Case File

Rolls-Royce Hawk Jet Deal

Author
Jack Cinamon
Published on
April 23, 2024
Image
Jet image credit Laurent ERRERA from L'Union used under CC BY-SA 2.0 Deed
Jet image credit Laurent ERRERA from L'Union used under CC BY-SA 2.0 Deed

Contents

Contents

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Introduction

Introduction

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India has a long history of corruption in defence procurement. Despite legislative changes during the period of the current case, intended to curb corruption through prohibiting intermediaries, this practice still remains, as does the corruption associated with intermediation.

In 2003, India, possessing the world's fourth-largest air force, faced a critical need for training aircraft to enhance its safety record. Over the preceding decade, the country had incurred the loss of 170 Russian-made MiG fighter jets and the tragic death of 40 pilots in accidents, prompting a demand for improved training resources.

Consequently, the Cabinet Committee on Security (CCS) at the Indian Ministry of Defence (MoD) approved the procurement of 66 British-made Hawk 115 Advanced Jet Trainer Aircraft (AJTs) for a fee of Rs. 5653.44 Crores (£734.21 million) from British arms company BAE Systems. Also signed was a deal for Indian based arms company Hindustan Aeronautics Ltd (HAL) to licence manufacture 42 additional aircraft in a deal worth Rs.1944 Crores (£308.247 million). The manufacturing licence for the engines was given to British defence firm Rolls-Royce in a deal worth Rs.792.2 Crores (£7.5 million). HAL later requested a manufacturing license for an additional 57 AJTs bringing the total number of aircraft to 214.

Rolls-Royce has admittedly been involved in numerous instances of corruption to obtain defense contracts. This particular deal with India is just one of these examples.

Case Details

Case details

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Seller country
United Kingdom
Seller company
Rolls-Royce
Buyer country
India
Goods category
Aircraft
Equipment sold
165 Hawk 115 Advanced Jet Trainer Aircraft
Deal value
£1.68 Billion
Sum involved in corruption
At least £ 2.85 million.
Start year
2003
Outcome status
Mixed

Actors

Actors

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  • Rolls-Royce Holdings plc - a British arms company, specialising in engine manufacturing.

  • Rolls-Royce India Pvt Ltd - An Indian subsidiary of Rolls-Royce.

  • BAE Systems plc - a British arms company, and the largest in Europe.

  • BAE Systems (Operations) Ltd - A subsidiary to BAE Systems.

  • Hindustan Aeronautics Ltd (HAL) - an Indian state-owned arms company.

  • RR Turbomeca Ltd - was a joint venture between Rolls-Royce (UK) and French helicopter engine specialist Safran Helicopter Engines (formerly known as Turbomeca). Turbomeca bought out Rolls-Royce's involvement in the joint venture program during the mid-2010s. Headquartered in Bordes, France.

  • Tim Jones - Director of Rolls-Royce India Pvt Ltd.

  • Sudhir Choudhrie - Indian businessman and arms dealer, residing in London, accused of conspiring to pressure unknown public servants to cause the disappearance/ removal/ destruction of documents to evade a CBI investigation.

  • Bhanu Choudhrie - British-Indian entrepreneur, investor and business owner, residing in London. He is the son of Sudhir Choudhrie, also accused of conspiring to pressure unknown public servants to cause the disappearance/ removal/ destruction of those documents to evade a CBI investigation.

  • Intermediary 4 - Unknown Indian individual and the recipient of bribes.

Allegations

Summary of Corruption Allegations

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In 2012, media reports unveiled corruption allegations against Rolls-Royce, prompting an investigation by the Serious Fraud Office (SFO) in London. This eventually led to the largest British fine ever imposed on a company for criminal conduct when Rolls-Royce and the SFO entered into a Deferred Prosecution Agreement (DPA) in 2017, admitting corrupt actions in 12 countries, including India. The DPA was worth a staggering £497,252,645.

A total of £2.85 million was revealed in bribe payments through intermediaries to secure two things; firstly, to negotiate an increase in the price of a Manufacturer’s Licence fee on behalf of Rolls-Royce from £4 million to £7.5 million. Secondly, payments were made to government officials including tax officials in exchange for an incriminating list of Rolls-Royce’s intermediaries.

