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A Paper Given at the Export Controls Conference in the Section on Transparency and Ethics |
Export Controls Conference
Section on Transparency and Ethics
By : Joe Roeber, Budapest
15-18 September 2003
[This paper followed a presentation by Anne-Charlotte Wetterwik of the Swedish Ministry of Foreign Affairs in which she described how the Swedish government and Transparency International have cooperated to formulate and codify the issue of "Corruption in the Official Arms Trade" (COAT), the two conferences that were held in Stockholm and Cambridge, and the proceedings of the working party that was subsequently set up to carry the ideas forward.]
The COAT working party distilled the results of the two conferences into a set of recommendations for action. The first reads:
"Export licensing and provision of export guarantees should be made strictly conditional on presentation by exporting companies of both annual sign-off letters and contract-specific no bribery guarantees."
You may well ask what corruption in the arms trade has to do with export controls focussed, as in this conference, on WMDs and terrorism. I shall try to show that the fit, if not exact, does not represent a departure from the underlying purposes of export controls. I shall approach the problem with two questions:
A rather oblique answer came in a comment made to me in the coffee break. "Everyone understands corruption, but not many people understand the consequences of corruption." Exactly right. In my work on the issue, I have been less concerned by the arms trade as such or even by corruption as such than by the effects of corruption on the trade in arms. I probably should remark here that this work is not part of any anti-arms campaign or of the huge effort to ban the trade in arms altogether. National security is the first priority of all governments and it follows that they must have the means to defend themselves. The trade in arms is both inevitable and legitimate. Far from banning the trade in arms, the thrust of the anti-corruption effort is to improve it! I shall explain this puzzling remark.
Let me give you an idea of the world we are talking about by briefly sketching in some cases.
The liveliest current controversy concerns the arms deal signed by the South African government in 1999. It followed an extensive review of the country's defence requirements that had concluded by identifying four options, all around the $1billion mark. In the event, the deal was to cost nearly $4 billion and, with cost inflation and devaluation of the Rand, is running up to $9 billion. If the accounts are drawn up in Rands, which is how the taxpayer will see them, the inflation is much steeper. The increase was the subject of much debate, not least because the arms themselves - which included advanced aircraft and deep water ships - bore little relation to the country's actual defence needs. Rumours of corruption surfaced almost immediately and were aired in Parliament only to be smacked down by the ruling party, the ANC. Ministers and civil servants were said to have been suborned by main contractors; blatant conflicts of interest has been ignored; the programme of offsets - investments intended to defray the costs - had given rise to a whole new domestic industry of "black empowerment" sub-contractors with no expertise but with plenty of political pull. The process by which BAE's Hawk jet fighter-trainer was chosen over a cheaper equivalent bore all the marks of having been rigged; the French company, Thomson (now Thales), whose African subsidiary was run by the brother of the chief of procurement in the Ministry of Defence, got a contract for a system that a South African company had already designed for the navy; the contract for submarines from Germany was signed by the Defence Minister, who had received a mysterious loan from Germany via Mozambique, before the money had been approved. An investigation was mounted by a Joint Investigation Team, or JIT, of three bodies (audit, prosecution, public defence). It notably did not include the only truly independent investigatory body set up for the precise purpose, the Heath Special Investigation Unit. The JIT produced a report in November 2001 that was widely derided as a whitewash. But there the matter rested until the suggestion surfaced a year later that the Deputy President, Jacob Zuma, had solicited a bribe from Thales in return for protecting it from investigation. The fight swiftly became political and extremely dirty, more within the ANC than outside, but the issue has yet to be tested in Court, where Zuma's financial adviser is to be tried. The question underlying it remains. What part, if any, did corruption play in committing South Africa to an arms deal it certainly cannot afford and is, in the view of many sage analysts, vastly in excess of its strategic needs?
The Al Yamamah deal, agreed between the UK and Saudi Arabia in 1986, is the biggest arms deal in the country's history. Worth £40 bn and still rising, it was touted as a triumph of Mrs Thatcher's personal relations skills and was the saving of British Aerospace and many thousands of jobs. It almost immediately ran into probing criticism, much of it to do with the size of the commissions said to have been paid. The British government was more successful in blocking criticism than the South African, fending off questions with misleading information. Thus, the government never comments on the activities of private companies or private individuals. (Mrs Thatcher's son was said to have been in the commissions loop.) It never paid commissions. (Nobody suggested it did, but it had negotiated the deal.) It was assured by the companies concerned that they obeyed the laws of the countries in all respects. (Urp...) Close observers of the deal in Washington and a report from the CIA, according to an insider, put the level of commissions in the range 30-35% which is almost certainly a simplification as commissions vary according to the goods and hence the ease with which they can be concealed. So much was unverifiable, but there were more public indications, involving Thorn Electrical and Rolls Royce, that the commissions paid were very high indeed. A report into the matter by the National Audit Office was concealed by the parliamentary committee for which it was prepared, "in the national interest". That same rubric was repeated by the New Labour government when it came to power in 1997 although, when out of power, it had promised to publish the report.
