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The Only Way Is Ethics

3 April 2014

Rolls-Royce is making a major effort to prevent future allegations of corruption. But the damage has already been done, with investigations being carried out around the world into its activities. Could the company be the most high-profile compliance failure?

Boiling Point

For more than a century it has been the symbol of luxury and achievement. The sign that the driver – or, as is often the case, the person being chauffeured – has made it. They have succeeded, made a fortune and can now drive the vehicle with the famous Silver Lady on the bonnet. The formal name for the Silver Lady is the Spirit of Ecstasy. That’s probably the feeling many people have had when taking delivery of their first Roller. It’s a sign that the owner has joined an elite worldwide club.

Unfortunately, Rolls-Royce is now gaining a reputation far less desirable. At present, it is under investigation in the UK, United States and India for corrupt business practices. This time last year, the company was accused of making payments to secure lucrative aircraft engine contracts in China and Indonesia.  This prompted the company to appoint David Gold, a member of the House of Lords and former partner at the Herbert Smith LLP law firm, to review its anti-corruption procedures; particularly the actions of “intermediaries in overseas markets’’.

Boiling Point

Late last year, it was formally announced that the SFO was starting an investigation into Rolls-Royce’s overseas activities. Earlier this month, Rolls-Royce revealed in its annual report that it was now also under investigation in the United States.

The report stated: “The group is currently under investigation by law enforcement agencies, primarily the Serious Fraud Office (SFO) in the UK and the US Department of Justice (DOJ).’’

The London-listed firm’s report emphasised that it was cooperating with the investigations but had yet to receive official notice of a formal DOJ probe, adding:  “Rolls-Royce has been cooperating with regulatory authorities on both sides of the Atlantic in regard to allegations of bribery and corruption. The SFO in the UK has launched a formal investigation. The DOJ is also investigating these matters, however we have received no notification of a formal inquiry being launched in the United States.”

If that was not enough, however, the company is now under investigation for the way it has conducted business in India. India’s defence ministry has just ordered an inquiry into the purchase of jet fighter engines from Rolls-Royce in a deal reportedly worth $1.6 billion. The inquiry will centre on allegations of kickbacks over the deal that saw Rolls-Royce supply engines to state-run Hindustan Aeronautics Ltd (HAL) between 2007 and 2011.

The key factor in these investigations appears to be the role of intermediaries. In response to this, Rolls-Royce announced this month that it is reducing the number of middlemen it uses. It also said in its annual report that it has restarted its 24-hour ethics telephone line for staff to raise any concerns about the way the company is conducting business.

The report states that it is working to simplify its anti-bribery policies in line with Gold’s findings. He produced his interim report last July with a final version expected later this year. At this stage, the company is keen to be seen to be doing all it can to reduce the scope for any of its current and future activities being tainted by allegations of corruption. The problem facing Rolls-Royce is that whatever measures it introduces now may prevent future problems but they can do nothing to eradicate whatever happened in the past. We do not yet know the exact levels of wrongdoing that may or may not have been carried out in connection with the Rolls-Royce deals that are now the subject of investigation. It is possible that even Rolls-Royce itself does not know precisely what has gone on.  There is another element of unknown that may also be troubling the company: are there any other instances of corruption carried out in its name that it does not yet know about? And what possible implications could they have for the company should they come to light?

Rolls-Royce seems both eager to discover what malpractice has been carried out in its name and determined to prevent it happening again. The company is, it has to be said, taking the steps needed to make sure nothing similar ever happens in the future. But why was it left until now to make sure that nothing illegal was being done around the world in the famous name of Rolls-Royce? We may be experts in compliance and, therefore, more aware than most of the need to run companies legally and safely. But there can be no excuse for Rolls-Royce not having already had measures in place to prevent, or at least detect, these instances before they became public knowledge.

The Bribery Act has made companies liable for the activities of anyone acting on their behalf anywhere around the world. It only came into effect three years ago, which is obviously after the Rolls-Royce deals in China, India and Indonesia that are currently under investigation. But a company of the size and stature of Rolls-Royce should have had robust compliance procedures in place years before they drafted Gold in to see what had gone wrong and make sure it never happens again. Whether or not a Bribery Act existed is irrelevant. It has always been the case that if a company can prove it has taken all possible steps to be legally compliant then it is more likely to receive a more favourable hearing should an investigation be carried out. If a company such as Rolls-Royce wants to prevent fraud and corruption it has to make sure its ethical stance starts at the top and percolates down through all levels of the company. It must involve close and on-going examination of the geographical areas where the company functions, the business sectors it trades in, the behaviour of its agents and business partners, the law in countries where it does business and any recorded incidents of business wrongdoing in those countries. Only then can the potential risk of bribery be accurately examined and negated.

Rolls-Royce probably knows all too well now that due diligence needs to include absolutely all aspects of a business deal; including hospitality, facilitation payments and referral fees. Clear reporting procedures must be created, introduced, publicised to staff and associates and enforced rigorously.  That is the only way that a company can encourage, respect and act upon whistle blowing – and be most able to respond quickly, decisively and appropriately when any allegations come to light. By doing this, a company can show it had devised adequate procedures, had acted completely appropriately and reported anything wrong as soon as it was aware of it.

It is interesting to note that it is now eight years since someone began writing allegations of bad practice against Rolls-Royce. If Gold’s review is to be of any real benefit to Rolls-Royce, it needs to identify why these concerns were not acted upon quicker – and how future responses could be improved. Such a measure will not bring back the Spirit of Ecstasy at beleaguered Rolls-Royce. But a spirit of compliance would go some way to preventing the Silver Lady losing any more of her lustre.


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