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22.1 On his return to AWB in July 2000, Mr Stott learnt of the payment of inland transportation fees through Ronly.[2246] He feared that Ronly may have been used 'as a vehicle by which AWB employees were stealing money from AWB'. [2247] He decided to engage Arthur Andersen to investigate. Mr Lindberg was aware of the retainer of Arthur Andersen. [2248]
22.2 In August 2000 Mr Andrew Tuohy was employed as a manager in the Business Fraud and Investigation Services Division of Arthur Andersen. [2249] He was requested by Messrs Goodacre and Stott to draft an engagement letter for the conduct of a review of AWB's International Trading Division.
Arthur Andersen set out its understanding of its retainer in a letter to AWB's Senior Corporate Counsel, Ms Sachak, dated 5 September 2000:
We understand that AWB Limited (AWB) has concerns about the integrity of international business transactions conducted by the International Marketing Group. You are seeking independent assistance in determining the existence of any illegal or unethical behaviour and any failure of control systems. We are mindful of your concerns that any investigation must be conducted discreetly so as not to alert anyone of your concerns.
…
As discussed, for purposes of discretion our inquiries will be conducted covertly under the guise of and in tandem with an Arthur Andersen Business Process Review. This project will give sufficient cover for us to conduct our investigations.
The first phase of our work subject to these arrangements will be limited to assessing the nature and extent of possible fraud, bribery, corruption or misconduct, and any related circumstances.[2250]
22.3 In the course of its review, Arthur Andersen:
22.4 On 25 October 2000 Mr Lindberg informed the Board that a business process review by Arthur Andersen was nearing completion.[2251] The Board was not told that the review extended to investigating the probity of employees in the International Trading Division.
On 26 October 2000 AWB requested that Arthur Andersen prepare a written report. [2252]
22.5 Arthur Andersen prepared three draft reports and a final report.
The first draft report was dated October 2000 but was described as current 'as at 15 November 2000'. [2253] Paragraph 2.1.3 stated:
Iraq-Ronly
The report assessed the severity of the risk ranking as high, denoting that the risk was immediate and required immediate action to remove the risk. [2255] It recommended 'full involvement of the legal section to be obtained in relation to non standard arrangements for the sale and payment of commodities and shipping'. [2256]
22.6 A second draft was also dated October 2000 and described as current to 15 November 2000. It reiterated the findings of the first draft report concerning Iraq. [2257]
22.7 The contents of each of the first and second draft reports were discussed with Mr Stott.[2258]
22.8 A third draft report, dated December 2000, was issued to Mr Stott in January 2001. [2259] Mr Goodacre recalled seeing a draft report but could not recall which draft he saw or when he saw it. [2260] The third draft report stated:
The payment of the freight is paid at 90% until the confirmation of the letter of credit came through then the final 10% is paid. There has recently been an issue with the payments as to whether AWB has paid the full amount. Iraq has claimed that only 90% has been paid. Mr Watson informed us that the Iraq systems are poor. The death of Zahir Zuhair may have affected the Iraq knowledge of the payments …
… The current management have removed this payment process through Ronly. There has been a recent increase in the trucking cost to $45 MT. This appears to be high. There may be a risk that this money is being diverted to other purposes. There may be a risk to AWB of excessive trucking fees.[2261]
Mr Stott asked Mr Tuohy to check the source of the information in the final three sentences quoted. [2262] Mr Tuohy did this and reported back to Mr Stott.[2263]
22.9 The final Arthur Andersen report, also dated December 2000 [2264], was delivered to AWB in February 2001. [2265] On 6 February 2001 Arthur Andersen wrote to Ms Sachak, AWB's Senior Corporate Counsel, enclosing the 'Review of [the] International Marketing Group'. The letter stated, 'The Review of [the] International Marketing Group report identifies the opportunities for improving the processes as described in the attached process maps'. [2266]
The overall conclusion expressed in the Review was:
The concerns initially raised by AWB management were supported by the identification of red flags/risk factors for illegal and improper acts. A number of the red flags were shown to be explainable and reasonable, however, other red flags remain significant risks to AWB. The control of these risks is important to the organisation and to the protection of its employees.
The Integrity Risk Review has uncovered a number of areas that could be improved. There are opportunities to create a better culture within the organisation that will reduce the likelihood of the incidence of integrity risks.
