 7 of the act. Section 7 makes companies libel for failing to prevent bribes paid on their behalf by a third party, a company can defend itself in court by showing that it had adequate procedures in place to prevent bribery on its behalf. The guidance, as it is written, risks presenting a tick list for companies to observe in order to avoid prosecution rather than simply providing guidance on compliance. In our view it should be left to the courts to interpret whether a company has adequate procedures in place to prevent bribery, on a case by case basis.
23. Secondly, the guidance suggests that companies will not fall within the jurisdiction of the Act just by virtue of their listing on the London Stock Exchange. If this interpretation of the act were to hold true large international companies which are listed in London would potentially be able to avoid prosecution for overseas bribery. The guidance also suggests that foreign companies who operate subsidiaries in the UK would not fall under the jurisdiction of the Act. This may well incentivise companies to operate subsidiaries in the UK to ensure that they do not fall foul of the act hence restricting the scope of the Act. This interpretation will unfairly disadvantage UK companies, whilst failing to prevent the damaging practice of bribing foreign public officials.
24. The Act should be used to investigate and prosecute not only UK but also foreign companies who are either listed on the London Stock Exchange, or who operate a subsidiary in the UK. This will broaden its indisputably positive impacts and create a level playing field for UK businesses.
25. Thirdly under Section 7 of the act, companies should be held liable for bribes paid by joint venture partners and subsidiaries where they benefit by virtue of their relationship to those entities. The MoJ guidance appears to contradict this. This matters because it will encourage UK companies to operate subsidiaries in high risk environments which they distance themselves from in order to avoid prosecution.
26. Successful implementation of the Act will be a matter for prosecutors and courts. This potentially misleading guidance from the MoJ should not get in the way of their ability to prosecute; nor should it lull companies into a false sense of security
Further Recommendations:
Effectively enforce the Bribery Act, ensuring that the UK is fully compliant with the 1997 OECD Anti-Bribery Convention; fines and penalties should be large enough to both punish and deter. The UK's financial penalties for companies that commit financial crimes including bribery and money laundering offences are currently woefully inadequate. This is particularly true when compared to the US which has levied substantial financial penalties against companies and banks that have either been prosecuted for financial crimes or that have settled voluntarily. If the UK is to successfully deter companies and banks from paying or processing bribes or from accepting stolen assets then the UK must levy fines large enough to act as a successful deterrent. In the BAE case the size of the fine was restricted because any increase would have decreased the size of the ex gratia payment to the people of Tanzania. Such a structure should be avoided in future.
Ensure that sufficient dedicated resources are available for the Act's effective implementation. UK diplomatic posts must have the awareness, capacity, political backing and will to assist UK companies to deal with demands for bribes. UKTI and other UK representatives should also be trained to identify risks and warn companies.
Introduce greater transparency and consistency in relation to the terms of negotiated settlements in bribery cases.
Actively and effectively enforce Article 45 of the EU Procurement Directive within the UK and work with the EU to ensure its successful enforcement across the Union, to ensure that companies found guilty of bribery are automatically precluded from government contracts.
Encourage self reporting and whistle-blowing as this is the most efficient way of bringing bribery to light.
The UK should use its anti-money laundering laws to tackle bribery by treating profits from a deal struck following a bribe as the proceeds of crime.
27. None of the above would require amendments to the Bribery Act or further legislation. However we do have recommendations for further legislation and regulation that would help curb financial crime. The Bribery Act is welcome, but alone will never curb corruption, or even bribery. Tackling bribery is not just about prosecution; it is also about uncovering the bribes in the first place and making it more difficult to pay them.
28. At present it is extremely difficult to detect bribes as they are often paid through shell companies and other corporate vehicles, often in secrecy jurisdictions or tax havens (half of which are British). The fact that companies and individuals are able to set up companies and trusts without providing their identity means that they can make and receive payments anonymously. This makes it enormously difficult to detect where bribes have been paid, slows down investigations, and severely limits the effectiveness of any anti-bribery legislation.
Recommendation:
29. Each country should maintain a verified national registry of beneficial ownership and control of all companies incorporated and trusts established there (ie, not just the immediate shareholder). No one should be allowed to become a director or company secretary or shareholder owning 10% or more of the shares of a UK company without having first proved their identity to the Registrar of Companies to the standards required by money laundering regulations for the opening of a bank account. The use of nominees to record the ownership of shares can be permitted, but only if the name of the beneficial owner is also on public record.
