Hard-Wired for Corruption
The arms trade and Australia's lax monitoring regimes
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.
TI defines corruption as ‘the abuse of entrusted power for private or political gain’. It notes that corruption in the defence sector can drive conflict, stifle development of other industries, and consume huge amounts of public money. Despite these well-known and significant risks, the defence sector remains opaque and largely unaccountable because, as Sam Perlo-Freeman, former Program Manager for Global Arms and Corruption at the WPF, has written, ‘The vested interests in preserving corruption are systemic and are tied to long-standing institutions of state power and politics, rather than just the greed of individuals’. In other words, fundamental political and economic interests drive high-level corruption between arms corporations and governments.
Corruption in this sector is of immense concern because the global arms trade, both legal and illegal, has a devastating impact on human life, public safety, and the environment. This is why, says TI, ‘it is vital that both exporting and importing governments have strong anti-corruption measures and transparency’.
‘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. 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.
Corruption and profiteering
The eight-year-long Saudi-led war in Yemen has been a profit bonanza for both the US and UK arms industries. Despite extensive evidence of appalling war crimes, and so-called ‘strict’ export controls to prevent weapons going to nations committing such abuses, the flow of arms and military services into Saudi Arabia and the United Arab Emirates for use in Yemen has continued unabated, prolonging the war and causing civilian carnage. Lockheed Martin, Raytheon, and Boeing, along with the United Kingdom’s BAE Systems, have reaped billions in revenue.
In its recent report examining how US arms sales have fuelled the Yemen war, Open Secrets accuses US arms manufacturers of ‘capitalising on conflict’, noting that ‘Foreign arms sales are big business, and the major defence manufacturers pushing for them have developed a consistent and deep influence through money in politics’. The report reveals that in the past twenty years, US defence companies have spent more than US$2.6 billion lobbying politicians and US$300 million supporting and influencing political campaigns. Comparable figures are not available in Australia.
The US arms industry has also capitalised on twenty years of war in Afghanistan. As Harvard University public policy professor Linda J. Bilmes points out, ‘While Washington bickers about what, if anything, has been achieved after 20 years and nearly US$5 trillion spent on “forever wars”, there is one clear winner: the US defence industry’. With the withdrawal of the US military and allies, Afghan civilians must now not only deal with life under the Taliban but face widespread starvation due to the war being continued by economic means. The United States and its European allies are inflicting ‘brutal collective punishment’ on the Afghan people by withdrawing essential foreign aid and imposing freezes on Afghan state assets in New York. According to The Guardian, Afghan people are so desperate for food ‘they are selling their young daughters into marriage or having their organs removed for cash’.
The Russia-Ukraine war is the next boon for arms manufacturers. Politicians in the United States and United Kingdom are already saying that the West needs to be prepared ‘for the long haul’. The initial supply of arms to Ukraine came from existing national arsenals, but the continuing violence will result in increased orders. As The Hill reported, ‘In the weeks following Russia’s invasion, Congress approved its largest-ever defence spending bill, while US allies in Europe pledged to dramatically ramp up their defence spending’.
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. A key tenet of the UN Arms Trade Treaty—which Australia championed at the United Nations and ratified in 2014—is that nations must promote transparency in the arms trade to build confidence among countries. Australia, however, does not.
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
Corruption affects everyone. Tax dollars that should provide important public goods and services disappear, government policy is shaped to suit the well-connected, inequality is worsened, and public health and safety become a privilege of the wealthy. As the Open Government Partnership explains, corruption also destroys trust and undermines the ability of governments and people to fulfil their potential to achieve the common good.
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
In addition, many of Australia’s core integrity agencies haven’t been granted the legal and financial independence they need to do their jobs. The Australian National Audit Office, for example, has suffered significant funding cuts, with ‘its appropriation as a percentage of government spending’ falling by ‘more than 50% over 10 years’ despite general government expenditure increasing by 68.3 per cent. From auditors-general and ombudsmen to information commissioners and the courts, agencies with major integrity functions need to be given the scope and mandate to operate as part of a unified, effective ‘system’, says a detailed assessment by TI Australia and Griffith University.
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. 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?’.
UK-based BAE Systems provides a good example of high-level corrupt behaviour. According to Perlo-Freeman, during the 1990s and 2000s, in ‘a deliberate choice that came from the top’, BAE Systems maintained an offshore shell company registered in the Cayman Islands called Red Diamond Trading which channelled hundreds of millions of pounds of bribes to key decision makers in a succession of arms deals. Other large arms companies create similarly purposed entities, which Perlo-Freeman argues are ‘the result of fundamental political and economic drivers of the arms trade in both buyer and seller countries. They are a product of the political nature of the arms trade itself’.
No evidence has emerged of such 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.
The Turnbull Government selected France’s Naval Group even while it was being investigated for corruption in three earlier submarine contracts (with a fourth corruption investigation added during the term of the contract). No details were released as to any anti-corruption due diligence undertaken by Defence on Naval Group’s history. Nor did Defence put any specific anti-bribery and corruption program in place for the contract. Details of the process by which three bids were shortlisted (Japanese, German, as well as the French) were not made public. The Swedish multinational Saab, which designed and helped build the earlier fleet of Collins Class submarines, didn’t make the shortlist. FOIs lodged with Defence by Chris Douglas seeking information about anti-bribery/corruption measures being used uncovered no documents. A subsequent request uncovered one document, which Defence refused to release, citing a need to protect the interests of EY and Naval Group.
