Defense Industry Faces New Scrutiny of Anti-Corruption Practices

More than 100 defense companies from Lockheed Martin Corp. (LMT), the world’s largest arms maker, to Czech military truck manufacturer Tatra AS, face a new test of their anticorruption practices as an independent watchdog puts the industry under examination.

The U.K. arm of Transparency International will issue its first ranking of about 130 companies worldwide on Oct. 4, grading their corporate guidelines for avoiding corruption. Each company is being assessed against 34 criteria and will receive a grade from A to F, an executive for the not-for-profit organization said in an interview in London.

The defense industry has been hit by numerous scandals over alleged corruption during the past decade, with Boeing Co. (BA), BAE Systems Plc (BA/) and Finmeccanica SpA (FNC) the subject of probes. A unit of European Aeronautic, Defence & Space Co. (EAD) currently is under investigation by the U.K. Serious Fraud Office over bribery allegations in Saudi Arabia.

“There is enormous scope to improve corruption standards in arms deals globally,” Mark Pyman, defense and security program director at Transparency International U.K. said in an interview. “We don’t think corruption is a necessary evil” of the arms trade, he added.

Defense contractors under the microscope are based in 32 countries and include public, private and state-owned businesses, Pyman said. Around one-third are U.S.-based, another third are European, with the final segment from across the rest of the world.

“Companies are increasingly concerned with the reputational damage of getting involved in corruption,” Trevor Taylor, an executive at defense-policy adviser Royal United Services Institute, said in a phone interview. “It is still a massive problem,” he said, in part because low government pay in many countries makes civil servants susceptible to bribery.

Internal Practices

Although Transparency International’s grading will be based entirely on standards companies have published, the organization will take into account information businesses provide about internal practices. Those will be reflected in a secondary ranking, Pyman said.

The principal goal of the report is to prompt chief executives to tighten standards. A secondary audience is governments, Pyman said, who may choose to take the ranking into account as they evaluate bids.

Another objective is to help generate backing for a defense and aerospace industry-driven effort to develop common standards under the International Forum on Business Ethical Conduct. The forum was created in 2010 between the European and U.S. aerospace industry lobby groups to exchange best practices. Membership now totals 18 entities, according to the forum’s website.

Transparency International’s industry report will be followed in January by a grading of countries, Pyman said. The review will span 83 countries.

Work on the surveys is receiving financial support from the U.K. government’s Department for International Development, Pyman said.

To contact the reporter on this story: Robert Wall in London at rwall6@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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