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*The Supply-side of Corruption and Limits to Preventing Corruption within
Government Procurement and Constructing Ethical Subjects
(A later version of the paper was published in Critical Perspectives on Accounting,
Vol. 28, May 2015, pp 62-70)
Prem Sikka
Centre for Global Accountability
University of Essex, UK
Glen Lehman
Division of Business
University of South Australia, Australia
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Abstract
Corruption in government procurement programmes is a perennial problem. The
paper by Dean Neu, Jeff Everett and Abu Shiraz Rahaman emphasises the value of
internal controls in government departments in constraining individuals and
promoting ethical conduct. In response, this paper argues that good internal controls
in government departments, though highly desirable, are unlikely to make a
significant dent in corrupt practices to secure government contracts. A major reason
for this is the supply of corruption by corporations keen to secure lucrative contracts.
Within the spirit of contemporary capitalism, they have an insatiable appetite for
profits and have shown willingness to engage in corrupt practices to secure
government departments. The issues are illustrated with the aid of two case studies.
It is argued that the supply-side of corruption severely limits the possibilities of
preventing corruption in government procurement.
Key Words: Corruption, government procurement, internal controls,
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1. Introduction
In a world of secrecy and easy mobility of money, elites seek personal riches, power,
status and competitive advantage by renting influence through illicit means. The
volume and extent of corrupt activities is hard to know (Serra and Wantchekon,
2012), but is estimated to be running at around $2.6 trillion a year (European
Commission, 2011). These amounts are large enough to make a significant
difference to economic, social and political policymaking, and the quality of life of
citizens. As governments are one of the biggest spenders in any economy,
considerable institutional attention is focused on controlling corrupt practices by
government officials in granting public contracts (for example, see Organisation for
Economic Cooperation and Development, 2005, 2010; United Nations Office on
Drugs and Crime, 2003). A common recommendation for reform is enhanced
surveillance which “strengthens accountability so that government officials can be
held responsible for the proper implementation of public procurement rules and
regulations and the decisions they make in actual procurement cases. Such
accountability requires a credible sanctioning system for violations of rules with
adequate internal controls and audit procedures; a complaints system for bidders as
well as appropriate administrative; and judicial review bodies attributed with the
authority to impose corrective measures” (European Commission, 2013: 260).
The above themes are present in the paper by Dean Neu, Jeff Everett and Abu
Shiraz Rahaman (forthcoming) which shines a light on the possibility of discouraging
and combating corrupt practices within the government procurement process. In
Foucaldian traditions, the hope is that ethical subjects/individuals can be produced
through suitably designed internal controls and surveillance systems which give
visibility to departures from the established norms. Towards this end, government
departments are urged to implement and enforce a variety of managerialist
techniques and performance indicators, including procedures for risk assessment,
training, sanctions, self-reviews and reports by internal and external auditors. The
Big Brother approach implicit in the paper presupposes that individuals can be
coerced to internalize some value systems and, in the process, somehow become
ethical citizens. The surveillance systems advocated by Neu, Everett and Rahaman
(forthcoming) portrayed as are universal and are thought to be applicable across
almost all cultures regardless of social tensions, legitimacy of the state and networks
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of power. Internal controls seek to produce a kind of stability and certainty by binding
individuals within a system of governance, but they can always be resisted by those
able to game or subvert them for personal gain. Some might even comply merely to
gain advantage from compliance rather than necessarily embrace the ethical
positions envisaged by the paper. The paper’s recommendations might constrain
some corrupt practices, but the gains are likely to be modest because internal
controls aimed at individuals cannot stifle systemic pressures for profits and personal
riches.
This paper seeks to extend the debate by Neu, Everett and Rahaman by arguing
that public procurement controls, no matter how well designed, are unlikely to
significantly reduce corruption in the present social environment. The Neu, Everett
and Rahaman paper assumes that government officials indulge in illicit activity and
primarily focuses on the demand-side of corruption. However, government officials
cannot be corrupt on their own. There is a supply-side and another party has to
collude and be willing and able to supply bribes under a cloak of secrecy to secure
government contracts (UK Africa All Party Parliamentary Group, 2006). The supply-
side primarily resides in large western corporations. George Soros, an international
financier adds that “international business is generally the main source of
corruption1” and Transparency International adds that “bribe money often stems from
multinationals based in the world’s richest countries” (Transparency International,
2007: 2). In many cases, the corporations have revenues bigger than the gross
domestic product of nation-states, and have access to a vast network of subsidiaries,
affiliates and advisers to camouflage their activities. In pursuit of competitive
advantage, some corporations and their executives have shown a willingness to
subvert laws, international treaties and well designed internal controls instituted in
government procurement programs (Boulton, 1979; Chatterjee, 2009). Thus,
corruption in government procurement cannot easily be checked without constraints
on the supply-side of corruption.
