MYTH 5

CORRUPTION IN THE ARMS TRADE IS ONLY A PROBLEM IN DEVELOPING COUNTRIES

The arms trade often invokes two contradictory images in the mind of the average citizen. Ask them if the arms trade is ‘dirty’, and the answer is usually ‘yes, of course’. Yet ask the average citizen in a first-world country whether their own governments and defense equipment suppliers are corrupt, and the answer is usually no. ‘Our systems are clean’, the first-world citizen will insist. ‘If there is corruption, it is only because third-world leaders and rogue dictators demand it. It is the cost of doing business in a dirty world.’It is almost unthinkable that corruption could infect an arms deal between a first-world country—Austria, say—and a first-world supplier—Sweden, for example.

The result of these attitudes is, primarily, inaction. National governments and prosecutors don’t believe that the arms trade, especially in developed countries, needs to be more effectively monitored, despite the fact that, as is discussed below, it is a particul­arly high-risk industry in terms of corruption. The number of prosecutions of arms companies and/or dealers is minuscule in view of the extent of the evidence of wrong-doing against them; which is a function of, among other things, a complete lack of political will.

THE SCALE OF CORRUPTION

In reality, corruption in the global arms trade is endemic and systemic. Indeed, it is arguably one of the most—if not the most—corrupt industries in the world. In 2005, the analyst and academic Joe Roeberwas given access to a range of hard-to-find data, including secret US intelligence files. After analyzing the data, Roeber found that up to as much as 40% of all corruption in all global trade occurred in the sale of armaments.1 A few years earlier, the US National Export Strategy Report published by the Department of Commerce relayed that the US became aware of, ‘significant allegations of bribery by foreign firms in 294 international contract competitions valued at $145 billion ... About half of the bribe offers are for defense contracts’.²

There is also a direct link between the levels of perceived corruption in a country and the amount that those countries spend on buying weapons. In 2000, three academics linked to the Inter­national Monetary Fund reviewed corruption perceptions and defense spending across 120 countries. Their finding was that, ‘corruption is associated with higher military spending as a share of GDP and total government expenditures, and with larger procurement outlays in relation to both GDP and government spending ... countries perceived as being more corrupt tend to spend more on the military’.³

The pervasiveness of corruption in the trade, as these figures suggest, simply cannot be the result of opportunistic dictators creaming off the top. Instead, they indicate active collusion on the part of arms producers and their governments in corruption. Two of the most recent examples of this are BAE Systems and the German arms manufacturer Ferrostaal.

BAE Systems and Their Network of Covert and Overt Agents

BAE Systems is the third largest defense manufacturer in the world, with 40% of its turnover earned supplying the US defense establishment.4 The company was investigated for nearly a decade, by the UK’s Serious Fraud Office (SFO) and the US Department of Justice, amongst others, for alleged widespread corruption in its sale of defense equipment to a range of countries including Saudi Arabia, the Czech Republic, Hungary, Tanzania and South Africa. In 2008, the Serious Fraud Office supplied an affidavit to South African authorities, which were also investigating BAE Systems for alleged bribery and corruption in the hugely controversial purchase of Gripen and Hawk jets. The affidavit, and the attached evidence that the SFO had uncovered, was eye-opening.

The SFO found a document from 1995 in which BAE outlined a series of strategies to make their use of ‘marketing advisers’ and ‘consultants’ more opaque—something the company needed to do, according to the document, because of increased attention being paid by the US Department of Justice to BAE’s ‘marketing activities’ in Chile, which had allegedly included payments to Chile’s notorious dictator Augusto Pinochet.⁵ To do so, in 1998 BAE Systems formed a company named Red Diamond Trading in the British Virgin Islands, a well-known tax and secrecy haven. Red Diamond Trading, in turn, was operated by a company called Headquarters Marketing, the unit within BAE Systems that had been engaging in ‘marketing activities’ in Chile.6 BAE would make payments via its online banking services in London to a raft of advisors—an almost industrialized system of securing influence.

