209.Bribery and corruption in the arms industry, and the ways in which governments can and should address them, were a recurring theme in the work of the previous Committees. Evidence that we received from NGOs indicates that there remains considerable concern about corruption in this industry.
210.According to Corruption Watch UK, corruption is “a persistent and defining feature of the global arms trade”. A study by Transparency International in 2005 had “estimated that the arms trade accounted for 40% of all corruption in global trade”. Corruption Watch UK attributed this primarily to the extent of secrecy in the arms trade but also to a number of other factors. These included the fact that “The use of long supply chains and complicated multi-country subsidiary company structures provides ample opportunity for the insertion of corrupt middlemen (as agents or intermediaries) and/or false contracts”. Andrew Feinstein, the Executive Director of Corruption Watch UK, elaborated on this point:
it was found in an [Organisation for Economic Co-operation and Development] study conducted in 2014 that, in a review of foreign bribery between 1999 and 2014, in 75% of the cases that it examined the bribery was carried out by an agent or intermediary. So an enormous amount of the corrupt activity takes place through all these categories [of brokers and agents], which I refer to broadly as intermediaries.
211.Corruption Watch UK drew attention to the deleterious effects that corruption in the arms trade has in the realms of development and security. It undermines defence forces, creates opportunities for the diversion of weapons into zones of actual or potential conflict and facilitates terrorism in a number of ways. It pointed out that “The UK’s National Anti-Corruption Strategy 2017–2022 correctly acknowledges that ‘corruption threatens our security and prosperity, both at home and overseas … Tackling corruption is in the UK’s national interest.’”
212.In respect of the UK, Corruption Watch UK set out details of several instances where defence companies operating in the UK have been investigated for corruption, sometimes resulting in criminal enforcement. It noted that some of the companies involved are among the biggest contractors to the MoD.
213.However, we heard a different perspective from industry representatives. ADS Group told us that Transparency International’s “2015 Defence Companies Anti-corruption Index ranked the majority of the UK Defence companies in ‘Band A’ or ‘Band B’, with companies showing extensive or good public evidence of ethics and anti-corruption programmes”.
214.When we asked the Chief Executive of ADS Group, Mr Everitt, about the various corruption cases involving UK arms firms he said:
If you look at those companies and the actions they have taken, I think that in all cases they self-reported. In most of the cases, they relate to the use of agents at a period in time where it was certainly not illegal. It was certainly before the introduction of the anti-bribery and corruption legislation that we have in the UK and that is widely endorsed elsewhere.
He suggested that the companies concerned had “had a difficult time”. But their managements had recognised “that serious issues and flaws were apparent in their own systems” and they had “made strenuous efforts to ensure that those type of activities cannot happen again”. He stated that the industry had now “put our house in order”.
215.When we asked him about cases that had not involved self-reporting and which were still unresolved, Mr Everitt said that he could not speak for individual companies and insisted that “there is no evidence of systemic corruption in the UK defence industry”. The many companies that his organisation represented “behave and operate their businesses in a wholly reputable way”. The source of problems in the past had tended to be associated with “the use of such things as agents and other things”. Mr Everitt stated that “In many cases, we can dispute what people knew and all the rest of it”—and companies no longer made such extensive use of intermediaries.
216.Representatives of two companies told us about actions that they had taken to address the issue of corruption. Philip Bramwell, of BAE Systems, told us that his company had commissioned Lord Woolf to chair an independent expert review committee “to tell us what we needed to do to position ourselves as a leader in ethical business and to restore our reputation for ethical business conduct”. All 23 of Lord Woolf’s recommendations had been implemented, with an external audit and public reporting. Mr Bramwell said “I don’t think any defence contractor in the western world is willing to take the risk of being accused of corruption anymore.” Mr Cowdery, of Leonardo, told us that his company had been through a similar process with a report commissioned from Professor Flick. Mr Feinstein, however, told us that he was “really concerned that these exercises are an extremely good PR exercise, but we never actually get to monitor in a meaningful way the sort of change that happens.”
217.The representatives of BAE Systems and Leonardo both said their companies now used the services of advisers (not agents); these were limited in number and their use was subject to stringent controls. When we asked Mr Cowdery about the accusation by the Norwegian Council on Ethics (which advises the Norwegian sovereign wealth fund—the Government Pension Fund Global) that Leonardo “had unacceptable risk of corruption because of the use of agents, of which they counted up to 200”, he told us “I cannot comment on third parties’ views of Leonardo”. At a recent shareholders’ meeting, the company stated that the Norwegian Council on Ethics had acknowledged Leonardo’s efforts to combat corruption; and the Bank of Norway (which administers the country’s sovereign wealth fund) thought that the measures taken justified keeping an eye on future developments.
218.Mr Bramwell placed particular emphasis on the effect of the Bribery Act 2010. It represented “a comprehensive anti-bribery and corruption framework” and was “having the desired effect among the companies that it regulates”. A conviction under the Act would have a significant negative effect on a company’s ability to do business around the world.