To advance its arguments, this paper is divided into three further sections. The first
section explains the supply-side of corruption and pressures that persuade
1 Financial Times, Fund Management Guru Reveals Doubts, 8 December 1998.
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corporations and their executives to engage in corrupt practices. The second section
provides two case studies relating to the supply-side of corruption and the tactics
used by global corporations to secure government contracts. The first case relates to
Hewlett-Packard (HP), a US-based company, selling computer hardware and
software to individuals, corporations and government departments. It operates in a
market “where it is possible to find a market price for a comparable item” (Neu,
Everett and Rahaman, forthcoming: 22) and thus, has benchmarks for checking illicit
practices. The second case study relates to BAE Systems plc, a UK-based
company, operating in the arms industry, and for “more than a century across the
entire globe, the weapons business has been a dirty business” (Naylor, 1998: 35;
also see Gilby, 2014). BAE sells high-priced products, often specialised products,
where it may be “difficult to determine a market price with the end result that a space
is created for corruption to occur” (Neu, Everett and Rahaman, forthcoming: 6). Both
companies are headquartered in countries classified as comparatively less corrupt in
the Corruption Perceptions Index 2013 published by Transparency International2.
The third section concludes the paper with some reflections and suggestions for
disrupting the supply of corruption.
2. Understanding Supply-Side Corruption
Almost every state prohibits the use of corrupt practices to secure government
contracts and considerable efforts have been made to regulate the conduct of
government officials associated with the procurement process (Organisation for
Economic Cooperation and Development, 2005, 2010; United Nations Office for
Drugs and Crime, 2003). Much of the regulatory architecture is devoted to the design
of internal controls and surveillance techniques to constrain government officials who
are often conceptualized as deviant, greedy, opportunistic and lacking in self-control.
The constraints on individuals may curb some who find illicit practices attractive, but
also obscure the extent to which institutional structures and norms provide
opportunities and motives for corruption. A focus upon government officials obscures
the supply-side of corruption which primarily resides in corporations providing goods
and services to government departments. Internal controls applicable to government
2 Corruption Perceptions Index 2013 available at
http://cpi.transparency.org/cpi2013/results/; accessed on 9 June 2014.
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departments can be checked and enforced by state auditors and scrutinized by
parliamentary committees. However, the state is largely excluded from directing the
inner workings of corporations (Habermas, 1976) and has little power to directly
enforce or scrutinize internal controls operating within corporations. The design and
implementation of internal controls within corporations is considered to be a private
matter for their executives, though the state can exert pressures for higher quality
internal controls through laws, threats of fines and punishment for transgressors, and
the debarring of some companies from securing government contracts. Such
pressures cannot easily be applied when corporations reside in another country or
wield considerable financial and political resources.
Corporations operate according to the logics of competition and private profit.
Periodic fines and punishments do not appear to have dulled the appetite for using
corrupt practices to secure government contracts (Boulton, 1979; Cragg and Woof,
2002; Passas, 2007; Chatterjee, 2009; Robins, 2012; European Commission, 2013).
Corporations engage in corrupt practices for three major reasons: to maintain higher
prices, to maintain a market for outdated products, and to remain in the field of
competition, especially if further sales can be secured at a later date (Moody-Stuart,
1997). Corrupt practices may enable corporations to mediate incessant pressures
from markets for higher sales, profits and market shares. However, manner of
mediation depends on contemporary institutional structures and value systems.
Arguably, neoliberalism has been in ascendancy since the second half of twentieth
century (Harvey, 2005). It has reconstructed nation states, corporations,
communities and individuals as competitive beings engaged in the endless pursuit of
private wealth and consumption which would somehow lead to vast increases in
efficiency, affluence and happiness. The spirit of neoliberalism is inculcated into
every organisation and individual through a relentless focus on output
measurements of performance, which subjects individuals to a disciplinary regime of
surveillance techniques, performance targets, evaluations, appraisals and rewards
(Boltanski and Chiapello, 2005). Such practices normalise the logic of competition
and private gain, and performance-related pay has become the norm for business
executives. As the typical tenure of a chief executive at a major company is about
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4.8 years3, there is a temptation to collect as much reward as quickly as possible.
The shortness of the tenure in office means that executives rarely have to face the
consequences of any illicit practices, assuming that they are discovered. In any
case, the fines, if any, are generally levied on corporations rather than individuals. In
this environment, ‘bending the rules’ for personal gain is increasingly seen as a sign
of business acumen. Stealing a march on competitors, at almost any price, is lauded
as an entrepreneurial skill, especially where competitive pressures link profits,
promotion, niches and salaries with meeting business targets (Sikka, 2008). In the
absence of effective moral constraints, any deal is considered to be acceptable as
long as it is profitable and shame resides in being caught rather than engaging in
corrupt activity. The consequences of such an entrepreneurial culture are noted in a
UK government report which states that at some major corporations, directors have
a “. . . cynical disregard of laws and regulations . . . cavalier misuse of company
monies . . . a contempt for truth and common honesty” (UK Department of Trade and
Industry, 1997: 309). The above provides the context for understanding the two case
studies and reflections on whether internal controls can constrain corporations from
using corrupt practices to secure government contracts.