Through Red Diamond Trading, BAE Systems entered into contracts with ‘covert advisors’ (BAE Systems contracted with ‘overt advisors’ directly) whose identity was to remain secret. Gary Murphy, a senior investigator with the SFO, was clear why he believed this system had been established: ‘I suspect a primary reason behind the inception of Red Diamond was to ensure that corrupt payments could be made and that it would be more difficult for law enforcement agencies to penetrate the system.’⁷

BAE Systems made use of Red Diamond extensively. In the South African contract alone, SFO investigators tracked roughly £115m in payments to ‘covert advisors’ either via Red Diamond or other offshore routes.⁸ One of these ‘covert advisors’ was one FanaHlongwane, who, at the time the purchase from BAE was being negotiated, served as the special advisor to the then minister of defense, Joe Modise. Modise, in turn, had been instrumental in getting BAE selected as the supplier for Hawk and Gripen aircraft, which he achieved, in the case of the Hawk, by going so far as to instruct evaluators to ignore the fact that they cost more than double the price of their nearest competitor. It later emerged that Modise had secured shares in a company that was due to receive considerable business through BAE’s promised offset program.

In 2010 and 2011, BAE Systems entered into plea bargain agreements with the US Department of Justice and US Department of State, respectively. In the DoJ plea bargain, BAE Systems agreed to a fine of up to $450m in return for being allowed to plead guilty to lesser charges. Nevertheless, the information that formed the basis for the settlement, known as a Statement of Offence, confirmed just how frequently BAE Systems made use of the Red Diamond network.9 BAE admitted that it paid, from 2001 onwards, £135m and $14m to ‘marketing advisors’ in a host of countries. Most importantly, BAE Systems confirmed that it ‘made payments to certain advisors through offshore shell companies even though in certain situations there was a high probability that part of the payments would be used in order to ensure BAE was favored in the foreign governments’ decisions regarding the sale of defense articles’.¹⁰ In its settlement with the Department of State, which included a fine of $79m, BAE admitted that it had made over 1,000 payments to ‘unauthorized brokers’, while retaining at least 300 brokers and advisors on its books from the late 1990s to 2007.¹¹

Ferrostaal around the World

In late 2011, the questionably named WikiGreeks website uploaded an explosive document: a lengthy internal compliance audit of Ferrostaal—the German mega manufac­turer heavily involved in the maritime defense trade—by the US law firm Debevoise & Plimpton. Debevoise & Plimpton had been asked to review all of Ferrostaal’s payments, by itself and its subsidiaries, related to its numerous contracts around the world. What they found was remarkable: between 1999 and 2010, Ferrostaal or its subsidiaries had made payments of €1.13bn to various players in relation to its numerous international contracts, of which €309m were identified as raising serious ‘red flags’.12 ‘The compliance investigation found that Ferrostaal made questionable or improper payments on many of its largest and highest profile projects’, the report noted. ‘Many of these payments appear to have been systemic, in that they occurred repeatedly throughout the Company on projects of all sizes.’¹³

The report tracked a number of different submarine contracts the company had entered into, including hugely controversial purchases in Portugal, Greece and South Africa. The Portuguese example gives a flavor: in 2004, Portugal opted to buy two Type 209 submarines from the German Submarine Consortium, of which Ferrostaal was a primary member, for €881.48m. Investigators found that, amongst others, Ferrostaal had made a payment of €1.679m to Dr. Jurgens Adolff in 2004 and 2005. Dr. Adolff was the German Honorary Consul in Portugal at the time the selection was made.¹⁴

HARDWIRED FOR CORRUPTION: WHY THE TRADE STINKS¹⁵

Of course, companies like BAE Systems and Ferrostaal do not operate in a vacuum. Instead, they work in an industry that is almost uniquely prone to corruption, due to a number of factors.¹⁶ The first, and most notable, is that the defense trade is intimately linked to national security concerns. National security often cloaks large arms transactions, making their form and content opaque. Classifying documents becomes the norm, rather than the exception, making it difficult for citizens and journalists to access crucial information and hold decision makers to account. In certain instances, even law enforcement agencies can be denied access to information and documents on this basis, or told to simply stop looking. One recent example of this was when the UK’s then prime minister, Tony Blair, instructed the Serious Fraud Office to stop investigating BAE Systems for corruption in Saudi Arabia, citing Britain’s security relationship with Saudi as the reason. Under this protective shroud, all sorts of corporate and individual malfeasance can be undertaken without much fear of ever being detected. Such heavy-handed secrecy is not only corruptive, it is entirely unnecessary, as we will discuss in the following chapter.

