New Delhi: “False accounting”, breach of Indian Defence Procurement Rules, and an allegation of corrupt payments to an Indian tax inspector — a judgment passed by a UK court in 2017, which the CBI relied on to file an FIR against Rolls-Royce dated 23 May, reveals several damning allegations against the company.
The Central Bureau of Investigation (CBI) has booked London-based, India-born arms dealer Sudhir Choudhrie, his son Bhanu, and British aerospace major Rolls-Royce, for alleged corruption in procurement of 115 Hawk jets for the training of Indian Air Force pilots.
The CBI FIR talks about media reports alleging corruption against Rolls-Royce, leading to a probe by the Serious Fraud Office (SFO), an investigative UK government department. Rolls-Royce and the SFO then reached a Deferred Prosecution Agreement (DPA). A DPA is available to a corporate entity for certain economic or financial offences and provides for a mechanism through which prosecution can be avoided by entering into an agreement on negotiated terms with a prosecutor.
This DPA was approved by the Crown Court at Southwark in the UK on 17 January 2017. Under the DPA, Rolls-Royce agreed to pay penalties amounting to £497.2 million — purportedly the largest British fine ever imposed on a company for criminal conduct.
The UK court judgment (approving the DPA) included a summary of allegations against Rolls-Royce, covering activities spanning seven countries — India, Thailand, China, Malaysia, Nigeria, Indonesia, and Russia — over 24 years, from 1989 to 2013.
Referring to this judgment, the FIR says, “There are reasons to believe that significant amounts paid to the intermediaries/middlemen by Rolls-Royce were routed to public servants in India. The Crown Court judgment specifically mentions payment of GBP 1 million by Rolls-Royce to Intermediary for (an) increase of license fee of Rolls-Royce from GBP 4 million to GBP 7.5 million.”
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‘False accounting’
According to the summary of facts which formed a part of the judgment, one of the allegations against Rolls-Royce pertained to “false accounting” between March 2005 and September 2009.
It said that during this period, the Indian government restricted its defence contracts and despite several undertakings that it had not used “intermediaries”, Rolls-Royce allegedly continued to use one. Payments to this intermediary were shown as payments for general consultancy services, and not commissions. Thus, Rolls-Royce avoided compliance with procurement rules.
It noted that the defence ministry’s Defence Procurement Manual 2006 introduced a requirement that for supplies worth over INR 1 billion, all foreign suppliers had to sign a “Pre-Contract Integrity Pact” which had an undertaking that the bidder had not engaged anyone to intercede or facilitate the buyer to award the contract to the bidder and had not paid anything for it.
On 26 March, 2004, Hindustan Aeronautics Ltd (HAL), a State-owned aerospace and defence firm, and a joint venture of (Rolls-Royce and a French company) entered into an agreement, giving HAL the licence to manufacture, assemble and repair the joint venture’s engines for a fee of £7.5 million. This was a precondition to a larger contract by which Rolls-Royce supplied Adour engines for BAE Systems Hawk aircraft sold to India. The licence agreement contained an undertaking almost identical to the one in the Integrity Pact that came much later.
However, in or around April 2005, a senior Rolls-Royce employee was allegedly told that four commercial consultancy agreements were to be used to pay the intermediary £1 million in respect of the licence agreement. This transaction features in the CBI FIR. July 2005 onwards, Rolls-Royce signed all four consultancy agreements but none allegedly revealed any link to its license agreement with India. Around 1 September, 2005, the four companies were paid £1 million.
‘Corrupt payments to tax inspector’
Another allegation against Rolls-Royce relates to an agreement between January 2006 and August 2007 to make payments to a tax inspector in exchange for a May 2002 list of Rolls-Royce’s advisers. This list was removed by a tax inspector from the offices of Rolls-Royce in Delhi during a tax survey in January 2006.
It alleged that Rolls-Royce paid its intermediary in India to retrieve the list and prevent further investigations. Between April 2006 and August 2007, £1.85 million was allegedly paid to entities related to this intermediary.
The summary referred to internal discussions within Rolls-Royce which allegedly showed that they were worried of possible consequences if the Indian tax authorities were to pass the adviser list to the MoD and also about a potential CBI investigation.
They were concerned that with some customer contracts secured with the assistance of advisers on the list, it appeared that Rolls-Royce may have breached the terms of the contracts and Indian Defence Procurement Rules, either by appointing an adviser, or by failing to disclose such an appointment.
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Non-functional warehouse
The summary of facts also took note of when a Pegasus Long Term Agreement 1 (LTA1) between Rolls-Royce and the MoD, dated 1 October, 2002, for Indian Navy’s Sea Harrier aircrafts’ Pegasus engines was extended through Pegasus Long Term Agreement 2 (LTA2). Under LTA2, Rolls-Royce would supply relevant parts for a further five years. The contract was dated 19 February, 2007, with a value of £43 million. This was the first time that Rolls-Royce had to sign the Integrity Pact.
In early 2007, there was a proposal for Rolls-Royce to establish a warehousing/distribution facility in the United Arab Emirates for certain defence products traded in India. By July 2007, it involved a 10-year arrangement with a Dubai-registered company linked to the Indian intermediary, which had, by then, already been used by Rolls Royce through a consultancy agreement for payments for the adviser list cited earlier. This project was approved both by the MoD and Rolls-Royce headquarters in 2008.
Again, the agreement spoke of the warehousing arrangement without mentioning that it also provided a means of remunerating the Indian intermediary for assistance on MoD contracts, including the LTA2 one.
The summary of facts also noted that apart from one test-run supply of parts in January 2010, the warehouse never became fully operational, and no other parts were shipped through it. However, regular amounts due under the contract, totalling £3.32 million, were paid to the Dubai company from February 2009 until September 2009, it said.
‘Largest investigation to date’
The UK court took note of the steps taken by Rolls-Royce over the years to address the allegations, and said they “entirely accept that Rolls-Royce could not have done more to address the issues that have now been exposed”. It favorably took note of the “change of culture and personnel” within Rolls-Royce.
It observed that “Rolls-Royce is no longer the company that once it was (sic).” The judgment underlined the fact that “the indictment as a whole reveals bribery was being carried out by Rolls-Royce’s employees over a long period of time in multiple jurisdictions and multiple business areas.”
The investigation against Rolls-Royce included “data and review of email containers from relevant employees together with a review of relevant archive material; 229 internal investigation interviews”. Rolls-Royce also reviewed over 250 relationships it had with intermediaries, agents, advisers and consultants, closely analysing over 120 of them. It continued to share regular reports to the SFO and the Department of Justice, with full disclosure of the findings.
Along with Rolls-Royce’s internal reviews, the SFO conducted its own extensive investigation as well , with “the extraordinary cooperation of Rolls-Royce”. The judgment said the SFO commenced an investigation into these businesses, and that “it is the largest such investigation to date”.
The court did not name the recipients of alleged corrupt payments in other countries because it could lead to action or the imposition of a penalty which would violate the European Convention on Human Rights. It clarified that the DPA is available to a body corporate, a partnership or an unincorporated association and that “it is not available to an individual who, if convicted of corruption or bribery is likely to face a substantial custodial sentence.”
(Edited by Smriti Sinha)
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