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On April 27, 2015, Transparency International UK (“TIUK”) released the Defense Companies Anti-Corruption Index 2015 (the “Index”). The Index, which was first released in October 2012 and now updated for the first time since then, assesses the transparency and quality of the ethics and anti-corruption compliance programs of 163 defense companies from 47 countries and assigns a grade from “A” to “F” to each company. It also compares companies’ scores in 2015 and 2012. The Index is based on publicly available information from the companies, though TIUK also reanalyzes the results based on company internal information where the company volunteers such information. The Index produced some surprising results:

  1. Only four of the 163 companies analyzed received a grade of “A” on their compliance programs. These companies — Bechtel, Fluor, Lockheed Martin and Raytheon – were all American (as were 54 of the 163 companies analyzed).
  2. Two thirds of the companies analyzed (107 companies) received grades of “D” to “F,” with limited or no evidence of anti-corruption compliance programs.
  3. 23% of the companies (37 companies) provided no evidence at all of compliance programs.
  4. 42 companies (33%) have improved significantly since 2012, while 76 companies (60%) have improved since 2012.

The Index identified a number of key areas for improvement by defense companies:

  1. Only 13 of the 163 companies provided evidence of conducting regular due diligence on agents.  This is amazing given the fact that approximately 90% of FCPA enforcement actions involve third parties.
  2. Only eight companies have whistleblowing procedures that encourage reporting.
  3. Only three companies publish evidence of detailed procedures to mitigate offset contracting corruption risk.  Only 13 companies provided public evidence that this offset contracting corruption risk is addressed in policies or procedures or that offset brokers and partners undergo due diligence.
  4. 76% of the companies do not provide evidence that they explicitly prohibit facilitating payments.  Although there is an exception for such payments in the FCPA, they are illegal bribes under local law and the UK Bribery Act.  Put another way, only 19 of the 163 companies surveyed explicitly prohibit such payments and provide guidance on how to respond to them.
  5. Only four companies provided evidence of providing targeted and regular anti-corruption training to board members.

There are a number of takeaways from the TIUK Index.  First, while there are a number of defense companies with good anti-corruption compliance programs, there is vast room for improvement given that two thirds of the companies received grades of “D” to “F.”  Part of this may be explained by companies not making information on their compliance programs publicly available, but it is likely that the poor grades also reflect significant weaknesses in the compliance programs of many defense companies around the world. Second, improvements by defense companies in a few key areas can make a world of difference in the effectiveness of their compliance programs.  For example, establishing a basic risk-based due diligence procedure for agents and other third parties will help companies address a huge area of FCPA compliance risk.  Similarly, adopting policies or procedures to conduct due diligence on offset brokers and partners and offset projects also will address a major compliance risk area.  Other recommended areas of improvement include prohibiting facilitating payments (as opposed to personal safety payments where the health or safety of an employee is threatened), providing targeted and regular anti-corruption law compliance training to board members, and ensuring an effective whistleblower system. The point is that by taking a relatively small number of common-sense steps, defense companies can significantly strengthen their anti-corruption compliance programs.  One benefit of taking such steps is that they will improve their grades in future TIUK evaluations of defense company compliance programs.  A more important real world benefit is that their improved compliance programs will enable them to more effectively prevent and detect corruption, providing significantly better protection in conducting their international business.

Author

Howard Weissman is of counsel in Baker McKenzie's Washington, D.C., office. He has decades of experience in advising on US laws and regulations directly impacting international business operations such as the Foreign Corrupt Practices Act (FCPA) and US antiboycott laws, International Traffic in Arms Regulations, Export Administration Regulations, and foreign agency and anti-bribery laws. Mr. Weissman has designed and implemented corporate anti-corruption compliance programs and training programs. He served as vice president and associate general counsel at Lockheed Martin Corporation, where he worked for more than 25 years.

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