3. TWO CASE STUDIES
This section provides brief details of two case studies which show that the lure of
private profits and personal gains is not constrained by internal controls. The
transactions in the case studies have taken place at a time when there is an
extensive regulatory architecture requiring companies to implement effective internal
controls and discourage corrupt practices. This includes a variety of laws such as the
UK’s Fraud Act 2006, Companies Act 2006 and the Bribery Act 2010. The US has
the Foreign Corrupt Practices Act 1977 and the Sarbanes-Oxley Act 2002. These
laws reflect and have also influenced the 1997 OECD Convention on Combating
Bribery of Foreign Public Officials4. In addition, auditing standards in most countries
3 The Daily Telegraph, 'CEOs must keep learning to avoid the five-year axe',
http://www.telegraph.co.uk/finance/businessclub/management-
advice/10064862/CEOs-must-keep-learning-to-avoid-the-five-year-axe.html;
accessed on 3 June 2014.
4 For some details see http://www.business-anti-corruption.com/about/about-
corruption/the-oecd-convention-on-combating-bribery-of-foreign-public-officials-in-
international-business-transactions.aspx.
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require auditors to evaluate the quality and effectiveness of internal controls (for
example, Financial Reporting Council, 1995). These requirements should focus
executive attention on the need for legal and ethical conduct, but too many
corporations have been cited for their participation in corrupt practices (Cragg and
Woof, 2002).
3.1 Hewlett-Packard
HP operates from 770 sites in 95 countries5. In April 2014, the company paid a fine
of $108 million for violation of the US Foreign Corrupt Practices Act6. The charges
related to the payment of bribes to secure government contracts in Russia, Poland
and Mexico7. The court judgment provides some details of the practices and
encourages reflections on the extent of corporate practices used to pursue profits
(US Securities and Exchange Commission, 2014).
During the period 2000 to 2007, the Russian subsidiary of HP (hereafter HP Russia)
paid bribes through agents and consultants to government officials in Russia to
secure contracts for computer hardware and software worth an estimated €35 million
($42 million). HP Russia was keen to secure this contract with the Office of the
Prosecutor of General of Russia because it was seen as a ‘golden key’ for unlocking
further contracts of around $100 million (US Securities and Exchange Commission,
2014: 3). To secure the contract, HP Russia created a secret slush fund to facilitate
bribes to government officials directly, as well as through agents and intermediaries.
HP Russia created excess profit margins for the slush fund through an elaborate
buy-back deal structure (US Department of Justice, 2014), whereby (1) HP sold the
computer hardware and other technology products called for under the contract to a
Russian channel partner, (2) HP bought the same products back from an
5 As per
http://www.hp.com/hpinfo/globalcitizenship/media/files/hp_fy11_gcr_hp_operations.p
df; accessed 18 May 2014.
6 US Securities and Exchange Commission press release, SEC Charges Hewlett-
Packard With FCPA Violations, 9 April 2014
(http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541453075#.U6
GC6FRwaic; accessed18 May 2014)
7 US Justice Department press release, Hewlett-Packard Russia Agrees to Plead
Guilty to Foreign Bribery, 9 April 2014 (http://www.justice.gov/opa/pr/2014/April/14-
crm-358.html; accessed 17 May 2014).
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intermediary company at a nearly €8 million mark-up and paid the intermediary an
additional €4.2 million for purported services, and (3) HP sold the same products to
the Russian government at the increased price. The payments to the intermediary
were made through a series of shell companies, some of which were directly
associated with government officials, registered in the US, the UK, the British Virgin
Islands and Belize. Some monies were laundered through offshore bank accounts in
Switzerland, Lithuania, Latvia and Austria. Portions of the funds were spent on
travel, cars, jewelry, clothing, expensive watches, swimming pool technology,
furniture, household appliances and other luxury goods for government officials. To
conceal the corrupt payment, HP Russia employees kept two sets of books (US
Securities and Exchange Commission, 2014: 5): (i) an internal set of documents that
identified the recipients of the payments, and (ii) a sanitized version of the same
documents that were provided to management in the credit, finance, and legal
offices outside of HP Russia. There were also off-the-books side agreements. As
one example, an HP Russia executive executed a letter agreement to pay €2.8
million in purported “commission” fees to a UK-registered shell company which was
linked to a director of the Russian government agency responsible for managing the
project. HP Russia did not disclose the existence of the agreement to internal or
external auditors or management outside of HP Russia. At one stage, HP Russia’s
country manager signed a contract which was being handled by an HP subsidiary in
Germany even though he had no authority, or power of attorney, to act on behalf of
the German subsidiary. When, three months later, the German subsidiary learnt of
this, it ratified the contract through a retroactive power of attorney. HP Russia made
about $10.4 million in illicit profits from its Russian contract (US Securities and
Exchange Commission, 2014: 5).
