Will New EU Defence spending Rules Reduce Corruption ?

Julia Muravska, project officer in Transparency International’s Defence and Security Programme, asks whether EU countries will use new EU laws to tackle corruption in defence spending – or use to fine print to avoid real change.

Notorious corruption allegations in the defence sector, such as those surrounding the BAE /SAAB fighter jet sales to South Africa or the sale of submarines to Portugal and Greece by the German Submarine Consortium, tend to revolve around a thing called offsets. –

Agreed between the buying governments and foreign supplying companies, offsets require the companies to make additional investments, often unconnected to the main contract. Offsets can be used as conduits for bribes in defence contracting, and thus cause inefficiency and waste of public and already scarce resources available to defence in the EU.

Offsets are often worth just as much or even more than the main contract to which they are attached. They carry high risks of corruption, for instance offset projects being channelled to companies in some way connected to purchasing government officials. As our report ‘Defence Offsets: Addressing the Risks of Corruption & Raising Transparency’ emphasises, this happens not only due to the high level of secrecy within defence procurement generally, but especially since they usually lack the scrutiny and monitoring of the main defence contract and are therefore opaque instruments.

An opportunity to ensure that offsets are finally made transparent and accountable to the public could come in the shape of the EU Defence Procurement Directive, adopted in July 2009 to open up the EU defence industry to cross-border competition by harmonising the way governments’ procure defence contracts. The Directive restricts additional investments around defence contracts: otherwise known as offsets. EU governments had until August 21 to change their national laws accordingly, especially where offsets are concerned.

Intended to “write the rules” on how EU member states purchase defence equipment, from soldiers’ boots to armoured personnel carriers and patrol boats, the Directive has important implications for the future of offsets in the EU.

The new EU rules require member states to have a sound justification of offsets’ importance to national security and value to the so-called European Defence Technological and Industrial Base (EDTIB). They will also demand that offsets don’t distort civil markets.

Any offset that is not transparent can hardly qualify for either of these principles. It is critical for national legislators to take advantage of the momentum generated by the final stages of the EU Directive transposition to ensure that offsets which do persist in the EU countries are carried out with transparency and accountability.

The word “transparency” appears often in discussions around offsets as part of the larger European Defence Equipment Market (EDEM). However, what it refers to is competitive transparency, or open competition, which, no doubt, is important for a competitive EDTIB. In contrast, the more crucial aspect of public transparency of offsets seems to have been ignored thus far. This is public transparency from an integrity point of view and is critical to reducing the risk of corruption with which offsets have become associated.

Governments must seize the opportunity to raise integrity in national defence procurement, by catalysing reforms to reduce corruption risk in offsets. TI calls on EU governments to:

• · Firstly, acknowledge that offsets cost a premium over the acquisition price that is far from negligible and also that more transparent offsets will be cheaper offsets.
• · Then, require prices with and without offsets. Transparency and integrity cannot be addressed in offsets without knowing how much they cost to the taxpayer.
• · Require corruption-related due diligence to be performed on individuals and organisations involved in every stage of an offsets deal. It is a government’s responsibility to ensure that offsets are not used to provide undue benefits.
• · Make processes robust, replicable, traceable and transparent. Robustness ensures that offsets are adequate, effective and efficient, limiting the scope of discretionary decisions. They should be applicable to different processes and projects, and allow to identify who made which decision and based on what. Being transparent on the processes does not jeopardise confidentiality regarding national security and commercial secrets.
• · Engage civil society organisations and the media in the process since they can be valuable assets in ensuring transparency and supporting due diligence and monitoring efforts.