The convolutions of French politics were exposed in the pertinacious unpicking of the scandal involving the oil company Elf by the Norwegian-born examining magistrate, Eva Joly. The former Foreign Minister under Mitterand and President of the Constitutional Court, Roland Dumas, was convicted in 2001 of enjoying money corruptly paid to his mistress by Elf to open the back door into his office. Two years later he was found not guilty on appeal, on the grounds that he could not have known that her FF 17 million flat and gifts bought with the bottomless expense account were corruptly paid. This did not include the FF65 million paid, she had said at one point, to persuade him to change government policy on the sale of six frigates to Taiwan. Policy was indeed changed and Dumas himself said the commissions paid on that deal came to $500 million. The toils of the Elf case wound into Germany where the circumstances surrounding its purchase of the moribund Leuna refinery added to the pressure that brought down ex-Chancellor Helmut Kohl and, with him, the CDP. The process of which Kohl's political demise was the operatic climax had started with another sale to Saudi Arabia: 36 tanks for nearly $500 million for which government approval was obtained by sweetening the CDP with a 1 mn DMark payment in a Swiss car-park - a small amount to pay for such a benefit: the commission payments amounted to nearly one-half of the contract total.
The list could be extended by scores more examples. Three of the more prominent were as follows. Bofors payments on the sale of 155mm Howitzers to in India was a scandal dating from 1988 that is still running in spite of the attempts of the Congress Party to kill it off. The payments by Italian helicopter manufacturer Agusta to the Belgian socialist party spelt the end of Willy Claes's career in NATO. The sale of a air traffic control system to Tanzania for more than $100 million was only stopped when the head of the central bank courageously denounced it but it persisted in another form, eventually ending up as a $30 million system, itself causing a scandal in part because even that greatly-reduced price tag was deemed by the World Bank to be greatly in excess of the country's needs. Everywhere that arms and defence systems are being traded, it seems, there is corruption.
It is worth pointing out here that these are all cases of "grand corruption" and to be distinguished from "administrative corruption" or grease payments. People in export controls are all too familiar with grease both because it is so prevalent and because it has a devastating effect on any system of control. That is not what we are talking about here. Our subject is grand corruption - creaming of contracts, often on a huge scale - in the official arms trade. It is also worth pointing out here that this discussion does not include any aspect of the illegal trade - black and grey markets, embargo-busting, smuggling - that are the popular idea of corruption in the arms trade. We are solely concerned here with the official trade in arms, usually involving one or more governments. That the highest in the land are involved is, if anything, more dangerous than the involvement of out-and-out crooks.
Let us start the discussion with two propositions - or rather one proposition and an axiom. The proposition is simply this: that the international arms trade is the most corrupt of all legal international trades. (It can be taken for granted that nothing in the brief - heavily truncated - list of misdeeds above is proof of anything about the trade as a whole. We will never find testable proof of a proposition so broad.) There are good reasons for this unenviable position, most of them common to the five "most corrupt" international trades: arms, infrastructure projects, civil aircraft, energy and telecommunications. They are all very large industries with very large individual projects involving huge sums of money. The projects are sporadic and irregularly-spaced. Each of them is significant to the individual companies involved, however large themselves. Many of them are buyers' markets, oversupplied by desperately undernourished sellers. In most of them, the key contract decisions rest with a small number of well-placed people who are not subject to transparent oversight. This is bad enough.
The arms business has all of these properties and two more: the trade operates in conditions of secrecy, sanctioned by governments "in the national interest"; and they are intransparent to such a degree of opacity that, by most normal definitions, they are not really markets at all. (For markets to function as such, players must have full access to information.) Thus, even if the decision-makers were accountable, the information is not available to monitor their decisions. To these two properties can be added a third: the interest of governments. Where national security is involved, governments feel morally free of the constraints of law. It is the governments that allow the trade the protection of secrecy. Secrecy is the precondition for corruption for, as we should all know, secrecy will always be abused. In summary, it is not unfair to say that the arms trade is hard-wired for corruption.
