Fatally flawed? TRACE International due diligence in question again in Rolls-Royce’s Nigeria case

Fatally flawed? TRACE International due diligence in question again in Rolls-Royce’s Nigeria case

Due diligence provider TRACE International certified a Nigerian company that, according to court documents, paid bribes on behalf of Rolls-Royce. The revelation comes less than a year after allegations that TRACE certificates helped Unaoil do corrupt business around the world on behalf of multinationals. The failure to detect possible wrongdoing by Unaoil and Rolls-Royce’s Nigerian agent, which has family connections to a key government department, raises serious concerns about the robustness of TRACE’s due diligence process.


Unaoil, a Monaco based intermediary for large multinationals in the oil industry, was described by the US Department of Justice in its Deferred Prosecution Agreement with Rolls-Royce as having “regularly bribed foreign officials and others in order to secure work for Rolls-Royce” while the UK’s Serious Fraud Office said in a 2016 submission to the High Court in London that Unaoil conducts “no lawful business”.


The Nigerian agent in the Rolls-Royce case, meanwhile, was named by the FT as PSL Engineering and Control, a Lagos-based company which claims on its website to provide “engineering solutions to clients”.  According to court filings accompanying Rolls-Royce’s £671 million corruption settlement in January, PSL, which is not identified by name in the documents, corrupted government officials in an attempt to secure business for Rolls-Royce. Specifically, PSL is accused of making improper payments to officials in National Petroleum Investment Management Services (NAPIMS), a Nigerian government body that supervises bids for contracts, including ones that Rolls-Royce vied for.


In one incident in 2010, PSL paid £5,000 into a private bank account in London linked to officials at NAPIMS, according to court documents. Three directors of PSL were also related to a key NAPIMS official.  In return for PSL’s links to NAPIMS, Rolls-Royce received confidential information about the bidding process for two energy projects.


The court documents show that a number of Rolls-Royce employees were suspicious about PSL’s work for Rolls-Royce which started in 2009. In December 2010, one Rolls-Royce employee raised concerns that PSL would not pass TRACE International’s due diligence process and also flagged suspicions about the agent’s family connections to the Nigerian government.


In March 2011, Rolls-Royce employees became aware of press reports about alleged corruption affecting the construction of the Oghareki power plant, a project that both the UK manufacturer and PSL were involved in. During 2010, Nigerian media widely covered two petitions to the country’s Economic and Financial Crimes Commission calling for an investigation into the Oghareki power plant project in Nigeria’s Delta State.


One petition, written in April 2010 by Intelligence Watch UK, said the project had been fraudulently awarded in June 2009 to DavNotch, a company allegedly linked to Victor Ochei, a senior Delta State politician. In particular, the Delta State government awarded DavNotch a multi-billion Naira contract to purchase and install two Trent gas turbines from Rolls-Royce. PSL provided technical assistance to the project. Nigerian government officials reportedly questioned at the time why Rolls-Royce had been selected to be the supplier, as the company’s turbines were possibly not as well suited to Nigeria’s tropical climate as other alternatives.


In May 2016, the Financial Times reported that the SFO was investigating Rolls-Royce’s and PSL’s involvement in the Oghareki project. However, the gas turbine contract was not covered by the SFO’s Deferred Prosecution Agreement, and the SFO made no allegation of wrongdoing against Rolls-Royce in relation to the Oghareki project.


Davnotch denies any allegations of impropriety, and Ochei says he divested from the company in 2011. According to local media reports, the Oghareki power plant project has been abandoned.


As part of its due diligence process TRACE says it reviews local media reports. However, a certificate posted on PSL’s website shows that TRACE, following due diligence checks, certified the company as “of good standing” on 1 April 2011.


The question is how did TRACE certify a company which was not only linked in the media to a corruption-tainted project, but which was also the subject of substantial concerns by one its own clients (Rolls-Royce)? Staff at Rolls-Royce continued to raise concerns about bribery by PSL in July 2011 several months after the company had been certified.


TRACE was not the only organisation to carry out due diligence on PSL. The same month that TRACE certified PSL, another due diligence provider, Altegrity Kroll, produced a report highlighting the corruption risks relating to PSL, which included allegations of corruption, use of political connections and family connections to government employees. A month later, Rolls-Royce commissioned another due diligence exercise, this time from Stirling Assynt, who while questioning how the company had managed to get contracts before even being incorporated, concluded that PSL was “more acceptable as agents of foreign companies than others” and was “a suitable partner” for Rolls-Royce.


