Hard-wired for corruption

Corruption is not a sleazy add-on to the global arms trade. It is central to procurement decisions and makes the industry far bigger than it needs to be. If corruption could be tackled, the industry would dwindle to its irreducible strategic necessity
August 27, 2005

It is appropriate that arms trade-related corruption should have claimed one of its biggest victims in the shadow of July's G8 Gleneagles summit. Jacob Zuma, deputy president of South Africa, and tipped by many to be the next president, was sacked in June because of his connection to a businessman who had solicited bribes from a French defence company. The fall of Zuma highlights the "first, do no harm" development approach for rich countries, which was largely absent in Gleneagles. This approach stresses not so much the good things we should do for Africa but the bad things we should stop doing, from money laundering through western banks to dumping subsidised food on African markets. Close to the top of this list sits the western-dominated arms trade, distorting the budgets of poor countries and entrenching corruption. Governments of arms-exporting countries should be asked whether it is acceptable to bribe the leaders of poor countries to buy arms they may not need with money they cannot afford in order to provide employment in rich countries.

Even if exporting countries wanted to control the trade (a big "if"), the inducements offered by producers make the job all but impossible. The long-running saga of South Africa's $5bn 1999 arms deal, which brought down Zuma, is an exemplary case. It was under attack from the start because of well-founded stories of corruption and its irrelevance to South Africa's strategic situation. But it took until October last year for the first big case to come to court. In Durban, Schabir Shaikh, a businessman, was found guilty of corruption and fraud, mainly arising from his "generally corrupt" relationship with Jacob Zuma. More specifically, he solicited bribes of 500,000 rand (£43,000) a year from a big French contractor in the deal—Thales (formerly Thomson-CSF)—for Zuma to protect the company from parliamentary investigation. The deal was protected. On 8th June, Shaikh was sentenced to 15 years in prison. Zuma, a popular figure and presidential contender, was sacked a week later. In a parallel case, a South African businessman, Richard Young, is suing the government for 150m rand (£13m) for loss of a sub-contract, part of the 1.3bn rand (£112m) contract for control systems for four new corvettes awarded to Thales, allegedly as a result of corrupt dealing. These two cases are linked not only by the contract, the company, its African subsidiary and Schabir Shaikh, its director, but also by the fact that Schabir's brother, Chippy Shaikh, was head of procurement in the ministry of defence.

Britain has no reason to be complacent that it was the French who were shamed in court. Young's tenacious pursuit of information in the courts has turned up leads into the British part of the deal: sales of Hawk trainers by BAE and of Saab Gripen fighters by BAE/Saab. The Hawk was chosen against the wishes of the South African air force, which wanted the Italian Aermacchi (as does the RAF), costing half as much. The Gripen purchase was also questionable because South Africa does not face a threat needing billions to be spent on state of the art weapons. Indeed, the air force did not need new fighters at all, as it had only recently taken delivery of fighters with a life extending to 2012 and beyond—and did not even have enough pilots for them. Thanks to Young's efforts, evidence was obtained showing how such information had been edited out of the 2001 joint investigating committee report on the deal, widely—and now, it seems, justly—perceived as a whitewash. In April this year, the opposition party, the Democratic Alliance, announced it would be asking the parliament's watchdog committee, the standing committee on parliamentary accounts, to reopen the matter. The ruling ANC has squashed the committee's efforts in the past and has the power to do so again.

So what, if anything, are G8 governments doing to tackle their home-grown bribers? And how does Britain measure up? Not very well, according to an OECD report published last March, just a week after the Commission for Africa (CfA) report. Britain is signatory to the OECD convention on the bribery of foreign officials, but has never shown much enthusiasm for it, dragging its heels over the need to introduce minimal legislation. More than five years after Britain signed the convention, according to the OECD, there are still few signs of action.

The CfA put export credit agencies in the frontline of the battle against corruption. Britain does not measure up here either. The export credit guarantee department has been extremely reluctant to refuse credit cover for doubtful payments. However, it issued new guidelines in May 2004 designed to exclude corrupt payments from credit agreements. Within six months, the safeguards were fatally weakened under pressure from major exporters, among them defence equipment manufacturers Rolls Royce and BAE.

The CfA also recommended that negotiations for a legally binding international arms trade treaty should be started by next year. But in spite of the personal commitment of the British foreign secretary, Jack Straw, this was knocked off the G8 agenda by the combined votes of the US and Russia. The US votes in principle against any treaty that would put legal restraints on its freedom of action; Russia's motives were not made public, though it was suggested that a desperate need for export sales to bolster a crumbling defence industry played a part.