219.Mr Feinstein told us that the Bribery Act was “generally very good and a very important piece of legislation”, but he queried its usefulness as a tool for dealing with corruption specifically in relation to the arms trade.
220.In 2012 the then government gave an “unqualified confirmation that if it becomes aware of corruption in arms deals it will take appropriate action under the provisions of the Bribery Act 2010, regardless of whether there is a risk of diversion or re-export under Criteria 7”. In their 2013, 2014 and 2015 reports, the previous Committees asked the government to state “the names of any individuals and any companies against whom it has taken action under the provisions of the Bribery Act 2010 in relation to their arms export dealings or financing”. In its response to the 2015 report the government stated that “No offences under the Bribery Act 2010 have yet been brought to court in relation to arms export dealings or related financing.”
221.When we asked Mr Stuart about the lack of prosecutions under the Act, he emphasised its importance as a deterrent to corruption. He told us that it had had:
a positive effect across the piece, because of the sanctions that are in place. Companies are more careful than ever before in trying to make sure that their company is not involved in that at any level, because the responsibility, thanks to the Bribery Act, comes all the way up to the top of the company.
222.Corruption Watch UK suggested to us that “Based on the regularity of these scandals, it is clear that the UK’s export licensing regime fails to properly monitor the risk of corruption”. While corruption would “clearly fall under” Criterion 8 (regarding sustainable development), “it is deeply concerning that not a single export license was refused under Criterion 8” in 2016.
223.In 2012 the then government had indicated that corruption concerns were actually dealt with under Criterion 7 (regarding the risk of items being diverted or re-exported from their intended destination). However, while the 2016 Annual Report showed that 122 licence applications (for SIELs and SITCLs) had been refused or revoked with reference to Criterion 7, no information was given as to whether corruption had been a consideration in any of these cases. Mr Feinstein further told us that corruption appeared not to be consistently taken into account in relation to Criterion 7, even in cases where there was a clear link between corruption and diversion of controlled goods (with which Criterion 7 is concerned).
224.Corruption Watch UK advocated that an additional Criterion relating specifically to corruption should be added to the Consolidated Criteria. They noted that in 2011 the previous Committees had made a similar recommendation in respect of inserting such a Criterion into the EU Common Position on Arms Exports.
225.Mr Feinstein insisted that a new Criterion was needed in addition to the Bribery Act, to actually prevent corruption occurring and to deal with the role that intermediaries played in corrupt dealings. He also told us that the ATT “requires states to assess the potential that arms might ‘commit or facilitate an act constituting an offence under international conventions or protocols relating to transnational organized crime to which the exporting State is a Party.’” Corruption and money laundering were recognised by the UN Convention against Transnational Organised Crime as acts of transnational organised crime, and this made a separate Criterion on corruption necessary. He thought this was why the European Parliament had in 2017 recommended the insertion of a separate corruption Criterion into the Common Position.
226.When we asked Mr Stuart for the Government’s view of this proposal, he told us:
we are not yet convinced that bribery and corruption being considered routinely as part of the export licence application process will be beneficial. Even if it were possible, it is not clear at what point allegations of corruption would constitute sufficient evidence to refuse an export licence, and if it did not end up in refusal it would not be of much practical use.
The Government thought “that it is better to make sure that the Bribery Act is being properly enforced, rather than conflating different regulatory frameworks”.
227.We note the written and oral evidence to our inquiry that links intermediaries (agents, advisers and brokers) with corruption and the diversion of arms. While we are not in a position to be able to validate these allegations, we are, nevertheless, mindful of the need to be concerned about them.
228.The Government must publish, in its Annual Reports on Strategic Export Controls, the names of any individuals or companies against whom it has taken action under the provisions of the Bribery Act 2010 in relation to arms-export dealings or financing related to such dealings.
229.We note the previous Committees’ recommendation regarding the creation of an additional licensing Criterion relating to corruption. The Government must give this formal consideration and set out clearly the reasoning behind the conclusion it reaches.
238 Corruption Watch UK (), para 20
239 Corruption Watch UK (), para 21; cf
240 Corruption Watch UK (), paras 24–25
241 Corruption Watch UK (), para 26–31; cf
242 Corruption Watch UK (), para 26
243 Corruption Watch UK (), paras 3–10
244 ADS Group (), para 22
254 ; cf
255 Leonardo, , 15 May 2018, pp 45–7
256 ; cf
257 ; cf
258 , October 2012, p 16
259 HC (2014–15) , para 46
260 , July 2015, para 46
262 Corruption Watch UK (), Executive Summary
263 Corruption Watch UK (), para 12
264 HC (2017–19) , p 19
265 Corruption Watch UK (), para 13; cf
266 ; cf Corruption Watch UK (), para 10
267 Corruption Watch UK (), para 32
269 ; cf
Published: 18 July 2018