DEFENCE COMPANIES FAIL ANTI-CORRUPTION TEST
On 4 October 2012 Transparency International UK (“TI-UK”) (the UK chapter of the international non-government anti-corruption organisation) published a new index which, it claims, finds that two thirds of companies do not provide enough public evidence that they adequately prevent corruption.
Transparency International has a Defence and Security Programme and this is an international project based out of TI-UK.
TI UK’s press release of 3 October 2012 states that defence corruption threatens everyone “... tax payers, soldiers, governments and companies...With huge contracts and high secrecy in the defence sector, there are numerous opportunities to hide corruption away from public scrutiny... A company website is the best place for a company to tell the world exactly how it fights corruption”.
The index provides an analysis of what the 129 biggest defence companies around the world do, and fail to do, to prevent corruption. The study, which grades companies from A to F, measures defence companies with a combined market value of more than US $10 trillion, with a combined defence revenue of over US $500 billion.
Transparency International estimates the global cost of corruption in the defence sector to be a minimum of US $20 billion per year based, on data from the World Bank and the Stockholm International Peace Research Institute.
Mark Pyman, who is the author of the first study of its kind and director of TI UK’s Defence and Security Programme states:
“Corruption in defence is dangerous, divisive and wasteful. The cost is paid by everyone. Governments and tax payers do not get value for their money and clean companies lose business to corrupt companies. Money wasted on defence corruption could be better spent... It is in the interest of companies, governments, and tax payers that the defence industry raises standards globally. I hope the defence industry responds to the challenge and imbeds good practice in preventing corruption, and increases transparency in the sector...”.
Findings of the TI UK study include that:-
- 85% of defence companies’ leaders do not publicly speak up enough on the importance of preventing corruption. Despite the importance of a consistently strong “tone from the top”. Very few senior leaders actively engage both in public and within the company on corruption. TI-UK recommends that in order to ensure that corrupt opportunity does not lead to corrupt actions, CEOs should actively promote a values culture, through speaking out against corruption both within the company and publicly across the industry. It also calls on chief executives, government defence procurement chiefs and investors to demand that better systems be put in place.
- 10% of companies have good disclosure of their anti-corruption systems. Mr Pyman claims that this statistic is much better than it would have been 10 years ago and that the industry is actually changing.
TI-UK did invite companies to provide further internal evidence of their systems. One quarter did so, and many of them have stated additional good practice matters of how to tackle corruption.
The index bands companies on the level of public evidence of the anti-corruption systems they have in place. TI-UK also shows what the banding would be for 34 companies that provided internal information. TI-UK’s defence team assessed companies on their publicly available data through 34 questions covering what TI-UK considers to be the basic systems and processes needed to prevent corruption. The questionnaire was divided into 5 “pillars”:-
- Leadership, governments and organisations;
- Risk assessment;
- Company codes and policies;
- Training; and
- Personnel and helplines.
Companies were also invited to comment and provide further evidence of capabilities from internal sources. For the 34 companies that did provide internal information, the defence team reviewed and discussed the documents with them. TI-UK then used this information to show the positive impact it would make on the overall banding results. Once all assessments were completed they went through an internal and external peer review with 5 peer reviews. The companies received a copy of the finalised assessment and they were also all given an opportunity to make any further statement they may wish to make.
We at the BriberyLibrary welcome TI’s initiative in the defence industry. This industry is perhaps the most notorious in terms of its reputation around the world for becoming involved in corruption. This arises as a consequence of a number of factors, including the high value of the products being sold, the fact that defence equipment is almost always being sold to governments, and also due to the particular jurisdictions around the world in which such products are often sold.
Any internet search of corruption investigations brought over the last 5 years or so will reveal many well known defence company brand names being prosecuted both in the United States and the United Kingdom as well as in other countries.
Here is a link to a TI press release about the survey’s results. If you go to their website and click on the colour coded category, the interactive screen will show on the right hand side which companies fall within which category.
There are also details of the analysis which was conducted, the methodology and actions suggested for CEO’s and corporate leaders, for institutional investors, for defence ministers and government defence procurement chiefs and for civil society.
There is also a tool which has been developed by TI’s defence and security team to help countries diagnose their own corruption risks which they describe as a typology which outlines how corruption can occur in defence and security establishments, and a self assessment process for in-depth analysis for nations.
In our view, this is a significant step in the right direction: TI’s initiative will help highlight the issues which companies within this sector globally have to tackle. It seems likely that as time progresses the companies which properly address these issues and set up systems and processes which brings transparency to the way their organisation operates will be the ones who continue to win contracts and become better trusted players within the international market.
In separate news, but related to both Transparency International and the defence industry, Mark Pyman commented in relation to the proposed merger of BAE Systems and the European defence group EADs: he claims that if the merger were to proceed it could produce an arms company which was so large that it would operate
“... beyond the reach of the law... this will be a huge defence company in Europe and there will be a concern that it will be above prosecution, almost like the banks...”.
He continues “if the merger goes ahead, it is really important that the combined companies have anti-corruption systems at least equal to BAE’s (currently band B) and which really should be in band A”.