[Editor's Note: Viewpoint author Mark Pyman, a former CFO of Shell companies in West Africa and China, is the director of Transparency International's defense and security program.]
Citizen expressions of anger and disgust at corruption are rapidly becoming more common, enabled by social media and the example of the Arab Spring. Defense and security are hot topics, with Indian citizens questioning the alleged bribery associated withsales in their country, Swiss citizens' political parties at odds over the value of a proposed purchase of fighter aircraft and Saudi citizens usng Twitter to debate corruption allegations about and subsidiary sales to Saudi Arabia.
People are increasingly demanding transparency in how their taxpayer money is used. They want to see that companies and governments do what they can to prevent corruption before it happens. And this fast-moving trend is focused in those growing markets where defense companies increasingly hope to sell their products.
Using data from the World Bank and the Stockholm International Peace Research Institute (Sipri), Transparency International estimates the global cost of corruption in the defense arena to be a minimum of $20 billion per year—as much as the total pledged by the G8 nations in 2009 to fight world hunger.
The majority of defense companies are woefully unprepared for this challenge. Transparency International U.K. recently completed a major analysis of 129 large international defense companies, looking at what they said publicly about their anti-corruption mechanisms, and what—from their internal information—they actually had in place. We graded the company results from Band A to Band F, from best to worst. Only one company made it into Band A on the basis of public disclosure.
Moreover, we found that almost two-thirds of defense companies do not tell the public what they are doing to prevent corruption. Indeed, almost no CEOs or board members were found to have made any serious public declaration against corruption; most say nothing about it internally, either. There is very little evidence of annual reviews of the effectiveness of company anti-corruption systems, despite guidance to do so that is contained in the U.S. Foreign Corrupt Practices Act. This raises serious questions. Does the company have good systems but fail to tell the public? Do they truly do nothing to mitigate corruption risk? We cannot say.
Purchasing governments are little better. In our parallel study of 82 defense ministries, most were found to have poor anti-corruption systems. Corruption risk surrounds the use of subcontractors, tenders, offset contracts, agents and middlemen in procurement; yet there appear to be few controls. These poor results reveal a huge gap in awareness between what increasingly worries the public and what governments and companies are doing.
So what can companies and governments do to close this gap and win the public's trust?
Defense companies must take corruption risk much more seriously. Companies can adopt three strategies to follow this route:
•CEOs need to speak out publicly about corruption risks and how transparent dealing is in everyone's interest—even though they will face criticism and cynicism.
•Companies need to put their own houses in order, with better ethics and compliance programs, more demanding periodic reviews of their effectiveness and better whistle-blower protection programs.
•The best and broadest way to tackle this problem, however, is for companies and governments to collaborate on a strong, global, sector-wide initiative that leads to much greater transparency in arms deals with all weapons-importing governments.
The oil and mining industries did something similar a decade ago. Together with governments, they created the Extractive Industries Transparency Initiative, bringing together governments and companies for more open oil exploration and production contracts. This initiative has 37 implementing governments and more than 70 companies as members.
The defense world could do this, too. It could work collaboratively across governments and companies to raise transparency and reduce corruption.
Taking these steps is key to closing the “awareness gap” and to building transparency. Without taking these actions, corruption in defense will continue to cost money and lives. It will cheat companies, investors and taxpayers out of money, and leave armed forces with substandard equipment. It is in the best interest of companies and governments to tackle this issue seriously—now, before Twitter changes the nature of the public debate worldwide.
Tap the icon in the digital edition of AW&ST for Transparency International's ratings of U.S. and European defense companies' anti-corruption policies, or go to AviationWeek.com/transparency