The tactic of bribing government officials to secure contracts was also used in
Poland (US Securities and Exchange Commission, 2014). US court documents show
that between 2006 and 2010, HP Poland made improper payments to one or more
government officials to secure and maintain lucrative government contracts with the
Polish national police agency. HP Poland’s employees, including senior officials,
circumvented internal controls to provide free laptop and desktop computers, iPods,
flat screen televisions, cameras, home theater systems, dinners, flights and
sightseeing tours to government officials. Many of these were paid in cash, without
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authorization, and were not properly recorded in HP’s books and accounts. After
some initial lucrative contracts, HP Poland employees and agents expanded the
bribes to include large cash payments from off-book accounts and the government
officials were promised 1.2% of net revenue from the relevant contracts. When, in
March 2007, a Polish official signed a contract valued at $15.8 million, a bag
containing $150,000 in cash was left at his home. A further $100,000 in cash was
handed over in a Warsaw parking lot, followed by further cash payments of
$360,000. The relationship was also cultivated through covert means. In one
method, a HP Poland executive established multiple anonymous e-mail accounts
and shared the passwords with the Polish IT Official so that he could write and save
messages as “drafts” within the account. The HP Poland executive also provided the
Polish government official with prepaid mobile telephones. The HP Poland executive
and the government official also met in remote locations where they would
communicate silently by typing information on a laptop computer about upcoming
tenders and bribes. Through corrupt means, HP Poland secured contracts worth
approximately $60 million and generated profits of about $16.1 million.
The tendency to secure government contracts through illicit payments is also
encountered in Mexico (US Securities and Exchange Commission, 2014). Here
hardware, software and licensing contracts worth $6 million were sought with
Mexico’s state-owned petroleum company, Petroleos Mexico. Once again, agents
were cultivated and paid secret fees, this time called “influencer fee”. This was
equivalent to 25% of the licensing and support components of the deal. There was
no written agreement with the agent selected and the amounts were passed through
shell companies and records were falsified. HP Mexico made $2.5 million profit from
the deals.
Commenting on the $108 million fine for HP, a spokesperson for the Securities and
Exchange Commission enforcement division said that "Hewlett-Packard lacked the
internal controls to stop a pattern of illegal payments to win business in Mexico and
Eastern Europe. The company's books and records reflected the payments as
legitimate commissions and expenses. Companies have a fundamental obligation to
ensure that their internal controls are both reasonably designed and appropriately
implemented across their entire business operations, and they should take a hard
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look at the agents conducting business on their behalf8". Ernst & Young were the
global auditors of HP throughout the period during which corrupt payments were
made. The company always received unqualified audit opinion.
3.2 BAE Systems plc
BAE Systems plc9 (BAES) is the world’s second largest defence contractor. It
exports a wide range of products and services for air, land and naval forces, as well
as advanced electronics, security, information technology and support services. It
has customers in over 100 countries, though most of its business is based around
four key markets - the US, the UK, the Kingdom of Saudi Arabia and Australia10. The
company’s sales have been the subject of critical media scrutiny for some time. For
example, The Guardian newspaper has claimed that “Three huge BAE deals with the
Saudi royal family kept Britain's sole warplane manufacturer in profitable existence in
the 1960s and 70s. All were corrupt ... successive UK governments, desperate for
foreign exchange, took no notice11”. In 1985, the UK and Saudi governments signed
a government-to-government contract12 known as the Al Yamamah contract. The
£43 billion contract was Britain’s biggest ever arms export deal and BAE Systems
would provide Tornado and Hawk jets and other military equipment. It was soon
alleged that the Prime Minister’s son, Mark Thatcher, received kickbacks for the
contract13. In 1989, amidst allegations of the payment of secret commissions to a
8 The Guardian, Hewlett-Packard to pay $108m to settle scandal over bribery of
public officials, 9 April 2014
(http://www.theguardian.com/business/2014/apr/09/hewlett-packard-108m-
corruption-government-it-us-bribery; accessed 15 June 2014)
9 It is the successor company formed in 1999 after the merger of British Aerospace
and Marconi Electronic System.
10 As per http://bae-systems-investor-relations-v2.production.investis.com/bae-
systems-at-glance.aspx; accessed 19 May 2014.
11 As per http://www.theguardian.com/baefiles/page/0,,2095814,00.html; accessed
21 May 2014.
12 In legal terms, this means that BAE sold equipment to the UK government, which
then sold it to the government of Saudi Arabia. As the sale is technically by the
government, this entitles UK government auditors (e.g. the National Audit Office) to
scrutinize the process.
