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18 January 2017 · 3 min read

SFO shows its metal with £497m fine for Rolls-Royce

Black cloud over engine manufacturer should now start to lift

The Serious Fraud Office’s (SFO) five year investigation of Rolls-Royce has finally come to a conclusion, with a verdict that shows the SFO is getting tough on corruption, but one which should hopefully allow the dark cloud over Rolls-Royce to start lifting.

The company announced on Monday that it has reached a Deferred Prosecution Agreement (DPA) with the SFO, agreeing to pay £497m with interest over five years, plus an undisclosed payment for the SFO’s costs.  It also has to pay the US Department of Justice (DoJ) $170m and Brazil’s Ministério Público Federal (MPF) $26m, creating a total fine of approximately £671m. These agreements relate to bribery and corruption involving intermediaries in a number of overseas markets. The conduct covered by the UK DPA took place across seven jurisdictions: Indonesia, Thailand, India, Russia, Nigeria, China and Malaysia.

I last wrote about this issue in our blog last November ‘One man’s gift is another man’s bribe’ and I noted that the US DoJ’s prosecution of Siemen’s in 2008 was probably the most comparable case. It paid a total of $800m to the DoJ ($350m in costs and $450m fine), as well as $854 to the Office of the Prosecutor General in Munich. In contrast, when BAE was investigated by the SFO in 2010 it was fined £30m, which at the time was a record monetary punishment for a corporate.

The SFO’s prosecution of Rolls-Royce is the most high profile bribery case since the new 2010 Bribery Act which made organisations liable for failing to prevent any member of staff or associated person from bribing an individual or Foreign Public Official on its behalf. It is therefore unsurprising that it has chosen to flex its muscles and impose a material fine. Historically the SFO has been seen as more lenient than the DoJ, but this ruling ensures this will no longer be the case.

The international nature of Rolls-Royce’s business means that this ruling may not be the end of this issue for Rolls-Royce. There may be some outstanding smaller issues in other jurisdictions. However, the company is likely to have reported everything they could find in this tranche, and this is the ruling the market has been hotly anticipating for five years now. The impact on Rolls-Royce’s cash flow will be material, with a £293m payment required in 2017, however, the fact that the negative impact can now be quantified goes some way to explaining the 7% jump in the share price today. Rolls-Royce’s cash flow is already under pressure with a high number of new engine deliveries, so this is another headache for the new management team to contend with.

The question now moves onto whether any other companies in the Aerospace & Defence sector are in the SFO’s crosshairs? Rolls-Royce cannot have been the only engine manufacturer to try and win business using intermediaries. In addition it will be interesting to see whether the competitive environment changes. Will this mean that there will be a greater requirement to prove technology over a competitor’s? And might deals potentially become more difficult and time consuming to sign? We shall be watching with interest.


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