A new report examining anti-corruption measures in the defense sector holds both good news and bad news: Many defense companies have significantly improved their ethics and anti-corruption compliance programs; plenty more still have a long way to go.
The report conducted by Transparency International measured the transparency and quality of ethics and anti-corruption programs at 163 defense companies worldwide. TI ranked each company in “bands” from A (highest) to F (lowest), based on a detailed assessment of 41 total questions covering six areas: governance, risk assessments, company policies and codes, training, helplines, and offset contracts.
Aerospace and defense companies are “definitely using the survey from a benchmarking standpoint,” says Sulaksh Shah, a forensic services partner with PwC, and the rankings are much noted in compliance circles.
Of the 163 companies in this year’s index, 127 were assessed in 2012, when TI last published the report. “The results show significant improvement overall,” the report stated. “At the upper end, 26 of the 127 companies are now in bands A and B, compared with only 10 in 2012. Furthermore, only 35 companies are in band F, compared with 46 in 2012.”
The report also showed that 42 companies improved by at least one band since 2012, with 18 companies jumping to band A or B from bands C to F. The improvement is mostly due to additional information disclosure in two areas: how the companies assess corruption risk, and how staff members are trained on ethics and anti-corruption measures.
Companies from every region of the world showed evidence of improvement. These countries include the United States, the United Kingdom, Brazil, Finland, France, Germany, Israel, Italy, Japan, the Netherlands, Norway, South Korea, South Africa, Spain, and Turkey.
“It is clear from this analysis that many companies in the industry are paying closer attention to corruption risks,” said Mark Pyman, director of Transparency International U.K.’s Defense and Security Program. This net improvement has taken place despite the questions in this year’s report being more extensive, he said.
In the TI report, four defense companies—Bechtel, Lockheed Martin, Fluor, and Raytheon—fell into band A, and 23 companies in band B. The B list companies include Accenture, BAE Systems, KRB, Northrop Grumman, Hewlett-Packard, and Rolls-Royce, to name a few. Twenty-nine companies are in band C, including Boeing, Embraer, General Dynamics, Honeywell, and Dyncorp International.
“The larger defense companies have been around the block for several years, so a lot of them are very mature in terms of what they have for compliance processes,” Shah says. The smaller companies are the ones that face the real obstacles, but even they are investing in more resources and focusing more on anti-corruption programs, he says.
Most of the 56 companies in bands A to C show evidence of leadership, with senior executives regularly speaking in support of a strong anti-corruption culture. In comparison, only 7 percent of the 107 companies in bands D to F share this leadership quality.
“The smaller companies are the ones that face the real obstacles, but even they are investing in more resources and focusing more on anti-corruption programs.”
Sulaksh Shah, Forensic Services Partner, PwC
Another high-level governance exercise among defense companies with strong ethics and anti-corruption programs is formal board review. According to TI, 37 out of 56 companies in bands A to C scored well this year on that point, compared with only 13 out of 44 companies in 2012.
Room to Improve
Despite significant improvements overall, 107 defense companies—which is 36 more companies than the 2012 analysis—landed in bands D, E, or F. This means they showed little proof that an ethics and anti-corruption compliance program was in place. Thirty-seven companies provided no evidence at all.
Most of the companies in these lowest bands, perhaps unsurprisingly, are foreign companies in Asia, Middle East, and Africa. For U.S. companies that want to expand into these regions, “it’s in their best interest that they spend more time and effort to build up the compliance program to mitigate those risks there,” Shah says.
The report did note one bit of good news among low-scoring companies: Of the 85 companies that scored in bands D to F in the 2012 index, 29 “substantially improved” their public disclosure, according to the report. This is due mostly to additional disclosures in how the companies assess corruption risk and how staff members are trained on ethics and anti-corruption measures.
Overall, defense companies scored lowest on public disclosure of their risk management processes. According to TI, only 22 companies provide good public evidence of enterprise-wide anti-corruption risk assessment processes with detailed mitigation plans.
Another common risk in the government defense sector is offset contracts. Offset contracts are arrangements made between a government and a company where the company must reinvest a percentage of the main contract back into the country.
Below is a partial list of questions that Transparency International assessed in its “Defense Companies Anti-Corruption Index.”
Does the company publish a statement from the CEO or the chair of the board supporting the ethics and anti-corruption agenda of the company?
Does the company’s CEO or the chair of the board demonstrate a strong personal, external facing commitment to the ethics and anti-corruption agenda of the company?
Policies & Codes
Does the company publish a statement of values or principles representing high standards of business conduct, including honesty, trust, transparency, openness, integrity and accountability?
Does the company have a formal process for review and, where appropriate, update its policies and practices in response to actual or alleged instances of corruption?
Does the company have a formal anti-corruption risk assessment procedure implemented enterprise-wide?
Does the company conduct due diligence that minimizes corruption risk when selecting or reappointing its agents?
Does the company have a training program that explicitly covers anti-corruption?
Is anti-corruption training provided in all countries where the company operates or has company sites?
Does the company provide tailored ethics and anti-corruption training for employees in sensitive positions?
Does the company have multiple, well-publicized channels that are easily accessible and secure, to guarantee confidentiality or anonymity where requested by the employee (e.g. Web, phone, in-person), to report concerns or instances of suspected corrupt activity?
Are the whistleblowing channels available to all employees in all geographies?
Does the company explicitly address the corruption risks associated with offset contracting?
Does the company conduct due diligence that minimizes corruption risk when selecting its offset partners and offset brokers?
Source: Transparency International.
A case in point: If a deal is worth $100 million, the government might require the contractor to invest an additional $50 million into developing goods or services in the country. In the process of that deal, however, the government official may neglect to inform you that, say, a close relative sits on the board of the sub-contractor receiving the offset—increasing corruption risks.
“Across the industry, minimal public information on company involvement in offset contracting exists, making it difficult to assess how companies address the associated corruption risks,” TI stated.
Companies involved in offsets should explicitly address this risk through policies, procedures, and contractual terms that increase transparency and accountability in their offset programs. That could come in the form of providing tailored training for employees involved in offset contracts, as well as conducting due diligence on all brokers and providers during appointment and re-appointment.
Examples of companies that scored high for their level of transparency in offsets are Babcock, Mission Essential, Lockheed Martin, Raytheon, Rafael Advanced Defense Systems, Rolls-Royce, and Thales.
One of the biggest issues all companies struggle with is “trying to monitor the activities of their third parties,” says Seth Cohen, PwC’s director of performance governance, risk, and compliance, and former director of global ethics and compliance for Avaya. With so many layers of bureaucracy both within the business and governments, just trying to get full visibility of potential issues is difficult, particularly for U.S. companies expanding their global footprint into emerging markets, he says.
According to the TI report, only 29 percent of companies provide public evidence of contractual terms for agents and monitoring mechanisms for ensuring that agents abide by these terms. Fifty-three defense companies provide some public evidence that they conduct due diligence on agents, but only 13 provided additional evidence that they regularly refresh their due diligence procedures.
Doing an appropriate level of due diligence on third parties goes a long way toward mitigating corruption risk. Shah says this includes asking the right questions: “Why are you hiring this individual? What makes this individual qualified beyond just the connections?” Some companies have room to grow in this area, he says, when it comes to “doing due diligence on a periodic basis and doing it more effectively.”