The ‘competitive evaluation process’ used to select Naval Group had been newly created, confusing to the market, and was criticised by some as less rigorous than traditional tender processes. For example, former anti-submarine warfare specialist with the Royal Australian Navy, Graeme Dunk, noted in the ASPI Strategist, ‘[I]t will be easier for the government to make a decision other than the one that might be recommended by Defence.’ Meanwhile, key staff resigned from closely related public roles to move into private roles with organisations that were central to the tender process. Later, a lobbyist and close friend of new prime minister Scott Morrison was hired by Naval Group to help ‘improve a rocky relationship with Defence’. The final contract was signed soon thereafter, after two years of bitter wrangling. The lobbyist and Naval Group have both refused to reveal any details of the arrangements made.
Austal—Cape Class patrol boat contracts
FOI requests by Douglas have revealed that neither the Royal Australian Navy nor the Australian Border Force (ABF) had anti-bribery/corruption programs in place for these contracts. In 2019, the Australian Commission for Law Enforcement Integrity (ACLEI) began an investigation into corruption allegations in the ABF contract. However, following a change in senior management at ACLEI, the investigation was shut down, and after ‘intense lobbying’ by Austal, the company was paid a success fee for delivering the boats to ABF, against departmental advice and despite the boats having defects at the time. The Sydney Morning Herald reported that ‘a senior Border Force official [was] involved in authorising the payments, leading to suspicions that the official may have engaged in corruption’.
BAE and Thales—warship sustainment contracts
In May 2019, The Weekend Australian published detailed allegations of fraud in sustainment contracts held by Thales Australia and BAE Systems Australia for the now-decommissioned Adelaide-class frigates. In mid-2018 the UK multinational BAE Systems won the new $35 billion Future Frigates contract to build the navy’s nine new anti-submarine warships (now $45 billion, significantly delayed, and with leading authorities calling for the contract to be scrapped). The 2018 contract was awarded despite ‘long-running concerns’ inside Defence about BAE’s alleged inflation of invoices by tens of millions of dollars on the Adelaide class frigates. A Defence internal audit reportedly found that BAE’s Adelaide contract was ‘riddled with cost overruns, with the British company consistently invoicing questionable charges’. By May 2019, in response to a whistleblower, Defence had launched another investigation. In an accompanying story, The Weekend Australian also alleged that Thales was paid an unexplained extra $16 million for work on the same ships, that a $30 million increase in its contract was not properly approved, and that it had claimed $100,000 to $200,000 per quarter more than it was entitled to due to Defence’s use of an improper financial formula.
In November 2020, Defence was asked about the outcome of its second investigation into the above matters. It responded that an ‘independent’ internal review found ‘no evidence of inappropriate excess charges by BAE and Thales’, and it blamed ‘minor administrative issues’ for the problems, which it said had been addressed through additional training. Yet so serious were the reported allegations that they were escalated to Defence’s Assistant Secretary Fraud Control, who reportedly then referred several matters to the Independent Assurance Business Analysis and Reform Branch of Defence. It must be asked, how ‘independent’ or effective can a review be when Defence investigates itself and its contractors by appointing an existing defence contractor to conduct the review, does not make public the review’s existence or its terms of reference, and keeps the report secret?
Actions for anti-corruption implementation
In November 2021 a detailed blueprint examining Australia’s entire framework of integrity institutions was published. The report laid out what the authors regard as the essential reforms needed for Australia to have a fairer, more accountable government. They include greater transparency regarding political lobbying and donations, stronger protections for whistleblowers, and a strong and independent anti-corruption watchdog. The report was written by public integrity and anti-corruption expert Professor A. J. Brown of Griffith University, in partnership with TI Australia.
In addition to this, Chris Douglas says, the Department of Defence needs to undertake anti-corruption due diligence on all major contractors, particularly companies based outside Australia. Furthermore, Defence and each company in the supply chain of any major project must have effective anti-bribery/corruption systems in place that meet international standards. The relevant international standard for such measures is ISO 37001. Currently, the Defence Department is not ISO 37001-certified, and nor are any of the major arms multinationals that are Australia’s most significant defence contractors (Thales is certified in France, but not in Australia).
Finally, while Australia has signed up to the OECD’s Anti-Bribery Convention, which criminalises bribery of foreign public officials in international business transactions, and has established the bribery of foreign public officials as a criminal offence, Australia has done little since joining the Convention to prosecute and sanction either people or companies under its new law. Given the high-risk regions and sectors in which Australian companies operate, including the arms sector, the Convention is important in Australia, yet the OECD’s Working Group on Bribery notes that Australia has not prosecuted a single company under these laws since 2011. There is one ongoing prosecution against a company but ‘this is insufficient to consider that Australia is proactively pursuing criminal charges’ against companies for foreign bribery, says the OECD, which has encouraged Australia to ensure appropriate funding for foreign bribery prosecutions.
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.
This long form feature first appeared in the print edition of Arena Quarterly magazine, Edition 10, in June 2022, and was subsequently published online in July 2022.
Editorial note: The above text has been updated to correct Sam Perlo-Freeman’s former position title with the World Peace Foundation.