Playing Defense Against Corruption
FEW OF the world’s largest defense contractors are providing enough evidence about how they battle corruption, according to a recent report by Transparency International U.K.
The report looked at 129 companies, including the companies with the most defense revenue from the “six largest arms-exporting nations,” as well as the largest defense companies from 25 additional nations. The types of companies ranged from consulting firms to construction companies.
Transparency International used public disclosures about each company’s anticorruption program to arrive at a score. It also invited the companies to provide additional information to supplement what could be found publicly.
Corruption is a major problem when doing business throughout the world. According to the report, corruption in defense companies “puts international security at risk; it can lead to regional arms races to satisfy the greed of intermediaries; and billions can be wasted in dishonest arms deals.”
Only one company (Fluor Corporation) received the highest possible rating of “extensive” when solely considering public information. The report found that two-thirds of the companies did not provide adequate levels of anticorruption transparency, and nearly half of them provided very little evidence of any anticorruption or ethics programs at all.
Of those with a program, the study could find only two that “have instituted a practice of regular assessment of their total ethics and compliance programme by an independent organization (such as a law or accountancy firm) and who have committed to publishing the assessment in full,” which the study called a best practice. ThyssenKrupp AG and BAE Systems were the two defense companies with that distinction. Among the worst practices found were overuse of confusing legal jargon and the use of “box-ticking” style in the writing of the program.
It is unclear why so many companies are not transparent about their anticorruption practices, says Mark Pyman, director of the Defence and Security Counter-corruption Programme at Transparency International. Pyman says it’s not a confidentiality issue, because major companies such as Northrop Grumman are forthcoming about their programs. “I think it is partly that many have not before been challenged about it: most company rankings in the [corporate social responsibility] world tend to exclude defense companies,” Pyman says.
Pyman was surprised by some of the major companies that did not receive high grades due to lack of transparency, like Rheinmetall (Germany), Patria (Finland), RUAG (Switzerland), and Ultra (U.K.). He says that “it would be very surprising if they did not have a solid set of [anticorruption] systems. But I think they now need to demonstrate that.” On the other hand, he says, “for many others, I think it is unlikely that they have good systems.”
Another surprise, says Pyman, was the high number of Western companies that received a poor rating.
Brinley Salzmann, director of exports for the Defence Manufacturers Association, says that many of the larger companies have begun to see the importance of putting anticorruption processes and procedures in place, and they have begun to prove their compliance with laws like the Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act. But small and medium-sized enterprises are not following suit, he says. He adds that the smaller companies “appear to think that they’re too small, and therefore, they’re below the radar screen.”
In 2010, BAE Systems pleaded guilty to violations, including making false statements about its FCPA compliance, and the company was fined $400 million. BAE Systems has since received a “good” rating in the recent rankings. Salzmann thinks it will take similar actions against a smaller organization to motivate more companies to take action against corruption.
“Our perception is that those companies who are taking it seriously…want to see the highest possible ethical standards being a key differentiator between themselves and other companies out there who are operating in the same international marketplace but [who] don’t have the same high standards,” he says. ”We’re trying to turn business to seeing it to be a potential commercial advantage in countries around the world.”
The study also looked at which companies advocate for these programs. It found that only 13 of the 129 CEOs speak out against corruption when appearing publicly.
Pyman says it’s important for more companies to lead the way in speaking out about countering corruption. “Industry change does not happen ‘in the shadows.’ It happens by industry leaders encouraging their peers,” he says. “I think it’s rare because it is a sensitive subject, and CEOs will get shot at if they put their head above the parapet,” he notes. “But I believe they need to do so.”
Some of the recommendations the report makes are for review of the programs and analysis of why so little information about programs is publicly available. It also calls for companies to hire external organizations to assess their ethics and compliance and it encourages them to engage with stakeholders who promote transparency and accountability.