Being so closely related to security concerns also means that the defense trade is much less regulated than other industries and is treated with a striking degree of preference. One good, albeit somewhat technical, example of this is the World Trade Organization’s Agreement on Government Procurement, which we briefly mention in Myth 2. The World Trade Organization negotiates binding trade agreements with the majority of the world’s governments. The Agreement on Government Procurement is one such pact, putting in place a raft of rules about how government procurement should be undertaken freely and fairly. All industries are regulated under the agreement, except for when they want to buy weapons:

Nothing in this agreement shall be construed to prevent any Party from taking any action or not disclosing any information which it considers necessary for the protection of its essential security interests relating to the procurement of arms, ammunition or war materials, or to procurement indispensable for national security or for national defense purposes.¹⁷

In addition, the role of the trade in national security and defense means that the companies are often considered vital strategic allies, and are granted access to the highest echelons of the political process. This is magnified by the fact that large weapons systems deals—for battleships and jet fighters, for example—are undertaken by states, rather than private actors. In such circumstances, if corruption does happen, it is not the corruption that takes place at border posts or traffic blockades; it is grand corruption that can involve senior political players and their political parties. When this happens, there can be enormous political pressure placed on investigative agencies and prosecutors to stop looking into graft, and national security can be invoked to stop prosecutions. It is a highly damaging feedback loop: national security provides the secrecy necessary for corruption to be encouraged, while corruption increases the need for secrecy to prevent detection.

The second feature of the trade—and one which magnifies the impact of national security exceptions—is that it is incredibly technical and complex, especially when it comes to sophisticated weapons systems such as submarines and stealth fighters. This has two outcomes. First, people from outside the defense establishment may not be able to penetrate the jargon that hides corruption, limiting accountability. Even if the veil of national security secrecy is withdrawn, investigators and citizens can still be mystified by the more technical aspects of deals. Second, it often means that there are only a handful of people making decisions related to the expenditure of billions of dollars. Corrupting an arms deal is thus easy—one only has to target a small number of people, rather than entire political systems.

The third feature of the arms trade that makes it susceptible to corruption is that there is often a worryingly close relationship between purchasing governments, the arms industry, middlemen and senior figures in the military and intelligence agencies. These cozy relationships can blur the distinction between what is in the interests of the industry and what is in the interests of the citizens a purchasing government represents. It also allows for ample opportunities for the installation of a ‘revolving door’, in which defense officials take jobs in companies they buy from and vice versa. In turn this creates a ‘revolving table’ in which the governmental buyer and the commercial seller at the table may find themselves swapping places when the next deal is negotiated.

This is particularly apparent in the United States. In 2010, the Boston Globe conducted a review of appointments in US arms companies. It was found that between 2004 and 2008, 80% of all retiring three- and four-star officers became well-paid employees of, or consultants to, the defense industry. In 2007 alone, thirty-four out of the thirty-nine retiring admirals and generals followed this path.18 It is important to remember that, post-retirement, three- and four-star generals are frequently brought into the Pentagon to help with strategy or are often allowed to sit in on meetings that interest them. The influence they bring to bear can be decisive.

