Building giant Leighton rife with corruption - bribery scandal hits ASIC
Building giant Leighton rife with corruption - bribery scandal hits ASIC; Corruption and cover-ups in Leighton Holdings international construction empire
Tweet Topic Started: 3 Oct 2013, 11:04 AM (2,344 Views)
Corruption and cover-ups in Leighton Holdings' international construction empire were rife and known to top company executives and directors, according to internal company files.
Those in the know included the Australian construction giant's chief executive at the time, Wal King, and his short-term successor David Stewart.
In revelations that will cause international embarrassment for Australia and raise questions about the role of the nation's corporate watchdog, the files expose plans to pay alleged multimillion-dollar kickbacks in Iraq, Indonesia, Malaysia and elsewhere, along with other serious corporate misconduct.
Hundreds of confidential company documents, obtained during a six-month Fairfax Media investigation, also reveal a culture of rewarding corruption or incompetence, and abysmal corporate governance in what looms as the worst recent case of corporate corruption involving a major Australian firm.
Mr King, one of Australia's most highly regarded chief executives and who has reportedly been approached by Communications Minister Malcolm Turnbull about taking an NBN Co board seat, was chief executive of Leighton Holdings for 23 years and is a prominent Sydney business community figure.
Leighton is one of Australia's biggest construction companies, with a market value of nearly $7 billion. It has built the Victorian desalination plant, Sydney's ABC studios, and Queensland's Ross River dam.
Among the most explosive of the company files is a memo written on November 23, 2010, by then acting CEO David Stewart. It says Leighton International managing director David Savage had revealed he and Mr King knew of a $42 million kickback to a firm in Monaco nominated by Iraqi officials who gave Leighton a $750 million oil pipeline contract. "I asked did Wal K approve this? And he said yes," the memo says.
The story may be all perfectly square. But how you could think you would cover the story without acknowledging Leightons links and their operations is completely beyond me. Typical of the Australian press. There is the fishbowl, and terra incognita beyond.
Think of the business Leighton is in – engineering and constructing large things.
Then look at the company which is/was its majority shareholder – Hochtief, a very large Austrian company with interests all over the world, but particularly prominent through Eastern Europe and Central Asia.
If you look at who Hochtief has very close links with you will find one Oleg Deripaska. One of the world’s richest dudes (noted attempted pen thief from Vladimir Vladimirovich Putin) legendary corporate hard man from Russia, who has has a rather large number of claims against him and his companies (look up Rusal, Basic Element and En+) which include bribery and extortion, inter alia.
If you look at the business they are in it is the business of building very large (often infrastructure) things. Who is the buyer of these things? Well governments mainly. Have a look at the map – if anyone can find a Government East of the Austrian Border on the Eurasian landmass which is not festooned in corruption claims (South of Scandinavia, excluding Singapore or Hong Kong) they are doing better than I (and I know this world well).
This is the world of Hochtief Basic Element (the vehicle Deripaska generally uses for infrastructure related things) and, when they need to bring in an Australian subsidiary, Leighton Holdings.
One of my weirder life memories was of explaining to people in that world that Wal King had something of a hard man reputation in Australia, while the Russians referred to him as ‘our Australian manager’
The other thing to note is that operating under the EU corruption provisions Hochtief is operating under considerably tighter corruption provisions than anything here. They will have a fair sense of how to work it. They have been doing so a long time.
I would observe that throughout the Eurasian landmass anywhere East of the EU greasing wheels will not just be part of doing business, but generally the biggest single part. I personally have witnessed the greasing of wheels on a number of occasions, spoken with the greasers and the greased at length about the process.
There may be ways of doing it that bring probity, but all too often a quick scratch of the surface reveals that the buyers arent all that interested in probity, and that bringing probity can bring a cost. For providers of the service this generally means a very carefully considered approach to any negotiations, generally after having ensured that what may ostensibly appear to be a tender process (or the like) is in some way competitive, and not simply a way to palm of state funds to a local magnate of choice. ‘Value creation’ as a concept takes many different forms, and often in this world it takes the form of ensuring someone somewhere receives a payoff in exchange for having a contract with a healthy margin built in.
