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September 2018
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Why backhanders and brown envelopes are not best for defence businesses

With the perception that bribery in some countries is as commonplace and accepted a practice as bartering, why should any change of law in Britain affect how business is conducted overseas? John Burbidge-King, anti-corruption expert and CEO of Interchange, explains how the forthcoming Bribery Bill will be a wake-up call to those involved in arranging defence contracts at home and abroad.

Bribery is already an offence under existing laws in the UK but the new Bribery Bill, well into the Parliamentary process, may come into force before a General Election on 2010. It makes it illegal to bribe a foreign official or a private person to obtain or retain business. The Bill will also make it an offence if businesses fail to prevent a bribe being paid by their employees or by other firms on their behalf.

The new corporate offence means that unlimited fines may be imposed on companies if found guilty. The only defence a company has against such a charge is to prove in court that it had adequate procedures to mitigate the crime. Furthermore, individuals who make illegal payments to secure business may face fines and possibly imprisonment of up to ten years.

Companies may in a climate of UK budget reductions seek more overseas contracts, and in so doing increase their exposure to ethical risk, particularly if they have no adequate procedures to mitigate bribery risk. With the prospect of fewer contracts in the defence sector up for grabs, this is serious stuff.

The Bribery Bill is important because it will bring into force measures which will hold individuals and organisations more accountable for their actions, both at home in the UK and abroad. As a result, they will face far more serious consequences if found guilty.

In June 2009, the Aerospace and Defence Industries Association of Europe (ASD) issued the Common Industry Standards (CIS), recognising the growing value of good practice in ethical issues for successful businesses. The CIS has been adopted by the UK’s A|D|S and national aerospace and defence trade industries in Europe and they are encouraging their members to implement it.

At the same time the Aerospace Industries Association (AIA) and ASD jointly formed an International Forum on Business Ethics Conduct and are in the process of jointly developing Global Principals for the Aerospace and Defence Industries.

I’ve often been asked – or had it put to me – that bribery is a perfectly normal way to do business in some countries? There is a perception that bribery and other types of fraudulent activity in business are the ‘done thing’. This partly stems from an approach where a company does not have a strategy to win business in such countries without paying a bribe; therefore the trap is already set.

The long running BAE Systems case, and others in the past, have tarnished the reputation of the aerospace and defence industry, despite the company taking bold steps, post the Woolf Report, to change the business culture. And whilst self disclosure by the Reading-based Mabey & Johnson bridge building company mitigated the level of fines, the revealing in court of where bribes were paid has had serious political repercussions, especially in Ghana and Jamaica.
Whilst executives and directors may wish to mentally segregate or bury fraud, it is often linked to bribery and other related crimes, which may adversely impact employees, managers, directors and the company itself when the Bribery Bill becomes law. Organisations operating in the defence sector which have not reviewed their risk profile could find themselves increasingly exposed.

The fact is that many governments outside of Britain now have anti-bribery and corruption laws as well as strict public procurement procedures which on conviction include criminal and civil penalties. These can include fines and imprisonment but also the debarment of companies from future contracts. Britain is now following suit, however, despite its prominent position in world trade, even it is playing catch-up.

One glance at Britain’s laggard position in Transparency International’s Corruption Perceptions Index – www.transparency.org – tells a sorry tale. For defence companies, the consequences are that British businesses may come under increased scrutiny when seeking contracts abroad, and face demands to demonstrate they have good working business ethics practices and governance in place.

And in a world which appears to have become more dangerous from a terrorist and organised crime perspective, smaller companies in particular need to be more than ever aware of the risks they run of unethical behaviour and how that might lead to their inadvertent association or infiltration by criminal elements. Furthermore, there is a growing international recognition and concern of the significant social, economic and political cost of these crimes. Bribery is no longer seen as a victimless crime.

Problems most often occur when organisations do not have ‘adequate procedures’ in place to prevent bribery and fraudulent activity taking place. It may be they fail to properly conduct due diligence on agents, advisers and other parties, or have no codes of conduct in place to provide guidance to their employees. So, often, they don’t try saying ‘no’ when a bribe payment is demanded or implied. Perhaps the boss simply said: -do what it takes to win the contract and employees assume that since a bribe has been requested, they have to pay up or lose out.

There are many negotiating tactics that can be employed to avoid paying a bribe whilst still obtaining the business, but the bottom line may be for a truly ethical company to walk away from a potentially unhealthy business deal because the risks are simply too great.

Any organisation deciding to run the risk of paying a bribe may win the business, but obviously then runs the risk of being investigated and prosecuted, resulting in costs, fines and reputation damage. It is increasingly likely that shareholders may take action against the directors for failing to protect the shareholders interests.

A company known to have bribed may also face threats of extortion from the bribe receiver if that person feels threatened by exposure. The cost of all of this could amount to more than the value of the actual contract they had secured. The profit and/or revenue accrued from such contracts is often the basis by which fines are awarded by courts, particularly in the USA.

The Bribery Bill in Britain will ensure that more and more businesses pay attention to their risk and exposure. But should this really be the basis upon which organisations make decisions about whether or not to take bribery and good business ethics more seriously?

In my experience, even before the Bribery Bill loomed on the horizon, an increasing number of companies in the defence sector have been looking at business ethics as a business opportunity, placing this at the heart of their business strategy. They have reaped the benefits of changing business risk into business value.

An effective anti bribery prevention programme delivers very clear business benefits, including a return on investment in areas such as:

  • Increased brand value and a reputation for integrity and trust
  • Becoming a contractor of preference and dependability
  • Building sustainable and ethical supply chains
  • Ability to more confidently enter new overseas markets and successfully bid for projects
  • Delivering more from indirect sales channels
  • Reduced risk of share volatility and shareholder class actions for listed companies
  • Better employee retention and higher quality recruitment, especially graduates
  • Reductions in materials and other shrinkage
  • Compared with the costs of dealing with a corruption allegation, even if not prosecuted, the financial cost of implementing effective corruption prevention measures is minimal.

    For companies which have not been as proactive in this area as some of their peers, the forthcoming Bribery Bill represents a step-change opportunity for organisations to open the cupboard and change business risk into real business value.

    The implementation of strong business ethics policies and processes, embedded into the DNA of an organisation from board to front line, has become a necessary priority in mitigating what can easily become a terminal illness for businesses.

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