Fraud in the Middle: Corruption Risk in Defense Contracts

In the long history of business, use of a “middle man” has been a traditional, if somewhat shadowy, way of securing deals between parties. Unfortunately, the use of a middle man to facilitate business can also increase the risk of corruption through bribery and similar malfeasance. Nowhere is this more true than in the military defense industry.

One recent example is the new investigation by the UK Serious Fraud Office (SFO) into allegations of fraud, bribery and corruption at Airbus. Katherine Dixon, Director of Transparency International (TI) Defence and Security Programme, said:

“The use of agents is one of the biggest corruption risks across the defence and aerospace sector, and Airbus is just one of a long line of companies that have run into trouble. The failure of Airbus to declare its agents highlights the weakness of self-disclosure requirements and why governments can and should use export policies to reduce the influence of corrupt middlemen.

“The Airbus case demonstrates the need for more consistent transparency requirements in export policies around the use and payment of agents.”

TI, the global corruption watchdog organization, recently produced a report that examines this problem. “Licence to Bribe? Reducing corruption risks around the use of agents in defence procurement” highlights the risk of using middle men in defense deals. While the report defines the likely problems and how, and why, they arise, TI also offers several key recommendations for both companies (contractors) and military organizations doing business with them.

COMPANIES

  • Implement ethics and anti-corruption programs that minimize the corruption risks posed by agents.
  • Ensure that agent incentive structures are centralized, accountable, and transparent.
  • Make greater demands of governments (for guidance, clarity and accountability).

IMPORTING GOVERNMENTS

  • Increase clarity and transparency in procurement.
  • Establish ethics and anti-corruption requirements for all bidding companies
  • Strengthen oversight and enforcement.

EXPORTING GOVERNMENTS

  • Review arms export strategies and strengthen export controls.
  • Support companies facing demands for corrupt behavior.

The above bullet points are elaborated on in greater detail in the report itself, which is downloadable at TI’s website. The report also includes guidance for society on the whole, with useful advice such as:

  • Demand more information from governments on how public money is spent in the defense sector.
  • Monitor defense procurement and publish information on defense contracts.
  • Conduct research into agent ethics and anti-corruption programs.
  • Discuss the risks around the use of agents with national defense establishments and export credit agencies, and provide advice for reducing these risks.
  • Advocate for greater disclosure around the use of agents by defense companies.
  • Advocate for governments to require companies to have ethics and anti-corruption programs that apply to their agents as a condition of bidding for MoD contracts.
  • Establish independent reporting mechanisms to collect allegations of malfeasance.

Fraud will always exist, and high-dollar defense and other military contracts will always be targeted by fraudsters due to the sheer amounts of money that can be made through bribery and corruption. Use of a middle man only adds to this corruption threat. Following TI’s guidance, businesses, governments and the citizens they serve can help limit future cases of fraud and help reduce financial losses.