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Corruption Controls Sadly Lacking in Defense Industry: Study


However, according to Lord Robertson, former Secretary General to NATO, the industry should view this as "a major opportunity."


MINYANVILLE ORIGINAL The Defence Companies Anti-Corruption Index, released today by Transparency International, analyzed the anti-corruption practices of the 129 largest defense companies around the world based on what the organization "considers to be the basic systems and processes needed to prevent corruption."

The findings in this first-ever study are stark: Fully two-thirds of "the world's biggest defense companies do not provide enough public evidence about how they fight corruption," reads the peer-reviewed report, which conservatively estimates the cost of corruption in the defense sector at $20 billion per year.

However, according to Lord Robertson, former Secretary General to NATO, the industry should view this as "a major opportunity."

He writes:

Those defence companies that do take the subject seriously have the chance to be seen by their government clients as better companies with which to do business. As governments toughen their attitudes towards corruption, having a reputation for zero tolerance of corruption will be a distinguishing asset for a defence company. Ignoring both the risk and the opportunity is poor business strategy.

The Results

The 129 companies were given letter grades and divided into groups based on basic anti-corruption systems currently in place:

Band A (83.3%-100%): Extensive
Band B (66.7%-83.2%): Good
Band C (50.0%-66.6%): Moderate
Band D (33.3%-49.9%): Limited
Band E (16.7%-33.2%): Very Limited
Band F (0%-16.6%): Little or none

"One thing I was quite surprised about was the number of American and Western companies that did quite poorly, that didn't disclose very much -- or any -- information," Tiffany Clarke, Project Officer with Transparency International's Defence and Security Programme, tells me. "For the most part, they are publicly-owned, the SEC has been around for decades; you would think the public, as well as investors and government, would expect this."

On the positive side, Clarke says Transparency International received internal information from 34 defense companies in several countries.

"The majority were from the US and the UK, but also Germany, Japan, and a few others," says Clarke. "A good range from around the world, that had to go to their boards and get permission. They felt it was important enough; that was quite commendable."

Still, only one company -- foreign or domestic -- qualified for inclusion in Band A: Fluor (NYSE:FLR), which is not, as described by Transparency International, a "pure" defense company (9% of its business involves the military). Fluor does, however, employ "valuable good practices of anti-corruption procedures that may be useful for the defence community."

Fluor, Band A

Band B is made up of nine companies: Accenture (NYSE:ACN), BAE Systems, Fujitsu, Hewlett-Packard (NYSE:HPQ), Meggitt, Northrop Grumman (NYSE:NOC), Serco Group, Thales S.A., and United Technologies (NYSE:UTX).

Within Band B, Transparency International finds "significant variation," stating: "Six companies publish good information on three of the five pillar areas -- leadership, polices, and personnel -- but provide little to no information on the other two areas: Assessing corruption risk and training. Few of the companies show public evidence of sustained leadership engagement promoting anti-corruption and ethics."

TI recommends that companies in Band B "upgrade their website disclosure to Band A levels. Such clarity sends a clear message to clients, to governments, and to the public about the company's commitment not to tolerate corruption."

Those in Band C "score just above 50% -- not poor, but definitely not a good level of public disclosure." This group consists of 32 companies, including names such as Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), and Raytheon (NYSE:RTN). Band D, those achieving "limited disclosure," includes 25 companies like Daewoo, ManTech (NASDAQ:MANT), and Hindustan Aeronautics. And while there are just 13 companies in Band E, from Mitsubishi Heavy Industries to Dassault to the Gorky Automobile Plant, the majority of the companies in the Index fall into Band F -- 47 in total. These are those companies Transparency International claims "are not able to publicly demonstrate that they have basic anti-corruption systems in place."

Gorky Automobile, Band E

Some of the names found in Band F are fairly well-known (Kawasaki Heavy Industries, Abu Dhabi Shipbuilding), others less so (Kharkov State Aircraft Manufacturing Company, the Arab Organisation for Industrialization, Pakistan Ordnance Factories).

Pakistani Ordnance, Band F

While there is plenty more work to be done by those in Band F, Clarke does find reason for optimism.

"We had an Urdu speaker call Pakistan Ordnance Factories," Clarke tells me. "They happened to have a Vigilance Officer, their version of a Compliance Officer -- at least someone to reach out to. Unfortunately, we never heard back from them, though it does say something that there is a position there."

What Next?

Mark Pyman, author of the Index and Director of Transparency International UK's Defence and Security Programme, calls corruption in defense "dangerous, divisive, and wasteful."

"It is in the interest of companies, governments, and taxpayers that the defence industry raises standards globally," he writes.

To this end, Pyman sees the small percentage of defense companies with disclosure rated "good" as a decent start, explaining, "This is much more than it would have been ten years ago: The industry is changing."

Tiffany Clarke says the Anti-Corruption Index is intended to promote change within two primary audiences.

"The report is giving companies all the information they need to become really good at reining in corruption," Clarke explains, "but the other target is government defense procurement offices -- we're saying there are two sides to the bribery coin, the supply side and the demand side."

"One interesting thing we found is that defense companies which are linked to the government generally disclose less," Clarke tells me.

Consequently, Clarke says Transparency International will be "looking into governments in the next couple of months and ranking them in much the same way."

As Lord Robertson maintains, a "corruption scandal can wipe away the decades spent building a reputation." It is in the interest of all parties involved "to take action, and this index," he writes, "provides the guidance to do so."

"I very much hope that the industry responds to the challenge."

Follow Justin Rohrlich on Twitter: @chickenalaking

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