Measuring corruption We cannot put an exact figure on the extent of corruption, but we can draw some lines around it. The value of the arms trade was $29bn in 2003, a low year: the trade had averaged $10bn a year more than between 1999 and 2003. Arms importers are grouped in regions of instability: the middle east, the Indian subcontinent and the far east. Arms exporters are more concentrated: the top four exporters (the US, Britain, France and Russia, all G8 members) account for three quarters of all exports. The US alone accounts for 44 per cent of total arms deliveries to developing countries (see table). This is hardly surprising given that the US industry exports from a domestic military spending base which is almost as much as the rest of the world put together. Moreover, buying arms from America creates a de facto defence pact, which makes the US a most attractive partner. To some extent, this political advantage compensates for the difficulty US companies have in bribing. (The Foreign Corrupt Practices Act, criminalising the bribery of foreign officials, was passed in 1977 following a Watergate-inspired investigation of corporate slush funds.) Some US companies bribe nonetheless, but on a relatively small scale. It is unsurprising that their competitors resort to bribery to, as they see it, level the playing field.

One of the paradoxes of the arms trade, given the grip it has on politics and the public imagination, is how small it is, less than 0.5 per cent of total world trade. But it is large in other ways. The industry's share of corruption is grossly disproportionate to its share of trade. Indeed, the arms trade may account for almost half of all corruption in legal trade.

To many expert observers, corruption is peripheral, an add-on. So little significance does corruption have for them that, in all the huge literature on defence, foreign policy and the arms business, there is only one book, Mark Phythian's The Politics of British Arms Sales Since 1964, where it is taken seriously. Serious—grown-up, one might say—students of the industry, both friendly and unfriendly, concern themselves with strategy and material. They share the assumption that bribery does not affect the main procurement decisions, which are taken by professionals in response to strategic need and within budgets determined by cabinet decision. This is entirely wrong. Corruption is not peripheral; it is central to procurement decision-making.

The clearest statement of the consequences of corruption was made 40 years ago by Donald Stokes, lorry salesman and car magnate. Given the job of developing an export strategy for the British arms industry, he reported to the government that "a great many arms sales were made not because anyone wants the arms, but because of the commission involved en route." This is the core of the case against bribery, that it is not just a simple add-on to the procurement process but that it distorts the decisions. Once it ceased to be a honey-pot for the enrichment of the well connected, the procurement of arms would dwindle into an irreducible strategic reality. That would be a useful objective: to reduce the arms trade to a level no larger than it needs to be.

The closest one can get to comprehensive, systematically collected data on corruption in the arms trade is found in restricted reports by the intelligence agencies—or the national audit office report suppressed by successive British governments. The NAO report was commissioned in 1989 in response to the refusal by the ministry of defence to make available to parliament's public accounts committee information on the huge Al Yamamah arms deal with Saudi Arabia, worth over £20bn. When the report appeared, three years later, the committee's chairman decreed that it should be kept from his committee members for reasons, it was widely rumoured, to do with the revelation of commissions paid on the back of the deal. Labour said it would publish the report when it came to power, and then refused.

However, the word does get out. In 1997, an official in Washington told me that a mid-1990s report by the CIA concluded that arms trade corruption then accounted for 40-45 per cent of corruption in world trade.

The only publicly available statistical data come from the compliance department of the US department of commerce, which collects reports of corruption to monitor performance under the OECD convention and other treaties. According to its annual report on compliance, rather more than half of the bribe offers reported to it are for defence contracts—despite the fact that they account for less than half of 1 per cent of world trade. Much of world trade does not lend itself to corruption. A more relevant comparison would be with a group of trades that does. In the late 1990s, the US state department drew up a list of the five "most corrupt" international trades: arms, infrastructure or civil engineering projects, telecommunications, energy and civil aviation. That group accounted for roughly 10 per cent of world trade—of which arms, defence equipment and services account for only about 5 per cent. Simple maths tells us that arms has to be the most corrupt of all legal trades.

More impressionistically, we could listen to people close to the trade, a sort of vox pop:

  • One of the few prepared to be quoted is Jonathan M Winer, former US deputy assistant secretary of state. He wrote to me: "The notion that the Europeans offer and the Africans take bribes isn't at all the case in regards to arms. Everybody takes bribes from everybody, and if not bribes, then gratuities, benefits, undue advantage, commissions, contracts for friends and relations, other benefits material or political, and so on." ("Commission" is the preferred euphemism for "bribe." Companies pay commissions to middlemen who pay bribes to the men of influence. It is a handy fiction because it allows companies to bribe while claiming ignorance of what the middleman was doing.)
  • Terence Taylor, strategic analyst and head of the IISS office in Washington DC, told me: "A common feature of arms sales to the third world is the payment of a commission to the buyer." In private discussion, not for quotation, experts assume that every defence transaction with the developing world (more than half of world arms trade) is accompanied by commission payments for the buyers—the politicians, the military, civil servants and their well-placed friends.
  • A senior marketing manager of a huge defence conglomerate, now retired, said that in 20 years of selling arms, only twice did he not pay a commission to the buyer.
  • The French aircraft company Dassault paid a bribe to the Socialist party of Belgium to secure a contract for upgrading F-16s, a job for which the company was not obviously qualified. At his judicial examination in 1995, Serge Dassault said that "everyone pays commissions." His government agreed. When the Belgian courts issued a warrant for Dassault's arrest, the French minister of foreign trade protested that commissions are a normal part—aides naturelles—of the arms business and had been organised in that manner for decades. Dassault was let off this year by the European court of human rights on the grounds that the Belgian court did not have jurisdiction.
  • In June last year, a former Russian defence minister said arms deals in many countries were possible "only when handing over some kind of commission to the buyer."
The five "most corrupt" trades listed above share structural features. The projects are large and discrete. They appear at random intervals. Each can, separately, make the difference between a comfortable life and near-death for the supplier companies. Competition for business is fierce and stock markets do not reward high-principled losers. In the developing world, the decision to purchase rests in the hands of an unaccountable political elite. The local culture may favour the payment of bribes as a normal exchange of favours. In such circumstances, companies feel they have no alternative to paying bribes if they want to stay in the business.

The arms business has all of these features plus two more that set it apart. First, it is an opaque market. There is nothing particularly sinister in that: all companies would work behind screens if they could, but in any halfway efficient market they cannot get away with it. The arms trade gets away with it because defence goods are complex and each contract contains a mix of special requirements. An unknowable price can accommodate any amount of covert payments.

The second of its unique features is more telling: the secrecy that cloaks all of its activities. This privilege is allowed the industry because of its role in national security. But secrecy also offers a standing temptation to conceal incompetence, deflect political embarrassment or steal. The obvious example is the slush funds used for such payments. Peter Clark, the head of prosecutions under the Foreign Corrupt Practices Act in the US department of justice, wrote to me, "Unaccountable money generates greed." People presiding over money they do not have to account for—usually because it is illegal—are tempted to take some for themselves.

If a Martian were given the job of designing an industry with the express purpose of making it corrupt, he might have come up with something looking very like the arms industry. It is hard-wired for corruption.

Why has the situation been allowed to persist? The answer lies in the significance of the domestic arms industry for governments, which is out of all proportion to its size. The reasons are: its role in national security, its usefulness as a tool of foreign policy and its contributions to the economy. As a result, governments support their exports with enthusiasm and not a little money—subsidies of £450-950m in Britain and $7.6bn in the US. Exports are seen to be critical to economic health and, supporting exports as they do, governments are inevitably complicit in the corruption. They are not promising recruits for an arms trade reform movement.

Companies tell us they would not pay bribes if they did not have to. That would be more believable if they had shown more interest in attempts to do something about it. Maybe they are not such reluctant participants as they claim. Corruption is a handy marketing tool, allowing companies to engage in non-price, non-performance competition and levelling the playing field with the dominant US suppliers. Corruption also increases the size of the market.

What is the cost of corruption in the arms trade? It is impossible to say, but using a crude and fairly widespread 10 per cent rule of thumb, bribes in the international arms trade amount to $3bn a year, a large sum but not huge. To that, however, should be added the cost of the arms that would not have been bought without the bribes to kick the orders along. What would that be, 10 per cent? 50 per cent? That would take the cost up to a range of $6-18bn. But even that does not get to the heart of a cost that should be seen in relation to the country's poverty, as in South Africa. High-tech arms are not needed; houses, roads, schools and hospitals are.

There are, of course, real difficulties in attacking the problem, even if companies and governments wanted to. They cannot act alone without ceding market share to their competitors. And it is hard to co-operate with competitors you do not trust. Even if a quorum of European or OECD countries were to decide to bind their companies to take action, others would step into the breach. Russia, China and Israel are front-rank competitors; not to mention Brazil, Romania, Ukraine and the other second-rank suppliers.

What is to be done? Why single out the arms trade? The industry is not big and the amounts involved are not huge. The arms trade is not the only one open to corruption; there are those other "most corrupt" trades. Laws intended to catch them will catch arms as well. The OECD convention should catch them all.

But arms are a special case; the trade is uniquely corrupt and the effects are far more damaging than the numbers seem to suggest. There are two broad approaches to the reform of the arms trade: the indirect and the direct.

The direct is the intuitively obvious approach, the US approach. You identify the problem, bring your guns to bear on it and blow it out of the water. You pass laws and hit people who break them. You introduce rules and conditionalities to loans and other financing packages to restrict the freedom to misbehave. (Thus, the World Bank's "blacklist" of companies excluded for corrupt practices is a powerful sanction.) You set up an information system with hotlines, monitoring the trade closely and encouraging whistleblowers. The more that this can be done through multinational institutions (such as the OECD, the G8, the EU or even the WTO) the better. Such organisations have some—but varying—ability to police or shame their members.