Those who do best (and I would note that Hochtief work within EU legislation and build a number of things in Russia – Airports and Olympic facilities amongst them) work over an extremely long timeframe, have a very careful understanding of how corruption works. The balance between telling the locals how to do things, telling them they are corrupt, and just letting them have what they want when they want it is something that has brought an awful lot of companies undone. But before anyone gets too far onto the moral ground they may want to have a peek at local governments and their land management practices, or state governments and their coal mine allocation processes.
In being a partner/part of Hochtief Leighton will have a particularly experienced partner on this issue. I would be absolutely amazed if neither company had ever bribed, slipped a backhander, or organised a kickback through local sub contractors, but at the same time I would be fairly surprised if it hasnt been something ‘managed’ with particular finesse at a corporate level.
The remerging focus on allegations of corrupt behaviour reminds investors that mgmt has work to do to address “legacy” issues. Until these issues are addressed fully, we expect pressure to remain on LEI’s share price. Retain Neutral on LEI. Focus returns to allegations of corruption–Press reports from the Fairfax Media published overnight follow a 6mth investigation of allegations of corrupt behaviour in LEI’s international operations. The keyallegation surrounding a bribe paid to obtain an oil & gas construction contract in Iraq has been subject of an Australian Federal Police (AFP) investigation since LEI self-reported the issuein early 2012. However, the reports suggest that: (1) More widespread (though not specified) corrupt activitiestook place. (2) Information may have been withheld from investigators. (3) Former mgmt, including former CEOs Wal King and David Stewart, knew of and, in some cases, condoned activities. No significant new information revealed…- In response to the reports, LEI stated that no new allegations have been made and that the Group “takes these accusations seriously”. Further, LEI notes a number of changes that have taken place over the past 2yrs including internal investigations into the alleged corrupt practices and implementing new risk mgmt systems and Code of Conduct. …but a reminder that issues remain to be dealt with–The core allegations in these reports remain under investigation by the AFP and no charges have been laid. However, these reports remind investors of the risks remaining to the Group from “legacy” issues that have yet to be fully dealt with. If the investigations lead to charges being laid, the Group would need to address them through a legal process. If the Group is then found guilty, it could incur financial penalties and enforceable undertakings to address any shortcomings. The Group could also face reputational damage and, in certain circumstances, find it more difficult to bid on work if clients deem that the Group is unfit. But, we believe these risks are small at this stage until the AFP reveals its position.
Leighton Holdings rejected claims of impropriety amid allegations that its staff were aware of multimillion-dollar kickbacks paid to Iraqi officials.
Even so the construction company is facing a shareholder class action seeking to recover some of the losses as almost $1 billion was wiped off its market capitalisation last week.
It comes after a Fairfax Media investigation revealed a handwritten note by former managing director David Stewart that suggests he and former chief executive Wal King knew of a $42 million kickback paid to Iraqi officials to secure a $750 million oil pipeline project.
Fairfax Media also published a preliminary tender document that showed the signature of former Leighton senior executive David Savage that included an alleged kickback to win a lucrative project in Iraq.
High-profile lawyer Mark Elliott lodged a writ on behalf of shareholders in the Victorian Supreme Court. Mr Elliott, a Leighton shareholder, said the company should have been more upfront about the extent of the allegations, being investigated by the Australian Federal Police.
Leighton group secretary Vanessa Rees attacked the media coverage in The Age, The Sydney Morning Herald and The Australian Financial Review, saying in a statement it was important that media reports about the AFP investigation were ''fair and balanced''.
''Leighton does not propose to correct all of the inaccuracies contained in a number of media articles,'' Ms Rees said, but was not specific. She said it was not appropriate for Leighton ''to descend to debate over matters of errors'' when those matters were subject to court processes.
The statement said Leighton's board and management ''condemn any form of corrupt or fraudulent behaviour''.
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