An employee fits the nose cone to a Trent 700 aircraft engine on the production line at the Rolls-Royce Holdings Plc factory in Derby, U.K., on Wednesday, Aug. 19, 2015. Rolls-Royce's XWB engine developed for the Airbus A350 should bring in twice the cash flow than the existing Trent 700 model on the Airbus A330, Chief Executive Warren East said in July. Photographer: Chris Ratcliffe/Bloomberg
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Rolls-Royce shares were up almost 8 per cent on Tuesday after the UK’s flagship engineering group announced it had agreed a £671m deal with regulators to settle allegations of bribery and corruption, including the largest British fine ever imposed on a company for criminal conduct.

In a statement late on Monday, Rolls-Royce also said it expected “profit and, in particular, cash” to be ahead of expectations for 2016, after a good finish to the year.

Shares in Rolls-Royce were up 7.7 per cent at 716.7p in Tuesday morning trading.

One person familiar with the situation suggested the stock price rise may have been fuelled by funds unwinding short positions ahead of Rolls-Royce’s results on February 14. Having issued five profit warnings in two years, the group had repeatedly been targeted by hedge funds that bet on disappointing numbers, added this person.

Rolls-Royce has been under investigation in the US and the UK for alleged bribery and corruption in China, Brazil and Indonesia and other markets. Brazilian authorities have also been probing allegations there.

Rolls-Royce said on Monday it had reached deferred prosecution agreements with the Department of Justice in the US, the Serious Fraud Office in the UK and Brazil’s Ministério Público Federal. “These agreements relate to bribery and corruption involving intermediaries in a number of overseas markets,” it added.

The UK share of the settlement, which amounts to £497.2m, plus interest and costs, will go before a judge for approval at a court hearing in London on Tuesday. About $170m will be paid to the DoJ and $25.6m to Brazilian regulators.

In such court-approved deals, the company admits wrongdoing, pays a fine and agrees to various other compliance measures. If the group meets these requirements, there is no prosecution at the end of the agreement term. While common in the US, the DPA was introduced to the UK in 2014 and only two have so far been agreed, at significantly lower levels. Standard Bank’s total fine in November 2015 came to less than $40m.

The fact that Rolls-Royce has agreed to the DPA is a huge coup for David Green, the SFO director, who has sought to make deferred prosecution agreements a key weapon in the watchdog’s anti-corruption armoury since his appointment in 2012.

It follows criticism that the SFO has made little headway since the 2011 Bribery Act, which made companies criminally liable for failing to prevent bribery. The fine far eclipses the SFO’s annual budget of £34m. “You can’t underestimate the political significance of this for the SFO,” said one lawyer.

As a leading UK company and household name, the Rolls-Royce investigation was one of the SFO’s most important. The company has been dogged by allegations of bribery for years, largely relating to the use of agents to win foreign business.

In Indonesia, the widely reported allegations included that the company had given Tommy Suharto, son of the country’s former president, a blue Rolls-Royce car and $20m to encourage Garuda, the country’s airline, to buy its Trent 700 engine. Tommy’s attorney wrote to the SFO in 2013 to deny any wrongdoing.

In Brazil, Rolls-Royce was named in the investigation into bribery and kickbacks at Petrobras, the state-controlled oil producer. The Financial Times reported last year that the SFO was also looking at suspected bribery in Rolls-Royce’s former energy operations in Nigeria as part of the wider inquiry in Brazil, Indonesia and China.

Rolls-Royce was first approached by the SFO in 2012 regarding allegations of corruption in Indonesia and China.

The company then appointed law firm Debevoise & Plimpton to investigate. Certain businesses in those countries and others were “red flagged” and files were passed to the SFO, which launched a criminal investigation a year later. The DoJ also began looking at the allegations.

Since the SFO inquiry was launched, Rolls-Royce says it has significantly reduced the use of third-party intermediaries and toughened up its compliance procedures. “Rolls-Royce has co-operated fully with the authorities and will continue to do so,” said the company.

Rolls-Royce said total payments in the first year to all three regulators would come to £293m. The UK fine will be paid over five years. More details would be forthcoming at the company’s annual results on February 14, added the group.

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