The Crown Court judgment on the DPA for India revealed Rolls-Royce's concealment of intermediaries, payments to public servants, and manipulation of records to avoid scrutiny. The SFO investigation alleged that Rolls-Royce paid bribes in India for jet engine sales and services.

In 2023, the Indian Central Bureau of Investigations (CBI) registered a case against the Choudhries, Rolls-Royce officials, and unknown individuals, unveiling illegal acts and recommending charges under Indian Penal Code and Prevention of Corruption Act. The case involves allegations of unregistered Indian agents influencing government decisions and corrupt practices in defense deals.

The case alleges a conspiracy to defraud the Government of India in the procurement of Hawk Aircraft from Rolls-Royce plc, UK, and its associate group companies, including Rolls-Royce Turbomeca Limited and BAE Systems.

Timeline

Timeline

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2003
  • 3 SepThe Cabinet Committee on Security (CCS) at the Ministry of Defence approved a package for the procurement of Hawk 115 Aircraft. also signed, was an agreement between the governments of India and the United Kingdom to provide long-term support for these aircraft. The key approvals were:
    • 24 BAE Hawk 115Y AJT in flyaway condition with spares, ground support equipment and training aids, along with materials for 42 aircraft to be manufactured by HAL at a cost of £734.21 million, equivalent to Rs. 5653.44 Crores at Rs, 77/- per GBP.
    • 42 additional aircraft to be licence manufactured by HAL at a cost not exceeding £308.247 million, equivalent to Rs.1944 Crores.
    • Manufacturer's License Fee for engines with a payment of approximately £7.5 million to Rolls-Royce.
  • Included in the procurement of the above was an inter-Government agreement with the Government of the UK for long term product support.
2004
  • 19 MarA Memorandum of Understanding (MoU) was signed between India and the UK for long term product support.
  • 26 MarThe official contract signed for the supply of 24 HAWK Aircraft by way of direct supply and materials and transfer of technology for 42 Aircraft to be licence manufactured by HAL were signed between the Indian Ministry of Defence and BAE Systems/Rolls-Royce.
  • Also signed was a licence agreement by RR Turbomeca Ltd (RRTM) and HAL. The licence agreement gave HAL licence to manufacture, assemble and repair the RRTM Adour Mk 871-07 engines for the AJTs. The fee payable to Rolls-Royce was £7.5 million. The licence agreement was a precondition to a larger contract by which Rolls-Royce supplied Adour engines for BAE Systems Hawk aircraft sold to the Indian Government. This contract was signed (by BAE Systems) in 2004 (with a value to Rolls-Royce of £122 million).
  • All these contracts contained Agent/Agency Commission prohibition clauses to the effect that the supplier (Rolls-Royce/BAE) shall confirm that it has not engaged any agent/middlemen to intercede, facilitate or in any manner recommend to the Government of India for award of the contract nor any amount has been paid to any such individual/agent/middlemen. If found the supplier will be liable for a refund for the full amount from the buyer, also debarring any supply contract with the Government of India for a minimum of 5 years. In the terms of the said agreement, the purchaser has the right to consider termination of the contract either wholly or in part and in such an event, the supplier was bound to refund all payments made by the buyer for equipment not yet delivered by the supplier. It required the supplier to confirm that they hadn't given any gifts, commissions, fees, or favors to anyone involved in the purchasing process. If they violated these rules, the buyer had the right to cancel the contract and ask for compensation for any losses incurred.
2005
  • 21 FebThe Ministry of Defence signed a contract with HAL to make 42 aircraft and equipment. HAL produced these Hawk aircraft between August 2008 and May 2012, delivering them to the Indian Air Force. As part of the agreement, HAL correctly paid BAE Systems £308.247 million and Rolls-Royce £7.5 million for their services.
  • AprAn employee at Rolls-Royce’s Marketing Services department informed a senior Rolls-Royce employee that four Commercial Consultancy Agreements were to be used to pay an Intermediary (called Intermediary 4 by the SFO) £1 million in respect of the licence agreement. Intermediary 4 had materially assisted in Rolls-Royce obtaining a licence fee of £7.5 million, when the Indian Government was initially considering a maximum fee of £4 million. According to sources, HAL declined to comment on the increased price. Payments to this intermediary were shown as payments for ‘general consultancy services’, and not commissions. Thus, Rolls-Royce avoided compliance with procurement rules.