30. This would have to be an international standard to work. Two possibilities exist for the UK to push it internationally:
through its membership of the Financial Action Task Force, the OECD body that sets the global anti-money laundering standard and is currently reviewing its standards, including this one
in Brussels, where a recent EC Internal Security review called on the EU to amend its anti-money laundering standard to provide greater disclosure of beneficial ownership and control of companies and trusts.
How the government coordinates its policy against transnational financial crime
31. The following aspect of the BAE Tanzania story is indicative of the need for a more joined-up UK strategy towards transnational financial crime.
Barclays' Loan to Tanzania
32. It was extensively reported at the time that Barclays was providing the loan for the deal: a loan without which the sale could not have gone ahead. When the deal first came up in 1995 it could not go ahead because the Tanzanian Central Bank would not pledge the country's gold reserves as collateral.
33. According to the Guardian, Barclays made the loan at a rate of 4.9% even though the World Bank and IMF refused to lend for such a white elephant project. This was reportedly just below market rates, even though Tanzania was not supposed to borrow on commercial terms due to its existing debts, $3 billion of which had just been written off by its donors. A World Bank report said that a civilian radar system could be bought for a fraction of the price.
34. Barclays' involvement was criticised in Parliament by Clare Short, then Secretary of State for Development, and Norman Lamb MP.
35. Clare Short said: "under the HIPC [Highly Indebted Poor Country] initiative, countries cannot borrow unless the loan is concessional. Somehow a loan from Barclays Bank, which is funding the project-there is no way that Barclays can provide concessional funding-has been reported to the IMF as being concessional, so the project squeaked through, which is very odd."
36. Norman Lamb MP said that the IMF had written to him explaining the financing Barclays had provided, saying "the terms of the financing package obtained by Tanzania in 1999 for its air traffic control system yielded a weighted average grant element of 35.9%, which is consistent with the definition of concessionality under the terms of the IMF's concessional loan facility, the Poverty Reduction and Growth Facility."
37. As Mr Lamb pointed out, this seemed like an extraordinary thing for Barclays to do:
"Barclays might simply have had a fit of generosity, but that seems unlikely. Perhaps it had something to do with the fact that, on 11 October 2000, Barclays secured a banking licence to operate in Tanzania. Was that the payback for subsidising the deal? The other more sinister explanation is that the contract price was fiddled and artificially inflated so that it looked to the outside world as if Barclays was providing a concessional loan, which was necessary to get the deal past the IMF."
38. He continued: "When a Secretary of State alludes to corruption, surely it is time thoroughly to investigate the financing of the deal. I have also been told that bungs were paid to oil the wheels of the deal."
39. These questions about the role of Barclays in allowing this deal to go ahead were not satisfactorily answered at the time. Now that that the payments by BAE have come to light and BAE has pleaded guilty to accounting errors which hid them, it is once again pressing to ask what due diligence Barclays did on this loan to reassure itself that its funding would not facilitate a corrupt deal.
40. A leaked request for mutual legal assistance from the SFO to the Tanzanian authorities says: "the SFO has reasonable grounds to believe that the financing package was structured to circumvent, and in reality may have breached" the requirements agreed with the IMF and World Bank.
41. In the same leaked document the SFO alleges that it had reasonable grounds to believe that a recipient of payments from Vithlani was the Tanzanian Attorney-General, Andrew Chenge. Without his agreement, the SFO says, the financing package involving Barclays could not be agreed.
42. According to the document the SFO had evidence to believe that:
Chenge was personally in charge of negotiations by 1995
Between 19 June 1997 and 17 April 1998 Chenge received $1.5 million into an account at Barclays in Jersey in the name of a company he controlled called Franton Investments Ltd. The money had previously come from another Barclays account in Frankfurt, and may ultimately have been sent from LGT Bank in Liechtenstein.
Barclays later became concerned over the governance of the Franton accounts and ended the client relationship (a date is not given).
Vithlani, the recipient of BAE's payments, was involved in setting up the financing package with Barclays. For example, the SFO says that on 28 September 1999 Vithlani wrote to Barclays enclosing the final draft of the financing package. He enclosed a legal opinion dated 15 September 1999 from Chenge concerning the financial arrangements, including that they would not be subject to suit in Tanzania, that English law would be used in the event of any dispute, and that these arrangements would not cause Tanzania to become ineligible for IMF funding. Such conditions, the SFO said, were important to Barclays' willingness to proceed.
