Engineering giant Rolls-Royce engaged middlemen for swinging defence contracts in India between 2005 and 2009 violating Indian laws, according to the judgment of a British high court. The company also paid bribes to an Income Tax official to remove a list of its middlemen recovered during a raid on its India office. At least two major defence deals — Advanced Jet Trainer Hawk aircraft for the Indian Air Force and Pegasus engines for the Navy’s Sea Harrier aircraft — involved illegal kickbacks, according to the judgment.

These are among the details contained in the filings in a London court earlier this week where Rolls-Royce agreed to pay a fine of $809 million for its corrupt practices in India, China, Indonesia, Brazil, Thailand, Russia, Nigeria and Malaysia.

The terms of the agreement between the Serious Fraud Office and Rolls Royce —called the Deferred Prosecution Agreement (DPA)-- approved by Sir Brian Leveson QC, the president of the Queen’s bench division of the high court, details the illegal payments carried out in India to secure lucrative defence contracts and to scuttle investigations. There has been no official response from the government. until Friday evening.

“I turn to counts 5 (concerning the false accounting in India) and 6 (the conspiracy to corrupt in relation to the adviser list acquired by the tax authorities). For both, it is submitted (and not challenged) that the culpability should be assessed at the highest level,” the judgment reads.

Illegal Payments to Procure Defence Deals

According to the judgement, illegal payments to procure Indian contracts “was an organised and considered scheme, unlawful from the start, in which Rolls-Royce played a leading role, involving the creation of numerous intentionally misleading agreements and was committed over a sustained period of time.”

As it progressed, “it increased in sophistication, being designed deliberately to contravene the Indian Government’s defence procurement rules and allowing Rolls-Royce to retain Indian Government contracts which it knew had been obtained in breach of those rules and in breach of signed contractual declarations of compliance.”

According to the judgment, the false accounting was carried on between 24 March 2005 and 30 September 2009, during which Rolls Royce won the contract to supply engines to the Hawk advance jet trainers of the Indian Air Force and Pegasus engines for navy’s Sea Harrier fighters.

The court says despite Indian government banning middlemen and Rolls Royce signing integrity pact with New Delhi, “RR (Rolls Royce) continued to use one of its key intermediaries (“Intermediary 4”) in relation to relevant defence contracts.” The intermediary is not named in the official filings.

The company created contractual documents recording the kickbacks as payment for general consultancy services to the intermediary, “rather than as commissions due in respect of those relevant defence contracts.” And this contractual documents “therefore did not correctly record the real reasons for these payments to Intermediary 4,” the judgment said.

The judgment pointed out that from 2003 Rolls-Royce changed its contract with the middleman for India by “contracting with a variety of different commonly owned intermediary companies or individuals; and arranging commercial consultancy agreements which purported to pay fixed fees for the provision of general consultancy services across a number of territories (Asia, Middle East, Russia, Ukraine, Mexico and China).”

The Hawk Deal

On 26 March 2004 a licence agreement was signed between Hindustan Aeronautics Ltd (HAL) and a joint venture (Rolls-Royce and a French company) giving HAL licence to manufacture, assemble and repair joint venture engines for a fee of £7.5 million. This was a precondition to a larger contract, by which Rolls-Royce supplied Adour engines for Hawk aircraft for the IAF. This contract was signed (by BAE Systems) in 2004, with a value to Rolls-Royce of £122 million.

According to the judgment, “In or around April 2005, a senior Rolls-Royce employee was told that four commercial consultancy agreements were to be used to pay the intermediary £1 million in respect of the licence agreement. Another senior employee had, by 24 March 2005, already signed ‘Proposed Appointment’ forms authorising the agreements.”

“The nature of the assistance provided by the intermediary, the extent to which the maximum licence fee initially considered by the Indian government had been increased and the verbal agreements to pay the £1 million to the intermediary were identified,” the judgment says.

“From July 2005 onwards, all four of the new consultancy agreements were signed by Rolls-Royce,” the order says, pointing out how payments were made to them for Indian deals.

“On or around 1 September 2005, £1 million was paid to the intermediary’s four companies. Within Rolls-Royce’s accounting system, none of the payments were categorised as ‘Adviser Remuneration’, or settled to a specific project,” the judgment says.

The Navy Payments

When a contract was signed for Pegasus engines for the Navy’s Sea Harrier aircraft on February 19, 2007, it was valued at £43 million.

“A Rolls-Royce employee signed the Integrity Pact and the contract containing similar terms to clause 6.5 of the Integrity Pact,” the report points out. The ‘Business Evaluation Form’ of June 2006 recorded commission as 0%, but also recorded a figure of 13% under ‘Other’ sales related costs, it said.

For the kickbacks to be paid for the deal, Rolls Royce on paper established a warehousing and distribution facility in the United Arab Emirates for certain defence products traded in India. “By July 2007, the proposed arrangement (named Project Jasper) involved a 10-year arrangement with a Dubai-registered company linked to the Indian intermediary, which had, by then, already been used by way of a consultancy agreement” by Rolls Royce.

Rolls-Royce paid the Dubai company a service fee, based upon the throughput of the goods traded. The fee would be a maximum of 10%, and a project assessment, formally to launch the project, was approved in July 2007, the judgment says.

Effective from 1 November 2008, a supply agreement for the warehouse arrangement was further signed which specified an overall service fee of 9% of the value of the shipped parts, plus a single payment of £170,000 to cover initial investment costs. The agreement set out total base prices per month, up to the end of 2010. These totalled £8.76 million, the judgment says.

“Apart from one test-run supply of parts in January 2010, the warehouse never became fully operational, and no other parts were shipped through it. Regular amounts due under the contract were paid to the Dubai company from February 2009, until September 2009 (the advance fee and the monthly payments due for November 2008, until June 2009). These payments totalled £3.32 million,” the order says.

Paying Income Tax Officer

The judgment said Rolls-Royce “played a leading role in the arrangement, unlawful from the start, which involved an intention to bribe a tax inspector or other public official of the Indian Government and was designed to prevent an investigation by the Indian authorities into both the tax affairs of Rolls-Royce and its use of advisers (contrary to the relevant regulations and various signed contractual declarations).”

Between January 2006 and August 2007 an agreement to make “corrupt payments to a tax inspector as an inducement to recover a May 2002 list of Rolls-Royce’s advisers which, in January 2006, had been removed by a tax inspector from the offices of Rolls-Royce in Delhi during a tax survey,” the judgment says.