Any money movement has the potential of financial crime, if the amount is large, then the potential for financial crime increases in its proportion. Transparency in financial transactions reduces the risk of financial crime. The transactions that are not in the public domain and unaudited increase the chances of financial crime exponentially. Arms deals are one of the most secret transactions due to their connection with national security. Stockholm International Peace Research Institute estimates the total global military expenditure is around 1.6 trillion USD, making it one of the biggest industries. Commodities in the market are very costly. One Eurofighter comes at around $96 million, Sukhoi-35 costs around $65 million while warships cost anything between few millions to billions. This causes each and every defense deal to end in multi-billions. As deal reaches multi-billion mark, bribes and corruption component increases too.
In 2017, Austria has sued Airbus and Eurofighter consortium for willful deception and fraud related to around $2.13 billion. Austria alleges Airbus and Eurofighter have misled for around 15 years causing $1.17 Billion damage. Austrian government requested the seller to show all costs separately while Eurofighter added around $196 million offset cost to the purchase price. If this is proven, then it’s a clear case of willful deception. Periodic checks on general ledger and audit of account books would have avoided this being continued for 15 years. Eurofighter is jointly owned by Airbus which is a consortium of European companies, BAE Systems of the UK, and Leonardo-Finmeccanica of Italy. This increases the spread of alleged corruption and fraud at multi countries levels. Similarly in South African Arms deal scandal, one politician was jailed for defrauding parliament after failing to disclose a discount he received by one of the bidders in the government’s arms acquisition program, which was a case of bribery.
The nature of the Arms market is quite different than any other traditional market. There are three key players in the arms deal, with whom most of the financial transactions take place. Most of the time, these players are involved or affected by fraud, bribery, and corruption.
1. Arms manufacturing and selling countries: Developed countries have specific expertise with their established brand names for Warships, missile technology etc. Developing countries buy arms from developed countries, where agreement and payment are at the governmental level. These selling countries are least prone to corruption and bribery.
2. Private Defense Manufacturers: There are plenty of private defense manufacturers across Europe and the Americas who supply less complex arms like Howitzer guns, Helicopters, and Small Arms and Light Weapons (SALW) to developing countries. They work within the respective government’s guidelines. There are more examples of fraud, deception, and increased cost in this type than previous.
3. Middlemen, Business Agents, or Influencers: Agents are involved in the country level as well as in private contracts. Sellers appoint their agents who have good reach and the ability to influence the decision-makers. These middlemen bypass the red tapes and accelerate the process, pay bribes and keep the deal moving in the direction they want. Most of the bribe occurrences are observed through middlemen. Common red flags for bribery and corruption are where Influencers or facilitators are paid money which is much above the standard rates or money transfer takes place between manufacturers and decision-makers and where transactions are routed through agents.
Transparency International has developed a very detailed map of the government defense anti-corruption index. Map shows that Brazil, African, and Middle Eastern countries possess maximum risk of corruption. Except Brazil, all other countries are defense importer, where seller pays bribes through middlemen during the arms purchase. Almost half of the countries have little or no oversight on defense procurement, so many of the bribing and corruption cases go undetected and unreported. In 2013, it was estimated that the global cost of corruption in defense is almost $20 billion per year. That constitutes a major chunk (approximately 40%) of global corruption worldwide. The spread of arms deals is very broad, so as scale of corruption involved in it. Corruption in arms trade doesn’t only damage the financially or country’s reputation, but it costs human life. This underlines the need for a robust mechanism to recognize suspicious patterns, track money trails, identify red flags and detect and control the corruption involved in the arms deals.
The next part of this blog will use the overview from this blog as a reference and identify the factors in the Arms trade that act as a catalyst for corruption.