Aerospace and defense group Rolls-Royce may face prosecution after Britain's Serious Fraud Office (SFO) ordered it to hand over details of possible bribery and corruption in China and elsewhere, the company said on Thursday.
The world's second-largest maker of aircraft engines said the SFO had asked it to conduct an internal inquiry into dealings involving intermediaries in China, Indonesia and other overseas markets, which it did not name, and report the results.
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"It is too early to predict the outcomes, but these could include the prosecution of individuals and of the company. We will cooperate fully," Chief Executive John Rishton said.
Shares in Rolls-Royce, which have risen a quarter this year, fell as much as 5.6 percent in early trade. The stock was down 3 percent at 886.75 pence by 1410 GMT, valuing the group at around 16.6 billion pounds ($26.7 billion).
A source close to the investigation said the allegations relate to events in the "distant past" and Rolls-Royce had told the U.S. Department of Justice about the inquiry.
A separate source said a whistleblower had raised the allegations with the SFO, which then ordered Rolls-Royce to undertake a preliminary investigation earlier this year. The company hired a law firm for the task and passed the results, which had identified matters of concern, to the SFO.
The company, a major British exporter, dates back to 1884 and on its website says it prides itself on its "integrity, reliability and innovation".
"I want to make it crystal clear that neither I nor the board will tolerate improper business conduct of any sort and will take all necessary action to ensure compliance," Rishton said in a statement.
"This is a company with exceptional prospects and I will not accept any behavior that undermines its future success."
Analysts said past fines within the sector over corruption tended to be relatively small. Any offences committed in the "distant past" would probably not fall under the British Bribery Act, which came into effect only in July 2011.
This tougher law introduced an offence of failure to prevent bribery, and clamps down on "facilitation payments" and disproportionate hospitality to oil the wheels of business.
Companies can be handed unlimited fines if they cannot show they have "adequate procedures" to prevent bribery, while guilty individuals face up to 10 years in prison and unlimited fines.
MATTERS OF CONCERN
Rolls-Royce's profits have risen strongly in recent years due to soaring demand for more fuel-efficient engines for planes made by Airbus and Boeing. Luxury Rolls-Royce cars are made by a separate company belonging to BMW AG.
Aerospace and defense companies use intermediaries, which can be individuals or companies, in countries where they do not have a large presence. Intermediaries cover tasks from sales to coordinating maintenance and support contracts.
The SFO declined to give details of the investigation. "It's up to Rolls-Royce to say what they think is right to say. It's not something we would provide information about or comment on," a spokesman said.
Allegations of corruption are not new to the defense and aerospace industry. BAE Systems, Europe's biggest defense company, was fined $450 million by the United States and Britain in 2010, following long-running corruption investigations at home and abroad into defense deals in Saudi Arabia, Tanzania, Sweden, the Czech Republic and Hungary.
"BAE ended up with fines that were not exactly huge, so you would imagine that Rolls could end up with a fine that won't trouble investors much," said Espirito Santo analyst Ed Stacey, noting that the European Union has banned arms sales to China.
"China is involved and you can't sell anything defense-related there, so it (the probe) has to concern its civil aerospace or energy businesses," he said.
The SFO, which spent years chasing BAE Systems over bribery allegations, formally launched a criminal investigation in August into allegations that European defense group EADS bribed Saudi Arabian officials to win a contract.
Rolls-Royce's operations span the civil aerospace, defense, marine and energy sectors and the company did not disclose which units were involved. It has almost 2,000 employees across Greater China, including joint ventures, and the country's operations contributed 934 million pounds in revenue in 2011, making it the group's fourth biggest market.
The British company, which reported overall sales of 11.2 billion pounds in 2011, is heavily involved in China's civil aviation and energy industry. Its website says every major airline in mainland China is a long-term customer, with its engines powering 370 aircraft with 166 more on order.
Last year it won a contract to supply gas compression equipment for China's West-East Pipeline Project - the world's longest natural gas pipeline.
Indonesia is a relatively small market for Rolls-Royce, which caters to civil, defense, marine and energy customers in the country, including supplying engines to carriers and the air force. It also supplies propulsion systems and marine equipment to its naval and commercial ships.
Anti-corruption body Transparency International ranked China and Indonesia the 80th and 118th most corrupt countries out of 174 in its perceptions index published on Wednesday.
Based on evidence provided by Rolls-Royce on its anti-corruption systems, Transparency International ranked the company in the third tier of six in an October study of the global defense industry.
Other British aerospace and defense companies such as BAE and Meggitt were deemed to be more open about anti-corruption measures and went into the second tier.
"In other cases, the largest negative fallout has been on the company's reputation," said RBC analyst Robert Stallard, adding that such investigations tended to be lengthy.
Rolls-Royce's history dates back to 1884 and the electrical and mechanical business established by Henry Royce. Having built his first motor car in 1904, Royce then met Charles Rolls, who sold quality cars in London, and the two agreed to manufacture a range that would bear the name Rolls-Royce.
Following success in the motor industry, the company branched into aero engines in 1914 to meet the need in Britain for air power for the First World War, before moving into the civil aviation sector.
The company said on Thursday it had significantly strengthened its compliance procedures in recent years, including the introduction of a new global ethics code and a new intermediaries policy. It plans to appoint an independent senior figure who would lead a review of current procedures and report to the ethics committee of the board.
($1 = 0.6214 British pounds)
(Additional reporting by Kirstin Ridley, Kate Holton and Brenton Cordeiro in London and Tim Hepher in Paris; Editing by Elaine Hardcastle and David Stamp)