13 The Independent, Mark Thatcher accused: Sources say he got 12m pounds from
arms deal signed by his mother, 9 October 1004
(http://www.independent.co.uk/news/mark-thatcher-accused-sources-say-he-got-
12m-pounds-from-arms-deal-signed-by-his-mother-1441851.html, accessed 20 May
2014).
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number of agents and Saudi royals, the National Audit Office14 (NAO) began an
investigation15. In 1992, the investigation was abruptly discontinued and the report
remains unpublished “amidst fears that its publication would offend the notoriously
sensitive Saudis, jeopardising continuing trade relations16”. In 2004, it was reported
that BAE’s chief operating officer operated a “slush fund” which made corrupt
payments of £60 million to Saudi officials, including providing prostitutes, Rolls-
Royces and Californian holidays17. The company allegedly used an elaborate
process of false accounting to make and conceal payments through shell
companies. Some of the entries were in code in order to conceal the identity of the
recipients. BAE’s response to allegations was a response that it “can state
categorically that there is not now and there has never been in existence what the
media refers to as a 'slush fund'. Neither has BAE Systems or any of its officers or
employees been involved in false accounting18”.
The media revelations, accompanied by documentary evidence, persuaded the
Serious Fraud Office19 (SFO) to launch an investigation. On 1st December 2006, it
was reported that “Saudi Arabia has given Britain 10 days to halt a fraud
investigation into the country's arms trade ... The country's advisers have made
clear through diplomatic channels that unless the inquiry is closed, the kingdom's
arms business will be taken elsewhere20”. In 14 December 2006, the Attorney
14 It is a Parliamentary body independent of any UK government departments which
scrutinises public spending by government departments, government agencies and
non-government pubic bodies.
15 The Daily Telegraph, BAE's arms deals with Saudi Arabia: Timeline, 30 July 2008
(http://www.telegraph.co.uk/news/worldnews/middleeast/saudiarabia/2473238/BAEs-
arms-deals-with-Saudi-Arabia-Timeline.html; accessed25 May 2014).
16 The Daily Telegraph, SFO illegally dropped Saudi arms inquiry, judge rules, 10
April 2008 (http://www.telegraph.co.uk/news/uknews/1584595/SFO-illegally-
dropped-Saudi-arms-inquiry-judge-rules.html; accessed 23 May 2014).
17 The Guardian, BAE chief linked to slush fund, 5 October 2004
(http://www.theguardian.com/uk/2004/oct/05/saudiarabia.armstrade; accessed 24
May 2014).
18 BBC News, BBC lifts the lid on secret BAE slush fund, 5 October 2004
(http://news.bbc.co.uk/1/hi/business/3712770.stm; accessed 19 November 2014)
19 SFO is a government department charged with investigation and prosecution of
serious or complex fraud, and corruption.
20 The Daily Telegraph, Halt inquiry or we cancel Eurofighters, 1 December 2006
(http://www.telegraph.co.uk/news/uknews/1535683/Halt-inquiry-or-we-cancel-
Eurofighters.html; accessed 20 May 2014).
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General told parliament that the investigation had been abandoned because of the
“need to safeguard national and international security. It has been necessary to
balance the need to maintain the rule of law against the wider public
interest21”.Prime Minister Tony Blair defended the action by saying that “the result
would have been devastating for our relationship with an important country22”. The
US authorities23, which had launched an investigation in 2005, were not pleased24
and made a formal protest to the UK government.
Attention was now focused on the US investigation into BAE Systems Inc., the US
subsidiary of BAE System plc, for its role in the Saudi arms deal, as well as contracts
for supplies to South Africa, Chile, the Czech Republic, Romania, Tanzania and
Qatar. On 1st March 2010, the US Department of Justice announced that BAE
Systems plc had pleaded guilty to conspiring to defraud the United States by
impairing and impeding its lawful functions and making false statements about its
Foreign Corrupt Practices Act compliance program, and violating the Arms Export
Control Act and International Traffic in Arms Regulations. BAE was ordered to pay a
$400 million criminal fine25. The court order (United States District Court for the
District of Columbia, 2010) relating to sales in Saudi Arabia, Hungary and the Czech
Republic stated that “BAES knowingly and willfully failed to identify commissions
paid to third parties for assistance in the solicitation or promotion or otherwise to
secure the conclusion of the sale of defense articles ... ” (p. 6). In the company’s
records, the middlemen were described as “marketing advisers” and BAES took
21 Hansard, House of Lords Debates, 14 December 2006, col. 1712
(http://www.publications.parliament.uk/pa/ld200607/ldhansrd/text/61214-0014.htm;
accessed 1 June 2014)
22 The Guardian, Dropping BAE inquiry vital to national interest, says Blair, 16
January 2007 (http://www.theguardian.com/world/2007/jan/16/bae.immigrationpolicy;
accessed 1 June 2014).
23 Financial Times, US issued protest on axing of BAE probe, 27 April 2007
(http://www.ft.com/cms/s/0/b008fd02-f45c-11db-88aa-
000b5df10621.html#axzz355ZUUp36; accessed 1 June 2014).