In 2008, the US Congress sought to address the revolving door by requiring high-ranking military personnel that were leaving the government to seek guidance before agreeing to join a defense corporation or become a consultant that would likely involve working with defense corporations.¹⁹ In addition, a centralized database was created that contains copies of the ethics opinions provided when retiring officials sought guidance. This database was not made publicly available. Citizens for Responsibility and Ethics in Washington (CREW) challenged this decision and in 2012 submitted Freedom of Information Act requests to access the database and view the 219 opinions that had been sought. CREW did not gain access to the database but received information on the ethics opinions sought by senior defense officials between January 2012 and May 2013.20 CREW found that ‘an overwhelming majority of employees seeking opinions—84 per cent—had at least one specific company or organization in mind, and defense companies dominated the list of prospective employers’.²¹ While it must be recognized that at least there was ethical guidance sought, it is disturbing that much of the information remained secret, and that the information that came to light showed how clearly the eyes of military officials were trained on employment in the defense industry.

In the UK, a 2012 investigation by The Guardian found that 3,572 senior military officers and MOD officials received approval to take jobs with arms companies after leaving the armed forces or MOD over the previous sixteen years.²² Organizations such as the Campaign Against the Arms Trade (CAAT) also monitor the ‘revolving door’: you can view all of the major revolving door appointments since they started tracking it on their website.²³

You may wonder why the ‘revolving door’ is an issue: surely people with experience of defense should be allowed to earn an income after they retire from public service. The problem is three-fold. First, there is always the worry that public servants may make decisions that benefit their future employers: to curry favor and ensure their employment, to help their future employers maintain their profitability, or simply because of an emotional bias or sympathy. Second, and perhaps most importantly, former public servants retain many of their professional connections after they retire, which they could use to inappropriately benefit their new employer. Third, and this is relatively unique to the defense industry, former public servants and senior military figures are able to take part in government deliberations directly, setting the terms and scope of military and acquisition policy. In 2011, for example, CREW found that in the US ‘some retired generals and admirals work for defense contractors while they continue to advise the Pentagon’. They pointed to the examples of General James Cartwright and Admiral Gary Roughead, both of whom took jobs in the defense industry shortly after retiring, who were simultaneously serving on the Defense Policy Board. The board’s function is to provide the secretary of defense with ‘independent, informed advice and opinion concerning major matters of defense policy’.24

Both General James Cartwright, who retired from the US Marine Corps on 1 September 2011 after serving as vice chairman of the Joint Chiefs of Staff, and Admiral Gary Roughead, who retired from the navy in 2011 after serving as the chief of naval operations, were appointed to the Defense Policy Board on 4 October 2011.’ General Cartwright, shortly after his retirement, was appointed to the board of Lockheed Martin; Roughead joined Northrop Grumman’s board less than four months after his retirement.

It is not just individuals who benefit from these close relationships; many companies seek to make substantial private profit from their relationship with the state in ways that can be somewhat baffling. In 2012, for example, Lockheed Martin attempted to secure a tax break on a hotel and conference centre it controlled in Montgomery County in the state of Maryland, despite acknowledging that most of the money spent in housing delegates there was money from federal contracts.²⁵ Lockheed eventually received a state lodging tax break in this instance, but were rebuffed from exemption at the county level. They were most recently granted an enormous $420m tax break in July 2014 in California.²⁶ California delegates (many with Lockheed Martin factories in their districts) argued that this tax break would make Lockheed Martin more ‘competitive’ in its bid to be the supplier of next-generation bombers to the US government, worth $55bn. Its primary competitor, Northrup Grumman, has now demanded a similar tax break to level the playing field.27 It seems perverse that two companies fighting it out to receive taxpayer money to build jets should receive a cut on the amount paid in taxes on their profits.

The fourth notable feature is that the arms trade is truly global. Large defense contractors are often massive agglomerations of once disparate companies, with long lines of supply that are spread throughout the world.²⁸ This process has accelerated with increased demands by importing countries that supplier companies undertake ‘technology transfer’ or move parts of the production process to the buyer country. Long supply lines usually involve the use of multiple subcontractors and a plethora of different jurisdictions. Corruption in these instances can easily be hidden through subcontracting and be facilitated in jurisdictions that may not be as well-resourced to investigate as countries like the US. According to a 1999 report by the US inspector general, it was precisely because ‘kickbacks were so pervasive in subcontracting in the Defense industry’ that the US introduced the Kickback Act of 1986, a piece of legislation unfortunately rarely mirrored in other countries.²⁹

The problems of subcontracting and long lines of supply are aggravated by the widespread use of ‘offsets’ in the defense industry, discussed in detail in the previous chapter.

