It is clear from this analysis that many companies in the industry are paying closer attention to corruption risks. Despite increasing the rigour of the questionnaire, there has been significant net improvement in the results of the second Defence Companies Anti-Corruption Index. This improvement is both among the companies that already had substantive anti-corruption programmes in place in 2012, and those that showed almost no evidence of anti-corruption programmes.
Examining the 127 companies assessed in both 2012 and 2015, the results show improvement overall. At the upper end, 26 companies are now in Bands A and B, compared with only 10 in 2012. At the lower end, only 48 companies are in Bands E and F, compared with 59 in 2012. Six companies have decreased by a band.
Greater willingness to share internal information. Defence companies have been more forthcoming than in 2012 in providing internal information for assessment. Of the 163 companies in the 2015 index, 63 shared internal documents, compared with 34 in 2012.
More demanding assessments. We have added questions on offsets, which were not covered in 2012, as well as on anti-corruption agenda review, risk assessment, charitable contributions and whistleblowing. Five of the questions are more rigorous, and the scoring criteria for 14 questions are more nuanced. Detailed modelling indicates that the 2015 index is up to 7% more demanding than the 2012 index.
New companies. This edition of the index features 163 companies, an increase of 36 from the 2012 edition.
For changes to the methodology since 2012, check out our methodology page here.
Employees who blow the whistle on corruption do their companies a great service: they bring to light a potentially serious incident, which allows the company to address the problem. Often the incidents reported are missed by internal audits and assessments. Whistleblowing also enables companies to self-report to the authorities, which may enable settlements and reduce the severity of punishment.
Increasingly, most defence companies have some form of whistleblowing capability: 65% of companies provide evidence of at least one whistleblowing channel in this analysis. However, provision of the capability is no guarantee that an employee using the facility will be protected from retaliation. Whistleblowing in many countries is still a complex social phenomenon, often resented by peers as well as by superiors. It is still more common for whistleblowers to be fired and stigmatized than to be praised and supported.
To the credit of the companies, after the 2012 index launched, they told us that the questions on whistleblowing were too simplistic. So, this year we added an extra question on the extent to which the company supported whistleblowers, tracked their experience, and encouraged them to continue to give such feedback.
The result, based on publicly available information, showed that this is a new and undeveloped area for most companies. Only nine companies provide mechanisms that support and encourage whistleblowing. For some examples of how companies that score well in this area deal address whistleblowing, refer to our assessments of Lockheed Martin, United Technologies Corporation, and General Electric.
Companies should encourage all personnel – including partners – to alert the company to malpractice. Once an individual has blown the whistle, the company should follow up with them regularly to make sure that there is no negative impact on the reporting employee, and that their complaint is dealt with effectively.
Even if a company’s anti-corruption systems are strong, its business partners’ conduct can make it vulnerable to corruption. Suppliers, sub-contractors, and agents can be a chink in the armour of an otherwise strong anti-corruption policy. Addressing third party corruption risk is a key component of risk management, the pillar that companies scored lowest in overall in the index; only nine companies scored well on having an anti-corruption risk assessment procedure for assessing proposed business decisions.
54% of companies state that they make suppliers aware of their stance on bribery and corruption. However, only 29% of companies provide public evidence of contractual terms for agents, and monitoring mechanisms for ensuring that agents abide by these terms.
Many companies are aware of the need to conduct due diligence on agents: 52 companies provide public evidence of such procedures. However, only 13 companies provide additional evidence that due diligence is refreshed at regular intervals.
What are offsets?
An offset is an agreement by a selling company to invest in the country purchasing from it. Offsets can take many forms. For example, they can include an agreement that the company will co-produce with a local company, subcontracting with a local supplier, or other investments in the purchasing company’s economy. Offsets can be direct, in which an investment is related to the items purchased in the contract, or indirect, which means that they’re not related to the contract itself. Offsets are a major issue in the defence sector, but are largely unknown in other sectors. But offset contracts are increasingl common. Outstanding offsets now represent about US $500bn worldwide. One of the reasons that offset programmes are at a high risk of corruption is that they are often very high-value–they can even exceed 100% of the main contract.
Offsets are opaque and complex mechanisms, which receive much less attention than the main defence deal and are particularly susceptible to corruption . There are currently major corruption allegations involving offsets, for example in submarine deals in Portugal, Malaysia and Greece.
Not all defence companies are involved in offset contracting. Based on public information, 82 of the 163 companies in this analysis are in involved in offset contracting. Only thirteen of these companies provide public evidence that offset contracting corruption risk is either addressed in policies and procedures, or that offset brokers and offset partners undergo due diligence. Only three companies out of the thirteen publish evidence of detailed procedures to mitigate offset contracting corruption risk.
This shows that this is an area where the industry can improve substantially. Companies should provide public evidence that corruption risks are explicitly addressed through policies, procedures and contractual terms that increase transparency and accountability in their offset programmes. Companies can providing tailored training for employees involved in offset contracts and conducting due diligence on all brokers and providers during appointment and re-appointment.
There also needs to be greater transparency on the government side in relation to offsets packages proposed by the contractors, offsets contracts, and the performance of these contracts.
Internal information provided by companies shows that there is better practice in place in some companies, but that information is not yet in the public domain. Looking at internal information, the number of companies that have mechanisms in place to address corruption risks in offsets doubles (from 12 to 24). The number of companies that conduct due diligence on offsets partners more than doubles, from 12 to 27 companies. However, the majority of companies still do not have good procedures in place. 47 of the 63 companies providing internal information engage in offset contracting. Of that 47, less than a quarter score well on addressing corruption risks and just over one-third score well on due diligence for offsets partners.