Rio Tinto executives blind to risks on Africa deal

Compliance experts are asking why Rio did not raise potential governance concerns about a cash-for-influence payment.

Former Rio Tinto CEO Tom Albanese.

When the most powerful executives at Rio Tinto emailed each other in May 2011 to discuss a $US10.5 million payment to an adviser who could influence the new president of Guinea, the main point of discussion was how much Rio was prepared to pay.

What is baffling compliance experts and others who have read the exchange that may land the company and some executives in hot water, is why there was no mention of potential governance concerns.

There clearly should have been, given an investigation Rio conducted after the emails came to its attention three months ago has seen the case referred to authorities in three jurisdictions, two executives stood down, a cloud over the reputations of former chief executives Sam Walsh and Tom Albanese, and the potential for hundreds of millions of dollars in fines.

The payment, discussed in company emails by then chief executive Mr Albanese, then iron ore chief Mr Walsh and international iron ore chief Alan Davies was to Frenchman Francois de Combret. It was for services in helping Rio strike a deal a month earlier to retain two iron ore mining leases in Guinea’s Simandou ranges by Rio paying the Guinea government $US700m.

“Sam, I accept this ($US10.5m) is a lot of money, but I also put forward that the result we achieved was significantly improved by Francois’ contribution and his very unique and unreplaceable services and closeness to the president,” Mr Davies says in a detailed May 10, 2011, request for approval.

He says there is still work to do to “secure the investment fully” and that he had knocked Mr de Combret down from an initial request of $US15m.

Mr Walsh then asks his boss, Mr Albanese, his thoughts on paying half the fee now and half on first production from the planned $US20 billion Simandou project.

“Worth giving this a try, but also think about optics to the GoG (Government of Guinea),” Mr Albanese replies.

Mr Walsh took over from Mr Albanese as chief executive in 2013 and was replaced by Jean-Sebastien Jacques in July this year. Mr Jacques apparently became aware of the payment shortly after his appointment, when the emails were quietly posted, by persons unknown, on a public website on August 29.

Rio then did an internal investigation before announcing on Tuesday that it was suspending Mr Davies, that legal head Debra Valentine would leave the company six months earlier than planned and the case would be reported to the US Department of Justice and the Securities and Exchanges Commission, Britain’s Serious Fraud Office and the Australian Federal Police.

During the investigation, on October 28, Rio said it planned to hand its share of Simandou over to partner Chinalco for a payment of $US1bn to $US1.3bn if it were ever developed.

The question that compliance experts are asking is why there were no signs of alarm bells about the appropriateness and legality of the payment in an email exchange at the highest levels of a company that stresses to employees that anti-corruption measures are effectively embedded in its DNA.

It is even more baffling because, little more than a year earlier, four employees of Mr Walsh’s iron ore unit, including Australian Stern Hu, were jailed in China for accepting bribes and stealing trade secrets.

Transparency International Australia chief executive Phil Newman said it was good that Rio had self-reported, but the clearly problematic payment should have been picked up earlier. “There should have been questions asked about whether this was an appropriate transaction, who they were dealing with and the political exposure, but it doesn’t look like that happened,” he said.

Mr Newman added that the fact Mr Albanese discussed the optics of the deal was “appalling”.

“There’s no way an issue of that nature should be discussed from an optics perspective, they should be saying ‘it’s not how we conduct business’,” he said. “It doesn’t speak well to the values and culture of decision-making.”

It is not known what other discussions the trio had about the appropriateness of the payment to Mr de Combret, which Rio this week said was made in full.

But the fact Rio has now stood down two executives and notified authorities shows its investigators did not find sufficient evidence that everything was OK.

One compliance expert said an eight-figure bill for consulting services was a “classic anti-bribery 101 red flag”.

“The consultant should be itemising what that bill was for, how many hours he worked and break down how many people were working with him,” he said.

“Guinea is a high-risk country, you’re paying an agent a huge amount of money because of his contacts in the government, and success depends on him — they are all massive red flags.”

Guinea is ranked 139th of 168 countries in Transparency International’s corruption perceptions index.

An industry source who has been through a US Foreign Corrupt Practices Act investigation said Rio was likely to face fines of more than $US100m from US authorities if found to have breached the act.

In September, hedge fund Och-Ziff agreed to pay $US200m to the SEC and a criminal penalty of $US213m, with chief executive Daniel Och personally paying an extra $US2.2m, after the fund was found to have used intermediaries to pay bribes to government officials in Africa, including in Guinea.

Attempts to contact Mr Davies, Mr Walsh and Mr de Combret were unsuccessful. Mr Albanese on Thursday refused to comment.