  • 23 MayThe employee at Rolls-Royce’s Marketing Services department informed a Rolls-Royce senior employee that the £1 million was approved in return for securing the £7.5 million licence fee.
2006
  • 9 JanDuring a survey conducted by the Income Tax Department, documents dated May 2002, containing vital information of Rolls-Royce list of its Indian intermediaries were seized from the premises of Rolls-Royce India by Indian tax inspectors and coincidently disappeared. In order to prevent a Central Bureau of Investigation (CBI) probe into the matter, Rolls-Royce paid Intermediary 4 to retrieve the list from a Rolls-Royce India office. The list included several companies connected to Intermediary 4. There is an inference that this involved payment to a tax inspector. These payments to Intermediary 4 were also made through contractual documentation which did not correctly record the real reason for the payments, but it is clear there were concerns that the adviser list could trigger a more extensive investigation.
  • On the same day, the MOD’s Defence Procurement Manual 2006 brought into force a requirement for all of its foreign suppliers to sign a standard “Pre-Contract Integrity Pact” for supplies worth over INR 1 billion (c. US $25 million).
  • 27 AprIt was reported to senior Rolls-Royce employees that the tax issues in India had been satisfactorily resolved.
  • 11 MaySeven new contracts were signed. It is accepted that these contracts were the mechanism by which Rolls-Royce made payments to Intermediary 4 in connection with the intermediaries list. Three of the new contracts were Side Letters to existing consultancy agreements. The remaining four were new consultancy agreements describing fixed fees payable for general services in relation to a number of territories. None of the proposal forms, Side Letters or consultancy agreements revealed any link to the adviser list issue.
  • MayAnother contract paying an additional £500,000 to an Intermediary 4 affiliate had also been signed. This similarly purported to be for general services. It is accepted that this payment is also related to the intermediary list issue.
  • In total £1.85 million was paid by Rolls-Royce to Intermediary 4 entities between April 2006 and August 2007
2008
  • 1 JanHAL made a request to the MoD seeking approval for entering into an agreement for license manufacturing of 57 additional Hawk aircraft, a strange development as MoUs and contracts were usually signed between the MoD and BAE/Rolls-Royce directly for License Agreement.
2010
  • 2 JunThere was a meeting between two Rolls-Royce employees and Intermediary 4 at which Rolls-Royce terminated the relationship. At the meeting, Intermediary 4 mentioned the help Intermediary 4 had given to Rolls-Royce in resolving the tax difficulty in the Rolls-Royce India office in 2006, and that Intermediary 4 had paid out a lot more than received from Rolls-Royce to resolve the matter and that, had Intermediary 4 not done so, some Rolls-Royce employees, including one based in India, would have gone to jail, and Rolls-Royce would have been closed out of the Indian market for 25 years.
  • 23 JulAn agreement was signed between the MoD and HAL for license manufacturing and supply of 57 additional HAWK aircraft (40 for the Indian Armed Forces and 17 for the Indian Navy) for a value of Rs. 9,502.68 Crores. These were successfully delivered between March 2013 and July 2018.
  • 27 JulAs part of the agreement, HAL and Rolls-Royce signed an Integrity Pact.
  • 30 AugThe agreement for supply of 57 additional Hawk Aircraft under License Manufacturing was signed between HAL and BAE Systems (Operations) Ltd., a subsidiary of BAE Systems plc. Clause 37 of the agreement prohibits the use of undue influence as well as payment of commissions/fee to any third party/agent/middlemen/intermediary. Violation of these clauses was also made punishable by way of recovery of amounts paid, termination of the contract etc.
2011
  • 28 JulAs the contract was pending, change order-001 was signed between all parties, providing for the procurement of additional airframe accessories and spares for an additional £63.074 million, thereby enhancing the value of the contract from £537.219 million to £600.293 million.

