BRIBES AND THE UNITED
KINGDOM ECGD
by
SALLY RAMAGE
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
£784 million in claims out of the £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 documents[1].
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 £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 was £33 billion and 60% of this £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 £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 Templeman[2]
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
2001[4]
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 £1 Billion for a BAE-Saudi Government transaction[5],
when it was disclosed that BAE was the ECGD’s biggest risk. At the time The
Serious Fraud Office was investigating BAE over a £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 £120 million , the British Aircraft Corporation contracted to
provide forty Lightning Jets, twenty five Provost Trainers and an undisclosed
number of
air-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 £2
Million in commission[6].
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:
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 countries[7].
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]
“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
Tel. 020 7239 7001/7190
Mobile 07818 076 688”
ENDS
Click below to
[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 £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.