What is needed is political will, both national and collective. The OECD convention relies on the willingness of governments to bring cases to court. There is no monitoring mechanism, no autonomous body with power to bring cases and, so far, no cases—therefore, one assumes, little political will.

A softer approach is being tried under the auspices of Transparency International (TI), the "coalition against corruption" based in Berlin. The British chapter, with funding from the development ministry, DfID, and support from the Swedish government, has been working on arms trade corruption (I am on the steering committee). A team has been exploring ways of setting up voluntary arrangements. One of its approaches is an industry code of conduct. Another is a tool that has been developed within TI, the "integrity pact," a project-by-project agreement between government and companies, a pledge not to offer or accept bribes, that has been used with some success but not, so far, widely in defence. However, the Indian defence ministry recently announced that it will adopt the integrity pact in all arms acquisitions. This is a big change. Indian arms purchases have been plagued with corruption for years. The Bofors case and the Tehelka sting are only the most prominent. If this succeeds, it will be a precedent and a source of pressure on other governments.

The main problem is obvious: how can you persuade a government or company to do something it considers to be against its interests? To go no further than Britain, the absolute silence on the subject from major British arms manufacturers is eloquent, while the government's actions in parliament and foot-dragging over legislation for the OECD convention speaks for itself. And not just in Britain; when the idea of adding a ninth criterion to the EU code of conduct on arms exports—introducing an explicit commitment against corruption—was being trailed five years ago, it was dropped under pressure from EU members.

Maybe we should start some way back up the decision chain. This is the indirect approach. The justifications of special treatment for the arms industry itself are all based on assumptions that can and should be challenged. The world has changed with the end of the cold war. It is changing with the increasing integration of the EU. It is not unreasonable to expect policies to change with them. These raise questions that go beyond corruption, so they will be left as questions.

First, what is the place of a national defence industry in national security? Should leading EU members not think of European rather than national self-sufficiency? With a larger base, the need for export markets would be less critical for companies.

Second, what is the role of arms exports in foreign policy? Governments use arms exports to foster links with sometimes doubtful regimes, as with sales to Indonesia and Zimbabwe. We already have export controls and codes that limit permissible sales, ignored and controversial as they sometimes are. Are they enough? Some question whether we should export at all. Tim Garden, former director of Chatham House, has argued that, from a security perspective, we should only export to those countries with which we have a formal defence agreement. That would clear up ambiguities surrounding sales of military vehicles to Uzbekistan.

Third, how important is the place of the arms industry in the economy? Does it really deserve such a special position as a creator of jobs and generator of exports? Samuel Brittan's 2001 paper for the Campaign Against Arms Trade questioned the value to the economy of the industry and of exports in particular. The defence industry employs about 2 per cent of British workers, and a fifth of these are engaged in exports. Brittan examined the effects of reducing both, particularly the latter, and concluded that the economic effects would be nugatory. The subsidies the industry receives are actually harmful. They foster distortions and force the government to support repressive regimes. In any case, why should the taxpayer buy exports for the companies?

The last item up for challenge is the passion for secrecy, a cloak under which anything can happen. Experts have told me that very little in the arms trade is really secret; people can generally find what they need to know. And even less actually needs to be kept secret. If this is so, the cloak should be removed where it is not needed. At the least, the need for secrecy should be rigorously examined and the exceptions to a general rule of openness sparingly conceded and clearly defined. This leaves, of course, the real reason for much of the secrecy: the unwillingness of the men of influence in the importing countries to be exposed, the presumed reason for the suppression of the NAO's report on the Al Yamamah deal in Saudi Arabia. Should our governments be offering them that protection?

The arms industry is unique not only in the nature of what it sells but also in its susceptibility to and level of corruption. This combination is peculiarly damaging and it should be made to work under special constraints. At the moment, the opposite is the case. It receives quite exceptional support from governments to sell goods into a market where price is not the first concern. There is a lot of money slushing around in secrecy and a lot of unscrupulous men who want—and, with a little bit of effort, can get—a piece of it. These men are not just, as is comfortably assumed, third world dictators; they are also our own people, scooping up "retro-commission" from deals many of which were unnecessary. It is little wonder that the easy money on offer plays a major part in determining what happens. It is not peripheral to the business of selling arms; it is central. The problem is so damaging that it requires special treatment.

The arms trade may be ugly, but it is inescapable. Nations want to defend themselves and will buy weapons to do so. Rather than trying to abolish the trade, it makes more sense to improve it, make it open, transparent and efficient. What could be more innocent… or more subversive? By disabling corruption and by removing the special treatment the industry enjoys, we would go a long way to reducing the trade to what is strategically legitimate and ethically unobjectionable.