March 25, 2013
Credit: Mark Pyman
[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 with Finmeccanica sales in their country, Swiss citizens' political parties at odds over the value of a proposed purchase of Saab Gripen fighter aircraft and Saudi citizens usng Twitter to debate corruption allegations about BAE and EADS 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?