Transparency International’s Defense & Security Program recently released for comment a draft version of the 2019 Questionnaire and Model Answer document for the third edition of its Defense Companies Anti-Corruption Index. The deadline for companies to provide feedback expired on Nov. 2, 2018.
Unlike TI’s previous editions of the DCI in 2012 and 2015, the new DCI will be based solely on publicly available information. As indicated in TI’s draft Questionnaire and Model Answers, TI’s proposed questions are designed to promote public disclosure in areas TI believes are at high risk for corruption.
The DCI will assess 145 of the world’s leading defense companies in 39 countries. The list of companies selected for assessment in 2019 is available here.
The proposed questions fall within the following 10 key areas where, according to TI, “increased transparency and public disclosure of information could reduce corruption risks in the defense industry”:
- Leadership and Organizational Culture
- Support to Employees
- Customer Engagement
- Third Parties
- High Risk Markets
- Internal Controls
- Conflict of Interest
- Supply Chain Management
- State-Owned Enterprises
Notably, in order to receive full credit and a high DCI score, some proposed questions would require companies to publicly disclose potentially highly confidential, competition-sensitive and other information, such as:
- “Full details of its lobbyists and global lobbying expenditure,” including the names of external and association lobbyists.
- The company’s gifts and hospitality register, to be shared with “all relevant governments in the jurisdictions in which it operates.”
- Details of all suppliers with which it has an active business relationship.
- “A full and detailed list of all agents and/or third parties used in relation to each defense contract.”
- “A full list of all agents, brokers or consultancy firms with which it conducts business in relation to offsets.”
- “Full details (both project and value) of its offset obligations in relation to a named primary contract.”
- “A breakdown of its defense sales by customer, in the form of the value of total sales to each customer per financial year.”
- Publication at least annually of “high-level data from ethical and corruption-related investigations,” including the number of reports received, the number of investigations launched and the number of terminations as a result of investigation findings.
TI stated that the new DCI will no longer be a tool to measure the quality of companies’ anti-corruption compliance programs, but rather will purport to measure “risk of corruption” in their operations and drive public disclosure of risk areas based on information about their international operations in the ten categories above as identified by TI.
Based on our discussions with aerospace and defense companies, a number of companies have raised concerns with respect to TI’s proposed methodology and questions, including that:
- Disclosure of some of the requested information may harm businesses and raise concerns of shareholders.
- Disclosure of commercially sensitive and/or confidential information could create potential legal liability, as well raise competition issues, and have privacy (e.g., under the EU’s General Data Protection Regulations) and cybersecurity implications.
- Law enforcement agencies in the United States and other countries could view answers to certain questions as a road map for potential investigations of companies disclosing the information.
- Given the negative sentiments in certain public circles with respect to defense contractors and defense sales, the disclosure could be commercially damaging to A&D companies’ counterparties whose names would be released such as their agents, consultants, suppliers, etc.
- National security concerns in certain countries could be implicated by some of the public disclosures called for in the TI questionnaire.
- Information on defense equipment acquisitions may provide valuable intelligence to potential adversaries.
- Some companies viewed the requests for very extensive data such as information about their entire supply chain (which would include suppliers of stationary, cleaning, travel and catering providers) as “fishing expeditions” that would be unnecessary to assess compliance or corruption risks.
- Preparing disclosures of this magnitude will require substantial financial and manpower effort and strain limited compliance resources that could be better used elsewhere, e.g., on specific compliance projects with a higher return on investment in terms of corruption prevention.
- Given that a significant number of questions will be difficult to satisfy for the reasons described above, there may be little incentive to cooperate with TI because even companies with state-of-the-art compliance programs and strong compliance cultures could get low scores, along with companies that are less committed to compliance and ignore TI’s DCI.
We believe that TI is aggressively trying to challenge defense companies to publicly disclose what traditionally has been deemed to be competition-sensitive information about key areas of their operations including lobbying, their supply chain, agents and other third parties, offset projects, offset brokers and consultants, and customers.
In addition, while publicly stating that TI is no longer in the business of measuring the effectiveness of compliance programs, the new DCI implicitly establishes TI’s standards and expectations for anti-corruption compliance programs that in certain instances are very precise and significantly higher than current state-of-the-art compliance standards. This is done by posing certain questions that embody compliance requirements and measures or by proposing scoring guidance that similarly includes compliance requirements or standards.
We see three broad areas in TI’s proposed new DCI approach that may be problematic for A&D companies. First, as noted above, TI’s proposed approach would require disclosure of competition-sensitive information. Second, it would implicitly establish stringent compliance program standards that are unprecedented even for companies with state-of-the-art compliance programs. Third, it would require public disclosure of compliance-related information at a level of detail that is also unprecedented.
Current Status and What Companies Can Do
We know that a number of companies took the opportunity to offer feedback and communicated their concerns to TI before its Nov. 2 deadline. We understand that TI is currently reviewing these comments and may address some of them in the final version of the questionnaire expected to be released late this year or early next year. We hope that TI will carefully consider the input that companies have provided and will prepare the final version of its questionnaire in a manner that will encourage companies to cooperate in an effort to increase transparency and strengthen their compliance programs without fear of competitive harm or legal or contractual liability.
In the meantime, we suggest that companies carefully review the questions in the current draft to determine:
- What information being requested by TI is already public.
- What information responsive to TI’s questions they could make public without incurring legal or contractual liability, jeopardizing commercial relationships, or suffering serious competitive harm.
- How they could make their compliance programs more effective and mitigate corruption risks regardless of whether it will fully satisfy TI’s requirements as set forth in the proposed questionnaire.
In this regard, A&D companies should consider updating their websites with information on their compliance programs, including on the tone and conduct at the top, general anti- corruption policies and procedures, whistleblowing and nonretaliation procedures, conflict of interest policies and procedures, expectations and requirements for business partners, business courtesies and charitable and political activities, to the extent they believe that making this information public is in their best interest. This will help demonstrate their commitment to compliance. It will also provide the ancillary benefit of possibly getting a better score when TI launches its defense company review process next year.
If the final version of TI’s questionnaire, however, still requires information that is difficult to provide or that raises legal, contractual or commercial liability or exposure, companies may decide not to participate in TI’s benchmarking exercise. While TI may not be interested in making the A&D industry happy, by setting the bar unreasonably high, TI may find itself losing an opportunity for meaningful engagement and positive change by alienating companies that are committed to anti-corruption compliance.