Part I of this blog series had outlined the corruption in the Arms industry and the importance to curb that at the global level. The current part will focus on the different ways of corruption in the Arms trade. Irrespective of a country, private defense manufacturer or a militia, or any selling or purchasing party, an arms deal is very much complex because of its own unique character. Moreover, parameters related to arms deal incubate further corruption:
1. Transactional volume of trades: Arm, ammunition, and equipments are expensive commodities and they are also purchased in the bigger quantity. For example, the USA arms trade in 2020 was more than $175 billion. This makes transactions in the arms deal are of much higher volume compared to other deals. This is a classic example of Trade-based money laundering. The basic idea behind this is misinvoicing. A large chunk of corruption happens at this stage since transactional volumes are high. Misinvoicing misrepresents the actual value of a commodity and allows to transfer of more money than actual value. Over and under-invoicing is very common in the arms trade to launder money or pay bribes. Frequent auditing of invoices can prevent the misinvoicing. Also, comparative analysis of Invoices against market values can bring down the corruption through trade-based money laundering.
2. Involvement of influential/eminent personalities: Arms deal decisions are made at the highest governmental level. Decision-makers include senior bureaucrats and politicians. Many of them are Politically Exposed Person (PEP). Transactions related to PEP needs to be monitored using name screening and a Transaction Monitoring system. Any transaction between a PEP and an arms company can be a clear indication of corruption.
3. High Level of Secrecy: Arms deal is a sensitive subject and it is often linked with national security. A high level of secrecy results in no audit of the transactions. Many details related to arms deals are never released to the public and if at all there is any malpractice, it gets buried in the name of secrecy. The hidden links in the transactions during the deal time can be identified using general ledger data analytics. It will also enable the transaction tracking and finding money trail. There are tools available in the market to join similar transactions, which can be further classified based on the different parameters to identify the bribes.
4. Extreme competition: Nature of deal and money involved brings a very strong competition in the arms deal. Often sellers optimize all possible options to get the deal. Middlemen are used as an influencer to influence decision-makers to change the bid and tender parameters sometimes by paying bribes. Most of the bribes are paid through a middleman. It takes an extensive investigation to follow the money trail and establish a relationship between seller and purchaser. Money transfers to influencers who are not company employees is a red flag to detect the bribe. Differences in the payments of contracted influencers is another indication of suspicious transaction. Transaction Monitoring system can identify transactions where involved parties are unrelated or find a money trail that is suspicious. Also, third-party agents working as influencers should be scanned by a thorough due diligence process. There are examples from the SIPRI report on Transfers Of Small Arms And Light Weapons To Fragile States: Strengthening Oversight And Control shows foul practices of middlemen involved in the arms trade. One of the examples shows that an agent who dealt with an arms deal for a country later received a diamond mining license which might be a quid pro quo arrangement.
Regulated Arms market is important for arms control. Identifying and reducing corruption is essential in the regulated market. If corruption in Arms trade is curbed, then the world will be free from almost half of existing corruption.