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Procurement risks

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Defence Procurement is characterised by large, infrequent and technically complex contracts, is hard for outsiders, and indeed for some insiders, to fully comprehend. The secrecy that surrounds much defence procurement – some necessary, much not –makes it easier than in other sectors to divert money illegally.

The procurement process typically involves around ten steps, represented diagrammatically in this image, with corruption vulnerabilities presented at each stage of the process in purple font.

TI-DSP has identified 9 corruption risk areas in the procurement process:

Technical Requirements

Deciding equipment specifications—to be sure that the equipment is accurately described and appropriate to the need—is a highly technical task. This complexity makes corruption easier, as the number of those who can question and scrutinise contracts and contract proposals is low. Read more.

Single Sourcing

One of the fundamentals of fair and transparent procurement is competition. Our research has found that in a dozen major governments, some 50% of all defence procurements were being carried out through single source, non-competitive procurement. Read more.

Agents and Brokers

The use of secret agents or middlemen is more widespread in defence than in any other industry. Whilst representatives have legitimate tasks in assisting companies to operate in unfamiliar cultures and styles of government, there is no doubt that the use of middlemen also facilitates the payment of bribes to decision makers. Read more.

Collusive Bidders

Collusive bidding occurs when principal supplier companies agree amongst themselves which company is to win the contract which, in theory, they are competing against each other for. In some cases, one company is the beneficial owner of several of the bidding firms, but does not disclose this fact. Read more.

Financing Package

One of the most hidden corruption risks arises in the financing package. In many cases the main defence contract has a high level of scrutiny, but the same is very rarely true of the financing package. Read more.

Offsets

Offsets are arrangements made by purchasing governments with their suppliers, requiring the contractors to reinvest a percentage of the value of the deal in the importing country. Offsets are very opaque and receive much less transparency and attention than they should, given their high susceptibility to corruption. Read more.

Contract Award & Delivery

Two stages of the contracting process—the decision of which company to award the contract to, and the delivery of the equipment or services by the company—can be influenced by corruption. Read more.

Subcontractors

Large defence contracts involve many layers of subcontractors. The compliance programmes of the subcontractors are usually significantly weaker than of the platform-makers with additional opportunities for corruption. There are specific problems in conflict environments. Read more.

Seller Influence

When procuring defence and security equipment and services, the interests of the armed forces should be the central issue. International political deals and arm-twisting can mean that the contract is awarded to a company because of its nationality, rather than its bid. Read more.