Anti-bribery and corruption in defence procurement: Risks and mitigation measures
Prashant Mara and Devina Narvekar
The defence sector the world over struggles to find a balance between the secrecy linked to national security considerations and transparent oversight/accountability. Complex technical and commercial deal structures, exacerbated by high value stakes, make the procurement process susceptible to influence peddling and corruption.
The Indian defence sector is no stranger to corruption-related procurement controversies. Corruption under Indian laws is benchmarked against the concept of “undue influence”, which is interpreted widely and includes both monetary and non-monetary bribes/influence.
The Indian government has adopted a zero-tolerance policy against bribery, and any allegation will attract investigations against the accused.
1. Scope for corruption in the defence procurement process – red flags
2. Role of consultants in defence procurement
Given the complexity inherent in defence procurement processes, those who understand the process better can play a role in assisting contractors/suppliers in navigating it. Complex procurement requirements, convoluted supply chains and the encouragement of local investment (through technology transfer or offsets) create further opportunities for the involvement of consultants.
The nature of functions undertaken by the consultant dictates the legality of their role:
2.1. Conditions governing engagement of agents
The Defence Acquisition Procedure, 2020 (“DAP 2020”) under which the Ministry of Defence (“MoD”) undertakes capital procurement for the armed forces sets out guidelines pertaining to the role and engagement of agents (in respect of agency functions).
The appointment of defence agents is subject to a strict set of conditions and compliances. For instance, their engagement/termination must be disclosed to the MoD within 2 weeks, along with details of all payments made to the agent in the previous year. Conditional contracts are barred and the MoD can reject/remove an agent at any stage with immediate effect.
2.2. Perception of agents
As agents have been embroiled in a number of bribery prosecutions in India, their engagement may carry negative connotations (regardless of their tasks). For regulatory and perception risk management, it is advisable to:
Thoroughly diligence the proposed agent and only appoint agents registered with the MoD.
Include strict payment terms that exclude transacting with an offshore account (to avoid allegations of corruption and foreign exchange violations).
Include monitoring mechanisms in the agency contract to avoid illegal or unethical acts.
Ensure consultants are restricted to back-end support, with no direct communication with the MoD.
3. Consequences of corruption
3.1. Contractual sanctions
The ‘Integrity Pact’ signed by the bidder with the government at the time of bid submission prohibits corrupt or anti-competitive practices. Sanctions for contravention include forfeiture of deposits, termination of the defence contract, blacklisting, liability for damages to the MoD etc.
3.2. Statutory sanctions
Criminal and civil prosecution for payment of bribes or abetment of offences (which could result in heavy fines and imprisonment of the top management (including directors)).
Heavy penalties under foreign exchange, tax and money laundering regulations.
4. Where does the liability fall?
4.1. Corporate liability: corporate criminal liability can be attached if:
an officer/agent of the company (i.e. the bidder or agent engaged in defence procurement) commits bribery while exercising the powers given to him by the company; and/or
the directors/employees/agents of the company commit fraud, wilful misconduct or gross negligence.
4.2. Personal liability:
The director in charge of the company’s affairs will be liable for offences of the company.
“Officers in default” (including whole time directors, key managerial personnel and chief executives) responsible for the acts of the company will also be liable.
5. Risk mitigation measures
5.1. Core guidelines
Formulate procedures on ethical conduct of employees and intermediaries while dealing with government officials.
Institute whistle-blower programmes, and anti-bribery training for India-specific projects.
Ensure there is proof that these measures were communicated to employees/intermediaries and that they had easy access and knew how to activate them, if required
5.2. Use of consultants
Classify and be clear as to the role of the consultant. For agency functions, ensure payments are compliant with DAP 2020, tax and foreign exchange laws. Periodically audit agents to ensure such compliance.
5.3. Monitoring and review
· Conduct in–house/external audits of company policies, monitor third party relationships, audit high risk transactions and review internal financial control mechanisms.
5.4. Top-level commitment
· Establish the ‘tone from the top’ - commit adequate time and resources to ensure anti-bribery compliance.
· Communicate the ‘zero tolerance’ policy towards corruption to both internal and external stakeholders.
5.5. Incident Response Protocol
· Devise a broad level response strategy (i.e. a combination of legal, technical and public relations actions) to contain risks and deal with any investigations.
This article was originally published by Geopolitics. A copy of the original publication can be downloaded below.