The Statement of Facts asserts that Rolls-Royce’s compliance in relation to PSL was “ineffective and failed to detect the corrupt nature of the relationship” between PSL and NAPIMS. Interestingly when Rolls-Royce’s Higher Risk Committee met in January 2012 to consider PSL’s approval, employees’ concerns about corruption were not discussed and only two due diligence reports were put before it, neither of which made mention of the family connection between PSL and NAPIMS. Given that the Altegrity Kroll report did mention the family connection, it is not clear which reports were put before the committee and whether TRACE due diligence reports were one of the two. The Committee approved PSL as an agent in March 2012.


Virna Di Palma, a spokesperson for TRACE, was unable to comment on the specifics of the due diligence carried out on PSL in 2011 as her organisation discards documents after three years.  Di Palma also said while TRACE issued PSL a certificate certifying the company as a “member of good standing” in 2011, TRACE only began its official certification programme after 2012.


Di Palma added: “As every compliance professional knows, due diligence is not a guarantee against wrongdoing… If a company withholds information or knowingly permits or directs a vetted agent to pay bribes, then the due diligence process is entirely undermined.”


However, TRACE’s due diligence process was clearly important to Rolls-Royce. For example, in 2007 Rolls-Royce issued a company-wide business ethics code that made TRACE due diligence mandatory for external advisers hired by the manufacturer. Oil services company Unaoil was also approved by TRACE due diligence for a decade, helping it win business from Rolls-Royce. Unaoil is now under investigation by authorities in the US, UK and Australia over allegations that it paid bribes on behalf of numerous multinationals, including Rolls-Royce.


According to Fairfax Media, Unaoil gamed the TRACE due diligence process by getting company executives to submit false references attesting to the highly ethical operations of the Monaco-based business. Cyrus Ahsani, the chief executive of Unaoil, called TRACE “wankers” and “box tickers”, but realised the importance of passing the organisation’s due diligence process. He urged his sons to hang TRACE’s certificates on the walls of the Unaoil head office.


Neither Unaoil or PSL are currently listed on TRACE’s database of certified companies.


A box ticking exercise?


In the wake of the Unaoil scandal, the president of TRACE, Alexandra Wrage said: “We knew that the sheer volume of due diligence we handle meant we would eventually have a Unaoil in our midst. That is, a TRACE certified entity under criminal investigation.”


Now another company implicated in criminal proceedings has managed to slip through TRACE’s due diligence process. It seems that the organisation’s due diligence methods are fatally flawed.


In order to get TRACE certification an intermediary must consent to a 2-3 week due diligence screening. TRACE will then compile a report based on: a questionnaire filled out by the intermediary; references from multinationals that have used the agent; media searches; court case searches and screening of sanctions lists. Companies can still get certification despite having multiple red flags in their report.


A significant flaw in the TRACE due diligence process is that the organisation assumes that both the intermediary and the multinational will be forthcoming and honest in their questionnaires and references. The slew of ongoing corruption, money laundering and tax fraud investigations into some of the world’s largest companies, suggests that a resolute belief in the honesty of multinationals may be misled.


As TRACE does not carry out full-blown investigative research into intermediaries, it will be unable to discern if an agent or multinational is lying unless there are public court documents or media reports to suggest so.


Part of the problem is the terminology that TRACE uses, which creates the misleading impression that companies have been fully vetted, their business ethics guaranteed, rather than the truth, which is that they have passed a due diligence process costing a few thousand US dollars. In an interview with Global Investigations Review following the Unaoil scandal, Wrage recognised that the word “certify” (which appears on PSL’s certificate), is problematic.


She said: “The terminology – and I’m obviously not delighted with it in the wake of this – is that they are TRACE certified… “Can Unaoil stand up to the world and say, ‘Yes we’re TRACE certified’? Yes… Should we change the name of it? It’s possible. We can certainly consider it. It’s due diligence; it’s certainly not a guarantee.”


As TRACE readily admits receiving certification or passing background tests does not actually guarantee an agent is corruption-free.  But it does provide a crucial stamp of credibility that multinationals can hide behind when trying to show that they took proper measures to vet agents and prevent corruption. The Rolls-Royce scandal has shown yet again that the TRACE certification process is flawed. It begs the question, are TRACE certificates worth the paper that they are printed on?