“Kickbacks in military subcontracts open the door to wartime profiteering and corrupt the integrity of our government contracting process.”
Assistant Attorney General (US) Tony West

A specific feature of the defence industry is the small number of large defence firms—often called ‘platform-makers’—who control multiple layers of subcontractors working on their programmes. In general, the platform-makers have large compliance programmes in place, because the risks of non-compliance are increasingly high. However, the quality of the compliance programmes and the awareness of corruption risk amongst the subcontractors is dramatically less.

This gives rise to two main opportunities for corruption:

• The subcontractor itself may be gaining its contracts through influencing or paying someone at the next level up in the subcontractor chain
• The prime contractor itself uses the subcontractor as a route through which bribes can be paid to the contracting government. This may be a condition of the subcontractor receiving the business.

Corruption in Subcontracting Environment

In conflict environments, the flow of money into a country represented by local contracting and logistics is an important part of helping to develop that country, but also heightens the risk of corruption. Subcontractors add a further layer of complexity to the high-risk area of defence procurement.  The more frequently money changes hands, the higher the risk that some of it will end up in the wrong ones.

Subcontractors act as intermediaries between prime contractors (often government agencies) and those who provide goods or services.  Though subcontractors can be used in a transparent and accountable way, corruption risks increase with the number of layers between contract and delivery.

The complexity and natural challenges of conflict environments mean that all too often the terms of contracts are not fulfilled.  Subcontractors vying for a contract may pay kickbacks to prime contractors; because of the lack of oversight throughout the long chain of contractors, there are greater opportunities for bribes and kickbacks. 

Given the complexity and pressure of conflict environments, it is easy for corrupt contracts to be awarded, and for non-performance to be tolerated.  By increasing the steps between contract and delivery, subcontractors heighten the corruption risks inherent in defence procurement.  

Defence companies must ensure that their ethics and compliance programmes and codes of conduct extend to subcontractors.  Companies must conduct thorough due diligence on subcontractors, and ensure they meet high standards; subcontractors must not be used as a way to avoid compliance.

In some cases, security services are subcontracted to private military and security companies (PMSCs). In many cases, the services provided by these subcontracted organisations are not adequate—guards are ill-equipped, corruption within the ranks is rife, and there is little or no oversight of their performance. 

Corruption Example: Subcontracting Armoured Vehicle Procurement in Iraq

A 2007 investigation by the Guardian newspaper accused British companies of committing fraud in the chaotic environment of post-invasion Iraq by delivering ‘phantom’ armoured vehicles. The Coalition Provisional Authority awarded a US $8.48 million contract to the armoured car company Zeroline, which subcontracted a second British company, APTx, to source the vehicles. Both companies received payments from the CPA—but the vehicles were never delivered. Two years later, following the investigation by the Guardian and then by the Special Inspector General for Iraq Reconstruction, those responsible in the companies were arrested. The collusion to commit fraud between the prime contractor and subcontractor in this case highlights the need for adequate oversight in defence procurements, especially in conflict environments.

(Information in this case study is from The Guardian, 14 March 2010)

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