24 UK NGOs made attempts to force the government to continue with its
investigations, but were ultimately unsuccessful (The Guardian, Lords rule SFO was
lawful in halting BAE arms corruption inquiry, 30 July 2008;
http://www.theguardian.com/world/2008/jul/30/bae.armstrade; accessed 30 May
2014)
25 US Department of Justice press release, BAE Systems PLC Pleads Guilty and
Ordered to Pay $400 Million Criminal Fine, 1 March 2010
(http://www.justice.gov/opa/pr/2010/March/10-crm-209.html; accessed 3 June 2014).
14
active steps to conceal its relationships with them. BAES used onshore and offshore
shell companies to disguise the origins of secret commissions and also advised
recipients to use offshore shell companies. There was little internal scrutiny of the
payments. The court order noted that “BAES established one entity in the British
Virgin Islands to conceal BAES's marketing advisor relationships, including who the
agent was and how much it was paid; to create obstacles for investigating authorities
to penetrate the arrangements; to circumvent laws in countries that did not allow
agency relationships; and to assist advisors in avoiding tax liability for payments from
BAES” (p. 8). BAES’s official records maintained inadequate information about the
identity of the advisors and the nature of their work and, frequently the
communication was not in writing. Between May and November 2001 alone, BAES
made payments of over £135,000,000 (about $216 million) and over $14,000,000 to
certain of its marketing advisors and agents through offshore entities. (p. 9). There is
little persuasive evidence to show that the advisers performed legitimate activities to
justify the receipt of substantial payments. Amongst other things, the court order
noted that for the Saudi contract, BAES provided substantial benefits to one public
official and his associates (p. 12). These included “sums totaling more than
£10,000,000 and more than $9,000,000 to a bank account in Switzerland controlled
by an intermediary” (p. 13). For the contract to supply Grippen fighter planes to the
Czech Republic and Hungary, BAES made payments of more than £19,000,000 to
entities associated with an unnamed agent. BAES made “these payments even
though there was a high probability that part of the payments would be used in the
tender process to favor BAES” (p. 9-10). In May 2011, the US government levied
another fine of $79 million on BAE for violation of defense export controls26 for the
period 1997 to 2010 (United States Department of State, 2011).
In December 2010, the UK authorities announced that BAE had agreed to make an
ex-gratia payment of £29.5 million to the Tanzanian government, which the
company’s 2011 annual report referred to as a “charitable contribution27” to be used
26 Also see Wall Street Journal, BAE Pays $79 Million To Settle Case With State
Department, 17 May 2011(http://blogs.wsj.com/corruption-currents/2011/05/17/bae-
pays-79-million-to-settle-case-with-state-department/; accessed 22 June 2014)
27 Page 49 of the 2011 annual report, available at http://bae-systems-investor-
relations-v2.production.investis.com/~/media/Files/B/BAE-Systems-Investor-
15
for educating children in Tanzania28. A fine of £500,000 was negotiated by the UK
authorities for failing to “keep adequate accounting records29 in relation to a defence
contract for the supply of an air traffic control system to the Government of
Tanzania30”. The background is that, in 1999, BAE, with the support of the UK
government, entered into an agreement with the Tanzanian government to supply an
air traffic control system at the price of about $40 million (£28 million). The UK
government helped to secure the finance from Barclays Bank31. The World Bank and
the International Monetary Fund opposed the deal by arguing that an effective radar
system should only cost about $10 million32 (£7 million). The UK court order33 for the
fine provides some details of the discrepancies. Some $12.4 million (30% of the
contract value) ended up in two offshore companies operated by an agent. The
payments were recorded in accounting records by BAE as payments for the
provision of technical services by the agent. The court documentation noted that
“there was a high probability that part of the $12.4 million would be used in the
negotiation process to favour British Aerospace Defence Systems Ltd. The
payments were not subjected to proper or adequate scrutiny or review” (para 4.5).
The failure to record the information accurately was the result of a deliberate
decision by officials. Despite the admission that the company had failed to keep
adequate accounting records, its annual financial statements continued to receive
unqualified audit opinions. The judge expressed his surprise that the UK’s law
Relations-V2/PDFs/results-and-reports/reports/2012a/ar-2011.pdf; accessed 20
June 2014.
28 Serious Fraud Office press release, BAE Systems will pay towards educating
children in Tanzania after signing an agreement brokered by the Serious Fraud
Office, 15 March 2012 (http://www.sfo.gov.uk/press-room/latest-press-
releases/press-releases-2012/bae-systems-will-pay-towards-educating-children-in-
tanzania-after-signing-an-agreement-brokered-by-the-serious-fraud-office.aspx;
accessed 17 June 2014).
