British MPs have launched a crucial debate on how authorities tackle corruption by posing tough questions to the stock exchange regulator, Global Witness said today.
The UK must now seize the opportunity to revamp lax standards on corporate fraud, unravel some of the country's biggest corruption scandals and iron out a glaring conflict of interest at the heart of the listings regime.
Parliament's Business, Innovation and Skills select committee yesterday quizzed David Lawton, a director of the UK's stock market watchdog, on a scandal surrounding ENRC. The former FTSE100 mining firm de-listed on Monday amid allegations that its founders skimmed off profits, and that the company lied to investigators and paid off African presidents.
Global Witness has sent numerous questions to ENRC on corruption concerns surrounding its business in Congo and Kazakhstan but has received answers to none of them, although the company said that it “has a zero-tolerance policy to bribery and corruption”. Investigations into ENRC continue and it has not been found guilty of any wrongdoing.
Brian Binley MP of the Conservative party asked Lawton why ENRC was allowed to float in December 2007—three months after a damning audit by lawyers Herbert Smith raised strong suspicions of corruption surrounding the company’s Russian trading arm. The UK’s Serious Fraud Office is investigating ENRC deals in Africa and Central Asia.
MPs were unsatisfied with Lawton’s response that he was not aware of the audit.
“You are the protector of the probity of our stock exchange, aren’t you?” Binley said. “That’s your role. You protect investors from companies who would use our structures to defraud people, right? You missed this important report and allowed this to go ahead without question.”
The UK Listing Authority says it’s not its role to check whether a company may be corrupt. That role is assigned to the firm’s sponsor—in ENRC’s case Deutsche Bank—mandated to oversee the flotation.
This means that sponsors have an “inevitable conflict of interest”, Labour MP Ann McKechin said in the hearing. They stand to profit massively if their client floats smoothly: Deutsche Bank made almost $37 million in fees on ENRC’s 2007 listing and continued to act as firm’s broker until April this year, Reuters reported in May.
Lawton said recent legislation has given the Financial Conduct Authority extra powers to discipline sponsors. But there can be no guarantee that corruption risks will be properly flagged until this fundamental conflict is resolved, said Daniel Balint-Kurti of Global Witness.
“Putting sponsors in charge of due diligence is a massive disincentive to meaningful investigation,” Balint-Kurti said. “If this matter is not resolved, corrupt companies could be allowed to list on the London Stock Exchange. They can use the respectability that brings them to raise funds from the City.”
Lawton told the select committee that he would provide them with a copy of the sponsors’ report to the regulator on ENRC, provided duties of confidentiality don't prevent him doing so. This document must be made public. A free debate is essential if parliament is to close huge loopholes that invite exploitation.
Global Witness encourages the committee to look deeply into the ambiguous role of sponsors, as well as their equivalent on the more lightly regulated junior AIM exchange—Nominated Advisors or “Nomads”. Ensuring sponsors’ fees are independent of a successful listing would be one obvious way to lessen conflicts of interests.
A string of corporate scandals recently prompted Hong Kong’s stock exchange to make sponsors criminally liable for failures of due diligence. British MPs should consider similar measures if the UK is avoid repeating the ENRC fiasco.
Daniel Balint-Kurti on [email protected] or +44 (0)207 492 5872 or +44 (0)7912 517 146
Leigh Baldwin on [email protected] or +44 (0)207 492 5889 or +44 (0)7715 068 300
Notes to editors
1.Global Witness has seen the Herbert Smith audit and quoted from it at length in its written submission to the BIS select committee, which can be viewed here: http://data.parliament.uk/writtenevidence/WrittenEvidence.svc/EvidenceHtml/2333 . In our written submission we note that ENRC’s Initial Public Offering (IPO) prospectus declared the matters raised in the Herbert Smith audit as a “risk factor”. However, important details the prospectus provided of the RTS are contradicted by Herbert Smith, including the degree of knowledge that company officials had of the arrangement (see paragraphs 16-34 of our submission).
2.Global Witness has published numerous statements on ENRC’s Congo deals. Our most detailed report was published in June 2012 and can be found here: http://bit.ly/PMCBzX .