On June 28, 2016, Transparency International UK’s Defence and Security Programme (“TI”) launched Licence to bribe? Reducing corruption risks around the use of agents in defence procurement(the “Report”), a continuation of its longstanding efforts to combat corruption in the defense industry. In 2015, TI released the Defence Companies Anti-Corruption Index (the “Index”), which assessed and ranked the transparency and quality of the ethics and anti-corruption compliance programs of 163 defense companies from 47 countries. The newly released Report focuses specifically on the corruption risks posed by the use of sales agents and recommends steps to be taken by defense companies, exporting and importing governments, and civil society to combat that corruption.
The Report represents the latest step in TI’s ongoing initiative to combat corruption in the defense industry. The defense sector may encounter some difficulty in successfully implementing a number of the Report’s recommendations relating to making greater demands for support from exporting and importing governments. However, the Report’s recommendations with respect to effective anti-corruption compliance programs, agent compensation structures and controls represent best practices which can be implemented by all defense (and other) companies doing international business, regardless of size, in a reasonable and affordable manner. A number of major global defense companies, as reflected in the Index, have been following these best practices in their anti-corruption compliance programs for many years.
Agents and the Risk of Corruption in Defense Contracts
The Report discusses the corruption problems faced by the defense industry. A significant number of international corruption scandals have arisen from defense contracts. This high level of corruption can be directly linked to the high risk of corruption posed by agents. In the United States, approximately 90 percent of FCPA enforcement actions by the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) have involved corrupt practices by agents and intermediaries. In the OECD’s analysis of 427 foreign bribery cases worldwide between 1999 and 2014, three out of four involved third party intermediaries. In the majority of these cases, bribes were paid to obtain public procurement contracts.
Agents (individuals and entities) act for or on behalf of a company to further its business interests in numerous ways including, building relationships with public officials and decision-makers; exploring business opportunities in new regions; and assisting with logistics, language expertise, licensing, and other local advice. Agents perform a wide range of legitimate commercial functions and are in many cases indispensable to defense (and other) companies. They are often the key to a company’s competitive advantage and are necessary in many instances due to local law requirements or the realities of conducting business abroad. Agents, however, pose elevated risks for corruption because they often enjoy wide discretion and face little oversight in performing their functions. They also may have different compliance standards than the company that engaged them. Additionally, they frequently interact with public officials, increasing the risk of bribery.
TI’s Recommendations to Defense Companies
To minimize the corruption risks posed by agents, the Report makes a number of recommendations to defense companies. First, TI advises companies to implement ethics and anti-corruption programs and ensure that their agents also implement these programs. Other actions companies should take to reduce agent-related corruption risks include conducting due diligence when selecting and reappointing agents; maintaining procedures and contractual rights for monitoring, controlling and auditing agents; and providing risk-based anti-corruption training to agents and the employees managing them. TI also recommends that companies centralize remuneration arrangements for agents in a manner that promotes accountability and transparency. One way of achieving this is by regularly reviewing fees and justifying them in writing using objective criteria, such as the prevailing market rate, past performance, and the complexity and duration of the work. Companies also should include clear statements of work with milestone payments and measurable outcomes in contracts, make payments to local bank accounts, and ensure that remuneration is in accordance with local law. TI’s final recommendation is that companies make greater demands on exporting and importing governments. The Report states that companies can achieve this by requesting guidance and clarity on procurement processes, regulations, and customs from importing governments; seeking support from their home governments for influencing the way business is conducted abroad; and using government mechanisms to report corrupt activity.
Challenges with Implementing the Recommendations
Implementation of the TI recommendations by the defense sector could significantly increase transparency and greatly reduce the risks of corruption in defense contracts globally. A number of major global defense companies have successfully combated corruption by employing many of these practices. Other companies have altogether refused to use agents and declined to conduct business in high risk areas. Some companies, however, have not yet implemented strong anti-corruption programs. TI’s Index in 2015 thus found that two thirds of the companies analysed received grades of “D” to “F,” with limited or no evidence of anti-corruption compliance programs, and 23% of the companies surveyed provided no evidence at all of compliance programs. Amazingly, only 13 of the 163 companies surveyed in the Index provided evidence of conducting regular due diligence on agents.
Given the high level of competition in securing defense contracts and the realities of conducting business in high risk areas, the sector as a whole may encounter difficulties in successfully implementing TI’s recommendations with respect to exporting and importing governments. The Report notes that the defense market is shifting from North America and Europe into other parts of the world. Defense companies in the traditional market often are encouraged by their governments to seek business in high risk areas and simultaneously are expected to comply with their countries’ extraterritorial anti-bribery laws. It may be difficult in some cases for companies to obtain anti-corruption-related support from exporting governments that have their own agendas in making defense-related sales to promote national security and foreign policy interests. Importing governments and public officials also may have their own interests in securing certain defense contracts and in requiring or encouraging the use of agents, in some cases because of endemic corruption and collusion between corrupt officials and agents who serve as conduits. Given the presence of such countervailing forces, companies should make the requests recommended by the Report for anti-corruption support to importing and exporting governments, but are likely to encounter challenges in obtaining that support.
While individual companies and the industry as a whole likely will have limited ability to change the current practices of either exporting or importing governments, the Report’s recommendations with respect to anti-corruption compliance programs and agent compensation structures and controls represent best practices which a number of leading global defense companies have been following for years. These steps can be implemented effectively by all companies in the defense industry (and other industries), regardless of size, in a reasonable and affordable manner. Because defense agents represent such a significant risk from the standpoint of anti-corruption compliance, we recommend that companies include the recommended actions in their compliance programs and ensure that they are being properly implemented and followed.
The full text of the TI Report can be found at: