This post by our Communications Assistant Zachary Mehan is the first instalment of a blog series preceding the launch of TI DSP’s Government Anti-Corruption Index (GI).

The GI will show what governments currently do, and don’t do, to minimize corruption risks. The GI will serve as a tool for governments to measure their successes and failures in combatting corruption, for companies to adequately assess potential risks in certain countries, and for citizens to learn about how their governments can protect them from the risks to political, financial, and even physical security that can result from corruption in the defence and security sector. The research behind the index has been structured around TI DSP’s five-part typology of corruption risks. The purpose of these blogs is to familiarise readers with this typology prior to the release of the GI.

Vast amounts of money, combined with a secretive purchasing process, can be a formula for corruption. This is often the case in the field of procurement in the defence and security sector. Defence procurement is the process of purchasing defence equipment – from boots to submarines. The money spent on defence procurement comes from the taxpayer, making the oversight of this spending critical and public understanding of corruption in defence procurement imperative.

In procurement, corruption can take many forms. Corruption can also spur the acquisition of equipment that does not fulfil technical requirements and offers little to no strategic advantage to the purchaser. In Indonesia, for example, only 76 of 317 naval vessels are operational, and only half of their combat planes are airworthy. In spite of this, the most recent procurement contracts in Indonesia have been for Russian attack helicopters and battle tanks, a technical oversight claimed to be a result of supplier influence. This mismatch of equipment to need leaves solider vulnerable to foreign attacks. If soldiers cannot defend themselves, their citizens become vulnerable as well.

The recent scandal involving the sale of 140 Eurofighter jets from EADS to Austria, worth $19.5 billion, may be an example of a trend in defence procurement corruption. $144 million has allegedly been syphoned off into various shell companies thought to be owned by prominent Austrian bankers and officials. This money is an example of an offset payment; the ‘hidden price tag’ on a weapons contract incurred by the supplier. In theory, this money is invested by the company in development in the purchasing nation – a new school, factory, or system of roads. Being separate from the contract itself, offsets lack oversight, making them popular vehicles for bribes or personal investment ventures. This promise of untethered cash has come to define the competition for defence contracts. Many times, decision makers choose suppliers based not on the quality of their products, but on the value and flexibility of the offsets agreement. As a result, the overwhelming majority of recent corruption scandals have involved offsets on some level.

Corruption scandals can also involve suppliers and brokers, who often hold a privileged position. Sellers – whether foreign governments, companies, or individual brokers – have great influence over decision makers in purchasing nations, often playing international and domestic political considerations against tactical military demands. Agents and brokers are often hidden and sometimes have ties to prominent military officials, making them difficult to control. They are often paid handsome commissions to push deals through, such as in a deal for helicopters between Italy and India that allegedly netted the broker 51 million euros. These actors are potential conduits for bribes to high ranking officials. This can result in many defence contracts being uncompetitive. Competition can also fail when multiple companies owned by a single parent company stage a mock competition. Companies may also engage in collusive bidding; independent companies engage in false competition, having already agreed in secret who will win. Companies engage in collusion to set prices for future deals, allow each other to rotate supplying the contract, or in exchange for contracts with other countries. Collusive bidding can distort the market for certain products, raising prices that will be covered by taxpayers. Read more.

Read the full blog 'Defence procurement: A clear view of dirty dealing' at Reuters TrustLaw.

Learn more about our Governments Defence Anti-Corruption Index, to be launched on 23 January 2013.

Read more about Our Work and Focus Areas.

Read other blogs we've written.