Self-defence and self-interest: cleaning up corruption in the arms sector
14 Sep 2015 8:31 am by Mark Dunn
Several high profile investigations in recent years have thrown a light on what many claim is endemic corruption within the defence sector. Major international companies like Rolls Royce, Airbus and Italy's Finmeccanica are all under investigation over allegations of corrupt practices. In 2005, a single study found that 40 per cent of all corruption globally occurred within the arms trade while allegations of corruption in BAE Systems dealings with Saudi Arabia have swirled for a decade.
Defence: an industry with a poor reputation
We have already extensively reported Transparency International UK's Defence Companies Anti-Corruption Index 2015. It showed that while 33 companies from 47 countries have improved their ethics and anti-corruption programmes since 2012, almost 25 per cent of those surveyed have almost no anti-corruption measures in place at all. Of all the companies surveyed, just eight had whistleblowing mechanisms in place to encourage reporting of corruption, only 13 conducted regular due diligence on third parties and just three were able to show evidence that they have comprehensive procedures to avoid corruption in offset contracts.
While a raft of legislation to tackle corruption in much of global trade has existed for decades, it was not until December last year that the UN's Arms Trade Treaty (ATT) was ratified by 50 states and became international law.
UN action to take control
A key goal of the treaty is to tackle corruption. It is now illegal in countries which have ratified the treaty to authorise arms exports where there is a high risk of corruption. Governments and defence companies of these countries are obliged to examine each defence deal, determine whether the sale price is reasonable, that the customer is well known, that the goods are appropriate for their intended use and that any commission paid to third parties is fiar.
The greatest risks of corruption exist in defence procurement, finance, operations, among personnel and political ethics. Since ratification of the ATT, there has been continued investigation of alleged corruption within the sector. One such inquiry – into a Brazilian deal with French shipbuilder DCNS to build five submarines in South America – is ongoing. Investigators are said to be focusing on whether there was a competitive tender process for the programme.
While the US has yet to ratify the ATT, Transparency International's report found that American arms companies were the least likely to engage in corrupt practices. That may be partly due to the oversight that the US government apparatus places on defence – a Congressional committee report in 2011 found that the country was wasting up to $12 million a day on in fraud and waste among contracts issued to support the wars in Iraq and Afghanistan. The committee recommended the creation of a permanent inspector general for contingency operations.
Practical steps to increase transparency
It is clear that efforts to stamp out corruption in arms deals and to introduce greater transparency are gaining traction and so defence sector companies should ensure that they have the right procedures in place to ensure compliance:
- Companies should review their own due diligence practices, particularly in relation to the more difficult issues of verification and red flags.
- They should update practices, policies and procedures where they find scope for improvement.
- They should ensure that contracts are clear in allocating responsibility for conducting due diligence.
- Sub-contractors, brokers and other intermediaries and advisers should be required in their contracts to disclose all information material to the offset programme, specifically including potential corruption related observations or concerns.
- Companies should ensure that their corporate compliance and business conduct policies explicitly include reference to responsibility and requirements for offset arrangements.
- New FCA regulation focuses on foreign banks operating in the UK
- China Crisis –keeping ahead of unintended consequences
- What the Libor scandal tells us about corruption
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