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Failing to heed red flags can lead to trouble – $599 million worth

TOPICS:  Due diligence

The U.K.’s Serious Fraud Office gave Rolls-Royce some faint praise before blasting it in a recent court statement; the SFO said the global firm “did undertake some compliance” into a Nigerian company hired to help it land business there, but that the due-diligence effort “was ineffective, and failed to detect the corrupt nature of the relationship” between the Nigerian intermediary and a key government agency.

The events in question happened several years ago, when Rolls-Royce’s engineering division set out to win large contracts to work on power plants in southern Nigeria, according to the SFO court statement filed in a bribery case involving Rolls-Royce. A 53-page Statement of Facts by the SFO, recently filed in a U.K. court in connection with a deferred prosecution agreement with the company, laid out details of the case.

Some Rolls-Royce employees had expressed concern that a Nigerian company that Rolls-Royce hired to help land the power-plant contracts had a history of alleged corruption, and that some of the Nigerian intermediary firm’s executives had relatives and friends at the Nigerian agency awarding the tenders.

Rolls-Royce commissioned a due-diligence investigation into the Nigerian intermediary, by the Kroll p.i. firm, which spotted serious problems. Kroll’s report “highlighted a number of risks” with the intermediary, including close family and personal relationships between the government agency and the intermediary, the SFO report said.

Rolls-Royce then retained another firm, Stirling Assynt, to get another opinion. The SFO report stated: “The Stirling Assynt report questioned how the Nigerian Company had been able to procure contracts prior to its incorporation in 2008, but suggested that ‘this company is more acceptable as agents of foreign companies than others in the country,’ suggesting the Nigerian Company was ‘a suitable partner for you.’”

A Rolls-Royce management committee met to consider hiring the intermediary firm in light of the conflicting due-diligence findings, and ended up recommending retention of the firm. The SFO concluded that that deliberation “was not independent,” but was swayed by the presence of “the RR employees who had been responsible for the relationship with the Nigerian Company.”

Then a more senior “Higher Risk Committee” of Rolls Royce met to weigh the decision. “They had before them the two due diligence reports, and the outcome of the due diligence meeting,” but there was no discussion of the serious concerns raised by a number of Rolls-Royce employees about the intermediary, the SFO report said. “It is clear that the material considered at that meeting was insufficient.” The Higher Risk panel approved the hiring, which went forward in 2012.

Public allegations soon emerged that the intermediary firm and some Rolls-Royce employees paid bribes to Nigerian officials, and the SFO launched an investigation in 2013. Overall, the SFO concluded, Rolls-Royce “did undertake some compliance” into the Nigerian intermediary firm, but “it was ineffective, and failed to detect the corrupt nature of the relationship” between the Nigerian intermediary and the government agency.

Earlier this year, U.K. authorities signed a deferred prosecution agreement with Rolls-Royce to settle allegations of bribes being paid not only in Nigeria but in six other countries, as well. Without admitting guilt to any crime, Rolls-Royce agreed to pay $599 million in penalties, ending a three-year probe by the SFO.

In a judgment approving the SFO’s settlement with the company, senior U.K. judge Brian Leveson, president of the Queen’s Bench Division, ruled that Rolls-Royce for years had had a confusing system of due-diligence on intermediaries, and “did not have proper systems (or cultural recognition) in place to ensure that offences of bribery did not take place.”

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