In September 2009 £600,000 was transferred by Chenge from the Franton account at Barclays in Jersey to an RBS account in Jersey. Later he moved the funds to the investment manager J O Hambro, this time in his own name, and also had an account at Standard Chartered in Dar es Salaam.
43. Chenge resigned in April 2008 following claims about more than £500,000 in an account in Jersey. He denied wrongdoing and claims, through the law firm DLA Piper, that the completion of the SFO's investigations vindicates him. The SFO's plea bargain preventing further investigation of matters prior to 5 February 2010 means that these allegations will not now be tested in court.
44. The SFO's information about the Franton account at Barclays in Jersey raises the extraordinary possibility-untested by the case that concluded in December-that a bribe may have been paid into a Barclays account to facilitate the agreement of conditions which allowed a Barclays loan to go ahead to finance an unaffordable deal for Tanzania.
45. We recommend that the Committee call Barclays to account for its role in this deal. The questions which we believe need to be asked include:
(i)Can Barclays confirm the IMF's statement to Norman Lamb MP that 35.9% of the loan was a grant, and explain what this meant, and why this was done?
(ii)Can Barclays respond in detail to allegations that the size of the deal was inflated to make it look as though the loan was on concessionary terms?
(iii)What due diligence did Barclays do on Shailesh Vithlani and his role as an intermediary in arranging the financing?
(iv)How does Barclays justify its comment, reported in the Guardian in December 2001, that it was "not involved" in the debate surrounding the sale, when
its provision of a loan was so central to allowing the deal to proceed
it had received documents from Vithlani and Chenge discussing Tanzania's eligibility for IMF funding if the Barclays loan went ahead, this being one of the questions at the centre of the debate about the appropriateness of the deal?
(v)Has Tanzania repaid the loan to Barclays? If so how long did it take? What is the total amount repaid including interest? Does this exceed the ex-gratia payment to be made by BAE?
(vi)When exactly did Barclays close Chenge's Franton account in Jersey? It is to Barclays' credit that it did so, but had it identified its customer as a politically exposed person (ie a senior official and therefore a greater corruption risk)? When it closed the account, did it make the connection between suspicious money received by its customer Andrew Chenge, and the fact that the same man was responsible for giving the go-ahead for Tanzania to borrow heavily from Barclays?
46. In addition, Royal Bank of Scotland, J O Hambro and Standard Chartered-the banks that handled Andrew Chenge's funds after they left the Barclays' account in Jersey- should be asked what due diligence they did on Chenge and his source of funds. Did they identify him as a PEP and do enhance due diligence? How did they reassure themselves that these funds were not the proceeds of corruption? Did they file any suspicious activity reports?
Recommendations:
47. Commercial banks should be required by law to disclose loans made to sovereign governments or state owned companies, including details of rates as well as all fees and charges. Proposed loans should be published well in advance, allowing parliamentary scrutiny in the recipient country and, if necessary, in the home country of the company whose deal is being paid for by the loan. This would need to be a global standard in order to be effective, but the UK, as a major financial centre, is in a position to push this.
48. The UK should ensure that its anti-money laundering laws, with their requirement to do customer due diligence, are rigorously implemented both in the UK and in the Crown Dependencies and Overseas Territories. The current furore over frozen funds belonging to Ben Ali, Mubarak and Gaddafi shows that the lessons are still not being learnt by banks when it comes to accepting corrupt funds. The current light touch approach to AML regulation means that banks can tick the box to say they've done their customer due diligence yet still do business that fuels corruption.
49. The UK also needs to set up a whole of government approach to tackling corruption which spans all the relevant government departments. The current PEP group and Bribery groups are untransparent and they do not cover all of the relevant issues. The UK government's efforts to tackle corruption have so far been largely limited to bribery and asset freezing/recovery. We would urge the UK anti-corruption champion to introduce an anti-corruption strategy that tackles all of the aspects of corruption which UK companies and banks-and the government itself-contribute to as set out in the Bond corruption paper.
House of Commons - HC 847 International Development Committee: Written evidence from Global Witness