29 This was a statutory requirement under Section 221 of the Companies Act 1985.
30 Serious Fraud Office press release, BAE fined in Tanzania defence contract case,
21 December 2010 (http://www.sfo.gov.uk/press-room/press-release-archive/press-
releases-2010/bae-fined-in-tanzania-defence-contract-case.aspx; accessed 2 June
2014).
31 Hansard, House of Commons Debates, 25 June 2002, cols. 228-236.
32 BBC News, World Bank hits out at Tanzania deal, 22 December 2001
(http://news.bbc.co.uk/1/hi/uk_politics/1723296.stm; accessed 23 May 2014)
33 R and BAE Systems PLC [2010] EW Misc 16 (CC) (21 December 2010) available
at http://www.bailii.org/ew/cases/Misc/2010/16.pdf; accessed 3 June 2014.
16
enforcement officers had given BAE officials blanket immunities from any future
prosecutions.
In October 2010, the UK’s accounting regulator, the Financial Reporting Council,
announced that it would investigate audits and professional services advice provided
by KPMG to BAE in the period 1997 to 2007, but in 2013, the investigation was
abruptly abandoned because “proper assessment of KPMG’s conduct would require
consideration of work undertaken in earlier years. Because there is no realistic
prospect that a Tribunal will make an adverse finding in respect of a complaint
relating to work done so long ago it has been concluded that it is not in the public
interest to extend the investigation to the years preceding 199734”.
4. Summary and Discussion
It may be possible to design internal controls systems that enhance possibilities of
combating corrupt practices within the government procurement process. However,
government departments transact with private sector corporations who compete to
secure government contracts. Corporations are under incessant pressure from
markets and shareholders for higher profits and have to distinguish themselves from
their competitors. One way of stealing a march on competitors is by using illicit
means to secure sales to government departments. Following the 1997 OECD
Convention on Combating Bribery of Foreign Public Officials and the US Foreign
Corrupt Practices Act 1977, corporate executives should be aware of their
obligations and possible retribution for bribing government officials to secure
contracts, but they still indulge in corrupt practices. The two case studies presented
in this paper show that corporations went to enormous lengths to bribe individuals to
secure contracts. Some employees may have resisted illicit practices, but corporate
officials used clandestine meetings, bags full of cash, agents, shell companies and
false accounting to pursue corporate interests. These were not the actions of some
isolated individuals, but seem to be deliberate policies crafted at senior levels. No
34 Financial Reporting Council press release, Closure of investigation into the
conduct of: KPMG Audit plc, Member Firm of the ICAEW, 1 August 2013;
https://www.frc.org.uk/News-and-Events/FRC-Press/Press/2013/August/Closure-of-
investigation-into-the-conduct-of-KPMG.aspx, accessed on 31 May 2014).
17
executive has been fined, imprisoned, or forced to return the personal gains made
from corrupt practices. The supply of corruption is so deeply ingrained into corporate
governance structures that some companies even employ private detectives to
recover bribes if the recipients fail to deliver the promised benefits (Hawley, 2000).
Following Neu, Everett and Rahaman’s (forthcoming) arguments, it may be possible
to use market prices as benchmarks to detect artificial and inflated prices, but the
case studies suggest that this process may not work smoothly. Major corporations
dominate markets, and have considerable discretion in setting prices, especially if
markets are fragmented, or compartmentalized into geographical jurisdictions (Sikka
and Willmott, 2010). HP deployed an elaborate scheme to inflate market prices for
computer hardware and software. The creation of artificial prices requires collusion
between the buyer and the seller. The buyer was subject to internal controls
instituted by government departments, whilst the seller was driven by the logic of
private profits. HP’s books and internal controls could not be inspected by the
governments of Russia, Poland and Mexico. In any case, the accounting records
could not easily distinguish between the normal and illicit practices. In the case of the
Tanzanian contract, BAE priced its radar system at $40 million against an expected
price of around $10 million. Despite this discrepancy, the sale went ahead with the
full support of the UK government, and corrupt practices were not checked.
None of the corrupt practices highlighted in this paper were brought to the attention
of the public or regulators by internal or external auditors of the companies even
though they are central to debates about controlling corruption in government
procurement. Both HP and BAE bolstered internal checks and balances with audit
committees and non-executive directors, but they do not appear to have been
effective in curtailing or exposing corrupt practices. Even if suitable internal controls
could be devised to combat both the demand and supply of corruption, they are most
likely to constrain selected individuals. They cannot easily make a serious dent in the
systemic origins of corrupt practices which are embedded in the spirit of
contemporary capitalism that celebrates competition, individualization and quest for
personal riches.