The ethics of AWB staff is critical to the reputation and integrity risks of AWB. Particular higher risk areas such as the marketing of products, shipping and finance were assessed at a high level through this review. We found incidents that created ethical questions such as the offer of gifts, entertainment and money were encountered by your employees. We found that the incidents while not frequent did cause concern to your staff. Reduction of these risks can be achieved through education, improved communication, a consistent AWB policy and the enforcement of that policy. Other methods can be implemented to review and prevent incidents such as rotation of staff, audits, awareness of ethical issues and dilemmas that may be encountered.
1.6 Key Recommendations
It is recommended that AWB:
22.10 In its detailed findings concerning Mr Emons, Arthur Andersen wrote:
Iraq-Inland Trucking:
During our review we found a number of email records that related to Iraq. These records contained indicators of integrity risks or red flags. We conducted a review of the Iraq dealings. The main aspect of these findings is the state of mind, knowledge and involvement of AWB employees.
Mr Watson informed us that approximately two years ago a UN tender for 'Free on Truck' was in place. IGB (Iraq Grain Board) would pay the trucking fee to AWB together with the C and F value. AWB would remit the trucking fee to the Jordanian trucking company transporting the grain.
AWB received information that apparently originated from the AWB New York Office that the UN were asking about the payment to the trucking company. The information was that the Canadians had asked for an inquiry into the arrangements.
Mr Watson informed us that this raised concerns at AWB about future sales to Iraq. There was AWB management pressure to maintain the sales to Iraq. He advised that Mr Emons and Mr Officer wanted to find ways to avoid attracting the attention of the UN.
We were informed by Mr Aucher and Mr Owen of Trade Finance that they were approached by Mr Emons to assist in structuring payments. They declined to have anything to do with it.
The next solution to the situation was to have the shipping company's owner make the payments to the trucking company on behalf of AWB. Mr Watson approached some ship companies such as SANKO who refused to conduct the payment. He stated that they advised him that they did not wish to break UN laws. One company asked why AWB did not wish to make the payments themselves. Mr Watson then approached another company who did make the payments. This company made two payments to the Jordanian trucking company. They withdrew from making any other payments to the trucking company after inquiries were made by the Singapore Monetary Authority for suspicion of money laundering. AWB were asked to support the transactions with a letter.
Ronly then provided the mechanism to make the payments to the trucking company. Two methods were utilised. The first was that AWB make two payments, one to Ronly for the trucking fees and the second to the ship owner for the freight. The second method was to make a single payment to Ronly. Ronly would then make two payments one to the ship owner and the other to the Jordanian trucking company. Mr Watson authorised the payments to Ronly. These payments were made through a Liechenstein company. Mr Watson said that there was concern that payments made by Ronly in the UK would attract UN interest. Ronly for its part in the transactions received a payment per metric tonne (20 cents). We were informed that Ronly held the full amounts of these payments in their accounts for 20 days or more.
Mr Emons was the one who spoke to Mr Watson about the structure of the payments in the first instance. It was Mr Officer who instructed him to conduct the payments through the shipping companies and then through Ronly. Mr Watson arranged the trucking payments as part of the freight.
The payment of the freight is paid at 90% until the confirmation of the letter of credit came through then the final 10% is paid. There has recently been an issue with the payments as to whether AWB has paid the full amount. Iraq has claimed that only 90% has been paid. Mr Watson informed us that the Iraq systems are poor. The death of the Iraqi official responsible for the grain contracts, a person known as Zuhair, may have affected the Iraq knowledge of the payments.
There are a number of red flags that the employees were faced with in relation to these payments. This type of arrangement could be misinterpreted as a money laundering process. There were a number of clear warning signs in relation to these transactions that were not fully explored by AWB in legal or commercial terms. For example the issue of trying to use ship owners to make payments on behalf of AWB potentially damaged the reputation of AWB as would the attempt to disguise the transactions.