Outcomes

Investigation Outcomes

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2012
  • Media reports alleging corruption surrounding Rolls-Royce business practices surface. This led to a Serious Fraud Office (SFO), London, UK, investigation.
2014
  • Subhir and Bhanu Choudhrie are arrested as part of a SFO probe in London for allegedly helping Rolls-Royce pay bribes to secure contracts in China and Indonesia. The case against them was later dropped.
2016
  • 5 DecAn enquiry is registered with the CBI, New Delhi, against Rolls-Royce, Bhanu Choudhrie (son of Sudhir Choudhrie), unknown officials of the MoD, and other unidentified individuals.
2017
  • 17 JanThe SFO and Rolls-Royce have entered into a Deferred Prosecution Agreement (DPA) related to Rolls-Royce's actions in Nigeria, Indonesia, Russia, Thailand, India, China, and Malaysia. A DPA is available to a corporate entity for certain economic or financial offences and provides for a mechanism through which prosecution can be avoided by entering into an agreement on negotiated terms with a prosecutor.
  • As part of the DPA, Rolls-Royce is obligated to make payments totaling £497,252,645. This includes disgorgement of profits amounting to £258,170,000, a financial penalty of £239,082,645, plus interest. Additionally, Rolls-Royce fully reimbursed the SFO's costs, amounting to £13 million. The DPA was part of the admission by Rolls-Royce that it had acted corruptly in 12 countries, including India. This is the largest British fine ever imposed on a company for criminal conduct.
  • A Statement of Facts prepared by Rolls-Royce disclosed its corrupt payments in connection with transactions with countries like Indonesia, Thailand, China, Malaysia and India.
  • In the case of India, the Crown Court at Southwark, UK delivered a judgment on the DPA reached between the SFO and Rolls-Royce. The judgment revealed the concealment of involvement of intermediaries in India between 2005 to 2009 by Rolls-Royce despite restrictions imposed by the Government of India through an Integrity Pact. There are reasons' to believe that significant amounts paid to the intermediaries/middlemen by Rolls-Royce were routed to public servants in India. The crown Court Judgment specifically mentions payment of an estimated £1 million by Rolls-Royce to Intermediary 4 for increase of License Fee of Rolls-Royce from £4 million to £7.5 million.
  • The statement of fact given to the SFO by Rolls-Royce also mentioned a payment of £1.85 million through Intermediary 4 to public servants, including tax officials in India to help conceal the list of intermediaries taken by the Income Tax Department during their survey of Rolls-Royce India in 2006. These documents were allegedly concealed, removed, or destroyed by the accused individuals. Payments were made by Rolls-Royce in the form of consultancy agreements to intermediaries for obtaining a list of commission agents/advisors from the IT Department to hide this from the MoD, to avoid the termination of their contract and to prevent an investigation by the CBI.
  • Tim Jones, then Director of Rolls-Royce India, joined the income tax proceedings and his statements were recorded, though not publicly released.
  • The SFO investigation that concluded in 2017, showed that Rolls-Royce had paid bribes to intermediaries to sell and service jet engines for the Indian armed forces.
  • KPMG knew that there had been payments to Indian agents but failed to address these payments by Roll-Royce in India. They were fined £3.375 million for failing to highlight these issues in auditing.
2022
2023
  • 29 MayThe CBI picked up the case and registered a First Information Report (FIR), filing a case naming Sudhir and Bhanu Choudhrie.
  • It was found through the CBI First Information Report (FIR) that Choudhries are alleged to be unregistered Indian intermediaries who worked for Rolls-Royce and BAE Systems "in securing the award of contract for the supply of Hawk aircraft in question and used "undue influence on Indian public servants to induce the Government of India to approve the deal".
  • The CBI Enquiry revealed the illegal acts committed by Tim Jones, Director of Rolls-Royce India Pvt. Ltd., Sudhir Choudhrie, Bhanu Choudhrie, Rolls-Royce plc, BAE Systems , in conspiracy with some unknown Indian public servants and unknown private persons in India.