18
Government auditors and law enforcement agencies may have the capacity to check
corrupt practices, but the reality is murkier. In the case of BAE, the UK state went to
considerable length to thwart investigations. The NAO, the government auditor, was
prevented from investigating the frauds. In pursuit of what the government called
“national” interests, the SFO, a law enforcement agency, was neutered. The UK
government granted immunities to BAE officials from future investigations and
prosecutions. Seemingly, the commercial interests of BAE and its capacity to export
arms took priority over attempts to combat corruption. There is something very
troubling for democratic sensibilities in that the UK government’s interventions to
prevent investigations of corrupt practices were accompanied by the claims that the
rule of law is not compatible with pursuit of the public interest and exposure of
corrupt practices. Such worldviews pose serious questions about the willingness of
western states to eradicate the supply of corruption.
There is mounting evidence that internal controls are probably not constraining
corporate participation in predatory practices (for example, see Hadden et al., 2014;
Mitchell and Sikka, 2011). Interestingly, the controls and disciplinary practices are
mobilized to enact a theatre of legality and probity. In the case of HP, its 2013
financial statements identified some of the on-going litigation and investigations
under the heading of ‘litigation and contingencies’, but with minimal detail. The word
“bribery” appeared only three times in a 180 page document. The company’s 2013
‘Living Progress Report’ (its corporate social responsibility report) stated that “HP
does not tolerate corrupt behavior and prohibits bribery or kickbacks in any
circumstance. Corrupt behavior is an impediment to social and economic
development. It undermines the values on which HP is built, the principles of fair
competition, and the rule of law35”. BAE response was interesting. In 2007, it
appointed a committee of grandees, chaired by Lord Woolf of Barnes, former Lord
Chief Justice of England and Wales. The eventual report (Woolf Committee, 2008)
provided a brief glimpse of the already publicly known allegations, but was
accompanied by denial. The report said that the “Company has always maintained
that it does not believe that it has done anything that would constitute a criminal
35 HP2013Living Progress Report, p. 22
(http://h20195.www2.hp.com/V2/GetPDF.aspx/c04152740.pdf; accessed on 15 June
2014).
19
offence … [and that the payments] “were lawful commissions and not secret
payments” (Woolf Committee, 2008: 8). The report made 23 recommendations for
the company to improve ethical practices, something that has become a resource for
the company in reassuring its critics36, especially after the fines imposed by the US
government. The recommendations, such as those relating to staff training,
adherence to ethical codes, a new code of government lobbying, enhanced role for
internal audit, a register for gifts and hospitality and linking of executive remuneration
to ethical practices etc., reinforce disciplinary technologies and also create
possibilities for finding scapegoats in future episodes. This disciplinary apparatus
may facilitate the production of ethical individuals envisaged by Neu, Everett and
Rahaman, but cannot easily check the supply-side of corruption.
The central message of this paper is that there are limits to the effectiveness of
internal controls in government procurement programs. The controls can be
undermined not only by strategically placed officials from within, but by the constant
attacks from private sector corporations transacting with the government
departments. So what can be done to control the supply-side corruption? Perhaps
the offending companies, in this case HP and BAE could be debarred for a long
period from securing any government contracts, but in the face of strong corporate
lobbying, such laws are unlikely to emerge. Their executives could be personally
fined and extradited to the countries suffering from corrupt practices, but such
international laws and treaties either do not exist or are weak. To prevent a country
like the UK from delaying, obfuscating and abandoning investigations, there should
be joint investigations involving the supply-side and demand-side countries.
Following the examples in case studies this could have been a joint investigation
involving the US, Russia Poland and Mexico, or the UK, Saudi Arabia and Tanzania.
However, even that runs into difficulties, as some countries (Saudi Arabia) were not
keen on any investigation. Some of the proceeds of corruption pass through offshore
places facilitating secrecy and they are unlikely to cooperate fully. In any case,
various states would probably bring their national interests to bear on any
36 For example, see “Governance Summary” in the BAE’s 2013 annual report on
page 64 (http://bae-systems-investor-relations-
v2.production.investis.com/~/media/Files/B/BAE-Systems-Investor-Relations-
V2/Annual%20Reports/BAE-annual-report-2013.pdf; accessed 20 November 2014).
20
investigation, with the fight against corruption taking a back seat. Evidently, much
needs to be done to control supply-side corruption.
The persistence of corruption highlights a failure of education at home, work, school,
university and society. There is an urgent need for a program of deschooling (Illich,
1974) so that corporate executives can recognize their contribution to social
problems. Corporations need to accept that they were created to serve society and
must have legal responsibilities wider than the simple pursuit of private profits. Their
records need to be publicly accessible so that all citizens can evaluate their activities
and call them to account. Individuals need to be detoxified from the neoliberal
obsession with accumulation of wealth, power and status. Without this, programmes
of surveillance and internal controls may achieve marginal success, but are unlikely
to make a significant dent in curbing corrupt practices.
There is also an urgent need for further research into socialization of individuals into
corporate culture which incubates corrupt practices. The accounts of ‘insiders’
(Perkins, 2004) can do much to illuminate contradictions of organizational practices
which are frequently designed to present a legitimate face to the outside world whilst
internal dynamics are engaged in headlong rush for private profits, at almost any
cost.
21
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