The current management have removed this payment process through Ronly. There has been a recent increase in the trucking cost to $45MT. This appears to be high. There may be a risk that this money is being diverted to other purposes. There may be a risk to AWB of excessive trucking fees.[2268]
22.11 In reporting related to Mr Watson, Arthur Andersen noted:
Michael Watson stated that the extra payments were commissions to the best of his knowledge. That the 'friend in the middle east' is probably Zuhair. Zuhair dealt with Mr Emons. Zuhair was the one who instructed which trucking company to be used. At an airport lounge one time Mr Emons received a mobile phone call and said that it had been Zuhair who had asked if extra payments could be made. Mark said that he told him that he could not make those payments.[2269]
22.12 A reading of these passages makes clear at least the following:
- There had been an inquiry from the United Nations about AWB's payment of trucking fees.
- AWB had sought to hide or disguise the payment of the trucking fees.
- There had been AWB management pressure to maintain sales to Iraq. Avoidance of UN scrutiny of trucking fees was necessary if such sales were to be maintained.
- Entities requested by AWB to make payments of trucking fees on its behalf had declined because of fears such payments may have been in breach of UN sanctions or may have constituted money laundering.
- Increases in trucking fees appeared excessive, with the risk that some portion of the fees may be diverted to purposes other than trucking.
22.13 A meeting was held on 15 February 2001 to review the final report. [2270] Present were Mr Stott and Mr Goodacre from AWB and Mr Tuohy, Mr Mackellar and Ms Jackson from Arthur Andersen.
Most of the meeting was taken up with discussing the evidence concerning Messrs Emons, Aucher and Watson. [2271] There was, however, discussion of Arthur Andersen's findings in relation to the question of inland transport.[2272] Mr Goodacre learnt for the first time that there was a risk that some of the money paid to Alia was being diverted to other purposes. [2273] This flowed from the recent significant increases in trucking fees. [2274] He also learnt that Ronly had been used to disguise the fact that AWB was paying inland trucking fees. He said:
Prior to this I had understood from my discussions with Stott that the Ronly arrangement had no apparent purpose, and appeared to have been put in place to benefit the individuals concerned. [2275]
22.14 Mr Stott undertook to investigate the concerns about the Iraqi trucking payments. Mr Goodacre said:
Stott said that he would investigate the payments AWB was making to the trucking company to see if there was any substance to the comments made in the Arthur Andersen report that there may be a risk that money from those payments was being diverted to Iraq. [2276]
22.15 A further meeting was held on 23 February 2001. Present were Messrs Lindberg, Stott, Goodacre and Tuohy and a lawyer from AWB. The meeting lasted for at least an hour.[2277] Each person present at the meeting had a copy of the December 2000 final report. [2278]
Mr Tuohy produced a PowerPoint presentation entitled 'Integrity risk review-International Marketing Group' [2279], which set out a summary of risks identified and recommendations made. Copies of this document were made available to those present.[2280] Inland trucking in Iraq was identified as a risk. The primary recommendation was 'Assess the ethics and culture of employees at AWB'. [2281]
The contents of the December 2000 final report, including those parts that related to Iraq and Ronly, were discussed. [2282] The important components in each section were discussed. [2283] Reference was made to concerns that some of the monies paid to Ronly were finding their way to Iraq.[2284] The level of trucking fees was raised but was not discussed in detail. [2285] Mr Stott did not discuss his alleged 'tests' to determine Alia's legitimacy as a trucking company.[2286]
After the presentation there was discussion of Arthur Andersen's findings, the confidentiality of the report and what was to be done with the copies. [2287] It was decided that AWB would keep a single copy of the report in its offices and Arthur Andersen would destroy the remaining copies.[2288]
It was decided not to take the investigation any further because Mr Emons and Mr Watson had resigned from AWB. [2289] Management was asked to implement the recommendations suggested by Arthur Andersen.
22.16 As a result of the reports prepared by Arthur Andersen, and the meetings in February 2001, Mr Goodacre and Mr Stott knew that the increased trucking fees gave rise to the possibility that some of those fees were being paid to the Iraqi regime. Indeed, Mr Stott had known from November 2000 that a 10 per cent surcharge had been introduced and that it had been included in the inland transportation fee. [2290] Yet he did not disclose that knowledge in either of the meetings in February 2001 concerning the Arthur Andersen report. Messrs Stott, Goodacre and Lindberg also knew that steps had been taken, principally by using Ronly[2291], to disguise the payment of the inland trucking fees.
