DN - Defence Notes

Opinion: Corruption reigns in the ‘Wild East’

29th November 2017 - 04:00 GMT | by The Geobukseon in Asia-Pacific

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After surveying 22,000 people in 16 Asia-Pacific nations, Transparency International reported this year that just over one in four people had paid a bribe to access public services. The organisation stated, ‘Police top the list of public services most often demanding a bribe.’

That being the case with police forces, it would be foolhardy to think that a number of Asian militaries were any different in terms of corruption.

The Asia-Pacific region is alluring for regional and international defence companies, with the market amounting to $450 billion last year alone. Since 2013, Asia’s total defence spending has increased by more than 5% annually. Furthermore, Deloitte predicts that Asia-Pacific economies will drive 30% of the total global defence acquisition budget through till 2020. Unarguably, great temptations exist.

How bad is the corruption problem then?

Extremely bad if China is an indicator. President Xi Jinping is investing enormous effort to clean up the People’s Liberation Army (PLA) via a ruthless anti-graft campaign. Xinhua recently reported, ‘Since the 18th National Congress [in 2012], more than 100 PLA officers at or above the corps-level, including two former Central Military Committee (CMC) vice chairmen, have been investigated and punished.’

‘Since...2012, more than 100 PLA officers at or above the corps-level, including two former Central Military Committee (CMC) vice chairmen, have been investigated and punished.’

Xinhua

By point of comparison, Xinhua went on to say that this number ‘is even greater than the number of army generals who died in the battlefield during revolutionary times’. One of those collared, Gen Zhang Yang, until recently a CMC member, committed suicide on 23 November amidst a probe into ‘serious disciplinary violations’.

Another high-profile victim to fall into Xi’s hands was Xu Caihou, vice-chairman of the CMC until 2013. Investigators discovered more than a tonne of banknotes stashed in his basement, as well as numerous gems, jade items and antiques that filled ten military trucks. 

A RAND report entitled ‘China’s Incomplete Military Transformation: Assessing the Weaknesses of the PLA’, stated, ‘The PLA enjoys an almost absolute immunity from external oversight, budgetary transparency and/or accountability to the legislature for how it spends its funds and operates. As a consequence, the PLA is believed to be riddled with corruption.’

It continued: ‘Given the absence of oversight, it is possible that the PLA suffers levels of corruption equal to or even greater those in the civilian economy…’

Corruption clearly undermines military professionalism and negatively affects combat capabilities. For example, many high-ranking PLA officers purchased their posts without any consideration given to their skills or worthiness. As well as siphoning off money for procurements and training, widespread corruption also affects morale, meaning the fighting capability of the PLA remains an unknown quantity.

Because China is under a fairly widely imposed arms embargo, this particular market does not directly affect many Western defence companies, of course.

Elsewhere in Asia, however, there is great potential for Western defence companies to be ensnared in corrupt practices, especially as they seek to gain footholds in emerging markets.

One example is Vietnam. Indeed, Shephard reported in July, ‘While attending IMDEX in Singapore in May, a senior US defence industry source told Shephard that a recent meeting in Hanoi ended abruptly after Ministry of Defence officials informed the US delegation that an arms sale would require ‘25% off the top’. A secondary source in Singapore also said that Vietnam government officials were laundering money in Singapore via their wives.’

'...a recent meeting in Hanoi ended abruptly after Ministry of Defence officials informed the US delegation that an arms sale would require ‘25% off the top’

Shephard

Thailand is another nation of concern, thanks to a military junta calling the shots on all defence deals. It has been notable to see the growing closeness between Thailand and China, with recent deals for KS-1C surface-to-air missiles, VT4 tanks, VN1 IFVs and an S26T submarine.

It is apparently not just the cheaper price of Chinese weapons that has caught the eye of Thai leaders. A source with decades of involvement in Thailand’s defence industry revealed that political (i.e. military) leaders could be scooping commissions from Chinese companies in the order of 10%. Such an amount is positively frugal compared to Vietnam’s demands!

When Bangkok had democratically elected leaders, they were of course doing much the same, but at far more modest rates of a couple of percent. Of note, too, China is uncritical of selling equipment to what the rest of the world would consider despotic regimes.

Faced with having to do business in a junta-controlled country where such ‘commissions’ are almost routine, there are persistent rumours that one Western defence company with a regional office in Bangkok is now seeking to move to more law-abiding Singapore to escape being tarnished by this environment. This exemplifies how corruption can ultimately hurt the development of guilty economies.

Lest we think that only communist and military-controlled countries are guilty of corruption, let us consider other regional cases of graft.

Such is the resounding level of corruption in India that resultant stringent procurement regulations regularly suffocate defence procurements and cause unending frustration for foreign defence companies. Perhaps India is an example where the pendulum has swung to the other extreme, with red tape tangling even the most innocent of acquisitions.

Finmeccanica is the most infamous recent case in India, with allegations of malpractice in the sale of 12 AW101 helicopters surfacing in 2013. India proceeded to blacklist the company (since renamed Leonardo) last year, while an Italian court in April 2016 sentenced former CEO Giuseppe Orsi to 4.5 years in jail.

Additionally, ST Kinetics, IMI, Rheinmetall Air Defence, Corporation Defense in Russia, T.S Kisan and R.K Machine Tools are all blacklisted, served with a ten-year ban in 2012. Business dealings with a further 13 companies were suspended. Such bans have a long-term effect, as Leonardo found when Indian plans to procure Black Shark torpedoes were canned after the AW101 scandal.

Japan is normally considered to be squeaky clean, but important programmes there have fallen victim to corruption too. Kawasaki Heavy Industries had been selected to develop a new UH-X helicopter, but it lost the deal when it was discovered bid rigging had occurred. 

After scoring a series of triumphant overseas sales, Korea Aerospace Industries (KAI) was badly tarnished in 2017. Several executives are suspected of accounting fraud, manipulating costs of Surion helicopters and T-50/FA-50 jets, and creating slush funds worth tens of billions of won to bribe politicians for contracts.

Prosecutors believe that KAI’s CEO Ha Sung-yong, who quickly resigned, illicitly gained $9 million by inflating the price of parts delivered to the national air force and for aircraft sold to Iraq. KAI’s stock price plummeted after investigations were launched in July, plus its credibility among potential foreign customers has been damaged.

Should US readers be smugly thinking that the American military is immune, there is of course the cautionary tale of ‘Fat Leonard’. Leonard Francis, the Malaysian owner of ship support contractor Glenn Defense Marine Asia, overbilled the US Navy and lavished thousands of dollars of cash, travel expenses, prostitutes and luxury items upon officers of the Seventh Fleet to ensure his company gained business.

Beginning in 2013 and still ongoing, US prosecutors have investigated more than 440 people (including more than 60 current and serving admirals) and filed criminal charges against 28 individuals (of which 14 are USN personnel). Eighteen have so far pleaded guilty in what became the worst corruption scandal in the history of the USN.

There is no denying that corruption and nepotism is rampant in Asia-Pacific, and prosecutors have so far caught all manner of ‘tigers and flies’, to use one of Xi’s favourite expressions. Unfortunately, perhaps the majority of graft remains hidden and more attention needs to be given to the problem.

Defence contractors must beware of the region’s wily ways lest individuals or firms under pressure to nail a lucrative deal instead become the subject of the next big scandal.

Defence firms also need the integrity and ethical backbone to say 'no' to paying bribes, no matter how innocently they might be packaged, because they will certainly be demanded by a number of Asian militaries, and will ultimately only harm the countries that those militaries are supposed to defend. 

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