As of July, companies seeking the support of the UK’s Export Credits Guarantee Department (ECGD) face a new, substantially more stringent anti-corruption regime aimed at clamping down on the use of bribes to win contracts abroad. The changes represent the re-imposition of a set of rules that were put in place two years ago, but dismantled through the concerted lobbying of a number of companies, mainly within the defence industry, concerned that tightening certain rules would be “impracticable”.

The rules’ key amendments stipulate that, from the summer onwards, exporters and investors applying for ECGD support will be requested to provide the identities of agents involved in the award of contracts. The regime also contains a clause permitting the department to audit the contract records of exporters on a random basis, so as to verify declarations given that they have not engaged in corrupt activity. Many of the ECGD’s clients are unhappy.

The ECGD was established in 1919 to assist exporters in re-establishing their position following the First World War. Since the 1991 sale of its short-term arm, the department’s role has been to provide UK exporters of capital goods with finance and insurance “to assist them in winning overseas orders”, in addition to providing political risk insurance. In 2004-05 it provided in the region of £2bn ($3.65bn)-worth of guarantees and insurance: just under 39% of which covered overseas projects, a quarter backed defence exports and 35% backed civil aerospace projects. The biggest single recipient of guarantees (by frequency) is Airbus. Others include Rolls-Royce and BP.

While of undoubted assistance to the (relatively small number of) UK companies it backs, the ECGD has also attracted criticism from some campaign groups for backing arms deals to regimes with questionable human rights records, for example. The most high profile of these is the Al-Yamamah contracts – an ongoing series of sales to the Saudi military by BAE Systems currently under investigation by the Serious Fraud Office. BAE said it would not comment on the ongoing investigation.

Rule tightening

The ECGD took active steps to address criticisms when, in 2002, it published a statement in which it indicated that it would “combat corrupt practices”. The department then made a number of amendments to its standard documentation in 2003, and then again in May 2004, which further tightened up the rules, following which several users indicated they did not feel they would be able to apply for export support under the amended terms.

BAE Systems also sought support from then Secretary of Trade and Industry Patricia Hewitt, who agreed that the new regime was “not workable”. In December 2004, the terms were diluted so as to allow those companies to resume applications.

Unsatisfied with what it saw as a sop to the defence and aerospace players, a UK-based NGO, The Corner House, launched judicial review proceedings, resulting in a settlement that obliged the government to consult on whether the December 2004 rules would ensure that “taxpayers money is not used to support transactions tainted with bribery and/or corruption”, and that “an undue burden is not placed on exporters and/or banks”.

Following the consultation, the ECGD published an interim response, laying out possible procedural alternatives. These, in turn, elicited submissions that the Department of Trade and Industry considered, prior to publishing its final statement in March.

The strongest submissions (from both sides of the debate) related to the disclosure of agents, on the issue of which a number of interested parties, including the Confederation of British Industry (CBI), Airbus, Alstom, BAE Systems, the British Bankers’ Association, the British Exporters Association, and Rolls-Royce, presented themselves as a bloc, being of near unilateral opinion that the naming of agents presented too great a risk for businesses, and used near-identical language to express it.

In its interim response, the ECGD had suggested two alternative ways forward: that either companies identify agents, or that they give an “absolute contractual warranty” that they would repay any monies that the ECGD had been obliged to pay if an agent, regardless of the knowledge or acquiescence of the applicant, “had committed corrupt activity within the meaning of the ECGD forms”.

The additional approach of the latter alternative was welcomed by the bloc: in its submission, defence contractor BAE Systems said that it supported an approach that allowed an applicant to determine on a case-by-case basis whether to provide details of agents to ECGD. It suggested that applicants that had taken all reasonable steps to prevent an agent from acting corruptly, “including providing ECGD with details of its processes for appointing agents”, and whose agent acts corruptly contrary to the applicant’s express instructions, should not be unduly penalised, while the CBI described the obligatory identification of agents, without the warranty option, as “unworkable”.

However, anti-corruption organisation Transparency International described identification of agents as “a fundamental part of anti-corruption practice”, while The Corner House argued that the ECGD must be able to ask for and receive the name and address of an agent to be used by exporters, in the absence of which it would be “extremely difficult” for the DTI “to conduct proper due diligence with regard to the possibility that an agent may be used to pay bribes”.

