BAE tops EADS in anti-corruption study

BAE Systems, Europe’s biggest defence company, appears to do more to prevent corruption than EADS, the aerospace company with which it plans to unite in a €34bn deal, according to an extensive study on the industry published Thursday.

BAE ranks fourth most vigilant among companies, listed by the mechanisms they publicly reveal they have implemented to minimise corruption, while EADS scores 38th out of 139 worldwide defence and defence-related companies surveyed.

The ranking comes at a very sensitive time for EADS and BAE. Governments in Germany, the UK and France this week are in the process of deciding whether to allow the union between BAE and EADS – in which EADS would have a 60 per cent majority – to go ahead.

The two-year study conducted by Transparency International, the campaign group, and supported by Lord Robertson, former Nato secretary-general, includes Chinese and Russian companies, which generally made up the rear. Only France’s Dassault Aviation, of which 46 per cent is owned by EADS and 51 per cent by the French government, scored below EADS among the west’s biggest defence companies.

TI ranked the companies using publicly available data and gave each the chance confidentially to supply it with further information, which BAE did to a limited extent and EADS chose not to do.

Without including BAE’s extra data the UK-based company still far outranks EADS, which chose not to supply data because “the assessment failed our quality checks” and “the web platform does not meet the industry IT security standards”, its chief compliance officer wrote in a letter to TI.

EADS told the Financial Times it believed the report employed “subjective methodology”, adding that “we are committed to full compliance with the highest standards of integrity and transparency”.

Others, including EADS’s close peers Boeing, BAE, Lockheed Martin, did not share its concerns about the survey and supplied additional data.

In the view of Mark Pyman, head of defence at TI and a lead author of the study, the degree to which companies are willing to disclose their anti-corruption safeguards is directly linked to how good their effort on this front really is.

“On EADS, if you speak to people who know the defence industry in the US, they will say EADS is an order of magnitude less developed in this subject than any of the big American majors or any of the foreigners that have implanted themselves on US soil,” he says.

People close to the deal expect the issue of safeguards against corruption to come up when the US, BAE’s biggest customer, begins to study the tie-up, which will only go ahead if Washington approves. The US Foreign Corrupt Practices Act is extraterritorial and thus covers non-American companies.

“I am absolutely convinced that in a set of questions it’s something they [the US] would ask for,” says one person close to the deal.

In 2010, the US Department of Justice fined BAE $400m for lying about its payments to middlemen but noted that the company had since made progress in putting in place mechanisms to prevent a repeat of its transgressions.

Dick Olver, BAE’s chairman, has eradicated the lucrative network of middlemen through which the company had sold its arms and equipment overseas for decades, and has instituted a regular review of its ethics and compliance programme, the first of which was made public last year.

Mr Pyman gave this as a key reason BAE did so well, scoring 78 per cent, compared to EADS’s 53 per cent on publicly available data.

But even as BAE was cleaning up its act, an EADS subsidiary was being accused by a whistleblower of making gifts of luxury cars to members of the Saudi royal family and military, and paying a total of £11.5m to two bank accounts in the Cayman Islands without detailing what the payments related to. The UK’s Serious Fraud Office earlier this year launched a criminal investigation into these allegations.

The study into the defence industry by campaign group Transparency International, shows a large variation in the public evidence provided by the world’s leading defence companies on anti-corruption measures.

Explore the results for 129 of the biggest companies – which Transparency International estimates are responsible for more than 90 per cent of global arms sales – in this interactive graphic.

Full survey methodology