References

References

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  • Adeseye, T., & Roberts, K. (2017 January 27). SFO and Rolls-Royce agree to half billion pound DPA. https://www.jdsupra.com/legalnews/sfo-and-rolls-royce-agree-to-half-46141/

  • Bhadana, D. (2023, May 30). Delhi boy to merchant of war: How Sudhir Choudhrie evaded law and made billions. https://www.news9live.com/india/delhi-boy-to-merchant-of-war-how-sudhir-choudhrie-evaded-law-and-made-billions-2160377

  • CBI files case against Rolls-Royce, others for alleged fraud in Hawk aircraft procurement. (2023 May 29).

  • https://legal.economictimes.indiatimes.com/news/litigation/cbi-files-case-against-rolls-royce-others-for-alleged-fraud-in-hawk-aircraft-procurement/100590781

  • Central Bureau of Investigation. (2023 May 23). FIRST INFORMATION REPORT. https://cbi.gov.in/assets/files/fir/2108979717RC2162023A0006.pdf

  • Evans, R., Pegg, D., & Watt, H. (2017, January 17). Rolls-Royce apologises in court after settling bribery case.

  • https://www.theguardian.com/business/2017/jan/17/rolls-royce-apologises-bribery-671m-uk-us-brazil

  • Evans, R., Pegg, D., & Watt, H. (2017, January 20). Rolls-Royce sent agent to 'retrieve' document from India tax office. https://www.theguardian.com/business/2017/jan/20/rolls-royce-sent-agent-to-retrieve-document-from-india-tax-office

  • Hattersley, R. (2022 May 24). KPMG fined over £3m for Rolls-Royce audit failings. https://www.accountingweb.co.uk/business/financial-reporting/kpmg-fined-over-ps3m-for-rolls-royce-audit-failings

  • India picks British Hawk for its airforce. (2003, September 3). https://www.aljazeera.com/news/2003/9/3/india-picks-british-hawk-for-its-airforce

  • Joy, S. (2023 May 29). CBI registers FIR against Rolls-Royce, its senior officials in corruption case. https://www.deccanherald.com/india/cbi-registers-fir-against-rolls-royce-its-senior-officials-in-corruption-case-1222934.html

  • Mandhani, A. (2023 May 31). CBI is relying on a 2017 UK court judgment in case against Rolls-Royce. Here’s what it says. https://theprint.in/judiciary/cbi-is-relying-on-a-2017-uk-court-judgment-in-case-against-rolls-royce-heres-what-it-says/1604102/

  • Matussek, K. (2022, May 24). KPMG Fined £3.4 Million by UK Regulator Over 2010 Rolls-Royce Audit. https://www.bloomberg.com/news/articles/2022-05-24/kpmg-fined-over-its-2010-rolls-royce-audit-by-uk-regulator?leadSource=uverify%20wall

  • Mazoomdar, J. (2023, May 30). Who are Sudhir and Bhanu Choudhrie, father-son arms dealers booked by CBI? https://indianexpress.com/article/explained/who-are-sudhir-and-bhanu-choudhrie-father-son-arms-dealers-booked-by-cbi-8635599/

  • Minister of Defence, Government of India. (2006 August 22). Defence Procurement Procedure (Capital Procurements)

  • https://www.vifindia.org/sites/default/files/Defence%20Procurement%20Procedure,%202006.pdf

  • OECD. (2016). Country case: Integrity Pacts in India.

  • https://www.oecd.org/governance/procurement/toolbox/search/integrity-pacts-india.pdf

  • Serious Fraud Office (SFO). (2017, January 17). Deferred Prosecution Agreement – Statement of Facts – SFO v Rolls-Royce PLC. https://www.sfo.gov.uk/download/deferred-prosecution-agreement-statement-facts-sfo-v-rolls-royce-plc/

  • Serious Fraud Office (SFO). (2017, January 17). Deferred Prosecution Agreement – SFO v Rolls-Royce PLC.

  • https://www.sfo.gov.uk/download/deferred-prosecution-agreement-sfo-v-rolls-royce-plc/

  • Serious Fraud Office (SFO). (2017, January 17). Judgment: – SFO v Rolls-Royce PLC.

  • https://www.judiciary.uk/wp-content/uploads/2017/01/sfo-v-rolls-royce.pdf