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Do big defence contractors simply play by different rules?

26th January 2017

Katherine Dixon, Director Defence and Security Programme, considers whether some defence companies are too important to be prosecuted

Lord Justice Leveson concluded on Tuesday, that the DPA with Rolls Royce was in the “public interest”, following recognition that the company hired a network of agents to help secure contracts. The voluntary payments mean the company will avoid being prosecuted by anti-corruption investigators and thus ends the threat of being debarred from key markets.

This not the first case of a major defence contractor getting caught red-handed paying bribes to government officials to secure lucrative contracts in developing countries. Like other such high profile scandals, these proceedings demonstrate just how difficult it is for big government contractors to be brought to justice. On the face of it, there could be few clearer instances when prosecution, rather than a DPA, might seem like the only reasonable course of action. After all, the allegations relate to up to ten countries, over a sustained period – back to 1989, and involve significant sums changing hands. So this isn’t a one off ‘rogue’ operator and it seems implausible that senior executives were not tacitly sanctioning this activity. So the question is, if this isn’t an occasion to prosecute and properly deter, when would be?

The justification for the decision ostensibly rested on two main points – that senior execs had come clean in terms of historical transgressions, and that it really would be quite dreadful for everyone concerned if the company lost sales as a knock-on effect of prosecution. Hardly a compelling rationale – albeit the resultant changes to management and improvements in compliance system should be welcomed.

The underlying question is the extent to which the relationship with Government inevitably leads to a company of Rolls-Royce’s significance, effectively enjoying immunity from prosecution – even if not as a direct result of government intervention. Indeed, the judgement specifically referenced the potential ‘adverse effect to the UK defence industry, where Rolls-Royce has a critical role’. The UK’s national security strategy has at its heart, support for a strong national defence industry. A laudable aim. The problem is achieving this without relying heavily on exports to countries of high corruption risk. In the U.S., defence budgets are some of the hardest to cut, and the domestic market is the largest worldwide; US companies can succeed even without exports, including funding the necessary R&D to make them competitive. In contrast, domestic markets in Europe are simply too small to provide the economies of scale to enable a major defence company to survive, never mind to retain capability competitiveness. Interestingly, Lord Justice Leveson specifically raised the prospect of Rolls Royce being subject to mandatory debarment in Bahrain as a strong justification for pursuing a DPA rather than prosecution. Rolls Royce’s debarment from such government contracts, even for a short period, given its size, niche capability, and the government’s commitment to supporting home grown defence industry, is an outcome HMG would surely also be pretty keen to avoid.

So if the prosecution and therefore debarment of a large defence contractor is largely off the table, what can be done to ensure a sufficiently robust disincentive? Fines, the obvious solution, will only have limited consequences for companies of this size, making up a fraction of the profit generated from foreign business procured through bribery. Whilst the total figure of £671m is eye catching and about as large as it was ever going to get for a company admitting culpability, the £130m per year that this is amounts is more uncomfortable than painful as an operating cost. In March 2010 – BAE systems paid approximately $400 million in fines; and yet just a year later they had won federal contracts in excess of $6billion. The solution probably rests in two crucial principles; ensuring debarment is never simply off the cards and, secondly, the resolve to prosecute individuals come what may. The crucial test is whether the court would ever take the view that Rolls Royce should be prosecuted. On the prosecution of individuals – well, let’s wait and see.

In the longer run, smarter thinking is needed to ensure that Europe’s vital defence industries are able to operate sustainably, but also responsibly. Relying on governments with weak governance, but a well-armed security sector, to fund the UK’s national defence industry is a risky strategy – it will inevitably create strong incentives to protect big companies, that feel they don’t need to play by the rules. And we should also be in no doubt, that while there may be no victims in court to see justice done, victims exist in the many countries in which Rolls Royce has operated. Corrupt arms deals, particularly those where expensive equipment simply lies moribund, divert resources away from many of the poorest communities in the world and are at the root of public frustration in some of the most unstable regions of the world. Ensuring that British companies are never sustaining corruption in such countries must be central to the “public interest”.

image: W. Watts (CC BY-SA 2.0)