LONDON Aerospace and defense group Rolls-Royce (RR.L) said it was in talks with Britain's Serious Fraud Office (SFO) over potential corruption involving its intermediaries overseas.
Rolls said on Thursday it was too early to predict the outcome of the investigation by the SFO, but this could include prosecution of the company and of certain individuals, adding that it would cooperate fully with the probe.
The world's second-largest maker of aircraft engines behind U.S. group General Electric (GE.N), said it had passed information to the SFO relating to concerns about bribery and corruption involving intermediaries in China, Indonesia and other overseas markets, which it did not name.
"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," Chief Executive John Rishton said in a statement.
"This is a company with exceptional prospects and I will not accept any behavior that undermines its future success."
Shares in Rolls-Royce, which have risen 25 percent this year, opened 5.3 percent down in early trade on Thursday, valuing the group at around 16.2 billion pounds ($26 billion).
A source with knowledge of the events said the SFO had asked Rolls to investigate allegations of corruption in China and Indonesia earlier this year. Rolls hired an independent body to do this and passed the results, which identified matters of concern, to the SFO, the source added.
Aerospace and defense companies use intermediaries, which can be individuals or companies, in countries where they do not have large-scale infrastructure to support their operations. Intermediaries cover tasks from sales to coordinating maintenance and support contracts.
Allegations of corruption are not new to the defense and aerospace industry.
BAE Systems (BAES.L), Europe's biggest defense company, was fined $450 million by the United States and Britain in 2010, following long-running corruption investigations at home and abroad into defense 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.
"China is involved and you can't sell anything defense-related there, so it (the probe) has to concern its civil aerospace or energy businesses."
The SFO was not available to comment.
Rolls-Royce 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.
Indonesia is a relatively small market for Rolls, which caters to civil, defense, marine and energy customers in the country, including supplying engines to carriers and the country's air force. It also supplies propulsion systems and marine equipment to its naval and commercial ships.
Any question of impropriety is likely to be taken seriously by a company that prides itself on its "integrity, reliability and innovation," according to its website.
The company'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 of cars that would bear the name Rolls-Royce.
Following success in that 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.
Rolls-Royce, which reported sales of 11.2 billion pounds in 2011, has delivered strong profit growth in recent years on the back of soaring demand for more fuel-efficient engines for planes made by Airbus EAD.PA and Boeing (BA.N).
($1 = 0.6214 British pounds)
(Additional reporting by Kate Holton and Brenton Cordeiro; Editing by Elaine Hardcastle)