Such evidence as we have supports this conclusion. The TI "bribe-payers' index" puts the arms trade at the top of most corrupt sectors, alongside infrastructure projects. (I think this is almost certainly wrong, for understandable methodological reasons concerning the sources of data for the survey. Bad as infrastructure notoriously is, the arms business is even worse.) I have been told that the CIA report on the arms trade, cited above, concludes that corrupt payments in this single trade are greater than the sum of all other trades combined. This is very hard to believe, not least because it is hard to know where the information might come from. But there is one powerful piece of evidence to support the claim, from the US Commerce Department. Its Compliance Division receives reports from companies that have encountered bribery in competition for overseas contracts. If satisfied the accusations are correct, Commerce goes to the countries concerned to remind them of their treaty obligations. More than half of the complaints concern arms and defence systems deals - which supports the alleged CIA conclusion. Even if not exact, it identifies the arms trade as uniquely corrupt for arms accounts for less than 0.5% of international trade and only around 5% of the trade of the five most corruptible industries. This is our starting proposition.
I have spent a bit of time on the first proposition because it is central to this discussion. The second proposition - or axiom - is easier to deal with. The axiom is an economic one: where a decision-maker stands to benefit from his decisions, he will tend to take decisions that increase his benefit. You have only to assume rationality. (Economic rationality specifically, it hardly needs to be said.) It follows that, far from being peripheral, corruption acts at the centre of defence procurement. In some cases, commission-seeking behaviour actually drives procurement decisions - one possible explanation for the South African anomaly. This is far from the accepted view. Friendly students of the industry, who are numerous and expert, take the view that corruption is an irksome fact of life, but irrelevant to its main concerns - which are strategy and materiel. Unfriendly students see the whole industry as irremediably corrupt in the broader moral sense. For them, interest in corruption per se is a distraction from the task of closing the whole thing down. One result of this focus, or lack of it, is that there is nothing in the literature about the effects of corruption on the industry.
It should be clear by now that the effects are enormous. For one thing, and very much to the point of this meeting, it makes any form of control unworkable. More specifically:
# Suboptimal contracting means the wrong companies get the business. Public money is inefficiently used.
I hope this discussion has provided the basis for answering the two questions put at the beginning of this talk. To remind you, these were:
The second is the easier to answer because it is lies at the heart of this conference. If arms were not worth special attention, you would hardly be attending it. But, to answer it nonetheless (and to risk repetition), the arms trade is a special case because
It should now be obvious why I said at the start of this talk that, far from wanting to banish the arms trade, the anti-corruption effort is aimed at improving it. It is were possible to remove the distortions and irrationality that corruption introduces into the trade, there would be much less to complain about.
We are now in a position to answer the first question. Corruption is a proliferation issue because it generates a trade in unneeded arms and adds to world surpluses. It stands to one side of the preoccupations of this conference because it is not concerned specifically with WMDs, still less with terrorism. To limit the effects of corruption also stands to one side of the traditional methods of export controls, which work by restricting physical flows. But it would exactly fit the purposes of export controls which are to restrain, in the words of Ambassador Danielsson, "irresponsible exports that can destabilise a country or region".
How would we do this? I will be very brief here because the purpose of this talk has been to persuade you of the importance of the case, not to tell experts how to do their jobs. We are looking for methods of enforcement, which means we are looking for information and power. The recommendation quoted at the beginning of the talk reads: "Export licensing and the provision of export credit guarantees should be made strictly conditional on presentation by exporting companies of both annual sign-off letters and contract-specific no-bribery guarantees." The use of sign-off letters as an anti-bribery measure comes from some of the biggest companies in the oil industry, where senior managers must sign letters every year certifying that they have neither paid bribes themselves not do they know of anyone who has. It is a very powerful device and managers I have spoken to say it is very bracing to be made so directly personally responsible. Anyone who is found out knows that his job, career and possibly his future will be forfeit. Lodging a file of these letters with the licensing authority would be a form of pre-qualification for no company that did not comply with the requirement would be allowed to apply for an export license. The no-bribery guarantee would become a routine part of the application, simply stating that no form of bribery was used in obtaining the business. This is very broad stuff. If the idea were considered worth developing, working out the specific forms of words would be a matter for detailed discussion.
Where this use of export controls - specifically, licensing powers - would be a departure is that it would affect the trade indirectly, impinging on decision-making rather than directly on flows. But it is potentially the most effective way of attacking the issue of corruption available. The power to issue or with-hold licenses is one of the very few real sources of power governments have directly over the trade. Nailing corruption would have the desired effect since, if the reasoning of this paper is correct, corruption plays a significant (if unquantifiable) part in inflating the trade. It will never be perfect or complete - and how many times have I heard that said in the past couple of days? but it would make life a great deal more difficult for the corruptors and their counterparties. And that cannot be bad.
END
With acknowledgement to Joe Roeber.