22.17 The December 2000 final report was discussed at a meeting of the Executive Leadership Group but not in the same detail as in the meeting on 23 February 2001. The report itself was not provided to the ELG members. [2292]
22.18 Mr Stott was delegated the task of implementing the Arthur Andersen recommendations. A policy that imposed limits on the authority of employees was introduced. Any business involving 50,000 tonnes of wheat or more could not be concluded without the consent of the General Manager or the Group General Manager. [2293]
22.19 At some later time Mr Stott told Mr Goodacre:
He had made inquiries with both the IGB and DFAT as part of his investigations into the issues relating to the trucking payments and was satisfied that the level of trucking fees was justified and that the trucking company (Alia) was legitimate. [2294]
He also told Mr Goodacre that the increase in the payments to Alia had been authorised by the United Nations. [2295] Neither statement was true.
22.20 The Chief Executive Officer's report prepared for the 27 February 2001 Board meeting recorded:
Chartering is currently in the process of reviewing every component of its business. Integral to this review is a detailed process and procedure audit being conducted by Arthur Andersen and an internal staff capability audit.
A revised Business Plan, risk reporting framework and legal procedures are also being reviewed and re-developed. [2296]
This was noted by the Board. [2297]
22.21 The Chief Executive Officer's report of 30 May 2001 referred to the fact that significant effort was being put into revising all policies and procedures in the Chartering Department and addressing risks identified in the Arthur Andersen audit report.[2298]
However, the Board was not given any summary of Arthur Andersen's findings. Apart from Mr Lindberg, the directors were not shown a copy of the December 2000 final report until this Inquiry commenced its public hearings.[2299]
22.22 When Project Rose was initiated in June 2003, Mr Fuller provided to Mr Cooper the December 2000 final report because it was relevant to his task. [2300] Mr Cooper retained the report. He showed it to Mr Quennell of Blake Dawson Waldron. He provided a copy to Mr Stott, at the latter's request, prior to February 2003. [2301]
22.23 The Arthur Andersen report drew senior management's attention to the risks associated with the payment of greatly increased inland trucking fees, and the possibility that some portion of fees may have been siphoned off to Iraq. The matter was left for further investigation by Mr Stott. He made no proper further inquiry regarding the nature or extent of such fees, although he told Mr Goodacre he had done so. AWB management failed properly to address the risks raised in the Arthur Andersen report. The departure of Messrs Watson, Officer and Emons, which had already occurred by the time the final report came to be discussed in February 2001, was apparently regarded as removing risks associated with the 'ethics and culture' of AWB employees, which Arthur Andersen had recommended be assessed. Until Project Rose inquired into some of these matters in June 2003, there was no inquiry into the culture at AWB, why AWB employees had thought it necessary to disguise payments of trucking fees, the circumstances relating to the payment of trucking fees to a Jordanian company, the reason for the significant increase in trucking fees, or why AWB agreed to pay such increased fees.
[2246] T 2264.23.
[2247] T 2534.23-25.
[2248] T 899.
[2249] Ex 731, WST.0029.0050 at 0050, para. 3.
[2250] Ex 45, WST.0002.0131 at 0131.
[2251] Ex 1227, AWB.0285.0238_R at 0240_R. This report was considered at the Board meeting that day (Ex 1006, AWB.0285.0228 at 0230).
[2252] Ex 731, WST.0029.0050 at 0051, para. 11; Ex 1258, WST.0029.0054.
[2253] Ex 1405, EAY.0001.0080_R.
[2254] Ex 1405, EAY.0001.0080_R at 0093_R.
[2255] Ex 1405, EAY.0001.0080_R at 0085_R, para. 1.4.
[2256] Ex 1405, EAY.0001.0080_R at 0093_R.
[2257] Ex 1406, EAY.0001.0170_R at 0179_R, para. 2.1.3.
[2258] T 6106.37.
[2259] T 6116.15.
[2260] T 3393.18.
[2261] Ex 1407, CES.0001.0005 at 0117.
[2262] T 6119.
[2263] T 6119.32-43.
[2264] Ex 1565, AWB.0182.0106_R.
[2265] T 6116.11.
[2266] Ex 420, WST.0012.0022_R.
[2267] Ex 1565, AWB.0182.0106_R at 0113_R.
[2268] Ex 1565, AWB.0182.0106_R at 0117_R-0118_R. The first contract for which the cost of trucking was approximately US$45 per tonne was A0430, dated 2 November 2000 (see Chapter 21).
