A criminal investigation into Airbus Group’s practices in selling planes and arranging financing overseas will seek to shed light on the use of third parties who are often critical in closing deals.
The inquiry, which the UK’s Serious Fraud Office said it opened in July and Airbus disclosed on Sunday, could run for years. While Airbus may not feel the short-term impact, given that it has dropped the questionable middlemen and expects suspended financing guarantees to be restored, an unfavourable outcome could result in fines and damage the company’s reputation.
Scrutiny of the use of third parties comes as Airbus and its rivals seek greater influence in emerging markets, which have taken over from the US and Europe as drivers of growth in the commercial aircraft business. Airbus said in April that top management had identified questionable use of third parties and alerted the UK and other regulators, but the formal investigation brings the issue to a new, more serious level.
“The news came as a shock, since the issue had been downplayed,” Kepler Cheuvreux analyst Christophe Menard said in a note to investors yesterday. “It could turn out to be more serious than envisaged.”
One focus of the SFO inquiry is Airbus’s failure to disclose its use of third parties to UK Export Finance, an agency that arranges credit guarantees for overseas sales. Airbus lost export credit in April after the plane maker informed authorities of inaccuracies in a number of applications. Government guarantees are expected to resume by year-end, Airbus chief executive officer Tom Enders has said.
Airbus shares fell to their lowest since July 11 and traded down 0.7% to €50.64 at 11:53am in Paris. The investigation adds to a growing list of challenges facing the company, including delays on its A400M military transport, production teething problems with the wide-body A350 commercial jet, slow sales of the A380 super-jumbo and the grounding of the Super Puma helicopter after a fatal accident.
Managing sales in the Middle East, Asia and other fast-growing regions, where governments often hold key stakes in airlines and other businesses, has tripped up other manufacturers. Because setting up a local office can take several years, the faster route is often to rely on local, established companies with connections to people making purchase decisions. Using intermediaries for overseas sales is not illegal, but can complicate oversight.
In 2012, aircraft engine maker Rolls-Royce Holdings handed over details on what it called “matters of concern” uncovered in China and Indonesia. The following year, the SFO opened an investigation into whether Rolls-Royce engaged local agents in return for orders.
Airbus, which is based in Toulouse, France, said in a statement on Sunday that it’s cooperating with investigators. Airbus in April flagged to UK regulators and European export credit authorities “misstatements and omissions” involving the outside contractors in some export financing applications, which it found through an internal probe.
“This will have some negative impact,” said Shukor Yusof, founder of aviation consulting firm Endau Analytics in Malaysia. “The business of aircraft sale is so intense and competitive that there are people trying many avenues.” For 2015, only 6% of Airbus’s scheduled deliveries involved government loan guarantees, compared with about 30% at the height of the credit crunch, around 2009 and 2010.
SFO investigations take an average of four to six years. Enders’s mandate as CEO extends another two years.
One incentive for Airbus to cooperate is to make sure the company could be eligible for a deferred prosecution agreement, or DPA, if criminality is found. A DPA allows for a prosecution to be suspended in exchange for promises of compliance, as well as payment of a fine, redress and helping bring cases against individuals.
DPAs are a common enforcement tool in the US and were introduced in the UK in 2014, where the SFO has issued two of them. In November, ICBC Standard Bank Plc became the first company to agree to one, paying $33mn to resolve an investigation into bribery at its former Tanzanian unit.
Fines in SFO cases tend to be smaller than those in the US In 2010 UK defence contractor BAE Systems agreed to pay almost $400mn to the US and £30mn ($39.2mn) to the UK to resolve a bribery and fraud investigation.
UK Export Finance is one of several European agencies that have provided backstop loans for Airbus sales overseas. The company builds wings in the UK and assembles aircraft in France and Germany.
Airbus rival Boeing Co has been unable to tap US trade financing because a congressional impasse has left the US Export-Import bank with too few directors to approve deals. Until the financing is restored, both companies face the challenge of navigating uncertain markets with limited government assistance.
The Airbus investigation adds to the scrutiny of the role played by cross-border intermediaries. The SFO is investigating Monaco-based Unaoil SAM, which served as a go-between for companies and officials in the Middle East, Africa and former Soviet countries, amid allegations of corruption. The company has declined to comment.
Airbus said in the July 27 filing that it’s undertaking a sweeping review involving “legal, investigative, and forensic accounting” of consultants and other third parties used to support sales. The plane maker said it’s also screening potential contractors more diligently.
“The group cannot exclude that the comprehensive review and these enhancements of its controls and practices lead to additional commercial disputes or other consequences in the future,” the filing said.