Hard-Wired for Corruption -The arms trade and Australia's lax monitoring regimes

Christina Macpherson

Aug 2

Chris Douglas concludes that from an anti-bribery/corruption risk perspective, Naval Group should not have been put on the shortlist for the Future Submarines program, let alone selected to partner with Australia to build the submarines. The 'contract of the century' was mired in unacceptable risk from the outset due to Defence's poor risk-management processes and non-existent specific anti-bribery/corruption measures. A formal inquiry is needed both to examine how this deeply flawed decision was reached and to help prevent the situation recurring in future major defence procurement projects.

'In the arms business, it's always a time of war', wrote Roeber. Without war, there is no revenue, no profit, no growth. Countries with established arms manufacturing industries therefore have a perpetual economic driver towards conflict and warfare.

To give just one example, there is no visibility around what or how much weaponry Australia has exported to Saudi Arabia or the United Arab Emirates during the years of the Yemen war.

https://undueinfluence.substack.com/p/hard-wired-for-corruption?utm_source=substack&utm_medium=email Michelle Fahy 1 Aug 22, The international arms trade, worth around US$200 billion a year, represents less than 1 per cent of world trade yet is said to account for about 40 per cent of its corruption. While estimates vary, there is little dispute amongst long-term arms industry researchers that it is the most corrupt industry on the planet. Indeed, it is said to be hard-wired for corruption.

The World Peace Foundation (WPF), housed at Tufts University in America, produces extensive research on the global arms trade, including a compendium of corrupt arms deals. It says that 'Corruption within the industry is often treated in terms of isolated incidents, when it is, in fact, representative of the business model for the industry'.

This finding is supported by research for Transparency International's (TI) Government Defence Integrity (GDI) index, which assesses the quality of controls for managing corruption risk in defence and security institutions. The GDI shows that 86 per cent of global arms exports between 2016 and 2020 originated from countries at moderate to very high risk of corruption in their defence sectors, while 49 per cent of global arms imports went to countries at high to critical risk of defence corruption. Australia is rated as a moderate corruption risk in the GDI, with two key areas of concern being the lack of transparency in defence procurement and weak anti-corruption safeguards on military operations.

The legal trade in arms has long been known for its susceptibility to corruption. This is due to the high value and complexity of arms deals, the close association between the arms industry and political power, and the secrecy claimed necessary for national security, all of which shield arms-related activities from scrutiny. As arms industry expert Joe Roeber pointed out, 'Defence goods are complex and each contract contains a mix of special requirements. Comparison is remarkably difficult and effective monitoring by public watchdogs is all but impossible. An unknowable price can be manipulated to accommodate any amount of covert payments'. Further, there are very few major arms deals on offer globally each year—usually less than 10 in the range of tens of billions each meaning competition is intense—while only a small number of people make the decision on what to buy…

For example, in the month leading up to Russia's invasion of Ukraine, and just days after a horrific attack in Yemen by the Saudi-led coalition using a Raytheon missile that killed 90 people and injured 200, Raytheon's CEO told investors that global tensions represented 'opportunities for international sales', and that he expected to 'see some benefit' from 'the tensions in Eastern Europe [and] in the South China Sea'. Meanwhile, Just Security has noted that the 'well-documented risks of corruption in the arms industry and the potential for profiteering from an arms race in the Ukraine war' are risk factors embedded in the massive flow of lethal weaponry from the West into Ukraine…

Blanket secrecy

All countries justify secrecy around arms-related activity with claims of protecting 'national security'. The Australian government, for example, imposes a high level of secrecy over its arms procurement, sustainment and export deals, with politicians and the Department of Defence resisting demands for greater transparency…

Australia also relies on 'commercial-in-confidence' justifications to protect arms industry interests. This, in combination with national security claims, has led to almost blanket secrecy around Australia's arms exports. To give just one example, there is no visibility around what or how much weaponry Australia has exported to Saudi Arabia or the United Arab Emirates during the years of the Yemen war. The government has only released information about the number of export permits it has approved or declined (by March 2021 Australian approvals to these two nations topped 100). However, permit numbers are not useful, as not all permit approvals translate into actual exports, and permits can cover numerous types of equipment, small or large quantities, extend for varying time periods, and even cover multiple destinations.