The final notable feature is that, quite obviously, the trade in weapons often happens in times of imminent or active conflict. In these circumstances normal procurement procedures are suspended and all sorts of malfeasance can take place. Defense contractors can have a field day by price gouging, colluding with competitors, engaging in widespread fraud or winning contracts through what­ever means they deem necessary. And even if these crimes are detected, they often go unpunished, as the warring governments still require the services of the industry. The US’ experience in Iraq and Afghanistan, where the government relied heavily on private security contractors to do the work in the field, is instructive. In 2011, the Commission on Wartime Contracting found that at least $31bn had been lost through waste and fraud by contractors out of a total of $206bn spent by the US government: 15% of all expenditure.30 The commission noted that this was a low-ball estimate—at the upper range, it was possible that as much as $60bn had been wasted.³¹ The largest contractor, Kellogg, Brown & Root (KBR), was found to be guilty of a whole range of offences, such as getting paid the full monthly salaries of engineers who worked for less than an hour a month.³² KBR was a subsidiary of Halliburton, the company for which Dick Cheney served as chief executive officer in the few short years he wasn’t working in the White House in the mid-1990s. Nevertheless, KBR continued to receive multiple enormous contracts. ‘We basically said that KBR is too big to fail’, commission co-chair Christopher Shays noted. ‘So we are still going to fund them.’³³

CORRUPTING INSTITUTIONS

All of this suggests that the defense industry is particularly risky when it comes to corruption. But this is only corruption of the traditional sort: cash in envelopes or dodgy transfers through middlemen. It completely ignores another form of corruption: ‘institutional corruption’. Institutional corruption as understood by the Harvard-based academic Lawrence Lessig is the influence brought to bear on institutions that is legal, and may even be considered ethical, but that stops those institutions performing their intended functions properly. Think of the US Food and Drug Administration: its purpose is to regulate food and medicines in the US to ensure their safety. But if lobbyists or other influence peddlers are able to convince the FDA to adopt rulings that favor particular corporate interests, instead of maximizing safety, one can say that the FDA has been institutionally corrupted.

The defense industry, especially in the major producer countries, is guilty of institutionally corrupting numerous state institutions, be they the military, government or law enforcement. This is especially true of the US. As Bill Hartung has observed:

when other weapon systems are up for debate: Industry and Pentagon lobbyists swarm Capitol Hill; pressure is ratcheted up on members of the Armed Services and Defense Appropriations Committee in the House and Senate, many of whom have had key defense production facilities placed in their states or districts; key members receive generous political contributions from the producer of the weapon system and its subcontractors; … and official reports and testimony are created that make a one-sided case for the weapons system in question, often with the aid of the contractors.34

In one of the few military procurement scandals to be publicized and in which action was taken, the Boeing Corporation briefly lost a contract that had been awarded in 2003 to supply the US Air Force with jet refueling tankers. A senior air force official, Darlene Druyun, tailored the procurement criteria to Boeing’s bid, ensured the price accorded with the corporation’s needs and, together with senior air force and Pentagon officials and the White House conceived and implemented the company’s lobbying operation. Druyun’s daughter and son-in-law received jobs from Boeing while the negotiations were in progress. After the contract had been awarded, Druyun herself was employed by Boeing with a substantial signing-on bonus. In addition, the secretary of the air force, James Roche, resigned before a report on the tanker scandal concluded that he had broken ethics rules, and went to work for a company involved in the development of space-based weapons.35

Illustrating that even the accountability chain is seriously com­promised by institutional corruption, the inspector-general’s report on the tanker scandal concealed significant facts, after the White House scrubbed it of damning information related to White House officials’ role in the scandal. The inspector-general was lambasted in a Senate hearing. He resigned and went to work for Blackwater (as it then was named), one of the largest and most controversial defense contractors operating in Iraq, several of whose employees have been convicted of murder for deaths they caused in Iraq.³⁶