And in his submission, John Burbidge-King, a former director of De La Rue, argued that there remained “no commercial reason whatsoever for non-disclosure of identity and address” and that if sensitivities could not be adequately addressed through the use of non-disclosure agreements, “doubt has to be cast on the nature of the arrangement”.

In its final decision the ECGD said that it had found no compelling evidence of either the “unworkability” and “inappropriateness” of identifying agents but acknowledged there were concerns that identities would be divulged either through the operation of the Freedom of Information Act, or through the ECGD making enquiries through non-governmental sources.

DTI reservations

Nonetheless, the DTI decided against two submitted suggestions relating to the use of agents: that the ECGD should ask a number of additional questions about agents, and that it should require the names of agents of consortium partners. Noting that with regard to the former, while there may be pertinent questions to ask, such as how agents were appointed, the government considered that it was “more appropriate for the ECGD to bear those questions in mind” rather than imposing an “obligatory and burdensome requirement in all cases”.

Anti-corruption campaigners including The Corner House and Transparency International have given a cautious welcome to the new regime, with The Corner House describing it as a “genuine and important step in the right direction that will help go some way to restoring the ECGD’s and ultimately the UK government’s reputation on fighting corruption”.

The Corner House added that while the ECGD deserved credit for taking a fair but robust line, it was still disappointed. In particular, it said that giving exporters five days’ notice before conducting an audit provided sufficient time for companies to destroy or hide documents (and noted that the Parliamentary Trade and Industry Select Committee had recommended the ECGD remove the clause). It also noted that “the fact that companies are not required to make any declarations about non-controlled subsidiaries… means [they] could provide an obvious conduit for bribe payments”.

While the new regime is effectively done and dusted, exactly what procedures will be in place regarding the disclosure of agents is unclear – although progress is being closely watched by government as well as business.

The Corner House argues that it would be “extremely difficult if not impossible for the ECGD to conduct adequate due diligence on an applicant’s agent solely through open source, web-based searches” and that the ECGD would be missing out on vital information about the background and reputation of an agent if it limited itself to such searches. It added that “a local diplomatic official” ought also to know an agent’s identity, in order that discreet enquiries might be pursued.

A spokesman for the CBI told fDi that the trade body felt it had done “reasonably well” out of the consultation, and that the new regime “largely showed that the government understood the legal and practical dynamics” that ECGD-backed exporters had to work within.

But, he says, there are still concerns about how the ECGD will use information, and who within the organisation will have access to it. He adds that it has to be understood that the use of agents is a perfectly legitimate means of winning contracts and “a legitimate part of business practice”.

He acknowledges that what counts as “legitimate business practice” has changed, even in recent years, in part on the back of Organisation for Economic Co-operation and Development requirements that its members implement anti-bribery and corruption procedures under which prosecutions can be brought for acts committed outside of a company’s domicile.

One industry source told fDi that the new regime would not precipitate a major change in the way that commercial affairs are transacted, suggesting “business will adapt”, and pointing out that the new requirements are no more than what US companies are already required to do (in fact, US companies are able to obtain exemptions in some circumstances). He says that even in parts of the world in which the use of agents to forge relationships was most prevalent, such as the Middle East, business practice is “very much more open than it was 20 years ago”.

Agent transparency

However, Mr Burbidge-King, who has recently launched a consultancy service for companies wishing to manage their use of agents and institutionalise anti-corruption procedures, points out that there exists increasing demand for transparency and accountability in investment communities, and that “the next hurdle for many firms would be putting in place appropriate processes for the appointment of sales agents and consultants”.

But, he says, not all businesses have quite understood the imperative of doing so, and adds: “In some cases, we’re not talking about small amounts. If a company is paying 5% on a deal worth several hundred million, or a few billion, pounds – that is a lot of money that is just disappearing into the blue. It could be spent on anything.”

In late July, a Trade and Industry Select Committee conducted an inquiry into the process leading to the new regime, and concluded that it was largely sound and reasonable. While the ECGD has fine-tuned some of the new provisions in such a way as to respond to industry’s concerns regarding commercial sensitivity, from now on it looks as though British business is going to play by stricter rules than almost anywhere else in the world.