Corruption is a significant problem—no matter what sector it originates in. But a recent report from corruption watchdog Transparency International takes aim at one industry in particular: Defense. The report notes, “While it may be true that much has changed over the last two or three decades, systemic and cultural risks continue to plague the sector. Some of the most prominent cases have involved corrupt activity across multiple jurisdictions over several decades.” Why is anti-bribery and corruption compliance such a challenge for Aerospace and Defense?

The engineering arm of Rolls-Royce, which manufactures engines and power systems for aircraft, was embroiled in bribery and corruption allegations that spanned 12 countries over a 24-year period. Just last year, another Aerospace giant—Airbus—faced allegations of corruption, as well. At the time, The Guardian reported, “The company’s legal woes are a result of its use of ‘commercial agents’ – intermediaries who specialize in ‘difficult’ territories where they can assist multinationals in securing contracts.” And, while the case against BAE Systems dates to 2010, the $400+ million settlement has kept BAE on the FCPA Top Ten Largest Monetary Sanctions of all time.

4 reasons Defense is vulnerable to corruption risk

The Aerospace and Defense industry focuses on very specialized technologies that are usually subject to strict import/export requirements. While that may increase exposure to sanctions Risk, the bigger threat arises from three factors, according to Transparency International.

Clandestine Collaborations—Dealing with government agencies, particularly military branches, is sensitive business. As a result, when it comes to defense spending, the procurement process is less open and transparent than a government office purchasing paperclips. The reason for secrecy is often linked to national security, however, a lack of oversight—particularly in emerging nations—only enables those with corrupt intentions.

High-Value Contracts—Transparency International points out that contracts for large-scale weapons platforms and military equipment are lucrative in several ways. Not only is the initial value of a contract substantial, but the service and support contracts that accompany a purchase deliver significant value as well. Moreover, military equipment generally has a long lifespan, so getting the big contract is more critical because governments don’t replace battleships and fighter jets all that frequently. In such a competitive space, companies—and those acting on their behalf, may be tempted to facilitate winning a contract through questionable means.

Complex Negotiations—With so much money on the line, contract negotiations have an unusually long life-cycle. They also may involve global supply chains, joint venture partnerships and third-party agents that require enhanced due diligence and ongoing risk monitoring to ensure compliance throughout the span of a contract. In addition, offset projects pose an increased risk with regards to FCPA compliance because they create situations in which Politically Exposed Persons (PEPs) may be directing the work—and therefore the funding—to a project that benefits a government official directly or indirectly through his or her family members.

Political connections—PEPs are a risk consideration whenever contracts are issued by government agencies due to potential conflicts of interest related to campaign financing and defense lobbyists. But in addition, companies in the Aerospace and Defense industry are expanding into emerging nations to balance declining defense budgets among more developed nations. As a result, the companies enter markets where facilitation payments—otherwise known as bribes—are embedded in the culture or where Corruption and cronyism are rampant in government.

Enhanced risk mitigation is a must

Given the level of risk that the Aerospace and Defense industry faces, Transparency International recommends that companies strengthen their risk mitigation strategies around 10 areas:

• Establish a zero tolerance for corruption policy—from the top—and extend it through the organization
• Implement robust internal controls including risk-based due diligence, ongoing monitoring and regular assessments of process effectiveness
• Develop compliance training and support systems, particularly for employees working in high-risk positions
• Identify all potential or real conflicts of interest and maintain auditable records
• Emphasize the need for transparency throughout the customer engagement process, capturing important details related to political contributions, charitable donations and lobbying expenditures
• Manage potential supply chain risk by conducting bi-annual due diligence checks on current suppliers
• Develop effective third-party management processes, including incentive structures that do not encourage corrupt actions, beneficial ownership research on all agents employed on the company’s behalf and publication of disciplinary actions taken against third parties
• Commit to greater due diligence and transparency related to offset obligations, as well as on the beneficiaries, brokers and consultants involved in offset contracts
• Conduct supplemental due diligence into beneficial ownership and control structures when operating in high-risk markets
• Require full disclosure of the structure and shareholder ownership when engaging with state-owned enterprises

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