Hello. It looks like you’re using an ad blocker that may prevent our website from working properly. To receive the best Tortoise experience possible, please make sure any blockers are switched off and refresh the page.

If you have any questions or need help, let us know at memberhelp@tortoisemedia.com

Tuesday 24 September 2019

tortoise intelligence • responsibility100 index

The price of doing business

The FTSE 100’s £20bn penalty for behaving badly

By Alexi Mostrous and Tortoise Intelligence

In private emails and late-night phone calls, the co-conspirators were careful to refer only to Mr Fox.

That was the code name given to a high-ranking Kazakh official by three Rolls-Royce employees at the centre of a bribery scheme which eventually cost the British aerospace giant £671 million in penalties.

Mr Fox, whose name has not previously been reported, helped direct huge gas pipeline contracts in Kazakhstan towards Rolls-Royce in exchange for multi-million pound payments funnelled through the Bahamas, Switzerland and the United Kingdom, US court filings show.

Despite a British judge calling the bribery scheme a “truly vast” criminal enterprise, it can be revealed today that the payout from Rolls-Royce was only the seventh largest set of penalties of all FTSE 100 companies in the past three years.

Data gathered by Tortoise Intelligence shows that the firm is one of 41 of Britain’s largest companies to have been penalised for corporate wrongdoing since 2016. Together, more than £20 billion in fines, sanctions and settlements have been levied against the FTSE 100 for misconduct ranging from environmental infractions to fraud.

The figures can be released following the publication yesterday of Tortoise’s Responsibility100 Index, which ranks FTSE 100 companies by their commitment to the United Nations’ Sustainable Development Goals. The goals were introduced in 2015 with 169 targets “to achieve a better future for all” by 2030.

The Index is currently in Beta mode with the official launch to take place in January. At the top of the ranking sits Unilever, the consumer goods giant which has cut its manufacturing emissions by almost 20% since 2016. Companies at the bottom include Evraz, the steel and mining business, gambling company Flutter Entertainment and Aveva, the IT software company. A full list is available here.

Today, the focus switches to civil and criminal penalties paid by the FTSE 100 to authorities in the US and the UK. The sanctions range from relatively minor infractions to fines of millions, and in some cases billions, of pounds.

Measuring corporate responsibility by reference to sanctions is hard. How do you compare financial wrong-doing, for example, with environmental damage? Are companies that self-report mistakes worse that those that fail to take responsibility for what they have done? How should we measure social impact when it is meted out in financial terms?

Yet it is irresponsible to ignore sanctions altogether. As a measure of criminal and civil wrongdoing they are relevant to a number of the UN’s sustainable development goals, not least goal 16 which promotes the rule of law and calls for a reduction in corruption. When the fine is for an environmental violation or for workplace abuse, it is an indication that the corporation may not be acting sustainably in that area.

Using open-source data, we have collated 341 instances of FTSE 100 companies paying penalties since 2016. The numbers, obtained from public-source websites such as the US Violation Tracker, represent only penalties paid to US and UK regulators.

Analysis shows that:

  • A FTSE 100 company pays a penalty for corporate wrongdoing once every four days. Between 2016–2019, 29 firms paid out a total of £1 million or more each;
  • US authorities issued penalties worth 20 times those imposed by Britain. The average size of a UK-originated penalty was £24 million compared to £63 million from the US;
  • RBS paid out fines worth almost half the value of all financial penalties imposed on FTSE 100 companies since 2016. The bank, which is majority owned by the British taxpayer, has handed over some £8.6 billion;
  • More than £1.8 billion was paid in relation to criminal conduct. Reckitt Benckiser, the FTSE consumer goods company, paid £1billion to US authorities in July over claims its pharmaceutical subsidiary mis-marketed a drug to treat painkiller addiction. Reckitt Benckiser said it acted lawfully at all times and expressly denies any allegations of wrongful conduct. Around half of the cash was spent to settle civil, not criminal, claims.
  • Banks and oil companies dominate the list of the top ten biggest offenders, the data shows. BP paid penalties of more than £5 billion in the last three years as it wound down payouts from the Deepwater Horizon disaster.
  • Royal Dutch Shell has received 115 penalties since 2016 – the most of any company – mainly for environmental violations in the US. A Shell spokeswoman said the company was not familiar with Violation Tracker, the open source website used by Tortoise to collate US levied fines. She said Shell aimed to run a safe and responsible business and was “constantly striving to do better and, where we fall short, we work hard to rectify this”. She said the violations flagged related to subsidiary companies within the Shell group rather than to Royal Dutch Shell, the parent company.

