Licence to bribe? Reducing corruption risks around the use of agents in defence procurement Authors: Katie Fish, Michelle Man Transparency International UK cannot accept responsibility for the consequences of its Design: Greg Stevenson use for other purposes or in other contexts. Transparency International UK’s registered © Cover photo: Crown Copyright UK charity number is 1112842. © 2016 Transparency International UK. All Transparency International Defence and rights reserved. Reproduction in whole or in Security would like to thank the Network for parts is permitted, providing that full credit Social Change for their generous financial is given to Transparency International UK support to make the research possible. (TI-UK) and provided that any such Transparency International Defence and reproduction, in whole or in parts, is not sold Security would like to thank all individuals or incorporated in works that are sold. who provided feedback on earlier drafts of Written permission must be sought from this report, and all companies and Transparency International UK if any such individuals who encouraged us to do this reproduction would adapt or modify the study and engaged with us throughout the original content. process. The impetus for this research came directly from our conversations with Published June 2016 companies and in-depth discussions around the realities of using agents. We appreciate ISBN: 978-1-910778-08-1 that it involved a significant degree of trust on their part and we hope that the result will Every effort has been made to verify the be an increase in transparency and accuracy of the information contained in this accountability in the use of agents across report. All information was believed to be the defence industry. correct as of April 2016. Nevertheless, Licence to bribe? Reducing corruption risks around the use of agents in defence procurement Contents 1. An enduring problem 7 2. Agents 11 3. Defence companies and agents 16 3.1 Recommendations for defence companies 19 4. Governments and agents 21 4.1 Recommendations for importing governments 25 4.2 Recommendations for exporting governments 29 5. Recommendations for civil society 32 Endnotes 35 Annex 1: Agents and third parties in the 2015 41 Defence Companies Anti-Corruption Index Annex 2: Procurement in the 2015/16 44 Government Defence Anti-Corruption Index Secretive defence Anti-spending creates huge opportunities for abuse by corrcorrupt agents uptio 7 1. An enduring problem Defence procurement has produced of the highest risk factors for corruption some of the biggest international across the sector but, despite recent corruption scandals. Last year, South changes to the regulatory environment, the Korea indicted 63 individuals, including risks are as difficult to manage as ever. In 10 current or former military generals 2013, more than 90 per cent of reported US and a former vice minister, over an Foreign Corrupt Practices Act (FCPA) cases investigation into alleged defence were found to have involved third party procurement corruption.1 The US Navy is intermediaries.6 A global survey of currently at the centre of a high-profile compliance officers published in 2016 scandal relating to its 25-year found the main reasons behind increases in relationship with Glenn Defense Marine company bribery and corruption risks were Asia (GDMA). As of March 2016, nine perceived to be increases in the number of individuals had pleaded guilty and a US third party relationships, as well as global Navy captain sentenced to four years expansion, and increased enforcement of imprisonment over bribes paid to Navy regulations.7 officials.2 The Scorpene scandal, which involved suspicious payments to The defence contracting environment Malaysian defence officials in the 2002 exacerbates these risks. The defence sale of French submarines, has recently market is moving away from traditional resulted in a first indictment against the buyers in Europe and North America. This Anti- former head of DCNS. The contract, decline can be partly attributed to the worth USD 1.25 billion, was reportedly drawdown in Afghanistan and reduction in the most expensive military armed conflict in Iraq, as well as budgetary procurement by Malaysia to date.3 concerns and an increased focus on domestic economic priorities. At the same Corruption in defence procurement is about time, global economic power is shifting more than inflated commissions on sales towards emerging economies like China, and the waste of public money. By draining India, Brazil, Mexico, Russia, Indonesia, and state funds, corruption degrades a nation’s Turkey. By 2030, the collective size of these ability to provide security and essential economies is likely to be larger than that of services such as health, education, and the G7, while Colombia, Peru, Nigeria, infrastructure. It can result in soldiers Morocco, Vietnam, Bangladesh, and the operating with equipment that doesn’t work Philippines will have become huge or with no equipment at all. Corruption has consumer markets.8 Competition for the potential to damage relations between contracts is intensifying but many of the countries4 and can drive instability even in markets where companies are looking to seemingly stable and prosperous countries. make up the shortfall in sales are precisely For states exporting to regions where where corruption risks are higher. These corr defence institutions lack transparency and markets are often characterised by opacity accountability, the risk of diversion is high in the defence sector and companies and there is increasing evidence of arms frequently rely on local agents to participate from a wide range of countries reaching in bidding and carry out contracts, either non-state actors such as the Houthis in due to legal requirements or realities on the Yemen and ISIS.5 ground. Many of these jurisdictions also require companies to undertake Agents have played a key role in defence countertrade or offset agreements procurement for decades and many cases alongside the main contract and these of procurement corruption have involved opaque mechanisms create further uptio agents. They are widely recognised as one opportunities for agent activity.9 8 Major exporting governments, such as the The concentrated nature of the defence UK in its 2015 National Security Strategy industry provides a potential transformative and Strategic Defence and Security Review, opportunity. Countries share the same small recognise corruption as a driver of set of global suppliers for major defence instability and acknowledge the risks posed items and the top ten arms-importing to national security by instability abroad.10 governments account for 49 per cent of all Yet there is far less recognition that purchases.11 Impact would be felt at a global exporting arms to jurisdictions with high level if even a small number of major vulnerability to corruption could be exporting governments took steps to undermining national security strategy. strengthen export controls and required Governments have an interest in reducing importing governments to implement basic procurement risks in their primary markets, defence budget transparency and but also a responsibility for ensuring that independent oversight as a condition of defence exports do not contribute to export. Licensing criteria and controls like regional and global inequality, poverty, and the EU Common Position on arms export insecurity. As the defence market continues control already exist but are not adequately to evolve, there is a growing discord implemented. Many exporting governments between processes in exporting nations and are turning a blind eye to the destructive those in emerging import markets. impact of their defence export policies. Companies are operating in more challenging jurisdictions, often with Similarly, if several importing governments government encouragement, while also were to introduce stronger transparency being expected to comply with the requirements around the use of agents on extraterritorial requirements of anti-bribery companies tendering for their business, it is legislation in their home countries. likely that all major companies would adapt to changes, so as not to lose out in the Companies have a clear role to play in competitive process. This may in turn managing the agents they work with. encourage other governments to rise to Companies should not only have full equivalent standards of transparency, oversight of agent activities but also particularly as companies become more maintain the right to audit their financial sensitive to the risks of contracting in accounts. Unless companies are prepared jurisdictions that are highly vulnerable to to follow the money, the use of agents will corruption. Ultimately this change would continue to pose high risks. But change is lead to stronger defence sectors, more not going to happen by company action efficient public spending, and greater public alone. In order to reduce opportunities for trust across the board. corruption and the risk of instability abroad, governments need to raise international standards in defence procurement, and create space for civil society to provide independent oversight of defence contracting. procure 9 Recommendations COMPANIES IMPORTING GOVERNMENTS Implement ethics and anti-corruption Increase clarity and transparency in programmes that minimise the corruption procurement: risks posed by agents: • Ensure that embassies and • Conduct due diligence when selecting procurement officials are well- and