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. For example, if a deal is worth US $100 million, the government might require the contractor to invest an additional $50 million into developing goods or services in the country.

Offsets receive little attention because of their complexity and opacity. Under many trade agreements and in most industries, offsets are illegal. The Government Procurement Agreement (GPA) of the World Trade Organization, the North American Free Trade Agreement (NAFTA) and the European Union prohibit them, for example. However, the GPA and the EU make an exception for defence procurement, while the GPA also allows exceptions for developing countries.

Defining Offsets

Defence offsets are agreed between purchasing governments and foreign supplying companies when the former buys military goods or services from the latter. Essentially, governments require supplying companies to reinvest a percentage of the main contract back into the importing country, in order to “offset” the expenditure, so to speak. Besides being used to develop the country’s defence capabilities, they are frequently used as industrial (sometimes even social or economic) policy tools to improve balance-of-payments accounts and compensate the purchaser’s economy (and tax payers) for a large public investment not directly beneficial to the population.

Typically, offsets fall under one of two headings:

• direct offsets, in which the investment is directly related to the subject of the acquisition
• indirect offsets, which can be defence or civil, and are not related to the subject of the acquisition

Offset contracts are usually under-scrutinised and under-monitored in comparison to the corresponding acquisition contract. In fact, these contracts usually are not audited by the court of accounts. Offsets can therefore give rise to two different kinds of corruption risks:

1. those involved in the definition, negotiation, management and monitoring of offset programs can receive undue benefits from the offsets themselves
2. to complete a corruption cycle within an acquisition

Recent investigations look at offsets-related corruption, whether restricted to offsets (e.g.: Portugal’s fraud and forgery to obtain undue offset credits in the submarines’ acquisition) or as part of a procurement corruption cycle (e.g.: South Africa or Portugal).

Countering offset corruption risk

Transparency International's Defence and Security Programme has been working to counter the high level of offset corruption risk. In this vein, the defence team will continue to ensure that offset arrangements are not used to introduce, facilitate, or increase corruption within defence public procurement. 

In order to achieve this, we will continue to foster awareness on the part of governments, defence companies, international organisations and the public that offsets entail particularly high corruption risks within defence procurement, due to their opacity and complexity, that to be addressed explicitly.

We will continue encouraging governments to ensure that offsets are used for their intended purpose and, through their defence procurement agencies, to require clear monitoring, evaluation, and disclosure procedures in offsets contracts. We will further our engagement with defence companies and industry associations to encourage them to address corruption risks of offsets in their codes of conduct, anti-corruption policies, and due-diligence practices.

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