An employee works on a Trent 700 aircraft engine on the production line at the Rolls-Royce Holdings Plc factory in Derby, U.K. Picture / Bloomberg
An employee works on a Trent 700 aircraft engine on the production line at the Rolls-Royce Holdings Plc factory in Derby, U.K. Picture / Bloomberg
Rolls-Royce is to pay almost £700m (NZ$1187m) to settle bribery and corruption allegations which have dogged the company for years.
In a statement after the market closed, the FTSE 100 engineering group revealed it had reached a provisional deal with UK and other international regulators over claims it paid bribesto land international deals and was involved in fraud.
The company has struck a "deferred prosecution agreement" (DPA) with Britain's Serious Fraud Office (SFO) in which Rolls will pay £497m (NZ$843m) plus interest and costs to settle the claims that the regulator has been investigating since 2012.
Allegations include Rolls paying a $20m (£12.9m) bribe in return for persuading Indonesia's country's flag-carrier, Garuda, to buy Rolls' Trent 700 engines for its Airbus A330 airliners.
A deal to supply jet engines for Hawk fighter training aircraft to India has also been under scrutiny, with claims a "suspicious payment" was made to win the deal.
Rolls is also caught up in a massive investigation in Brazil over bribery at state-run oil company Petrobras, with claims the FTSE 100 business paid kick-backs in return for being awarded contracts.
The SFO has also been looking into contracts Rolls signed with airlines in China to supply engines for new jets.
It is not known whether the settlement covers all the claims or just some of them.
Under the terms of the DPA, Rolls is given a suspended prosecution as long as it abides by certain terms including paying the penalty.
Other requirements of a DPA can include a business being monitored by regulators for a certain amount of time to ensure it is meeting ethical standards and mandatory training of staff to prevent future incidents of bribery and corruption.
As well as settling with the SFO, Rolls has struck similar deals with the US Department of Justice and Brazil's equivalent body.
The company will pay the US authorities $170m (£141m) and $26m (NZ$44m) to Brazilian regulators to settle claims against it in those countries.
The DPA requires the judicial approval for it to be finalised and Rolls and the SFO are due to appear before Sir Brian Leveson QC at the Royal Courts of Justice on Tuesday morning for the deal to be approved.
Once the court has approved the DPA - which is a voluntary arrangement to avoid potentially tougher legal penalties - fuller details of the settlement are expected to be released.
In a statement, Rolls said it has "co-operated fully with the authorities and will continue to do so", adding that the penalties will be paid over a five-year period, with it handing over £293m (NZ$496m) in the first year of the deal.
Shares have been trading at a premium for a while. But it's put even more pressure on Rolls' cashflow which is already awful - we'll have to see if the company can cover its dividend come results.
The size of the settlement is a record for the SFO, dwarfing the £30m (NZ$50m) it hit BAE Systems with over corruption charges in 2010, though this was part of a joint arrangement with US prosecutors in which the defence group paid a total of close to £200m (NZ$339m).
The penalty will put further pressure on Rolls's balance sheet which is in a parlous state as chief executive Warren East tries to rebuild the the business after a string of profit warnings. The company warned at an investor day in November that new accounting rules will hit its profits in the future, with cash-flow expected to be essentially zero or negative this year, then £500m (NZ$848m) the next and £1bn (NZ$1.7b) the year after.
East has already cut the dividend - the first such move in a generation - to help get Rolls back on its feet but the impact of the settlement could drive Rolls into the red when it posts annual results next month.
However, one City analyst forecast Rolls shares could rise in response to the announcement, saying the SFO had been "generous" in both the size of the penalty and the timeframe Rolls has to pay it in.
"Investors don't seem to have been bothered by Rolls having this hanging over it," the analyst said, speaking on the condition of anonymity. "The shares have been trading at a premium for a while. But it's put even more pressure on Rolls's cashflow which is already awful - we'll have to see if the company can cover its dividend come results."
Sandy Morris, aerospace analyst at Jefferies, said that Rolls is unlikely to see its debt rating cut by ratings agencies as a result of the settlement, though the scale of it was "higher than I hoped", he said.
In the UK it has often been seen as a high stakes gamble to obtain a successful prosecution in the first place, putting huge pressure on the SFO to bring wrong-doers to account, often with limited resources, to secure corporate pleas of guilt.
However, he said he expects Rolls to weather the settlement, adding he is forecasting the company will deliver a free cashflow of £200m (NZ$339m) better than it has been guiding at the full year, driven by East's turnaround of the business and helped by currency exchanges movements.
The fine was described as "a very large bolt from the blue" by Nick Cunningham, an aerospace and defense equity analyst at Agency Partners, who added that settlements are "usually moderate compared to the size of the company".
Financial crime and risk advisers Exiger said the size of the penalty is an example of the SFo showing its teeth.
"It dwarfs the first few DPAs struck a year ago under new UK legal powers granted to the SFO and sends a clear signal that the UK means business in cracking down on global bribery and corruption," said Lisa Osofsky, European chair of Exiger.
"It's a sea change in the SFO's war on bribery and corruption, and helps the UK to be seen as more on an equal footing with powerful US enforcement authorities led by the Department of Justice," the former FBI deputy general counsel said.
"In the UK it has often been seen as a high stakes gamble to obtain a successful prosecution in the first place, putting huge pressure on the SFO to bring wrong-doers to account, often with limited resources, to secure corporate pleas of guilt," Ms Osofsky said. "The scale of the penalties provisionally agreed with Rolls shows that the advent of a DPA has been a key step in the right direction."
Despite the scale of the penalty, it does remove an unknown for Rolls.
Howard Wheeldon, an independent aerospace and defence analyst, said: "This will be a weight off the minds of senior Rolls management as it ends a near four-year period of investigation and uncertainty. Rolls-Royce and has fully cooperated with the investigating authorities, undoubtedly shortened a process that could have taken much longer."
ValueAct - the US investment fund which became Rolls's largest investor in 2015 with an 11pc stake - declined to comment on the implications of its holding of the settlement.
