This blog was orginally published by New America and can be accessed here
These are banner times for corruption watchdogs pushing for transparency. From Congress’s recent repeal of the bi-partisan Lugar-Cardin provision—which would’ve required oil, gas, and mining companies registered with the SEC to disclose payments to foreign governments—to the ongoing controversy involving veteran intelligence officer Michael Flynn and Russia’s ambassador to the United States, transparency and security have never seemed more impossibly intertwined—or at stake.
TI Defence & Security
We know that corruption is a threat to international security. Now we need to work out how to address it.
Corruption threatens international security, destroying the legitimacy and effectiveness of governments and the defence and security sector, hindering economic development, and providing a powerful call to arms for violent extremist movements. Fortunately the issue is gaining recognition. NATO’s Building Integrity policy, adopted at the 2016 Warsaw summit, acknowledges that tackling corruption is a core task of the Alliance, including in collective defence, crisis management, and spreading security through cooperation with partners. Similarly, the 2016 Anti-Corruption Summit Communiqué commits nations to concrete action.
This article was first publidhed by Defence One here
A recent anti-corruption summit produced hundreds of commitments, exactly eight of which concerned defense.
Slowly but surely, the world is realizing that corruption defies borders and that governments must work together to ensure the integrity of their institutions. (See: the Inter-American Anti-Corruption Convention, signed in 1996; the OECD Anti-Bribery Convention, 1997; and the UN Convention against Corruption, 2003.) But there is one area that remains all but untouched by these reforms: defense.
Speaking at the World Economic Forum in January, U.S. Secretary of State John Kerry called corruption a threat to “global growth, global stability, and indeed the global future” and asked governments to fight it as a “first-order, national-security priority.” Five months later, countries at the London Anti-Corruption Summit released a “Global Declaration against Corruption,” in which they pledged to “put fighting corruption at the heart of our international institutions” and advance inter-state cooperation to stop corruption. By Transparency International’s count, 42 individual countries made 648 commitments across 20 issue areas, nearly one-third of which we deem both new and ambitious.
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Author: Hilary Hurd – Transparency International Defence & Security Programme
Photo: © Crown Copyright.
In the UK and Europe, legislation such as the UK Public Contract Regulations 2006 and the European Public Procurement Directive give governments the power to debar or exclude companies guilty of fraud and corruption from public sector procurement. Despite having these powers, no companies have been debarred in the UK and the number in Europe is very low.
This blog was originally published by the Chartered Institute of Public Finance and Accountancy and has been reproduced with permission.
To highlight this issue, the CIPFA Counter Fraud Centre invited Transparency International to comment on the effectiveness of the European laws aimed at curbing fraud in the defence sector. TI’s analysis shows that despite tougher laws, corrupt suppliers are still not being excluded from public contracts. Comparing Europe to the US, TI’s report signals the need for urgent action, not only in the defence sector but across all areas of the public procurement sector.
Through multiple directives, the European Commission has been trying for 15 years to establish US-style suspension and debarment powers in Member States. Last month, the Commission concluded its public review of the 2009 Defence & Security Public Procurement Directive. But nothing has changed: strong words don’t make for strong laws.
The Defence Directive sets out rules for the exclusion for suppliers convicted, or strongly suspected of, corruption, organised crime, collusion, money laundering and supporting terrorist activities. The Directive was supposed to enable governments to hold defence companies accountable for fraudulent misconduct. The problem? It is not enforced by governments seemingly content to turn a blind eye to criminal wrongdoing.
New research from Transparency International uncovered 10 European defence suppliers that have been investigated or convicted of bribery in the last three years but have not been formally excluded from bidding. For example, Sweett Group PLC, which has continued to win multi-million dollar contracts from UK public procurement authorities, during the criminal investigation and immediately after sentencing.
But the problem is deeply entrenched. As of 2015, only the Czech Republic confirmed it had used its powers to exclude corrupt contractors. According to TI’s Government Defence Anti-Corruption Index 2015, Poland, meanwhile, still lacks the necessary domestic legislation to enable it to exclude suppliers at all. Rather than incentivising good practice and penalising bad behaviour, the Defence Directive is simply being ignored.
Another prominent example is the Italian bribery investigation into the sale of 12 helicopters for £466m to the Indian military. As part of the settlement, AgustaWestland’s UK subsidiary and Italian parent company were fined €380,000 in 2014, with a further €7.5 million in revenue confiscated, while the former CEO of AgustaWestland and the former CEO of Finmeccanica were both convicted of bribery. But despite the scale of the alleged bribery to Indian officials running into the 10’s of millions and the launch of two new bribery investigations into AgustaWestland’s sales operations by Swedish and South Korean enforcement agencies, the defence group has continued to win contracts – including in Italy and the UK. AgustaWestland’s annual report simply states that the settlement “was neither an affirmation of liability, nor an acknowledgement of guilt.”
Allowing convicted companies to evade exclusion removes any incentive for them to implement effective policies that minimise risk of future malpractice. In contrast, the US is seeing year on year increases in the number of companies self-reporting to the authorities. Meanwhile, in Europe, historically low criminal enforcement convictions are compounded by a failure to implement exclusion, removing any incentive for contractors to actively collaborate with enforcement agencies in the early stages of a criminal investigation.
So why isn’t the law being enforced? Transparency International’s research indicates that the primary causes are a lack of knowledge and understanding, state protectionism towards domestic defence contractors and defence market concentration. After all, if a country buys most of its defence products from a handful of domestic suppliers or via single source contracts, excluding those suppliers from bidding is a tough call. And the Defence Directive legitimises exemptions for “overriding requirements in the national interest”.
But crying national interest shouldn’t be the end of the story. Reliance on a few suppliers is not a distinctly European problem. And, even if governments can’t otherwise get access to the equipment they require, they still have options. For example, companies should still be required to prove that they have taken robust measures to reform their practices. A “self-cleaning” framework mandating robust anti-corruption measures a company needs to implement to continue bidding has been central to the success of the US debarment system.
Following the conclusion of this latest consultation, real action must now be taken to ensure companies are faced with real economic incentives to change their behaviour. For too many defence companies, paying a bribe to secure a lucrative contract still makes economic sense. Exclusion from public procurement gives governments a tool to reverse that financial equation. But a good law is a bad law if it’s not enforced. At the moment, the Defence Directive has undershot and underscored – more can and must be done.
Article authors: Eva Anderson and Hilary Hurd, Transparency International Defence and Security Program
To read TI’s recommendations and latest report ‘Evaluation of the functioning and impact of the EU Defence and Security Public Procurement Directive’, click here.
Photo: © Crown Copyright.