“It is extremely disappointing to see companies that should be setting an example in terms of business integrity are instead mired in controversy,” said Sophie Ogilvy, a director of Transparency International UK, the anti-corruption charity.

“We encourage firms to learn from their mistakes so that from this point on, the FTSE 100 moves towards becoming a beacon of business integrity and does not decline into something more resembling a rogues’ gallery.”

Commenting on the disproportionate amount of sanctions issued against FTSE 100 companies by US authorities, Ms Ogilvy said: “The figures revealed by this investigation highlight our concerns that UK authorities are ill-equipped to police corporate crime, both in terms of their powers under the law and the resources at their disposal.”

For years business leaders in the UK have expressed concern that US authorities too willingly punish international corporations, expecting them to settle quickly to avoid a costly court battle and the risk of getting locked out of the US market.

In 2012, when a little known US regulator called the Department of Financial Services (DFS) wiped £5 billion off the value of Standard Chartered after accusing the lender of money laundering, Boris Johnson, then Mayor of London, claimed it was trying to damage London’s claim to be the world’s financial capital.

Commenting on Tortoise’s data, former international development secretary Andrew Mitchell said that some of the fines issued against multinationals were “very unfair”.

“UK firms tend to pay US fines because their business will be destroyed if they don’t,” he said. “It’s rough justice.”

RBS was the recipient of the single largest penalty. Last year it announced it would pay $4.9 billion (£3.86 billion) to settle US claims that it misled investors on residential mortgage-backed securities between 2005 and 2008.

A US Department of Justice report released at the time quoted the company’s chief credit officer as describing underwriting standards at the bank as being “total fucking garbage” and “like quasi-organised crime”.

This year, RBS and Barclays were fined further millions by the European Commission and Swiss authorities for manipulating currency markets. The Tortoise Responsibility100 Index does not include fines from competition authorities, however, so these numbers are not included in the overall calculation.

Companies penalised for alleged criminal offences include AstraZeneca, which paid out £4.2 million in 2016 to settle claims that its employees set up bogus conferences, organised false travel documents and created fake tax receipts in order to “reward or influence” doctors in Russia and China. The Anglo-Swedish multinational declined to comment.

Carnival Cruises, another member of the FTSE 100, paid $40 million after it was caught using a “magic pipe” to pump thousands of gallons of polluted bilge waste along the British coast. This year the cruise company, which pays a reduced rate of tax in the UK thanks to a special deal with the government, had to pay a further $20 million in fines this year after falsifying documents and continuing to dump waste. A Carnival spokesman said that the company had created a new chief compliance officer role, adding that environmental compliance was a top corporate priority.

In several cases of allegedly criminal conduct, major companies have accepted so-called deferred prosecution agreements (DPA), under which companies are saved from criminal sanctions if they do not commit further offences over an agreed period of time.

Rolls-Royce was one of the companies to be granted a DPA in 2017 having cooperated with Serious Fraud Office investigators in bringing the bribery scheme to light.

Sir Brian Leveson, the judge who approved the DPA, specifically stated that the agreement with the company did not prevent individual executives from being prosecuted. Indeed, he warned that anyone convicted of corruption or bribery “is likely to face a substantial custodial sentence”.

However, James Finley, a British-born senior executive at Rolls-Royce at the centre of the bribery scheme in Kazakhstan, received a US prison sentence of just four months in July. He has not been charged by the Serious Fraud Office, which dropped its investigation into individuals at the company in January.

Mr Finley also received eight months of home confinement and had to pay a large fine, court records show.

An SFO spokeswoman told Tortoise a thorough investigation had been conducted. “Charging decisions in the UK are taken in line with the Code Test for Crown Prosecutors: does the evidence support a reasonable prospect of conviction and, if so, is it in the public interest to bring charges? There are many reasons why the case against an individual may not meet that test, and why, nonetheless, authorities in a different jurisdiction might come to a different conclusion.”

Sir Brian Leveson found that Rolls-Royce had given investigators an extraordinary level of co-operation. The judge agreed that the multinational was a fundamentally different business today. “The past practices that have been uncovered do not reflect the manner in which Rolls-Royce does business today,” CEO Warren East said at the time. “We have zero tolerance of business misconduct of any sort.”

Illustration Julia Allum for Tortoise

All our journalism is built to be shared. No walls here – as a member you have unlimited sharing

Further reading