The extent of institutional corruption in the defense sector is also seen vividly in the realm of threat identification and intelligence. It is now known that corporations are working at every level in the national security sphere from the operational to the strategic. Back in 2007, it was noted that

corporate intelligence professionals from companies such as Lockheed Martin, Raytheon, Booz Allen Hamilton, SAIC and others are thoroughly integrated into analytical divisions throughout the intelligence community, including the Office of the Director of National Intelligence … that produces the President’s Daily Brief (PDB)’.³⁷

R.J. Hillhouse has suggested that it is not possible to distinguish items in the PDB that are prepared by government employees or contractors, but that if this were to happen then the PDB would have ‘corporate logos plastered all over it’.³⁸ Therefore, corporations have significant opportunities to shape strategic government policy decisions, and at the same time are ‘removed from traditional accountability structures such as judicial and parliamentary oversight’.39 Some have noted that this could permit corporations to include items in the PDB and other strategy documents that could influence the US national security agenda in favor of particular corporate interests with limited oversight and accountability—this is a problem for democratic governance regardless of whether it occurs willfully or through inherent bias.

IS CORRUPTION A VICTIMLESS CRIME?

When people claim that corruption is only a problem for develop­ing countries, the rejoinder should be: this is not only factually wrong, it is deeply unethical. Why would corruption in developing countries be ok? Why are so few people angered by the litany of corruption with regard to the arms trade? There are many reasons, but one of the primary ones is that many people simply don’t believe that corruption is such a big deal. Corruption is seen as a victimless crime.

The harsh reality is that corruption, in the defense trade and beyond, takes a massive toll on democratic governance and human development. Corruption in the defense trade diverts enormous amounts of funds away from much-needed development goals. And, as the example below shows, defense spending, when it involves corruption, tends to decrease rather than increase human security.

Is Corruption a Victimless Crime? The South African ‘Arms Deal’

In 1999, the South African government bought a range of sophisticated weapons in a transaction known colloquially as the ‘Arms Deal’. Although the cost has never been nailed down firmly, it was estimated to set the country back at least $6bn: an enormous amount for a country that had just emerged from decades of apartheid and that had severe and pressing socio-economic needs. Since its announcement in 1999, the deal has been beset by numerous corruption alle­gations relating to all its constituent contracts.40 Two people have been sent to jail for either fraud or corruption relating to the deal; one of them was the ‘financial advisor’ to the country’s current president, Jacob Zuma, who himself faced 783 counts of fraud, corruption and racketeering in relation to the deal.

For a number of years, the South African government argued that providing anti-retroviral treatment to individuals with HIV/Aids was simply too expensive.⁴¹ In August 2003, a South African government study found that, if the drugs were rolled out by 2008, it would have deferred the deaths of 1.7m people and the orphaning of 860,000 children.⁴² If the money from the Arms Deal had been spent on HIV/Aids treatment, the government could have funded the full treatment of every HIV-infected person in the country for a full twelve years.⁴³ This is just one such example: if the money was spent on housing, for example, the country could have built around 2 million houses, just 200,000 houses less than would be needed to provide a roof over the head of every South African. Similarly, the money spent on the Arms Deal could have built a library for every school in South Africa, stocked them with books, and employed a librarian in each one for over twenty years.⁴⁴ It also could have funded the transfer of nearly 30% of all land in the country into the hands of those who had been dispossessed by the apartheid state, massively undoing one of the country’s great tragedies. Instead, South Africa bought a range of weapons whose utility is unclear and utilization questionable.

CONCLUSION

These examples, and many others, suggest that the question we posed right at the beginning of this discussion is not only misinformed, it is misplaced. The real question we need to ask is this: ‘How does the combination of access to enormous public funds and national secrecy corrupt democratic practices?’ The answer, as we’ve shown, is simple: the arms trade is not only systemically corrupt; it systematically corrupts governments and their institutions.