* Any views expressed in this opinion piece are those of the author and not of Thomson Reuters Foundation.
By Zachary Mehan
Vast amounts of money, combined with a secretive purchasing process, can be a formula for corruption. This is often the case in the field of procurement in the defence and security sector. Defence procurement is the process of purchasing defence equipment – from boots to submarines. The money spent on defence procurement comes from the taxpayer, making the oversight of this spending critical and public understanding of corruption in defence procurement imperative.
In procurement, corruption can take many forms. Corruption can also spur the acquisition of equipment that does not fulfil technical requirements and offers little to no strategic advantage to the purchaser. In Indonesia, for example, only 76 of 317 naval vessels are operational, and only half of their combat planes are airworthy. In spite of this, the most recent procurement contracts in Indonesia have been for Russian attack helicopters and battle tanks, a technical oversight claimed to be a result of supplier influence. This mismatch of equipment to need leaves solider vulnerable to foreign attacks. If soldiers cannot defend themselves, their citizens become vulnerable as well.
The recent scandal involving the sale of 140 Eurofighter jets from EADS to Austria, worth $19.5 billion, may be an example of a trend in defence procurement corruption. $144 million has allegedly been syphoned off into various shell companies thought to be owned by prominent Austrian bankers and officials. This money is an example of an offset payment; the ‘hidden price tag’ on a weapons contract incurred by the supplier. In theory, this money is invested by the company in development in the purchasing nation – a new school, factory, or system of roads. Being separate from the contract itself, offsets lack oversight, making them popular vehicles for bribes or personal investment ventures. This promise of untethered cash has come to define the competition for defence contracts. Many times, decision makers choose suppliers based not on the quality of their products, but on the value and flexibility of the offsets agreement. As a result, the overwhelming majority of recent corruption scandals have involved offsets on some level.
Corruption scandals can also involve suppliers and brokers, who often hold a privileged position. Sellers – whether foreign governments, companies, or individual brokers – have great influence over decision makers in purchasing nations, often playing international and domestic political considerations against tactical military demands. Agents and brokers are often hidden and sometimes have ties to prominent military officials, making them difficult to control. They are often paid handsome commissions to push deals through, such as in a deal for helicopters between Italy and India that allegedly netted the broker 51 million euros. These actors are potential conduits for bribes to high ranking officials. This can result in many defence contracts being uncompetitive. Competition can also fail when multiple companies owned by a single parent company stage a mock competition. Companies may also engage in collusive bidding; independent companies engage in false competition, having already agreed in secret who will win. Companies engage in collusion to set prices for future deals, allow each other to rotate supplying the contract, or in exchange for contracts with other countries. Collusive bidding can distort the market for certain products, raising prices that will be covered by taxpayers.
A lack of competition can also come from institutional factors. There are times when secrecy and expediency in procurement packages may be of legitimate concern. Military technology is also highly specialised, so often only few companies are able to meet the needs of a military purchaser. A major drawback to this can be seen in the deal between Mitsubishi Electric Corporation supplying satellite technology to the Japanese Defence Ministry. It was revealed in the last year that Mitsubishi Electric had been deliberately overcharging the Japanese government since the 1970s. Mitsubishi was soon banned from receiving government orders. In spite of these sanctions, the Japanese government still paid Mitsubishi 111.8 billion yen over the last year. Apparently, no other company could repair or produce this technology. The overriding risk here is single sourcing. By only offering contracts to a single supplier, governments may allow them to take up the entirety of the market, becoming beholden to them as a result.
Another issue with contracts can arise when dealing with subcontractors. Companies — supplying governments — often employ them to carry out the specific contract terms. Although the hiring of subcontractors can be for benign purposes, it can also increase the threat of corruption. Subcontractors are smaller and hidden from public scrutiny. For example, US law states that subcontractors are not subject to external audits, which increases the risk of bribery. Bribes can take the form of a payment to a large contractor to obtain work, or to government officials on behalf of larger contractors.
Contractors using subcontractors, who may then contract to others still, create a chain, and adequate oversight becomes more difficult as the chain becomes longer. Subcontractors may also undermine the contract award and delivery. Bribes paid by subcontractors may influence purchasers to acquire unnecessary or inadequate equipment and result in the contract going to a company offering far less value.
Corruption in the defence and security sector is dangerous, divisive, and wasteful. It cannot only be changed by strong leaders in the government and military, but by a public that is aware and willing to stand up against corruption. After all, it’s your money.
Zachary Mehan is a communications assistant at the Transparency International Defence and Security Programme
This post is the first instalment of a blog series preceding the launch of TI DSP’s Government Anti-Corruption Index (GI). The GI will show what governments currently do, and don’t do, to minimize corruption risks. The GI will serve as a tool for governments to measure their successes and failures in combatting corruption, for companies to adequately assess potential risks in certain countries, and for citizens to learn about how their governments can protect them from the risks to political, financial, and even physical security that can result from corruption in the defence and security sector. The research behind the index has been structured around TI DSP’s five-part typology of corruption risks. The purpose of these blogs is to familiarise readers with this typology prior to the release of the GI.