This is significant because the decades-long UK Campaign Against the Arms Trade has amassed a 'mountain of evidence of corruption in arms sales to Saudi' showing that bribery is central to the Saudi government's approach to arms deals. Andrew Feinstein, author of the exhaustively researched 600-page book The Shadow World: Inside the Global Arms Trade, told ABC radio in 2018 that he had never seen a Saudi arms deal that didn't involve 'massive amounts' of corruption, and that the percentage of a Saudi contract paid in bribes could be up to 'about 35 per cent of the contract price'. The United Arab Emirates is also known for its secrecy, corruption, and money laundering links.

Australia's decreasing commitment to anti-corruption measures

Australia's extraordinary current spending on military capability—$270 billion in a decade, on top of the usual defence budget—means the domestic arms industry is awash with cash. At the same time, the public's limited ability to scrutinise this spending has been eroded further by a defence minister, Peter Dutton, who has restricted Defence's engagement with the media. The combination of record sums of money and little scrutiny provides fertile ground for corruption.

Australia's performance on anti-corruption measures has nose-dived in recent years:

It recorded its worst ever score on a global anti-corruption index in 2022, dropping four points (from 77 to 73) and falling to 18th place. Australia has now dropped 12 points in a decade, from a high of 7th (85 points) in 2012.

Its membership status at the Open Government Partnership risks being put under review because it has 'acted contrary to the OGP process' and failed to submit its latest national action plan.
Its negligible attempts to investigate and prosecute cases of foreign bribery have been criticised by the Working Group for the OECD's Anti-Bribery Convention (it expressed concern over 'the continued low level of foreign bribery enforcement... given the size of Australia's economy and the high-risk regions and sectors in which its companies operate' and 'its long-standing challenges in attributing wrongdoing to corporate entities').
It has been named an 'international laggard' in expanding anti-money-laundering laws in line with recommendations by the G7's Financial Action Task Force, one of only three countries, alongside Haiti and Madagascar, to have failed to do so. Australia now risks being put on a grey list of countries that don't meet international money-laundering standards. (Australia has been resisting anti-money-laundering regulation for fifteen years.)
A dedicated federal anti-corruption body still has not been established…

Red flags

'The biggest corruption risk in an arms deal is a company's decision to pay bribes to secure the deal', says Sam Perlo-Freeman, former Program Manager for Global Arms and Corruption, World Peace Foundation, Tufts University. Decisions to pay significant bribes are made at a company's highest levels, and while no amount of technical anti-corruption measures will eliminate high-level corrupt behaviour, strong whistleblower protection mechanisms can increase the probability of exposure. Other anti-corruption measures are also important, particularly at lower levels where zealous company employees might be tempted to cut corners to advance their careers. However, such technical measures do not tackle the underlying political and economic drivers of high-level corruption in the arms industry, where winning large deals is necessary for corporate survival and price is not the primary concern. As Joe Roeber noted incisively, bribery in this context 'is not just a simple add-on to the procurement process, but distorts the decisions. What would the equilibrium level of trade be without the stimulus of corruption?' …

No evidence has emerged of…extensive corrupt practices in Australia, but there are regular red flags of possible arms industry corruption. Chris Douglas, a 31-year veteran of financial crime investigation for the Australian Federal Police, who now runs his own consultancy, is an Australian expert in anti-bribery and corruption measures. He says that such compliance programs are a necessary component of good corporate and public governance—essential for preventing corruption in the defence industry. Although he has lodged numerous Freedom of Information requests (FOIs) with the Defence Department about anti-bribery/corruption measures on major procurements, he says, 'I have not detected an ABC [anti-bribery/corruption] program being used in any of the major defence projects I have examined'.

Douglas says that the Department of Defence 'has not caught up with modern corporate management practices' and has no understanding of how to use anti-bribery/corruption risk-based assessments to manage the significant risks posed by bribery and corruption in its projects, particularly major ones. As he puts it: 'That any department would not undertake an ABC risk assessment when such large sums of money are involved, in an industry that is rated high for corrupt behaviour, speaks volumes about a poor culture within that department'.

Repeated cost blowouts and delays are just two of the red flags for corruption that are regularly found in Australian defence procurement and sustainment projects. The cost of these to the public is substantial.

While there are numerous examples of red flag projects, here are just three.

Naval Group—submarine contract

This contract was abandoned with the arrival of AUKUS, but the original deal with Naval Group requires a public inquiry to examine the full extent of the process by which the internationally lucrative 'contract of the century' was awarded. The need for an inquiry has been amplified given the shock shredding of Defence's largest ever contract, a decision which made international news and may yet cost Australia billions.