[2269] Ex 1565, AWB.0182.0106_R at 0135_R.
[2270] Ex 420, WST.0012.0001_R at 0012_R, para. 7.7; T 6126.20. This is consistent with Mr Goodacre's recollection that the purpose of this meeting was to discuss generally the findings.
[2271] Ex 420, WST.0012.0001_R at 0012_R, para. 7.7; T 6126.20. This is consistent with Mr Goodacre's recollection that the purpose of this meeting was to discuss generally the findings
[2272] Ex 420, WST.0012.0001_R at 0012_R, para. 7.8.
[2273] Ex 420, WST.0012.0001_R at 0012_R, para. 7.8.
[2274] Ex 420, WST.0012.0001_R at 0012_R, para. 7.8.
[2275] Ex 420, WST.0012.0001_R at 0012_R-0013_R, para. 7.9; see also Mr Goodacre at T 3342.22. Mr Stott's evidence at T 6232.45 was that he was not delegated the task of ensuring that the trucking fee was not being diverted to other purposes.
[2276] Ex 420, WST.0012.0001_R at 0013_R, para. 7.10.
[2277] T 6122.27.
[2278] Ex 731, WST.0029.0050 at 0053, para. 23.
[2279] Ex 1557, AWB.0159.0174_R.
[2280] T 6461.13 and T 6465.44.
[2281] Ex 1557, AWB.0159.0174_R at 0182_R.
[2282] T 6122.29.
[2283] T 6155.17.
[2284] T 6471.16-32; this evidence is consistent with the terms of the PowerPoint Presentation (see above).
[2285] T 6124.30.
[2286] See Appendix 18 for a discussion of the tests. Mr Tuohy could not recall whether Mr Stott had 'specifically mentioned these investigations' (T 6121.35-6). Mr Goodacre's recollection was that Mr Stott would 'make checks' in relation to the concerns raised in the Arthur Andersen report about the 'Iraq trucking payments' (T 3342.39-40), not that he had 'already made checks' (T 3342.43-4).
[2287] T 6123.37.
[2288] Ex 731, WST.0029.0050 at 0053, para. 24; T 6124.47 - T 6125.7.
[2289] T 6145.17 - T 6146.15. Mr Goodacre's evidence was to the same effect. He referred to there being a consensus that it would be very difficult to investigate the matters involving Mr Emons further. (Ex 420, WST.0012.0001_R at 0013_R, para. 7.12).
[2290] Mr Hogan in an email widely distributed within AWB, including to Mr Stott, on 2 November 2000 advised that the additional 10% would be included in the trucking fee which for the next contract would be US$44.50 (Ex 385, SNO.0001.0067_R; Ex 749, AWB.0416.0013_R; Ex 995, AWB.0420.0219_R).
[2291] And its nominee Tse Yu Hong Metal Limited.
[2292] T 3364.33-42.
[2293] Ex 420, WST.0012.0001_R at 0013_R-0014_R, para. 7.15; T 2156.45; T 2153.39.
[2294] Ex 420, WST.0012.0001_R at 0014_R-0015_R, para. 7.18.
[2295] Ex 420, WST.0012.0001_R at 0014_R-0015_R, para. 7.18.
[2296] Ex 1384, AWB.0156.0365_R at 0367_R.
[2297] Ex 1383, AWB.0156.0356_R at 0358_R.
[2298] Ex 1386, AWB.0156.0385_R at 0387_R.
[2299] Ex 519, WST.0020.0002_R at 0016_R-0017_R, para. 49; Ex 778, AWB.0415.0002_R at 0003_R, para. 12; Ex 780, AWB.0415.0006_R at 0007_R, para. 10; Ex 781, AWB.0415.0008_R at 0009_R, para. 12; Ex 782, AWB.0415.0010_R at 0011_R, para. 14; Ex 788, AWB.0417.0009 at 0010, para. 11; Ex 497, WST.0019.0046_R at 0055_R-0056_R, paras 37, 40-41 and 43; Ex 976, WST.0033.0154_R at 0155_R, para. 16; T 4205.31, T 4207.32, T 5600.46.
[2300] T 3326.26; T 3326.39.
[2301] T 3324 - T 3325.
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