* Too early to predict outcome of inquiry - CEO
* Allegations relate to "distant past", U.S. informed
* SFO was alerted by whistleblower - separate source
* Shares down 3 pct
By Rhys Jones and Kirstin Ridley
LONDON, Dec 6 Aerospace and defence group
Rolls-Royce may face prosecution after Britain's Serious
Fraud Office (SFO) ordered it to hand over details of possible
bribery and corruption in China and elsewhere, the company said
The world's second-largest maker of aircraft engines said
the SFO had asked it to conduct an internal inquiry into
dealings involving intermediaries in China, Indonesia and other
overseas markets, which it did not name, and report the results.
"It is too early to predict the outcomes, but these could
include the prosecution of individuals and of the company. We
will cooperate fully," Chief Executive John Rishton said.
Shares in Rolls-Royce, which have risen a quarter this year,
fell as much as 5.6 percent in early trade. The stock was down 3
percent at 886.75 pence by 1410 GMT, valuing the group at around
16.6 billion pounds ($26.7 billion).
A source close to the investigation said the allegations
relate to events in the "distant past" and Rolls-Royce had told
the U.S. Department of Justice about the inquiry.
A separate source said a whistleblower had raised the
allegations with the SFO, which then ordered Rolls-Royce to
undertake a preliminary investigation earlier this year. The
company hired a law firm for the task and passed the results,
which had identified matters of concern, to the SFO.
The company, a major British exporter, dates back to 1884
and on its website says it prides itself on its "integrity,
reliability and innovation".
"I want to make it crystal clear that neither I nor the
board will tolerate improper business conduct of any sort and
will take all necessary action to ensure compliance," Rishton
said in a statement.
"This is a company with exceptional prospects and I will not
accept any behaviour that undermines its future success."
Analysts said past fines within the sector over corruption
tended to be relatively small. Any offences committed in the
"distant past" would probably not fall under the British Bribery
Act, which came into effect only in July 2011.
This tougher law introduced an offence of failure to prevent
bribery, and clamps down on "facilitation payments" and
disproportionate hospitality to oil the wheels of business.
Companies can be handed unlimited fines if they cannot show
they have "adequate procedures" to prevent bribery, while guilty
individuals face up to 10 years in prison and unlimited fines.
MATTERS OF CONCERN
Rolls-Royce's profits have risen strongly in recent years
due to soaring demand for more fuel-efficient engines for planes
made by Airbus and Boeing. Luxury Rolls-Royce
cars are made by a separate company belonging to BMW AG
Aerospace and defence companies use intermediaries, which
can be individuals or companies, in countries where they do not
have a large presence. Intermediaries cover tasks from sales to
coordinating maintenance and support contracts.
The SFO declined to give details of the investigation.
"It's up to Rolls-Royce to say what they think is right to say.
It's not something we would provide information about or comment
on," a spokesman said.
Allegations of corruption are not new to the defence and
aerospace industry. BAE Systems, Europe's biggest
defence company, was fined $450 million by the United States and
Britain in 2010, following long-running corruption
investigations at home and abroad into defence deals in Saudi
Arabia, Tanzania, Sweden, the Czech Republic and Hungary.
"BAE ended up with fines that were not exactly huge, so you
would imagine that Rolls could end up with a fine that won't
trouble investors much," said Espirito Santo analyst Ed Stacey,
noting that the European Union has banned arms sales to China.
"China is involved and you can't sell anything
defence-related there, so it (the probe) has to concern its
civil aerospace or energy businesses," he said.
The SFO, which spent years chasing BAE Systems over bribery
allegations, formally launched a criminal investigation in
August into allegations that European defence group EADS
bribed Saudi Arabian officials to win a contract.
Rolls-Royce's operations span the civil aerospace, defence,
marine and energy sectors and the company did not disclose which
units were involved. It has almost 2,000 employees across
Greater China, including joint ventures, and the country's
operations contributed 934 million pounds in revenue in 2011,
making it the group's fourth biggest market.
The British company, which reported overall sales of 11.2
billion pounds in 2011, is heavily involved in China's civil
aviation and energy industry. Its website says every major
airline in mainland China is a long-term customer, with its
engines powering 370 aircraft with 166 more on order.
Last year it won a contract to supply gas compression
equipment for China's West-East Pipeline Project - the world's
longest natural gas pipeline.
Indonesia is a relatively small market for Rolls-Royce,
which caters to civil, defence, marine and energy customers in
the country, including supplying engines to carriers and the
air force. It also supplies propulsion systems and marine
equipment to its naval and commercial ships.
Anti-corruption body Transparency International ranked China
and Indonesia the 80th and 118th most corrupt countries out of
174 in its perceptions index published on Wednesday.
Based on evidence provided by Rolls-Royce on its
anti-corruption systems, Transparency International ranked the
company in the third tier of six in an October study of the
global defence industry.
Other British aerospace and defence companies such as BAE
and Meggitt were deemed to be more open about
anti-corruption measures and went into the second tier.
"In other cases, the largest negative fallout has been on
the company's reputation," said RBC analyst Robert Stallard,
adding that such investigations tended to be lengthy.
Rolls-Royce's history dates back to 1884 and the electrical
and mechanical business established by Henry Royce. Having built
his first motor car in 1904, Royce then met Charles Rolls, who
sold quality cars in London, and the two agreed to manufacture a
range that would bear the name Rolls-Royce.
Following success in the motor industry, the company
branched into aero engines in 1914 to meet the need in Britain
for air power for the First World War, before moving into the
civil aviation sector.
The company said on Thursday it had significantly
strengthened its compliance procedures in recent years,
including the introduction of a new global ethics code and a new
intermediaries policy. It plans to appoint an independent senior
figure who would lead a review of current procedures and report
to the ethics committee of the board.