Saturday, October 26, 2013

Corruption claims hang over Leighton

Leighton windows.

Investors are assessing the fallout from Leighton. Photo: Paul Miller

When headlines ''Claims corruption rife at Leighton'', ''Bribe claims hit board'', ''Going rogue'' and ''Ex Leighton exec quits as bribe scandal intensifies'' were plastered over the front pages of Fairfax Media newspapers earlier this month they wiped 13 per cent off the construction giant's share price and left the investment community jittery about bribery and corruption risks in other companies.

Leighton has denied the allegations and says it has spent a lot of time improving its processes, including banning facilitation payments. Despite this, the share price continues to languish as the stories roll out anew and investors consider the possible knock-on effects.

Citi analyst Elaine Prior has articulated the risks to companies in a series of reports that identify companies in the ASX 100 potentially at risk of bribery and corruption based on the location and nature of operations in countries where corruption is a perceived risk, using the Transparency International's Corruption Perceptions Index rating.


She says while many companies disclose ''generic'' information on their policies, such as record keeping, stance on facilitation payments and whistleblower facility, very few companies in her study provided much detail on how the policies were implemented and monitored in practice.

''In future, we suspect that investors may seek more information on companies' bribery risk assessment approach, how companies know that their people are following their stated bribery and corruption policies, what training is provided, and what internal compliance review processes are in place, rather than simply seeking codes of conduct and policy documents.''

Given the impact on Leighton of the bribery scandal and the regulatory crackdown sweeping the world, she is probably right. Even a sniff of a corruption scandal will force investors to take seriously the risks or face the prospect of a sharemarket bloodbath.

Since Australia introduced the anti-bribery laws 12 years ago 28 cases have been referred to the Australian Federal Police. There have been far too few scalps, with Reserve Bank subsidiary Securency one of the most high profile and the one that has resulted in some arrests.

This has put pressure on the AFP to start using the legislation more effectively to stamp out corruption and bribery. In the case of Leighton, the AFP has been investigating the company for almost two years yet it hasn't interviewed some of the key players alleged to be involved in the corruption. This is unfair to everyone. They need to put up or shut up.

Prior says companies are increasingly assessing their contractors and agents for potential bribery and corruption risk. She says this could be particularly relevant for companies that provide services to mining companies, which may become subject to their clients' due diligence processes relating to bribery and corruption. She says various companies that conduct due diligence on agents or partners include Alacer, Alumina, BHP, BlueScope Steel, Flight Centre, Macquarie Group, News Corp, Rio Tinto, Wesfarmers, Woodside Petroleum and WorleyParsons.

In a second report, Bribery and Corruption in the Spotlight, Prior draws attention to the fact that some countries are adopting stronger regulation and that will affect businesses as regulatory enforcement cranks up.

She notes that companies with British connections face tougher regulation following a beefing up of the British Bribery Act. Prior warns that companies that associate with corrupt activities can result in exclusion from future contracts. It means companies will increasingly be forced to conduct due diligence on their contractors, partners and agents. ''Companies implicated in bribery or corruption may face loss of contracts, or loss of the opportunity to tender for contracts. When allegations or investigations occur, this may divert substantial management/board efforts away from more productive activities, to the detriment of the company. These impacts are in addition to legal fees and financial penalties,'' she says.

As has been seen in the Leighton scandal, regardless of the outcome, there has been an impact on individuals, with several former Leighton staff falling on their swords. This is the best indication yet that companies are increasingly sensitive to ''perceived or possible links with corrupt conduct''.

Allegations include a $43 million kickback relating to a contract in Iraq, allegations relating to an Indonesian barge contract, and the resignations of employees including David Stewart, who resigned as chief executive of Laing O'Rourke, David Savage, who quit the board of British engineering group Keller plc, and Russell Waugh, who left a senior position at UGL.

''While we are in no position to judge potential legal outcomes, it appears that the various organisations were keen to distance themselves from these contentious issues,'' the report said.

It has also prompted the class action lawyers to sniff around to see if there is a case to answer in relation to potential continuous disclosure breaches, given the fall in the share price. Leighton informed the market in early 2012 that the AFP was investigating a possible breach of the law relating to payments that may have been made to facilitate work in Iraq. At the time the share price fell but not hard, as there was no mention of how big the potential bribery payment was.

There is no question investors have been spooked by all the talk of corruption and bribery. For this reason they will start pressuring for more information about policies. At the same time as Australian companies increase their footprint in developing countries, the risks become greater, making it a greater issue for boards.
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