Prepared remarks of SAM Director Colby Goodman at the "Global Anti-Corruption: Transparency in the Modern Age" symposium at the NYU Journal of International Law and Politics on October 17, 2017.

Introduction

Mr. Bauer and the NYU Journal of International Law and Politics, thank you for inviting me to speak today. I am pleased to join the panel with John Sopko and Katherine Dixon as I have learned a lot about the dynamics of corruption in the defense sector from their work.

I lead the Security Assistance Monitor program at the Center for International Policy in Washington, D.C. SAM, as we call it, focuses on increasing transparency and accountability in U.S. foreign security assistance. We are known for our comprehensive, public databases on U.S. security aid, military training, and arms sales, but we also conduct research on key U.S. security assistance policy issues such as corruption.

Since the focus of today’s event is on the Foreign Corrupt Practices Act (FCPA), I’m going to talk about an issue that is increasingly being neglected by U.S. government regulators, but remains a complex challenge to mitigating corruption in commercial arms exports: international arms brokers, intermediaries, or agents. Think Nicolas Cage in Lord of War

While there are many responsible arms intermediaries or agents, they are widely considered a high-risk factor in the international arms trade and beyond. According to a Transparency International report, “in 2013, more than 90 percent of reported U.S. Foreign Corrupt Practices Act cases were found to have involved third party intermediaries.”

Let me give you a quick example of when I was investigating one well-known arms broker.

Major Corruption Challenges

In early October 2009, U.S. officials received a tip about a suspicious company called Moonstorm involved in an arms deal with the government of Yemen. According to the Bulgarian government, the UN-blacklisted Serbian arms broker Slobodan Tesic was engaged in discussions to sell arms worth $95 million, including sniper rifles, anti-aircraft guns, and ammunition to the Yemeni Ministry of Defense, through Moonstorm.

While Tesic did not fall under U.S. law, U.S. authorities were concerned that some of the arms shipment could be diverted to Yemen’s thriving black market and potentially to terrorist groups such as Al Qaeda. The Yemeni government, however, chose to ignore U.S. concerns. In the end, Tesic delivered sub-standard weapons to the Yemeni government at exorbitant prices, which may have impacted their ability to combat terrorist threats.

While there is a relatively small number of arms brokers that play a leading role in orchestrating arms deals, there are hundreds and hundreds of    marketing agents, distributors, freight forwarders, financiers, and others that may use bribery in an arms sale.

In 2010, for example, BAE Systems pled guilty and paid a $400 million fine to the U.S. government after being caught in a scandal to cover up, among other items, payments made to “marketing agents” to help it secure arms contracts with Saudi Arabia. Similarly, Titan, a subsidiary of L-3 Communications, was charged in U.S. courts for paying a fee of $1.2 million to an agent to secure their sale of U.S. arms to the Sri Lankan military and for paying $109K to an agent to win an arms deal for the French military.

Companies may employ marketing or sales agents to give them an edge over other defense companies or to steer government officials to use their revenue on arms procurement instead of education or healthcare.

Agents in foreign countries can also attempt to subvert their own procurement process by encouraging a procurement official to buy arms from a particular defense company. This agent may push the procurement official in his country to buy weapons from a company even if their product does not match the government’s needs.

These bribes and subversive activities can not only lead to inflated prices and mismatched weapons systems, they can create serious shortfalls in government budgets.

In Nigeria, former military officials reportedly stolen around $15 billion through fraudulent procurement schemes. This massive theft of money crippled Nigeria’s military capabilities and its provision of basic social services, both of which seriously hurt efforts to combat Boko Haram.  

Transparency Tools for Oversight

In response to the above concerns and others, the U.S. government created several key types of transparency to improve oversight of U.S. arms brokers and mitigate corruption. These include export and brokering licenses, notices on political contributions, fees, and commissions, and congressional notifications, among others.

Probably the most frequently used U.S. government tool for effectively weeding out risky arms intermediaries is export licenses.

When a company submits a license to the State Department to export arms abroad, they must include the specific arms to be exported, the associated prices, all intermediaries, routes, and of course the buyers. The U.S. government then examines this information to see if any of the proposed intermediaries have been listed by U.S. law enforcement or intelligence as risky, if the proposed weapons don’t match the buyer’s weapons systems, if there are inconsistencies in the pricing, and other red flags.

The Defense Department’s failure to have a similar license requirement was identified as one of the reasons why a DoD contractor supplied faulty ammunition to Afghan security forces as part of the AEY Inc. scandal. Hollywood used this scandal as the basis for the movie War Dogs.

Recognizing that the arms trade is highly prone to corruption, lawmakers also require defense companies to report on political contributions, fees, and commissions at certain dollar values as part of a proposed arms deal. This was seen as a critical addition to the FCPA.

Lastly, the Defense and State Departments provide notifications to Congress on proposed arms transfers, which include proposed weapon types and pricing, among other items. The only place you can find all of these notifications in one place is on SAM’s website with a detailed analysis of big trends.

Transparency Gaps Increasing

Despite the benefits of these transparency tools, the U.S. government has increasingly reduced their effectiveness by adding major gaps and inconsistent reporting to Congress. These added gaps are driven largely by defense companies pushing to reduce what they have called onerous regulations on arms exports and changes in the global arms trade.

As part of the U.S. government’s Export Control Reform Initiative, companies are no longer required to report on political contributions, fees, and commissions for exports of arms that are now regulated by the Commerce Department. This includes tens of thousands of arms, including items once considered “significant military equipment.” It may soon include firearms as well.

U.S. export compliance lawyers have said the loss of this requirement is negligible as companies exporting arms regulated by the Commerce Department are still required to comply with FCPA. According to a former Justice Department official, however, this notification requirement has played a key role in strengthening defense company compliance programs against bribery. It also supported several key U.S. prosecutions, including the BAE Systems and Titan cases mentioned above.

There also concerns about the consistency of State and Defense Department notifications to Congress. The Defense Department regularly fails to mention whether any offsets – arrangements in which arms exporting companies invest in the recipient country to “offset” the cost of the deal – are included in most notifications. Offsets are especially prone to corruption.

The U.S. government has also substantially reduced the number of times companies are required to request a license to export arms. U.S. companies, for instance, can now export arms regulated by the Commerce Department to NATO plus countries, including Turkey, without an export license. In other words, the U.S. government is relying on the company to identify risky intermediaries or agents, problems with pricing, and a mismatch in weapons systems.

Recommendations

There are a few key changes to U.S. regulations and practices that could effectively address these major transparency and oversight gaps.

First, the U.S. government could add regulations to require companies exporting arms controlled by the Commerce Department to report on political contributions, fees, and commissions just like they do for arms controlled by the State Department. In doing so, the U.S. government may also want to alter the regulation to better address the additional challenges in reporting associated with licensed production and offset deals.

Second, Congress should consider demanding more consistent reporting on whether any offsets are part of a proposed arms deal. They could also press for including whether there was any political contributions, fees, and commissions paid as part of the proposed deal in the public notices.

Third, there is some deeper analysis needed to figure out how to address the major loss of information resulting from the elimination of the requirement to seek no export licenses for many types of arms, as the U.S. government is likely unwilling to change this gap.

The key to making these important fixes is the full recognition of how corruption in U.S. arms sales is negatively affecting U.S. foreign policy and national security goals. According to former Secretary of State John Kerry, governments must make corruption a “first-order, national security priority,’ calling it a “social danger”, “radicalizer”, and “opportunity destroyer.”