Defence giant Cobham faces investigation over 'irregular practices' in Asia

Cobham warns US Department of Justice of concerns at its TracStar unit
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Cobham yesterday became the latest UK defence giant to admit it had uncovered "potentially irregular sales practices" in Asia at one of its subsidiaries.

The 80-year Dorset based group said it had notified the US Department of Justice late on Monday night after it internally investigated concerns regarding overseas sales at its Florida-based TracStar Systems subsidiary.

Cobham is perhaps best known for manufacturing airborne refuelling equipment but it also builds gunshot detection systems and surveillance gear. TracStar is a fairly obscure part of its business, building satellite-tracking systems that account for only £15m of sales a year – less than 1 per cent of the group's revenue.

The problems echo those at the aircraft engine manufacturer Rolls-Royce, which is also said to have passed to the DoJ concerns about its own sales practices in Asia. Rolls-Royce's Asian issues, though, have also come under scrutiny from the UK's Serious Fraud Office.

In both instances, an employee is thought to have blown the whistle; and Cobham's website reveals it has a business ethics policy that encourages staff to report improper conduct.

A City source suggested that voluntarily going to US authorities with information about their own staff's potential misconduct was now virtually "a rite of passage" for British manufacturers with significant US operations. It is understood that the DoJ has acknowledged Cobham's approach, but that any further investigations are likely to take months.

Yesterday's announcement was deliberately vague in detail as the company does not want to pre-judge what has occurred, but its chief executive, Robert Murphy, has been warned that he can expect questions over the disclosure at Cobham's results next week.

Zafar Khan, an aerospace and defence analyst at Société Générale, said: "This is a surprise, but it is one of the risks [with] these kinds of defence companies that are involved in developing markets. This whole investigation is inevitably going to take considerable time, as we have seen with other situations."

Christophe Menard, the head of aerospace and defence sector research at Kepler Cheuvreux, added that the news was a "negative" for Cobham, but that the scope of the irregularities was likely to be small given the size of the subsidiary. He added that the voluntary approach to the DoJ demonstrated Cobham's "intention to fully co-operate with the investigation".

Early self-reporting to US authorities is considered a wise and conservative tactic in order to keep the Pentagon onside and to distance executives from problems not of their own making. Although the US is making huge defence cuts, it remains the world's most important market for the sector.